Stimulus mistakes hit 2021 returns, and more reasons for late refunds

Some things are turning into bad bets this spring. Putting money on Gonzaga University or the University of Kentucky making it to the Final Four in the men's NCAA basketball tourney. Thinking Tom Brady would really, truly stay retired from football. Imagining no one could possibly have a reason to remember the 2022 Oscars.

Add another to the list: Banking on seeing your federal income tax refund cash within the advertised 21 days.

Many people, plain and simple, shouldn't bet on getting refund money quickly, as the Internal Revenue Service is once again cautioning taxpayers not to rely on "receiving a refund by a certain date, especially when making major purchases or paying bills."

The IRS has a list of reasons that refund money could take months to get, even if you file electronically, including cases of identity theft.

Make no mistake, nearly 51.8 million people already have received tax refunds this year through March 18. That's up 4.1%.

The average refund was $3,305 so far — up 12.9% from the same time a year ago. Already, $171 billion in refund cash is out there since the tax filing season kicked off Jan. 24.

Many tax professionals and early tax filers tell me they've had no trouble getting their federal income tax refund within two weeks or so of electronically filing. So, that's some good news.

Last year, of course, the IRS found itself in an outlandish mess involving refund delays — a mess that continues to bog down refunds.

The IRS had a backlog of more than 17 million unprocessed tax returns from last year as of early February — including 10.8 million unprocessed individual returns, according to Senate Finance Committee testimony by Erin Collins, the national taxpayer advocate. That figure includes both paper returns and some electronically filed returns that had been suspended during processing, often due to mistakes on the return.

Collins told the Free Press that millions of taxpayers face challenging delays this year because of an inventory backlog at the IRS that was carried over into 2022.

The large backlog includes original returns, amended returns, individual business returns as well as correspondence.

"They're still working through those returns before they start dealing with some of the challenges and problems from this (season's) tax return," Collins said.

Of all individual returns processed last year, Collins noted, 77% resulted in refunds.

Processing delays generally translate into refund delays, she said, which can trigger financial hardships for some, including evictions, utility shutoffs and inability to buy necessities, such as groceries and medicine.

What kind of mistakes are being made with stimulus payments?

One trouble spot: Did you possibly overlook that you received any money last year? Or miscalculate how much money you got? And now you are claiming the recovery rebate credit on a 2022 return?

Or are you not reporting the correct information relating to the actual amount of money you received for the advance child tax credit payments in 2021?

The IRS is seeing mistakes in claiming the recovery rebate credit once again this year — and the child tax credit — and continues to warn taxpayers of potential delays. It could take several weeks to resolve some of these issues.

More: Average tax refunds higher than last year but paper headaches remain

More: Nearly 50,000 Michiganders have unclaimed cash from 2018 tax refunds: What to know

It's possible that someone could forget that they received money last year, for example, and then try to claim the recovery rebate credit on the 2021 return.

One taxpayer told me that he believed that he did not receive his third Economic Impact Payment last year for $1,400. He then claimed the recovery rebate credit on his return, which the IRS accepted via electronic filing Feb. 23. He expected a tax refund of $2,200.

Lo and behold, he looked again at his bank statements, which included an auto-deposit for $1,400 in early 2021.

Should he file an amended return now, he asked me, saying he owed $1,400 and then send a check to the IRS? He couldn't imagine that the IRS would simply adjust his refund down from $2,200 to $800.

But if he sent a check with an amended return, what would happen if the IRS issued the adjusted refund? How would he get the $1,400 back?

It's not an uncommon mix-up — and one that will lead to refund delays, according to Mark Steber, chief tax officer at Jackson Hewitt Tax Service.

The taxpayer who is still owed a refund should take no immediate action, he said, if this type of mistake is made with stimulus payments and the recovery rebate credit.

"No new tax return, no amended tax return, no paper filed tax return. The IRS is managing these," Steber said.

Unfortunately, we're talking about waiting possibly six to 12 weeks for the IRS to resolve this type of error, Steber said.

The IRS isn't rejecting e-filed returns that have the mistake but the agency is sending notices about those errors. The IRS states that taxpayers should not file an amended return in these cases.

More: IRS Letter 6475 can help you claim any extra stimulus cash owed: 5 things to know

Ideally, taxpayers would have received — and kept — IRS Letter 6475, which detailed the amount of the third stimulus payment that the taxpayer received from March through December last year. Many people received that money in one lump sum in March but others may have received what were called "plus up" payments.

Some people received a smaller amount in March or April last year, based on their 2019 tax returns. Later in the year, they received a "plus up" payment after filing a 2020 income tax return. They could have qualified for additional stimulus cash, for example, if their income dropped during the recession in 2020 and they qualified for more money based on their 2020 return.

Some "plus up" payments went to people who received money initially based on their information received from the Social Security Administration, Railroad Retirement Board or Veterans Affairs.

The IRS Letter 6475 gives you a complete picture of the total amount of money received for your stimulus payment or payments last year.

Collins said the IRS is working through its system to recheck the numbers for inconsistencies relating to the recovery rebate to verify what you're claiming for the credit against what was paid out last year.

"And if it is inconsistent, the IRS will be sending the taxpayer a notice for the taxpayers to either support their numbers or in essence to agree that the IRS records may be correct," Collins said.

"It is a long period of time before those taxpayers get those refunds," she said.

The tax return will flow into the error resolution system at the IRS if the numbers don't match up.

If the taxpayer still has a refund coming after the error is fixed, Steber said, the IRS will adjust any refund due and typically just send the balance as the new amount of refund. The money would show up, he said, either by direct deposit or paper check, as the taxpayer initially directed. The IRS also will send a letter to the taxpayer explaining the adjustment.

On the other hand, Steber said, it becomes more complicated if the taxpayer owes money. The taxpayer is at risk of facing penalties and interest if they owe a significant amount of money, Steber said, and it may be better to figure out what is owed, amend the return and make a payment to the IRS before the April 18 deadline.

Are many refunds being issued more smoothly?

"The good news," Collins said, "is that the IRS is not experiencing any unusual or unexpected problems. So far, toward the end of March, a very high percentage of individual taxpayers are filing electronically."

Many of refunds are being issued, she said, assuming no errors on an e-filed 1040 return.

But all is not running smoothly. Trouble spots still arise, even with e-filed returns, when mistakes are made.

Last year, for example, the IRS ended the filing season with a backlog of nearly 10 million returns that were put in a suspended status, as the agency reconciled discrepancies involving recovery rebate credits the taxpayers claimed that they were owed versus the stimulus payments they received in 2020. Any refunds on those returns faced delays.

Paper returns — and returns that request a paper check, instead of direct deposits — continue to face much longer delays based on an antiquated system.

Collins, who spoke to the Free Press by phone, cautioned that realistically it could take six to nine months for a refund, if you file by paper.

Yes, that's what she said — maybe nine months.

Much, she said, will depend on how quickly the IRS is able to move through a backlog.

Considering that the IRS is nearly a year behind in processing paper returns — yes, a year behind — many taxpayers will experience a great deal of frustration.

As of March 18, Collins wrote in a blog, the paper return backlog alone stood at nearly 15 million.

In her blog posted on March 30, Collins urged the IRS to quickly implement a bar coding technology for paper returns by next filing season to move away from the "IRS’s archaic data intake process."

The 2-D bar coding has been used by state tax agencies, she said, for the past two decades to automate the processing of paper tax returns.

"During that time, the IRS has considered, rejected, proposed, reconsidered, partially implemented and deferred the question of whether to implement scanning technology," Collins wrote.

The effort at the IRS to process paper returns currently, she said, evokes images of what data transcription looked like in the 1960s.

"Employees manually transcribe all paper tax returns," she wrote.

"Transcription consists of key stroking each digit and each letter on the return. For a moderately complex return, several hundred digits may need to be transcribed. For longer returns with more forms and schedules, the number of digits may approach or exceed 1,000 digits."

Bluntly, she stated: "In the year 2022, this doesn’t just seem crazy. It is crazy."

What can trigger delays?

Some are facing refund delays if they made a mistake reporting their unemployment benefits, which are now fully taxable on 2021 returns. Again, you don't want to guesstimate how much money you received in jobless benefits. You need to match that up with a 1099-G.

And the IRS listed other reasons that trigger refund delays:

• A correction needs to be made relating to the child tax credit or recovery rebate credit amount that the taxpayer lists.

• The return includes a claim filed for an earned income tax credit or an additional child tax credit.

• The return includes a Form 8379, the Injured Spouse Allocation, which the IRS says could take up to 14 weeks to process. If you're married and filing jointly, you could end up using this form to try to get back your share of a tax refund if the refund has been reduced to apply to a debt owed by your spouse, not you.

To check the status of a refund, taxpayers should use the "Where's My Refund?" tool on IRS.gov. Information for the most current tax year filed is generally available within 24 hours after the IRS acknowledges receipt of a taxpayer's e-filed return. If they filed a paper return, taxpayers should allow four weeks before checking the status.

More: Tax season anxiety is so high that even tax pros want relief

IRS phone and walk-in representatives can only research the status of a refund if it has been:

• 21 days or more since it was filed electronically (or since the IRS filing season start date — whichever is later)

• Six weeks or more since a return was mailed

• Or when "Where's My Refund?" tells the taxpayer to contact the IRS.

Contact Susan Tompor via stompor@freepress.com. Follow her on Twitter @tompor. To subscribe, please go to freep.com/specialoffer. Read more on business and sign up for our business newsletter.

This article originally appeared on Detroit Free Press: Federal income tax refunds may be delayed by stimulus mistakes, paper