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The good news is we started two weeks earlier than last year’s tax season kick-off of Feb 12. The reality is that we NEED it! There are a number of complicating factors this year, starting with a much larger than normal backlog. The IRS is still dealing with a backlog of millions of tax returns, including 6 million unprocessed original individual returns (Forms 1040), 2.3 million unprocessed amended individual returns (Forms 1040-X), more than 2 million unprocessed employer’s quarterly tax returns (Forms 941 and 941-X), and about 5 million pieces of taxpayer correspondence as of late December. Tax preparation professionals suggest: Do everything you can do electronically, especially if you’re due a refund. Keep the human element out and don’t expect to get through to the IRS by telephone. Contact tax professionals as needed.
Top issues for tax season
Taxpayers will once again have to track Economic Impact Payments in the calculation of the Recovery Rebate Credit and distinguish payments in early 2021 from those in the third round later in the year. There is a new wrinkle in the larger amount applied to non-child dependents, so there’s a greater potential that people did not get the full RRC in advance. Taxpayers may also be confused because the second round of payments that came out in 2021 was related to 2020 returns, so taxpayers may just report to their preparers what they got for all of 2021. They should use the IRS Letter 6475 to clarify what they got in the third round versus second.
Another complicating factor on the 2021 tax return will be a larger and fully refundable Child Tax Credit and the need to track and account for advance payments in 2021. The IRS issued Letter 6419 to help clarify the situation. The CTC raises a couple of more issues because of the advance payments that could cause people to be under withheld. Unlike the EIP, if they get too much, they must repay it. This will potentially result in a higher tax than they expect and may result in being liable for the underpayment of estimated tax penalty.
More taxpayers will be eligible for the enhanced Earned Income Tax Credit. There is an expanded age limit for eligible individuals, and the IRS also increased the income level and amount that childless individuals can receive.
Parents can now claim the childless EITC if they have children without a Taxpayer Identification Number. Also, a taxpayer who is separated and is filing as married filing separately can claim the EITC as being single in order to claim qualifying children.
More middle-income taxpayers will be eligible for the enhanced and fully refundable Child and Dependent Care Credit on 2021 returns, although some higher-income taxpayers may no longer be eligible. One caveat for all people to qualify is the need for documentation of daycare providers with their Taxpayer Identification Numbers (TIN)s.
Businesses will have to deal with modifications to the various COVID-related payroll tax credits and tax deferrals. Businesses that closed down because they were not making any income may have taxable income resulting from payroll tax benefits.
Additional complexities seem to be new schedules K-2 and K-3, the passthrough entity SALT cap workarounds in the 25 states that have them, the excess business loss rule, and the Code Section 475(f) mark-to-market election, which allows traders to elect to treat losses from stock sales as ordinary losses rather than capital losses. Talk to a qualified tax professional to better assemble an accurate tax return.
IRS Offers Text chat and Chatbot Updates to Help Taxpayers
Text chat is an automated system enabling taxpayers to interact with the IRS online. Recent usage is about 1.2 million in November 2021, with an average time on the chat of 6 minutes and 21 seconds. The IRS is also implementing Chatbot and Voicebot to further improve service levels. The “bots” allow the taxpayer to make a one-time payment by following the provided links. The Chatbot will be able to set up an installment arrangement once the phone line is authenticated, and taxpayers will be able to request transcript, payments, and balances. Both Voicebot and Chatbot can transfer a taxpayer back to an IRS assister.
IRS Having Difficulty Processing Power of Attorney Forms
Tax professionals are set to help filers navigate the 2022 Tax Season but are finding out they may have trouble getting power of attorney forms (Form 2848) processed. Taxpayers use Form 2848 to authorize an individual to represent you before the IRS. The individual you authorize must be a person eligible to practice before the IRS. Your authorization of a qualifying representative will also allow that individual to receive and inspect your confidential tax information.
One of the most substantial changes this year was to the Child Tax Credit. In 2021, the credit amount increased significantly, and rather than the annual lump sum, the IRS made monthly payments from July to December 2021. The 2021 changes also expanded the eligibility requirements and made the credit fully refundable. These changes meant more families qualified and middle- to low-income families could take advantage of the credit. Upper-income families could see a reduction in credit when compared to previous years, and some will not receive any credit at all. Credit Amount: $3,600 for children ages 5 and under at the end of 2021; $3,000 for children ages 6 through 17 at the end of 2021. Taxpayers are encouraged to visit the EITC website for assistance.