COVID-19 caused a delay in the tax return filing deadline, giving taxpayers extra time during this uncertain economic time. But the IRS still hadn’t processed millions of returns by October.
The IRS responded to the COVID-19 pandemic by extending the deadline for tax filing in 2020. Many welcomed the grace period in a year that caused huge shifts in the economy, including business closures, lay-offs, and an increase in the unemployment rate. However, one downside is that many people were still waiting to receive their tax refunds, even as we approached the end of the year.
So, what’s causing the delays, and what should you expect if you’re still waiting? The answers could also have implications for your 2021 taxes.
2020 IRS delays in refund processing
The IRS delayed the tax deadline in 2020 to July 15 to help American taxpayers struggling through the pandemic. Some taxpayers could have also extended that deadline further—until October 15—if they filed IRS Form 4868 by July 15.
In October, it was reported that the IRS still had not processed 2.5 million income tax returns that came in hard copy by the deadline. Considering that 70% of returns last year resulted in a refund, that’s a lot of taxpayers who still hadn’t received their checks.
Are you waiting on your refund? Taxpayers can check on their tax refund status, but only if they filed electronically. Those hard-copy tax returns that haven’t yet been processed can’t be tracked. However, e-filers also saw delays in receiving their tax refunds, so it’s wise to log onto the “Get Refund Status” tool from the IRS to see where you stand.
One reason for the backlog could be that the IRS is understaffed and underfunded. Even before the pandemic, the organization was struggling. The agency had also sent many late refunds in 2019, had poor customer service performance, and was trying to manage increased workloads with significant funding shortages.
The IRS’s budget has been cut by around 20% since 2010, and the agency lost 22% of full-time employees. These are major challenges for any year but especially in 2020.
Other reasons for delayed refunds
There are common reasons for refund delays in any typical tax year, some of which taxpayers can help avoid themselves. These include the following:
- Your tax return is incomplete or inaccurate
- Tax fraud has occurred, meaning someone else filed in your name illegally in an attempt to get your refund
- You submitted a return amendment
- Bank account information for the deposit was inaccurate
- Certain claimed tax credits have caused the IRS to take a closer look at the return
- The refund is being used to pay debt
When these issues are compounded with a pandemic’s challenges, even more severe delays are sure to occur.
Tax refund interest
Another interesting development in 2020 that applies to 2019 tax returns is the IRS-paid interest on late tax refunds. Law requires the IRS to pay interest on individuals’ tax refunds who were impacted by a federally declared disaster and filed by July 15. In a typical year, the IRS pays interest when a refund is delayed for over 45 days. However, this rule doesn’t apply to individuals who qualify for disaster relief.
This means that if a taxpayer receives a 2019 tax refund after April 15, 2020, it will include interest. According to the IRS, the average interest payment is $18. The interest rate for the third quarter of 2020 was 3%, down from 5% in the second quarter.
Where to go when you have tax questions
There continue to be many uncertainties facing our country, including whether another round of stimulus will be distributed and whether 2021 will bring the same tax challenges. And it is reasonable to suspect many of the delays seen in 2020 will extend into next year’s returns.
The team at Provident CPA and Business Advisors is here to help you during these ambiguous times. Whether you are an individual taxpayer or running a business, we can help break down tax laws that apply to you. We also help you pay the least amount of tax legally possible by ensuring you claim all applicable deductions and credits.
Contact Provident CPA and Business Advisors to learn more.