Tax Relief

IRS backlog, pandemic tax break

Taxpayers and the Internal Revenue Service (IRS) are facing a bumpy 2022 tax filing season, which the IRS says will begin on January 24 and last through April 18. Two major challenges await taxpayers: a second year steering pandemic-related tax breaks on their tax returns, and IRS backlogs that can delay processing and refunds.

For the past two years, the IRS has dealt with challenges such as pandemic-related staff disruptions and the need to quickly administer several large and complicated relief packages enacted by the tax code. Implementation issues at the IRS have exposed the trade-offs in using the tax code to administer social support, particularly during the pandemic.

The American Rescue Plan (ARP) Act, passed in March 2021, provided taxpayers with pandemic-related assistance through the tax law, which can be claimed during tax season and may affect the size of tax refunds for some taxpayers.

For the 2021 tax year only, the ARP increased the value of the child tax credit (CTC) from $2,000 per child to $3,600 for younger children or $3,000 for older children. It also eliminated income requirements and the work-related phase-in, expanding the number of households eligible for the loan.

Tax refunds are impacted by the expanded CTC. Whether they increase or decrease the individual reimbursement amounts compared to before depends on individual circumstances, such as the monthly advance payments in the previous year, which amounted to up to half of the benefit.

For example, a taxpayer with a younger child in 2021 may have received $1,800 of their $3,600 CTC benefit and would receive the remaining $1,800 when filing their taxes. If the taxpayer previously received the $2,000 CTC for the child, they would see a $200 reduction in their refund. However, if the taxpayer had not received a CTC prior to 2021 because of the income requirement, their refund would increase by $1,800 over previous years.

Some taxpayers may be required to return a portion of their CTC prepayments if the IRS used an incorrect income amount or number of eligible dependents when calculating the prepayment. Applicants earning less than $40,000 (individually) or $60,000 (jointly) are not required to repay any prepayments for falsely claiming up to a dependent, but protection does not extend to higher-income taxpayers. A clawback could reduce reimbursements for some households.

The ARP also included a third round of economic impact payments distributed beginning March 2021, valued at $1,400 per taxpayer and contingent on individual claimants with incomes less than $75,000 and joint claimants with incomes less than $150,000 . The payments can also affect tax refunds, as applicants who have not received or only partially received the payment amount to which they are entitled can claim the remaining amount as a credit on their tax return. Any adjustment will be in the taxpayer’s favour, although confusion may still arise due to changing eligibility rules for the three sets of payments made during the pandemic.

Taxpayers will also face likely IRS delays. A new report from the National Taxpayer Advocate found that as of mid-December 2021, the IRS had a backlog of 6.2 million unprocessed individual tax returns and 2.3 million amended returns.

The start of the 2022 tax filing season will likely widen the backlog and could delay refunds for many taxpayers, which the National Taxpayer Advocate attributes in part to the administration of pandemic-related tax breaks: “With tens of millions of individuals filing the [advanced] CTC and…the third stimulus payment, we believe the IRS will once again face the daunting task of manually reviewing tens of millions of tax returns, causing further processing and reimbursement delays for millions of taxpayers.”

Adding to the difficulties, the National Taxpayer Advocate argued that the IRS phone service in 2021 was “the worst ever” with a response rate of about 11 percent. These problems are the result of an agency dealing with pandemic-related disruptions and an ever-increasing scope of work as policymakers have channeled pandemic relief through tax legislation.

While pandemic assistance has been important, its implementation through the Tax Code has resulted in delays, unresponsive taxpayer services and confusion during the tax return process. More challenges could lie ahead if new tax changes are passed as part of the stalled Build Back Better agenda, increasing the workload of the IRS and potentially further degrading the taxpayer experience. Policymakers should avoid further complicating tax law and instead seek simplification so that taxpayers can better understand and comply with tax law and the IRS can adequately perform its core duty of tax collection.

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