Refund Delays, Stimulus Check Errors Foreshadow Rough Tax Season

(Bloomberg) -- Tax-refund delays and stimulus-payment hiccups could spill into the upcoming tax season as the Internal Revenue Service continues to face challenges related to the coronavirus pandemic and as Congress considers yet another round of direct payments.

Millions of Americans waited months for refunds in 2020, and millions also have yet to receive some or all of the stimulus payment approved last spring, according to a report Wednesday from Erin Collins, head of the Taxpayer Advocate Service, an independent office housed in the IRS.

The findings foreshadow what is likely to be a complicated and consequential tax season as taxpayers try to navigate tax forms to get missing payments. Further tangling things, another round of stimulus payments may be coming -- President-elect Joe Biden and Democratic congressional leaders are pushing for them -- and they could go out in the middle of tax-filing season, diverting IRS resources and potentially confusing taxpayers.

Delayed refunds last year were largely because of the agency’s sensitive fraud filters, and tax returns being filed on paper rather than electronically, the report said. The IRS was slow to process the 16 million paper returns as the agency halted work at several processing centers during the early days of the pandemic.

There were still 6.9 million unprocessed individual returns as of Dec. 25, according to the IRS. Some were filed as far back as April, according to the National Taxpayer Advocate’s annual report to Congress.

Awaiting Checks

The IRS took until September to create programs that would allow people to manually correct mistakes on the $1,200 stimulus payments, and that only addressed a “limited number of issues,” the report said.

The IRS has instructed millions of taxpayers who have not yet received some or all of their $1,200 payment approved in the spring or their full $600 payment from the December stimulus legislation to claim the missing amount on their tax return this year, which means some Americans could be left waiting more than a year to get their money.

“While the IRS’s inclination to use automation wherever possible is understandable in light of its human-resource constraints, its approach left taxpayers frustrated and without the funds some of them desperately needed,” Collins said in the report. “I am optimistic the lessons learned from the first round will make the process go more smoothly in 2021.”

The money is also critical as Americans have increasingly drained their bank accounts as unemployment levels remain high. Recipients of direct payments reported to the U.S. Census Bureau that they used the money for households basics, including food, rent or mortgage payments and utilities.

Fresh Round

Soon-to-be Senate Majority Leader Chuck Schumer has said his first goal after the Biden administration takes office is giving many Americans an additional $1,400 on top of the $600 payments Congress approved in December. However, it could take several weeks, or even months, for lawmakers to pass legislation -- meaning that many taxpayers likely wouldn’t be able to fix mistakes related to those payments on the IRS returns they file this season.

The IRS has yet to announce the start of the filing season, which usually begins in late January. It will run through April 15.

Collins also chided the IRS for a lack of transparency about delays.“For much of the year, relatively limited information was released, and comments made by IRS officials often were incomplete or misleading,” the report said.

The IRS said in a statement that tens of thousands of its workers are teleworking either part or full-time, and that while “significant progress” had been made processing returns, it’s still working through the backlog.Collins urged the IRS to send out weekly updates on processing delays and the status of its operations.