Yesterday the IRS announced that e-filing for individual tax returns (Form 1040) will open on Monday, January 23, 2023. At that time the Service will begin accepting and processing returns for tax year 2022. The IRS has used part of the money they received from the Inflation Reduction Act to hire more than 5,000 new telephone assistors and they have added more in-person staff for local Taxpayer Assistance Centers (TACs) so it may be easier for taxpayers and tax professionals to get IRS assistance this filing season than it has been the last few years. Reports from tax professionals on social media have noted that phone staff who had been assigned to help with clearing backlog have been released back to their phone assistance roles, which is truly welcome news for tax professionals and their clients.
Taxpayers using a professional to prepare their tax returns should nevertheless be aware that, while their returns can be prepared (and in some cases sent to the software provider for submission to the IRS) before e-filing opens, the returns will not be sent by the software providers to the Service until e-filing opens. The same is true for individuals who prepare and e-file their own returns using DIY software or the IRS Free File program. The re-opening of individual e-filing also means that prior year returns and amended returns (2019 through 2021) can be e-filed as well. Taxpayers who have not filed their 2019 returns or who could amend their 2019 returns to claim an additional refund amount have only until April 18, 2023 to do so. After that the 2019 tax year is considered closed with respect to “claims for refund.”
Taxpayers should do everything possible to file electronically and avoid filing returns on paper. Erin Collins, National Taxpayer Advocate, famously said that “paper is the IRS’ kryptonite.” That is still true. The IRS has been working hard to clear the backlog of paper-filed tax returns and correspondence that resulted from pandemic-related shutdowns and it has been making good progress. “As of December 23, 2022, we had 1.91 million unprocessed individual returns received this year. These include tax year 2021 returns and late filed prior year returns. Of these, 1.49 million returns require error correction or other special handling, and 414,000 are paper returns waiting to be reviewed and processed.” It is important to note, however, that processing is done in order so any tax returns still in process will be completed before the IRS begins processing paper-filed 2023 returns. And the IRS is expecting 168 million returns (electronic and paper) to be filed before this year’s tax deadline. To avoid processing delays, file electronically and accurately.
Taxpayers should also remember that refunds for tax returns that claim certain refundable credits, by law, are not released until February 15. If your tax return claims the refundable part of the Child Tax Credit, the American Opportunity Credit, or the Earned Income Tax Credit, no matter how early you file, your refund will not be released until mid-February.
To avoid processing delays and IRS notices taxpayers should wait until they are sure they have received all of their income documents: Forms W2 (wage income), 1099-NEC (self-employment income), 1099-MISC (miscellaneous income), 1099-K (income from third-party payment processors), 1099-R (retirement income), etc. Often, unless you have opted out of electronic receipt, you must sign into your online account (banking, broker, employer) to download the forms. It is really easy to miss one so it’s worth taking some time to ensure you have them all. Further, while the IRS has delayed the requirement for third-party payment processors to provide Form 1099-K for taxpayers who received $600 or more in payments, it is possible that many taxpayers who were not expecting Form 1099-K may receive one (or more). The payment processors may have simply decided to go ahead under the original requirement rather than adjust their systems. Taxpayers who receive Form 1099-K should also ensure that the amount reported is correct and correctly reported on their return. Some income reported on Form 1099-K could be non-taxable while other amounts could actually generate a loss.
It is also really easy to forget one or more W2s if you had multiple jobs during the tax year and/or you moved. If you want to make sure your tax return is accurate and avoid IRS correspondence later in the year (and the possibility of having to pay additional tax) be sure you have all of your W2s before you file your return or consider filing an extension. The IRS does not make wage and income transcripts available to taxpayers and tax professionals until late May; if you think you are missing income items it may be best to wait until these transcripts are available so you can be sure. Requesting an extension is not an audit flag but remember, the extension is for time to file, not time to pay. If you are expecting a refund an extension is no problem. If you expect to pay, you need to pay your expected amount of tax on or before this year’s filing deadline (April 18, 2023).
Finally, if you are considering hiring a tax professional or changing your tax professional you need to find one soon. As of right now, tax season is looking much less chaotic for tax professionals than it has been the last three years. Nevertheless, many tax professionals shed clients last year and/or raised their fees. Many others have decided not to accept new clients for this filing season. Expect it to be harder to find a tax professional and for fees, in most cases, to be higher.