Filing taxes last year was a nightmare for taxpayers, their accountants and the Internal Revenue Service. This year might not be much better.
The IRS is still working to issue guidance for the changes to the tax code signed into law more than two years ago. Congress also passed a series of tax breaks late last year that will require the IRS and tax software providers to revise forms at the last minute, and taxpayers may have to amend returns from prior years to claim those breaks.
It also could be another disappointing year for taxpayers expecting a hefty refund.
“I hold my breath for the entire filing season and breathe a sigh of relief every April 15,” said Robert Kerr, executive vice president of the National Assn. of Enrolled Agents, a group that represents tax preparers. “Every filing season is a miracle. The IRS fights an uphill battle every year.”
There are a few bright spots. The agency made it through one filing season with the changes from the 2017 tax overhaul, which greatly revised the tax code for individuals, small businesses and corporations. And unlike last year, the IRS won’t be facing a government shutdown forcing the agency to spend the final weeks of preparation with a bare-bones staff.
Still, tax preparers are bracing themselves for the 2020 filing season, which runs Jan. 27 to April 15.
“I don’t think we know enough or learned enough last year to say this year is going to be substantially easier,” said Mike Greenwald, a partner at accounting firm Friedman LLP.
Everyone wants extensions
For many accountants, the crunch isn’t concentrated just in the spring anymore. The new busy season now includes fall deadlines, reflecting the increased number of people filing on the extension due date to have more time to comply with new complex rules for pass-through entities. Tax professionals are still recovering from last year’s Sept. 15 deadline for partnership returns and Oct. 15 due date for corporate and individual returns.
“Last April was moderately harder than any other tax season,” said Steve Rossman, an accountant at Drucker & Scaccetti. “September was the worst tax season I’ve ever had.”
Accountants say a large portion of their sophisticated clients — especially those who have stakes in partnerships or invest in hedge funds or private equity — wait to file until the fall, because they don’t have the information yet from the fund to submit their own taxes.
“They are going to want to wait as long as possible to see if more guidance comes out,” especially rules about write-offs for debt and carried interest, Greenwald said. “They want us to learn on somebody else’s dime.”
Congress gave some taxpayers a gift in December, when it retroactively extended several expired tax breaks, including write-offs for some medical expenses, mortgage insurance premiums and college tuition. Taxpayers have the option to amend their 2018 and 2019 tax returns to claim those deductions if they’re eligible, but they should weigh whether the value of the tax break is worth resubmitting paperwork to the IRS.
“If you’re paying a professional $400 to get back $40, that math doesn’t work for me,” Kerr said.
Low and middle-income taxpayers should check their total income before shopping for a tax preparer, because they might be eligible for a free service. Taxpayers who earned $69,000 or less last year are eligible for IRS Free File, a no-cost, online tax filing system using private tax providers, such as H&R Block and Intuit’s TurboTax, according to the IRS. More than 20 states, including New York, Massachusetts and Michigan, also offer free state tax return preparation.
Refunds could also take a while to reach taxpayer bank accounts as the IRS clamps down on fraud. The agency has to wait until at least Feb. 15 to send refunds to taxpayers who claim the earned income tax credit or subsidies for health coverage. The agency says taxpayers who file at the start of the filing season can expect those as soon as the first week in March, as long as there are no problems with the returns.
The IRS recommends submitting a return electronically and requesting the refund via direct deposit, rather than check, for the quickest turnaround time.
Some taxpayers could also face longer-than-usual waits for their refunds because of a fraud filter that catches hundreds of thousands of legitimate returns, the Taxpayer Advocate Service said in a recent report. The screening system — intended to flag returns possibly filed by fraudsters looking to steal refund checks — identified nearly 1.1 million returns, but about 71% of those were false positives.
Taxpayers who weren’t happy with the size of their refunds last year could be similarly disappointed this year unless they changed the amount of tax withheld from their paychecks. Taxpayers often judge their tax preparer based on the size of their refund, Kerr said, even though it has more to do with how much they did or didn’t have withheld.
Optimize your refund
At the start of last tax season, the average refund was nearly 9% lower than in 2018, before the tax overhaul took effect. That gap largely closed by the end of 2019, but some taxpayers were startled by how the tax cuts and withholding rate changes meant they ended up with a much smaller refund than usual, even if they paid less in federal tax overall.
The IRS at the start of this year made it slightly easier for taxpayers to more accurately calculate how much employers should take out of their paycheck, according to Pete Isberg, vice president of government affairs for Automatic Data Processing, Inc.
The agency released a new Form W-4 that aligns with the 2017 tax code changes. It eliminates using so-called “allowances” to determine the withholding rate. Instead, the form asks for information about income sources, dependents and anticipated deductions.
The IRS says the new form reduces the complexity and increases the transparency about withholding, though some tax preparers say the form is still difficult for the average taxpayer to fill out.
But since these changes won’t affect this year’s tax returns, the best way to optimize your refund is to get in touch with your accountant as soon as possible, before they get too busy, Rossman said.
“Don’t wait until the deadline,” he said. “Whether you owe money or get a refund, it’s better to know now.”