American taxpayers who are anxiously awaiting a tax refund may find themselves waiting a bit longer than normal. The IRS is dramatically behind in tax refund (insert word here), and is holding more than 29 million returns for manual processing. This means that many filers have been waiting for 6-8 weeks or longer for their returns, which in past years have arrived in 21 days or less.
This year’s tax season presented a particular problem for the IRS and its team of tax professionals. First, the 2021 federal stimulus package signed into law by the Biden administration meant that the IRS had to manage the sending out of $1,400 stimulus checks to millions of Americans. Secondly, shutdowns in 2020 meant that there was a backlog of 2019 paper returns that the IRS is still struggling to process. In addition, the decision to pull millions of returns for manual processing means that Americans will be waiting a bit longer than usual for their tax refunds this year.
In December, 2020, the $900 billion Consolidated Appropriations Act of 2021 went into effect. At the same time, the IRS introduced several complicated tax code changes that would significantly alter the way they processed returns. Despite the delayed start of the tax season–February 12 instead of January 30—there was not enough time for the administration to process the stimulus package payments and implement the tax code changes to keep up with the normal 21 day processing time.
This Season is Challenging for the IRS
As part of the stimulus legislation, taxpayers were allowed a “look back” that allowed them to use their 2019 income to qualify for the Earned Income Tax Credit and the Child Tax Credit for 2020. These refundable tax credits are granted to low income families and are issued for qualifying dependents. The IRS needed to update its computer systems to adjust to this change, but was unable to do so in time for the tax season. As a result, the agency decided to manually process these returns, a move that has caused a drastic slowdown in the time it takes to issue refunds.
The Recovery Rebate Credit Created Slowdowns
Many taxpayers did not receive the first and second rounds of IRS stimulus checks in 2020, and were able to claim a rebate on their 2020 tax returns as a result. If there were inconsistencies between the IRS records and what the taxpayers reported, the IRS would have to process these returns and make the necessary corrections by hand. As of this writing, many of the submitted returns are still awaiting processing.
The IRS has established an “Error Resolution System” that catches errors and makes updates. The challenge, however, is that this system requires an IRS staff member to manually review the return before it can be processed. The IRS has placed those return in a “suspense” state until the review process is over. Coupled with a staff shortage, this manual processing means that millions of taxpayers are left waiting for their refunds.
Paper Returns are Creating a Backlog
In a normal tax year, paper returns don’t typically create a problem for the agency. A small percentage of filers will always file paper returns, and the IRS has procedures in place to handle them. In 2021, however, the combination of a skeleton staff, new tax code changes and economic impact payments means that the paper returns are causing additional strain. This year, seven million returns are being held for suspected fraud and require additional information from taxpayers. Another 11 million business returns are being held due to errors and are being processed manually.
The American Rescue Plan Creates Processing Headaches
In 2020, less than two million returns were delayed due to processing issues. This year, 6.7 million returns have not even been processed, despite being submitted by taxpayers as early as February. The new American Rescue Plan, a recently introduced plan that provides more one-time payments, tax credits and relief for unemployed workers has created yet more tasks for the IRS.
When coupled with deep budget cuts and significantly reduced staff, the end result is a long wait for much-anticipated tax refunds. Another challenge that the IRS is facing is the large number of taxpayers who are filing amended returns in order to take advantage of tax breaks introduced after the filing season started. This creates a situation in which the IRS has to process two returns for the same filer. In short, taxpayers shouldn’t hold the IRS to the normal 21-day processing time. Most won’t see refunds in this timeframe.
Relief for Taxpayers is Needed
The National Taxpayer Advocate agency has pressed for more transparency from the IRS, encouraging them to communicate with taxpayers as to the status of their refunds. As it stands, taxpayers who use the IRS app and the IRS “Where’s My Refund” website tool are only told that their refund is “processing” with no update about when the refund is expected. The site has crashed several times due to overwhelming demand from taxpayers who are confused about the delays. The site was down for several days for maintenance but has since returned. Taxpayers can use the site to check for status updates, entering their SSN or ITIN, filing status and expected refund amount.
The IRS tax refund delays has caused headaches for many taxpayers who are depending on their refunds and have been waiting. New tax codes, economic stimulus payments, reduced staff and manual filing has created a long backlog of returns that the IRS is struggling to process. Taxpayers can expect to wait for up to 8-12 weeks for refunds as the agency fights to keep up with demand. There is no end in sight, and even pressure from taxpayer advocacy groups has not brought relief.
The 2021 tax season has been like none other, and taxpayers have experienced frustration at the lack of updates from the IRS. While the delays are troublesome, taxpayers can rest assured that progress is being made and they will see their refunds eventually.
