The 2022 filing season kicked off with no one predicting smooth sailing. Practitioners, pundits and even the IRS itself foresee problems ahead.
The start of the season on Jan. 24 was two weeks earlier than last year’s Feb. 12 opening — but there are a number of complicating factors, according to Mark Luscombe, principal federal tax analyst at Wolters Kluwer Tax & Accounting.
The IRS starts the tax season with a much larger than usual overhang from the 2021 filing season, Luscombe observed. “There’s a backlog on processing 2020 returns and there will likely be a backlog on 2021 returns,” he said. “The message from the IRS is basically, ‘Don’t expect to get your refunds on time, and don’t try to call us.’” (See
“You might have better luck with online services but unless you’re talking to a person, you can’t really get answers to your questions,” he continued. “Practitioners were complaining all through 2021 about unopened mail at the IRS, and the resulting computer-generated notices.”
Barbara Weltman, a tax attorney and author of Small Business Taxes 2022, agreed. “Do everything you can do electronically, especially if you’re due a refund,” she advised. “Keep the human element out. And don’t expect to get through to the IRS by telephone.”
“We may not have the final story on due dates,” Luscombe suggested. “Last year they extended [the] filing season by a month, but it wasn’t announced this early.”
Top issues for tax season
Luscombe noted a number of changes in the tax landscape from last year.
“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,” he said. “It’s somewhat similar to last year, but the new wrinkle is a larger amount applied to non-child dependents, so there’s a greater potential that people did not get the full RRC in advance. Taxpayers will 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 have Letter 6475, which will clarify what they got in the third round. It will be a little more challenging than last year because of the third round of payments.”
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, according to Luscombe: “This is a totally new situation. The IRS will shortly be coming out with Letter 6419, which will help clarify the situation. The CTC raises a couple of more issues because of the advance payments that could actually cause people to be under withheld. Unlike the EIP, if they get too much they have to 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. “Most of the beneficiaries of the enhancements will be childless low-income individuals,” said Luscombe. “There is an expanded age limit for eligible individuals, and they also increased the income level and amount that childless individuals can receive, so there could be a lot more people eligible for this.”
Parents can now claim the childless EITC if they have children without a Taxpayer Identification Number, which is a change from last year, he explained. 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. “The phaseout range and the percentage range were increased, so a lot more taxpayers were eligible at the middle-income level,” he said. “Another complication is that the credit is now fully refundable, so that more lower-income taxpayers that didn’t have enough income to be eligible can now qualify. One caveat for all people to qualify is the need for documentation of daycare providers with their TINs. this might be a hurdle to put together after the fact — it’s a way for the IRS to track if daycare providers are reporting the payments as income.”
More people will be eligible for the enhanced Premium Tax Credit for health insurance obtained under the Affordable Care Act, Luscombe observed.”The premium is more generous and more available to more people,” he said.
Enhanced charitable contribution deductions are again available on 2021 returns for nonitemizers, with some modifications. In 2020 it was $300 maximum for all non-itemizers whether they were married or not, Luscombe said, while for 2021, the maximum is $600 for married filing jointly.
The business meals deduction will increase from 50% to 100% for meals and beverages provided by a restaurant. “It has to be provided by a restaurant,” he emphasized. “It can’t be a deli tray purchased at a supermarket. Delivery or takeout also qualifies for 2021 and 2022 returns. That was not available for 2020.”
Businesses will have to deal with modifications to the various COVID-related payroll tax credits and tax deferrals, Luscombe indicated. “Businesses that closed down because they were not making any income may have taxable income resulting from payroll tax benefits,” he cautioned. “And the Employee Retention Credit was extended in stages, ultimately to Dec. 31, 2021. Then it was terminated a quarter earlier, after the fact in mid-November. A lot of employers reduced their payroll taxes for the first half of the fourth quarter. If they did, they have to repay by Dec. 31, 2021.”
‘Another miserable tax season’
While not a big fan of the proposed Build Back Better legislation, Ryan Losi, executive vice president of Piascik, was optimistic about its inclusion of funding for the IRS. “I thought it would impact the economy negatively, but I thought at least the IRS would get the funding that was needed,” he said.
However, the National Taxpayers Union Foundation points out that most of the funding for the IRS in Build Back Better is for enforcement, not taxpayer service.
Losi anticipates “another miserable tax season. It appears that the focus will be simply on electronic filing. They won’t be able to allocate resources to manning the phones or practitioner helplines, or responding to correspondence or processing powers of attorney. We will continue to get incorrect notices and levies. I’d love to see a moratorium placed on any notices until the backlog is cleared up.”
In fact, 11 tax professional groups have recommended a number of steps for the IRS to take in order to reduce the need for taxpayers and tax professionals to communicate with the IRS due to “persistent and erroneous notices.” Among other things, the steps include discontinuing automated compliance actions until the service is prepared to devote the necessary resources for a proper and timely resolution of the matter, and providing taxpayers with targeted relief from both the underpayment of estimated tax penalty and the late payment penalty for the 2020 and 2021 tax years. (See
As we go to press, the IRS is scheduling a meeting with the groups to consider these steps.
“The biggest new issue this season will be the reconciliation of advance payment of the Child Tax Credit,” said Roger Harris, president of Padgett Business Services, one of the stakeholder groups set to meet with the IRS. “It’s something new, and right now it’s just a one-year issue. But it’s a complicating factor that has to be dealt with. It adds more complexity than last year because practitioners never had to deal with it before. It will probably create problems for the IRS when returns are filed and the numbers don’t match their records.”
“It will be a nasty filing season,” predicted Phil Gross, a member at Kleinberg Kaplan. The biggest complexities, he believes, are 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.
Gross is not a fan of extending the filing season: “We would not necessarily benefit from an extended season. It could complicate matters both for preparers and taxpayers.”
Harris agreed. “It’s time to get back to predictable deadlines,” he said. “There are ways to get extensions without changing the due date for everybody else. Hopefully we’re getting to the point where we can put some certainty back into tax season.”
