Tax preparers are bracing for a complicated tax season to get even messier after the latest stimulus package made a number of tax changes, some that will impact already-filed returns.
The legislation, which President Joe Biden is poised to sign into law, includes a third round of relief checks and a measure exempting the first $10,200 of 2020 unemployment income from federal taxes for people earning less than $150,000. The changes will require the IRS, which so far has been adamant about not extending the filing season, to modify its IT systems with about a month before tax returns are due on April 15.
The package also creates new headaches for tax professionals—many whom were already struggling to prepare returns this year because they still have questions about relief measures in last year’s stimulus packages.
“We’re literally building the freakin’ plane in the middle of the flight,” said Adam Markowitz, an enrolled agent and vice president at Howard L. Markowitz PA CPA. “And there are lots of ways to crash.”
The unemployment compensation tax relief in particular will require quick action from the IRS, as it impacts returns filed this year. As many as 40 million Americans received unemployment insurance benefits in 2020, according to The Century Foundation.
It isn’t clear if the agency will allow individuals who already filed to amend returns or whether it will find a way to issue refunds automatically to those who overpaid. Asked about the change early Wednesday, the IRS said it doesn’t comment on pending legislation.
Amending returns will typically cost taxpayers. And there are aren’t many ways for low-income individuals, who are already dealing with their share of challenges this season, to avoid those charges, said Patrick Thomas, who directs Notre Dame Law School’s tax clinic.
Many of the IRS’s Volunteer Income Tax Assistance and Tax Counseling for the Elderly sites, which offer free tax preparation to certain populations, including low-income individuals, are either closed or not operating at full capacity this year due to the pandemic. Thomas and others also noted it’s unclear if people can use the Free File program, another option for free tax preparation, to amend returns.
The Free File Alliance, which is the group of tax preparation companies that partners with the IRS to carry out the Free File program, didn’t return a request for comment.
The IRS has already been pushed to its limits this filing season—its resources are depleted after years of budget cuts, its call centers are stretched thin trying to respond to a flood of questions from taxpayers on the filing season and Covid-19 relief, and it is still processing tax returns from last year.
Former IRS Commissioner John Koskinen said he couldn’t remember the last time Congress changed the tax law in the middle of the filing season.
Sometimes lawmakers will renew temporary tax breaks, known as tax extenders, at the last minute, but never this late, and the agency’s systems are already well-adapted to adjust for those changes.
“There’s a good reason this is very rarely done, and that’s because the IRS systems are very complicated and parts of the software are hard coded,” Koskinen said. “To make changes in that system is complicated normally, but fixing the system while it’s running is even more difficult.”
Extend or Not?
Calls for extending the tax-filing season past the upcoming April 15 deadline are growing louder.
Up to this point, Commissioner Charles Rettig has rejected the idea, saying an extension is unnecessary. But the new aid legislation paired with increasing pressure from the outside may force the agency to act.
House Ways and Means Chair
What that means is the agency will be facing a crunch in the last month of the season, at the same time it’s trying to accommodate all the new legislative changes, said former Commissioner Mark Everson, now vice chairman of alliantgroup LP.
Still, extending comes with its own set of complications.
The Federation of Tax Administrators is advocating against an extension because of the time-consuming and expensive work state agencies would have to undertake to rework software and tax notices at this point in the filing season.
At the same time, the Covid-19 relief package has tasked the IRS with delivering advance payments—on an expected monthly basis—of the child tax credit beginning July 1.
“So, extending the filing season to deal with the tax exemption for unemployment payments will run into the work necessary to deal with the monthly child tax credits,” Koskinen said.