5 Reasons Why Your 2020 Tax Refund May be Delayed
If you are among the approximately 126 million taxpayers who expect to receive a tax refund, you may be anxiously awaiting those funds to be deposited into your bank account or to receive that check in the mail. However, an increased number of taxpayers are finding that their 2020 tax refunds are taking significantly longer than they anticipated. Here are five reasons why you may not have received that anticipated refund just yet.
Reason #1- The IRS is Still Processing 2019 Tax Returns
The Covid-19 pandemic significantly affected the IRS’s ability to process tax returns due to reduced staff, temporary office closures, and a shifting of the IRS’s priorities from tax return processing to issuing stimulus payments. The IRS was already understaffed before the pandemic, to which any taxpayer that has recently tried calling them could likely attest. Given that returns are generally filed and processed in sequence if a 2019 return hasn’t been processed yet, you are not likely to receive your 2020 refund. Albeit frustrating, the reasoning behind it makes sense. If the IRS turns over the 2020 refund to the taxpayer but then finds a significant issue on the 2019 return in which that taxpayer should owe money, the IRS has then lost the ability to offset that 2019 balance against the 2020 refund. To increase the speed in which your return is processed, I recommend e-filing your return in all cases that qualify (which is the overwhelming majority of all tax returns) and filing your return as soon as feasible in the preparation year.
Reason #2- The IRS Has Flagged Your Return for Identity Verification
With identity theft becoming a growing problem in the United States with each passing year, the IRS has been on the losing end by issuing many fraudulently obtained refunds to identity thieves. Oftentimes the IRS has encountered difficulties in clawing that money back from the individuals who perpetrate those frauds. Therefore, in cases where a taxpayer has a significant refund amount, where identity theft concerns have been identified in the past, or where the return may have aspects in common with returns that are highly susceptible to fraud (such as Earned Income Credit and/or Child Tax Credit), the IRS conducts some extra due diligence before issuing those refunds. Generally, the IRS mails a letter to the taxpayer providing them with a phone number to call in order to verify their identity before the refund can be issued. For taxpayers that do not check their mailbox often, even if you use direct deposit, I would highly recommend checking your mail if you are waiting on a tax refund. The IRS may have notified you that they are trying to verify your identity before processing your refund. If you have not received a letter, try using the “Where’s My Refund” tool on IRS.gov to see the status of your outstanding tax refund.
Reason #3- The IRS Has Adjusted Your Tax Return
One of the most common refund delays, for 2020 tax returns specifically, is the refund delay pertaining to the Recovery Rebate Credit, which is the tax return version of the stimulus payments that many taxpayers received in the summer of 2020 (for the first Economic Impact Payment) and/or between December 2020 – February 2021 (for the second Economic Impact Payment). Taxpayers who were shortchanged on either of those first two EIP/stimulus payments are able to claim the Recovery Rebate Credit on their 2020 tax returns. What many taxpayers do not realize, however, is that their 2020 tax transcript shows exactly how much they received as per IRS records. If there is a difference between what you claim you received and what the IRS has on file, your tax refund will be delayed until the error can be straightened out, or the IRS will simply adjust your tax return to the amount that its records show that you are entitled to based on known information. Keep in mind that if your return is adjusted, you are generally allowed to provide information supporting your position, and if the IRS is wrong you are entitled to recoup those funds that were wrongfully withheld (oftentimes with interest). But the process will likely take a while to resolve.
Reason #4- You Filed a Paper Return
Believe it or not, the IRS has allowed the electronic processing of tax returns since 1986! Though it took until the 1990s for e-file to become the widespread method of transmitting tax returns to the IRS, some taxpayers still prefer to file their returns via paper. There are still a few forms that are not transmissible via e-file. One of the most popular of these forms is the 1040X, which is the form in which taxpayers submit an amended tax return. However, beginning with the tax year 2019, the IRS has begun allowing amended returns to be submitted via e-file, with the plan of expanding to each subsequent tax year beyond that. But if you are amending a return for 2018 or a tax year prior to that, paper is your only option.
Paper returns had always been subject to delays historically, given that it involves the extra steps for the IRS of collecting mail, opening it, and entering it into the IRS system, rather than that all being handled simultaneously in an e-file transmission. Also, paper returns are more likely to have errors in calculation, missing forms and schedules, and other problematic issues that can delay processing. But in 2020, the U.S. experienced very well-publicized delays with mail and combining that with the IRS having shuttered offices during the pandemic and staffing shortages due to illness, childcare accessibility, and other pandemic-related challenges, the mail delays became exponentially worse than the typical 3 – 6 months pre-pandemic.
If you filed a paper return and have not received a refund, in addition to the “Where’s My Refund?” tool that I mentioned previously, you can also try accessing your tax return transcript for the year you filed on IRS.gov to see if your return has been entered into the system yet by the IRS and potentially whether it has been adjusted by the IRS since you filed it.
Reason #5- Your Return is Problematic
Sometimes when taxpayers file a tax return, and especially if the taxpayer self-prepares and does not double-check before submitting, a return can have a glaring issue that results in a significantly higher refund than what should have been reported. For example, the taxpayer’s W-2 may show federal tax withholding of $1,506 and the taxpayer accidentally types $5,106 into the self-preparation software and is surprised to find his or her refund is significantly higher than expected. Rather than investigating further, liking this higher refund, the taxpayer files the return as is. The problem with this is that this is easily caught by the IRS given that the federal withholding claimed on the return will not match IRS records. The IRS will set the return aside, process the returns that don’t have problems, and likely get back to the problematic returns later when it has time to do so. In the meantime, the refund that the taxpayer may have rightfully collected, albeit lower, is also delayed while the IRS puts the problematic return on hold. If your refund is delayed, one proactive way a taxpayer can approach it is to double-check his or her return and make sure there are no glaring issues. Also if it is a return for which a Wage & Income Transcript is available on IRS.gov, access your transcript to see If there are any variances that the IRS may have in its records that you did not incorporate into your return.
Final Thoughts on Tax Refunds
Receiving a tax refund from the IRS is generally not optimal, given that it means you overpaid the government during the year. The ideal goal is to pay in no more than necessary, but also not owe so much at the end of the year that you pay penalties and interest in addition to tax that you may owe. Small refunds are okay, and generally, the clients that I work with throughout the year will apply a small refund forward to their estimated taxes for the next tax year, such that they are not necessarily waiting for a check or direct deposit (that the IRS may sit on for several months). However, some taxpayers do prefer to get that refund check or deposit each year and I am unable to convince them otherwise. If you are in that situation, one downside is that you are telling the IRS you can wait to have use of your money, since you are allowing them to hold it all year rather than having use of it yourself by determining how much you should actually pay and paying them only what you owe and nothing more. If the IRS in turn decides they need a little more time than the 12 – 18 months you already gave them to hold onto your money, unfortunately, they are not likely to see this as a big deal.
If you would like to find solutions for optimizing your tax situation so that you are not waiting on the IRS to send you a tax refund, I would be happy to discuss this with you! Please contact me using the form below.