TaxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. payers and the Internal Revenue Service (IRS)The Internal Revenue Service (IRS) is part of the U.S. Department of the Treasury and is responsible for enforcing and administering federal tax laws, processing tax returns, performing audits, and offering assistance for American taxpayers. are set to face a bumpy 2022 tax filing season, which the IRS announced will begin January 24th and run through April 18th. Two major challenges await taxpayers: a second year of navigating pandemic-related tax relief on their returns and IRS backlogs that may delay processing and refunds.
Over the past two years the IRS has dealt with such challenges as pandemic-related disruptions for staff and the need to quickly administer several large and complicated relief packages enacted through the tax code. The implementation issues at the IRS have exposed the trade-offs of using the tax code to administer social support, especially during the pandemic.
The American Rescue Plan Act (ARPA), passed in March 2021, provided pandemic-related aid to taxpayers through the tax code that can be claimed during the tax season and may affect the size of tax refundA tax refund is a reimbursement to taxpayers who have overpaid their taxes, often due to having employers withhold too much from paychecks. The U.S. Treasury estimates that nearly three-fourths of taxpayers are over-withheld, resulting in a tax refund for millions. Overpaying taxes can be viewed as an interest-free loan to the government. On the other hand, approximately one-fifth of taxpayers underwithhold; this can occur if a person works multiple jobs and does not appropriately adjust their W-4 to account for additional income, or if spousal income is not appropriately accounted for on W-4s. s for some taxpayers.
For tax year 2021 only, the ARPA expanded the value of the child tax credit (CTC)The federal child tax credit (CTC) is a partially refundable credit that allows low- and moderate-income families to reduce their tax liability dollar-for-dollar by up to ,000 for each qualifying child. The credit phases out depending on the modified adjusted gross income amounts for single filers or joint filers. from $2,000 per child up to $3,600 for younger children or $3,000 for older children. It also eliminated the earnings requirement and work-related phase-in, expanding the number of households eligible for the credit.
Tax refunds will be impacted by the expanded CTC. Whether they raise or lower individual refund amounts compared to the past depends on individual circumstances, such as the advanced monthly payments last year that were worth up to half of the benefit.
For example, a taxpayer with a younger child may have received $1,800 of their $3,600 CTC benefit during 2021, and they would receive the remaining $1,800 when they file their taxes. If the taxpayer received the $2,000 CTC for the child before, they would see a $200 reduction in their refund. If, however, the taxpayer had received no CTC before 2021 because of the earnings requirement, they would see an $1,800 increase in their refund over prior years.
Some taxpayers may have to repay part of their advanced CTC payments if the IRS used an incorrect income amount or number of eligible dependents when calculating the advanced payment. Filers earning under $40,000 (single) or $60,000 (joint) will not need to repay advanced payments due to incorrectly claiming up to one dependent, but the protection will not extend to taxpayers with higher incomes. A clawback could reduce refunds for some households.
The ARPA also included a third round of economic impact payments, which were distributed beginning in March 2021, worth $1,400 per taxpayer and dependent for single filers earning less than $75,000 and joint filers earning less than $150,000. The payments may also affect tax refunds, as filers who did not receive any or part of the payment amount they are eligible for will be able to claim the balance as a credit on their tax return. Any adjustment will be in the taxpayer’s favor, though there still may be confusion due to the changing eligibility rules across the three sets of payments provided during the pandemic.
Taxpayers also will face likely delays at the IRS. A new report issued by the National Taxpayer Advocate found the IRS had a backlog of 6.2 million unprocessed individual tax returns and 2.3 million amended returns as of mid-December 2021.
The start of the 2022 tax filing season will likely add to the backlog and could delay refunds for many taxpayers, which the National Taxpayer Advocate attributes partially to the administration of pandemic-related tax relief: “With tens of millions of individuals claiming the [advanced] CTC and…the third stimulus payment, we believe the IRS will again be faced with the daunting task of manually reviewing tens of millions of returns, thus causing more processing and refund delays for millions of taxpayers.”
Adding to the difficulties, the National Taxpayer Advocate argued the IRS telephone service “was the worst it has ever been” in 2021, with an answer rate of about 11 percent. These problems are the result of an agency navigating pandemic-related disruptions and an ever-increasing scope of work as policymakers have run pandemic relief through the tax code.
While pandemic relief was important, implementing it through the tax code has resulted in delays, unresponsive service for taxpayers, and confusion during the tax filing process. Further challenges may lay ahead if new tax changes are passed as part of the stalled Build Back Better agenda, which would increase the IRS’ workload and potentially worsen the taxpayer experience further. Policymakers should avoid further complicating the tax code and instead aim for simplification so taxpayers can better understand and comply with the tax code and the IRS can passably perform its core mission of tax collection.