Even After the 2020 Federal Income Tax Filing Deadline, Millions Are Still Waiting for Refunds, by Ed Zurndorfer
The 2020 federal income tax filing deadline of May 17, 2021 has just passed. But millions of individuals who filed their 2020 federal income tax returns as early as the middle of February 2021 still have not received their 2020 federal tax refunds. This column presents some reasons why there is a backlog of 2020 federal tax refunds, what those individuals expecting their refunds should do to get more information about the status of their refunds, and what individuals should do during 2021 in order to avoid being a victim of delayed refunds of 2021 federal tax refunds when they file their 2021 federal income tax returns next spring.
Individuals who are waiting for their 2020 federal tax refunds should check the IRS’ “Where’s My Refund” tool, found here. Other than checking that Web site, there is little that can be done to track one’s refund, and that includes phone calls to the IRS. It is somewhat fruitless calling the IRS to inquire about the status of a refund as IRS phone centers are understaffed. Many phone calls to the IRS are rejected due to high volume and fewer employees are available to answer the phone calls.
Understanding Why There Are IRS Tax Refund Delays
There are several reasons contributing to the IRS tax-refund delays. First, the IRS is understaffed, a result of employee reductions. Meanwhile, the IRS has been asked to do more with less, including 15 percent fewer employees in 2020 than in recent years. Since the beginning of the COVID-19 pandemic in March 2020, the IRS has had to delay two annual filing deadlines, coordinate a total of 470 million stimulus payments to individuals, apply retroactive tax-law changes for 2020 that Congress enacted in March 2021 after millions of filers had already submitted their 2020 federal tax returns.
As recently as this month, the IRS was still processing about one million 2019 income tax return filed during 2020. Many of these returns were paper filed and have to be manually keyed into IRS computers by IRS employees. The IRS is moving returns to different IRS Service Centers in order to get through the processing backlog.
The IRS is also currently handling about 16 million 2020 individuals tax returns filed over the last months in which the individual filers are expecting refunds exceeding $10,000. IRS personnel must also review each of these returns to make sure each filer properly claimed recovery rebate credits if they were eligible for the stimulus payments during 2020. The IRS must also double-check child tax credits and earned income credits claimed on 2020 tax returns.
IRS Erroneously Issues Notices to File 2019 Tax Returns
In early February 2021, the IRS erroneously sent 260,000 notices to individuals stating they had not filed their 2019 tax returns when in fact they had. On February 18, the IRS issued a statement that recipients should disregard these letters.
But except in this case, individuals should not ignore IRS notices – even if they seem incorrect. Individuals who receive IRS notices in the mail are strongly advised to call the IRS (a toll-free telephone number should appear on the correspondence) to discuss the issue. They should make notes of the date and content of the conversation, including the IRS staffer’s name. If requested, they should write to the agency and respond to future letters.
The American Institute of CPA’s also has a list of recommendations for the IRS including pausing the IRS collection process for 90 days after May 17 in order to let the system “reset”. As of this week, the IRS has not responded to the proposals.
Finally, if there is any good news coming from the tax refund delays, it is the fact that the IRS will pay interest on late refunds. For most tax refunds issued after April 15, the IRS will pay interest provided that the tax return was filed by May 17, 2021.
The way the interest is paid is somewhat complex. Interest will apply starting a few days after April 15. The current interest rate comes to about 3 percent annually, and the interest will be included as part of the refund check. The interest portion of the refund is taxable income (the actual refund is not taxable income) for 2021 and must be reported as interest income on one’s 2021 federal income tax return to be filed in spring 2022.
Taking the Steps During 2021 to Prevent the Problem from Happening in 2022
Now that the 2021 tax filing season is over, those federal employees and annuitants who unfortunately are still waiting for their 2020 federal tax refunds should take the steps as soon as possible to prevent the same problem from occurring in spring 2022 when they file their 2021 federal tax returns. If they expect to have the same amount of taxable income in 2021 as they did in 2020, they should decrease the amount of federal income tax withholding from their biweekly paychecks or their monthly CSRS or FERS annuity checks. In deceasing the withholding, an employee will have more net pay every two weeks and an annuitant will have more net annuity every month. The end result will be that the employee or annuitant will not have to wait to receive “their money”.
To determine how much ideally should be withheld from one’s paycheck or one’s annuity check, employees and annuitants are highly encouraged to use the IRS’ W4 calculator found here. The calculator is easy to use. For employees and annuitants who may have more complex situations, they are encouraged to speak with a tax professional accountant who will be able to determine what is will the optimum amount of federal income tax withholding.
Edward A. Zurndorfer is a Certified Financial Planner, Chartered Life Underwriter, Chartered Financial Consultant, Chartered Federal Employee Benefits Consultant, Certified Employees Benefits Specialist and IRS Enrolled Agent in Silver Spring, MD. Tax planning, Federal employee benefits, retirement and insurance consulting services offered through EZ Accounting and Financial Services, and EZ Federal Benefits Seminars, located at 833 Bromley Street – Suite A, Silver Spring, MD 20902-3019 and telephone number 301-681-1652. Raymond James is not affiliated with and does not endorse the opinions or services of Edward A. Zurndorfer or EZ Accounting and Financial Services. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. While the employees of Serving Those, Who Serve are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.
Tax Refund Delays