Deciding When to File Taxes This Year Depends on Income Changes

Many taxpayers file their tax returns as soon as possible to get a quick refund, but this season it may pay to procrastinate.

The tax filing season opens tomorrow—as lawmakers continue to hash out final details of a new Covid-19 relief package.

A draft of the relief bill, released by House Democrats, calls for $1,400 payments for individuals earning $75,000 or married couples earning $150,000, plus an additional $1,400 per dependent. The checks, which will be based on either 2019 or 2020 tax return information, phase out completely for single filers making $100,000 or joint filers making $200,000.

The measure means some individuals will get higher checks if they wait to submit their 2020 tax returns—complicating the normal incentives to file early.

“I think it’s a facts and circumstances analysis for each person,” said Francine Lipman, a professor at the University of Nevada, Las Vegas William S. Boyd School of Law.

Those who will benefit from waiting are individuals who saw their incomes increase in 2020, despite the pandemic, and would therefore get larger payments if the IRS used their 2019 data. But they will have to weigh that benefit against their need for cash.

Whereas, people who made less money in 2020—maybe they lost their job or took a pay cut—will likely want to file immediately to get the largest payment possible, as soon as possible.

Amber Gray-Fenner, who owns Tax Therapy LLC, in Albuquerque, New Mexico, said the majority of her clients—many of whom are retired or are professionals who can work from home during the pandemic—saw their income either stay the same or increase from 2019 to 2020.

“And so I’ve got quite a few people who are just saying, ‘You know what? We can wait,’” she said.

Benefits to Filing Early

Some tax firms are urging clients to file early, regardless of possible benefits some might get from waiting if Congress passes a planned virus relief package.

Aside from getting a refund sooner, filing early ensures taxpayers are protected from fraud and criminals who steal tax return data to claim other people’s refunds, said Mark Steber, chief tax information officer at Jackson Hewitt.

“Don’t wait to file your taxes on that maybe-future-might-be-tax law, because you’ll get a leg up—that’s just not likely, that’s not the way it works,” he said.

The worst-case scenario is that Congress approves relief legislation that contains new tax perks after someone already filed, but those returns could be amended, Steber noted. The IRS has confirmed that people will be able to file amended 2020 returns electronically, allowing people to avoid the long delays many have been experiencing with paper returns.

But amending often comes with a cost, said Adam Markowitz, an enrolled agent and vice president at Howard L. Markowitz PA CPA.

That requires tax preparers to do more work, he said. And “if I have to do more work, I have to bill you for it.”

The IRS is aware that individuals whose incomes fell in 2020 may want to file early to ensure they get larger checks under the latest stimulus bill working its way through Congress, said Ken Corbin, commissioner of the IRS’s Wage and Investment Division and chief taxpayer experience officer.

“But our advice would be: ‘File an accurate return. If you don’t have all of the information, or you’re still waiting on some additional documentation, don’t rush to file that return,’” he said Thursday on a call with reporters.

Lack of Offset Fix

Taxpayers who have to claim part or all of prior relief payments as a rebate on their return this tax season are another category of individuals who might want to wait to file. That’s because the IRS may eventually fix a problem that currently would apply those rebates to any outstanding debts.

An IRS official said earlier this month that the agency wouldn’t have a solution ready by the start of the filing season, but didn’t completely shut down the possibility of a fix at some point down the road. During Thursday’s call, Corbin said the IRS is still looking at whether there’s anything it can do to help taxpayers hardest hit by the pandemic.

Congress approved payments of up to $600 per individual in a December Covid relief package and up to $1,200 in the March CARES Act (Public Law 116-136).

For the most part, the payments that have already been delivered and don’t need to be claimed on this year’s tax return aren’t subject to offsets for unpaid debts. National Taxpayer Advocate Erin Collins and several Democratic lawmakers have said it isn’t fair that the rebates claimed on returns are being treated differently than payments made in advance and have asked the IRS to step in to ensure people get the full rebates they are owed.

It is possible the IRS tries to address the issue once the filing season is over, potentially using existing procedures for adjusting tax assessments for math errors, said Gray-Fenner.

But Nina Olson, the former National Taxpayer Advocate, noted those procedures are typically used for adjustments that are negative to the taxpayer and that it’s unclear if the IRS can apply them to this type of situation. Congress may need to step in and create a fix through legislation, she said.

The IRS currently in its Internal Revenue Manual says it can’t bypass a completed offset in situations where a person is requesting the money back due to financial hardship.

Any actions the IRS could take to address the offset issue after the tax-filing season would be far preferable to the agency making a programming change in the middle of the season, said former IRS Commissioner Mark Everson, now vice chairman of alliantgroup LP.

The IRS’s systems are already stressed by the last-minute changes the agency had to make to accommodate Congress’s December Covid relief package, he said.

“There comes a point in time where you’ve got to live with what you have and not entertain making more changes if you want to deliver the system correctly,” Everson said.

—With assistance from Colin Wilhelm.