Examining the Delayed Tax Refunds of 2020

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. 

Why Are So Many Tax Refunds Unclaimed?

More than a billion dollars is out there waiting to be claimed. Unfortunately, many businesses don’t know they may be entitled to a share of it

Each year before tax time, the IRS announces the amount of unclaimed money it’s holding due to people not properly filing their tax returns. In early 2019, the IRS said there were still unclaimed income tax refunds for the tax year 2015 to the tune of nearly $1.4 billion, and they estimate that there are 1.2 million taxpayers who still didn’t even file a tax return that year.

So, why is there so much in unclaimed funds? And what can you do to ensure you claim what you’re owed?

Where does that money come from?

If the government gets too much tax from individual paychecks or taxpayers otherwise overpay, the only way taxpayers will get those funds back is if they file a tax return at the end of the year and it has the correct information, such as address and payment details. Otherwise, they have three years from the tax return date to clear up any info or file the return and claim the refund. After that three year is up, the money becomes the property of the U.S. Treasury.

So why don’t people claim their tax refunds? There are a few answers, as two tax experts told CBS News earlier this year:

  • Some individuals simply aren’t educated about how to file a return or even the necessity of doing it.
  • Sometimes individuals believe that a smaller refund isn’t worth the fee taxpayers will have to pay a tax professional. So, they’ll avoid claiming their money even if they know they overpaid on taxes.
  • Some taxpayers may want to stay unknown to the IRS, whether due to debts they owe to the government, immigration status, or other reasons.

Another reason that the IRS is sitting on refunds could simply be that a taxpayer has forgotten about their refund and hasn’t done anything to follow up on the money they were supposed to receive. This can happen if a taxpayer provided incorrect bank account information or has a new address, for example.

When businesses can get a tax refund

It’s important to understand the different business structures and when you may be able to claim a tax refund.

A C-corporation is a type of business structure in which the owners or shareholders are taxed separately than the business income. This is the most prevalent type of corporation, and because the profits are taxed both at the corporate level and the personal level, a double tax occurs. However, there are benefits of a C corporation, one of which is the ability to reinvest any revenue back into the company at a lower tax rate.

Other business structures, such as S corporations or LLCs, separate the business’s assets from its owners, but they don’t see that double taxation since income is only taxed once.

Because profits of C corporations are taxed separately than their owners, these businesses are the only type of business that is eligible to receive a tax refund. As with an individual, if the C corporation paid more estimated tax throughout a year, it can technically get a tax refund. This would also be true if your business paid too much-estimated tax on payroll or sales taxes.

Sole proprietorships, S corporations, partnerships, and LLCs are pass-through entities because tax passes to individual tax returns. So, if you run a sole proprietorship, for example, you’ll report your business earnings on your normal individual tax return.

As an LLC business owner, the only way you’d get a tax refund is if your total payments and withholding are more than your total tax liability on your return.

Remember that as a small business owner, it’s not always positive to get a tax refund. If you get money back, that means you overpaid and could have been earning interest on those funds in the interim. This could also interrupt your cash flow.

Filing a tax return

You should never wonder whether you are owed money if you file a proper tax return—and self-employed individuals must file a return if they made over $400 that year. Not doing so comes with some stiff penalties and other consequences.

Beyond the basic legal necessity, it keeps your financial record updated and could help protect you against identity theft. When you file a return using your social security number, that prevents someone else from filing a fraudulent tax return with your number. Even if you’re only now filing for previous years, doing so could still uncover that there had been a fraudulent tax return years back.

When your tax return is past due, it’s important to file it ASAP. Otherwise, you’ll stack up interest charges and late payment penalties.

Finally, if you’re self-employed and you don’t file a federal income tax return, the income you earned won’t be reported to the Social Security Administration—and you thus won’t get the credits toward your social security or disability benefits.

Provident CPA & Business Advisors help successful professionals, entrepreneurs, and investors get more out of their business and work less. Typically, our clients reduce their taxes by 20 percent or more and create tax-free wealth for life. Contact us for expert advice on tax planning and business strategy and discover how we help businesses exceed expectations.