Accountants are preparing for a complicated tax season to get even more chaotic after the recent stimulus package introduced a number of tax changes, some of which will affect tax returns that have already been filed.
The legislation, which President Joe Biden is about to sign, includes a third round of exemption controls and a measure to exempt the first $ 10,200 of 2020 unemployment income from federal tax for those earning less than $ 150,000 . The changes require the IRS, previously determined not to extend the filing season, to modify its IT systems about a month before tax returns are due on April 15th.
The package is also giving tax professionals new headaches – many have struggled to prepare their tax returns this year because they still have questions about aid measures in last year’s stimulus packages.
“We’re literally building the damn plane in mid-flight,” said Adam Markowitz, a registered agent and vice president at Howard L. Markowitz, PA CPA. “And there are many ways to crash.”
In particular, the Unemployment Benefit Tax Break requires swift action from the IRS as it impacts returns filed this year. According to The Century Foundation, up to 40 million Americans received unemployment insurance benefits in 2020.
It’s not clear if the agency will allow people who have already filed to change returns or if they can find a way to automatically remit refunds to those who have overpaid. When asked about the change early Wednesday, the IRS said it did not comment on the upcoming laws.
Changing the tax return usually costs the taxpayer. And there aren’t many options for low-income individuals already facing their challenges this season of avoiding those fees, said Patrick Thomas, director of the Tax Clinic at Notre Dame Law School.
Many of the IRS’s Voluntary Income Tax Help and Elderly Tax Advice Centers, which provide free tax preparation to certain populations, including low-income people, are either closed or underutilized this year due to the pandemic. Thomas and others also noted that it is unclear whether users can use the Free File program, another free tax preparation option, to modify tax returns.
The Free File Alliance, a group of tax preparation companies working with the IRS to run the Free File program, has not returned a request for comment.
The IRS has already reached its limits this filing season – its resources are exhausted after years of budget cuts, its call centers are overloaded trying to answer a barrage of taxpayer questions about filing season and Covid-19 relief Tax returns from last year processed.
Former IRS Commissioner John Koskinen said he couldn’t remember the last time Congress changed the tax law in the middle of filing season.
Sometimes lawmakers renew temporary tax breaks called tax renewers at the last minute, but never this late, and the agency’s systems are already well adjusted to accommodate these changes.
“There’s a good reason this is done very rarely, and that’s because the IRS systems are very complicated and parts of the software are hard-coded,” Koskinen said. “Making changes to this system is usually complicated, but repairing the system while it is running is even more difficult.”
Extend or not?
The calls for an extension of the tax filing season beyond April 15th are getting louder and louder.
Up to this point, Commissioner Charles Rettig has rejected the idea, stating that an extension is not necessary. However, the new aid laws combined with increasing external pressure may force the agency to act.
House Ways and Means Chairman Richard Neal (D-Mass.) And Subcommittee Chairman Bill Pascrell (DN.J.) noted in a statement earlier this week calling for an extension that the agency processed at the end of February had 31% fewer returns compared to the same period last year. The IRS started the season about two weeks later than normal.
That means the agency will face a crisis in the final month of the season while trying to accommodate any new legislative changes, said former commissioner Mark Everson, now vice chairman of the alliantgroup LP.
However, enlargement brings with it a number of complications.
The Association of Tax Administrators is against an extension because at this point in the filing season the state authorities would have to do time-consuming and expensive work to revise software and tax returns.
At the same time, the Covid-19 aid package has commissioned the IRS to make advance payments – probably monthly – for the tax credit for children from July 1.
“So extending the registration season for the unemployment benefit tax exemption will cost the work required for the monthly child tax credits,” Koskinen said.