In an ordinary year, tax preparers can expect to receive their tax refund within three weeks of the time the Internal Revenue Service receives their return. This year, however, is anything but ordinary. Many taxpayers are seeing delays of 10 weeks or longer and there are likely more delays to come.
For those who are still waiting, the Where’s My Refund tool from the IRS provides little clarity or consolation, telling taxpayers “Your tax return is still being processed. A refund date will be provided when available.”
While the Internal Revenue Service has provided few details as to the cause of the problem, there are several indicators as to what is causing the delays.
The first problem facing the IRS is their lack of staffing, which leads to longer processing times for tax returns. Because of the understaffing issue, there are still returns from 2019 that the IRS needs to process in addition to the large influx of 2020 tax returns.
Combining the backlog with the understaffing and the new tax legislation passed by congress in 2020, there are a multitude of reasons why the Internal Revenue Service has yet to process all the returns they received this year.
Not Enough Help
Despite its importance, the IRS has been plagued by significant understaffing for several years. This understaffing finally caught up with them this year. By March 26, 2021, there were still an estimated 2 million Form 1040s under review from prior tax years. At the beginning of May, it was reported that nearly 31 million returns were being held for manual reviews by the IRS (1).
The Big Trip-Up
You are unlikely to find this information on the IRS website, but Monotelo serves over one thousand clients across the country with our tax and financial planning expertise, and a common denominator we are finding in many of the delayed refund checks can be traced back to the recovery rebate credit.
While the IRS has not acknowledged this publicly, we believe the Recovery Rebate Credit has been a major cause for delay, because many of the Recovery Rebate Credit returns have been marked for manual review. This manual review time does not have an estimated completion date and accessing the “Where’s My Refund” tool via the IRS website provides little help, except to say that the return is still in process.
The Recovery Rebate Credit
The recovery rebate credit is an additional benefit that compares your stimulus payments received from rounds 1 and 2 against what you should have received, based on your actual 2020 income. If your income dropped in 2020 and you received less than full stimulus benefits, you were able to apply for the full benefit on your tax return under the Recovery Rebate Credit.
Unfortunately, it appears that taking this credit on your 2020 tax return has been a major cause for delay, as many RRC returns have been marked for manual review and the IRS does not appear to have the manpower to handle the additional workload.
American Rescue Plan
In March of this year, President Biden unveiled the American Rescue Plan, a sweeping legislation that included many changes, including expanding the COVID-19 vaccination program, providing a third round of stimulus payments, expanding the child tax credit for 2021 (more details can be found here), expanding the Earned Income Tax Credit for low income households, and more.
Among the changes that were included with the American Rescue plan were changes to the taxation of unemployment benefits in 2020.
Typically, unemployment remains a fully taxable benefit to recipients, which is why taxpayers are given the option to have federal income tax withheld from their check when they sign up for unemployment benefits.
With the large unemployment numbers in 2020 due to COVID-19 related shutdowns, the American Rescue Plan made the first $10,200 of benefits ($20,400 if you both you and your spouse were collecting unemployment) nontaxable, provided you met the income requirements.
This change contributed to an already burdened IRS, as they had to adjust how returns were calculated during the middle of tax season. In addition to the extra work this created, it also put a secondary burden on the IRS, requiring them to issue a second refund to anyone who filed a tax return before March. As of this article, the IRS has still not processed the unemployment refunds for early filers.
What To Do About My Refund
If your tax refund has been delayed significantly, you may be asking yourself what needs to be done to get your refund. Unfortunately, there is not much that can be done to expedite the processing time. Assuming that you filed your return and it was accepted on time, the only thing that can be done is to wait on the IRS to issue your refund or provide correspondence as to the cause of the delay.
Calling into the IRS is not a great solution. Even if you are able to get through to an IRS agent, the agent responses are likely to mimic the website - referring to the return as “in process” or “in review.” In 2020, IRS employees answered only 1 in every 4 calls made to the IRS’s toll-free phone numbers. Of the 100 million calls that were made to the IRS last year, nearly 75 million of them went unanswered (2).
While we would love to conclude this article with a catchy summary like “Three Steps to a Quicker Refund!” the reality is that the IRS needs more staff, fewer last-minute tax law changes and a little more transparency!
If you need additional support or have questions regarding how you can position yourself to optimize the credits that are available in 2021, please reach out to Monotelo for a free 20-Minute Tax Optimization discussion.