The pandemic continued to impact the collection and payment of taxes this year. Here are the highlights:

• The date taxes were due was moved out again this year, this time to May 17. (Most states followed this as well)
• The IRS had a huge backlog on tax processing, due to staffing issues as well as extra volume of work due to various relief efforts based on IRS data.
• One significant relief effort was the exclusion of up to $10,200 worth of unemployment benefits from taxable income.
• Another relief effort, the enhanced and now advanced child tax credit, gets lots of attention and needs to be fully understood by potential beneficiaries.
• After digging deeper into sizing the underpayment of federal taxes, it was reported the figure could be as high as $1 trillion each year.

Delay in tax due date:

The IRS was still trying to process millions of 2019 tax returns when 2020 dates came into view (see next section for more on the backlog.) The IRS first delayed the start of tax season by two weeks, then a month before tax day, they announced a one month delay in the due date for federal taxes. (Most, if not all states followed suit eventually.) Also announced was the fact that if people did not receive their expected stimulus checks, there would be an opportunity to claim a rebate for the stimulus amounts on their tax returns. For folks filing for extensions, the October 15 deadline did NOT change. (USA Today)

IRS behind on processing:

Before the 2020 tax season started, the IRS was reportedly unable to fully process 24 million individual and business returns. Millions were still awaiting tax refunds. Chronically underfunded, short on staff due to the pandemic, ancient computer systems, and the additional work of processing stimulus checks and tax relief measures hitting mid-tax season, it is not at all surprising that the IRS is struggling to keep up.

The number of tax returns filed was reported to be 152.5 million by June 11, according to the IRS. The number of unprocessed claims ranges from about 15 million to over 30 million. Electronic filings with no errors had no problem going through. (Remote workers could process these.) Theoretically, paper filings with no issues also went through quickly. Any return that required human review or verification may have caused a delay. (Don’t Mess With Taxes) explains:

Certain claims causing delays: The millions of still unprocessed filings, says the IRS, include tax year 2020 returns that require correction to the Recovery Rebate Credit (RRC) amount or validation of 2019 income used to figure the Earned Income Tax Credit (EITC) and Additional Child Tax Credit (ACTC).

Tax relief on unemployment benefits

What is it? Again, I’ll let Kay Bell, author of the Don’t Mess With Taxes blog (she is from Texas), explain:

COVID relief for the out-of-work: This is the latest round of refunds made to comply with changes in the American Rescue Plan Act (ARPA). One of this COVID-relief law's provisions deemed $10,200 in unemployment insurance (UI) benefits issued last year, mostly to folks who lost jobs during coronavirus closures, was tax-free.

This tax exclusion applies to individuals and married couples whose modified adjusted gross income in 2020 was less than $150,000.

Shortly after the law took effect on March 11, the IRS started working to adjust returns of taxpayers who filed their tax year 2020 Form 1040s before the ARPA change and included all their 2020 UI benefits as income.

The initial guidance from the IRS was that folks who filed before the change took effect should NOT file an amended return—the IRS will be able to calculate the rebates without them. However, there are a few circumstances in which it may make sense to file an amended return. If you or a family member received unemployment benefits in 2020, please refer to Kay Bell’s post linked above. She spells it out very clearly.

Advanced Child Care Tax Credit

Roughly 97% of working families may be eligible to receive the expanded Child Tax Credit for 2021 as set forth in the American Rescue Plan. This increases the tax credit from $2000 per dependent (under 18) to $3600 for children up to 5, and $3000 for children 6-18. In addition, advance payments of up to half the credit were available beginning in July and paid monthly for 6 months. The IRS sent letters to families they deemed eligible based on their 2019 or 2020 tax returns.

The full credit is available to those with adjusted family income under $150,000 (singles $75,000). If income is above that threshold, the credit is decreased. Many are not receiving what they were expecting. This could be because of how the age of the child is determined.  For example, if a child turns 6 in 2021, they are only eligible for $250/month, not $300, and if a child turns 18 in 2021, they aren’t eligible anymore.

Here are some useful links, including one to “opt-out” of the payments. If your income will be much higher in 2021 than it has been, you might end up having to pay the government back some or all of the advance payment! If you opt out and end up being eligible for a credit, you will get it when you file your 2021 return. (If filing jointly, both parents have to opt out or you will still get half of the payment.)

Portals:

• To enroll, unenroll, change bank information, or otherwise manage the payments use the IRS portal.
• If you do not file income taxes, there is a different IRS site for non-filers.
• To estimate what you are eligible to receive, try this CNET calculator.
• For detailed explanations and instructions also available in Spanish, check this White House site.

 (CNET) (WAPO-subscription may be required) (Barbara O’Neil’s MoneyTalk)

Missing tax revenue

There was lots of buzz in the spring about the fact that, according to the IRS, up to a $1 trillion of tax revenue goes uncollected each year. Think about that, and what it would mean for the deficit if those funds were actually collected.

The tax gap represents underreported income, underpayment or nonpayment of taxes owed and exaggeration of claimed tax breaks such as deductions and credits. (Reuters)

The top 1% of earners avoids paying taxes on roughly 20% of their income each year. Random IRS audits meant to catch this don't because the taxpayers use sophisticated methods that are harder to uncover. They also found that their estimates of underpayment were missing the mark. In 2008, in an attempt to cut down on tax evasion, the Offshore Voluntary Disclosure Program allowed taxpayers to declare previously undeclared offshore assets and pay a penalty without being prosecuted. Many of those who made declarations had been audited, with no negative findings, hence the grossly underestimated cheating. (This program was ended in 2018, by the way.)

At the heart of the issue is that, for income not subject to a government filing like a W-2 or 1099, Americans report only about half of their income, according to a 2019 IRS report. This is mostly business income, which does not have a reporting mechanism. Several attempts and systems were tried over the years to capture this, but to no avail. For a thorough discussion of proposals to address this situation, and some really interesting history (like how the number of dependents reported on tax returns dropped by millions when Social Security numbers were required!) this NYT Opinion piece is an informative read. You may not agree in general with the NYT Editorial Board, but it is hard to argue with the idea that it is worth investing in a system to keep businesses from cheating on taxes at the expense of the average wage-earner, and help close the deficit at the same time.

(Washington Post – subscription may be required) (NBER research paper)

General

• In case you were wondering, stimulus payments were NOT considered to be taxable income.
• In an effort that helps both staffing issues and taxpayers, and brings at least part of the IRS into this century from a technology standpoint, the IRS will start putting QR codes on many of the notices it sends to taxpayers. This way, the taxpayer can scan the code using a smart phone, and be sent directly to the appropriate part of the IRS website to get more information and to set up an account with the IRS to even pay online. (Kay Bell)
• How long should you hang on to tax returns and supporting documentation? For the most part, the statute of limitations on taxes is three years. However, there are certain documents you should hang onto longer. Most of them fall into the category of property or other transactions involving investments that you may own for a longer period of time. (Yahoo Finance)  

Sales Tax

For eleven states, this weekend is a sales-tax holiday. (USA Today) For a complete list of all states and dates, check out this site. (Tax Admin.org)

About the Author

Beth Tallman

Beth Tallman entered the working world armed with an MBA in finance and thoroughly enjoyed her first career working in manufacturing and telecommunications, including a stint overseas. She took advantage of an involuntary separation to try teaching high school math, something she had always dreamed of doing. When fate stepped in once again, Beth jumped on the opportunity to combine her passion for numbers, money, and education to develop curriculum and teach personal finance at Oberlin College. Beth now spends her time writing on personal finance and financial education, conducts student workshops, and develops finance curricula and educational content. She is also the Treasurer of Ohio Jump$tart Coalition for Personal Financial Literacy.