Low- and middle-income households may face tax refund delays and higher costs for tax prep services this year after a late start and new stimulus provisions complicate the filing season.
The Child Tax Credit (CTC) and the Earned Income Tax Credit (EITC) may be accessible to more people because of rules changes, but that could also mean longer processing times for the filers that claim them. Usually returns that have claimed those taxes cannot be released sooner than mid-February, but this year it may take longer, according to a report by the National Consumer Law Center.
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"The IRS says that there will be no extra delay. We're not sure that's really what's going to happen in practice," NCLC Associate Director Lauren Saunders told Yahoo Money, "because they have to do a certain amount of fraud screening and we just don't know whether they are going to get bogged down and things will be delayed."
The CTC provides a credit of up to $2,000 per child under 17 and the amount is reduced for single filers making above $200,000 and joint filers earning more than $400,000.
The EITC is a credit for low- and moderate-income working families. The maximum credit for families with one child is $3,584, while it is $5,920 for families with two children for the 2020 tax year. This season, taxpayers can use either their 2019 or 2020 income to determine eligibility for the credits, adding more complexity for those who claim them.
'The IRS is overwhelmed'
Under the Protecting Americans from Tax Hikes (PATH) Act passed in 2015, the IRS is required to delay the refunds of taxpayers that claim one of those credits until Feb. 15. The delay is intended to give the IRS time to prevent fraudulent refunds from being issued.
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But the late start of the filing season — beginning Feb. 12 — provides the IRS a much smaller window to perform the fraud screening this season, even though the agency said on its website those refunds would be available "as soon as the first week of March."
"The whole tax season is being delayed, plus the IRS is overwhelmed: they're still processing returns from last year, they're dealing with stimulus payments," Saunders said. "There may be reasons that they can't get those refunds out as quickly as they would like to."
The IRS had to deal with the distribution of two rounds of stimulus checks on top of dealing with backlogs and the slowprocessing of 16 million paper tax returns last season, according to the National Taxpayer Advocate Erin Collins's 2020 annual report to Congress. The IRS had a backlog of over 7 million unprocessed individual tax returns as of December 31 and over 2.3 million unprocessed business returns as of November 24 of last year, the report found.
“The challenges created by the COVID-19 pandemic will continue through the 2021 filing season and possibly for months longer, affecting both the IRS and taxpayers,” Collins wrote in her report.
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The delay in processing some of those returns was because they were frozen by the IRS fraud filters, the report found. For 1 in 4 returns flagged for income verification, it took refunds longer than 56 days to be sent. For nearly 1 in 5 flagged for identity verification, it took refunds over four months to be sent.
The potential distribution of a third round of stimulus checks included in President's Joe Biden $1.9 trillion stimulus proposal could further complicate the tax-filing season and the issuing of refunds if the plan is passed.
Taxpayers who claim those credits may also face higher costs when filing their returns. They are more likely to use a paid tax preparers because their returns are more complicated, according to the NCLC.
While there may be more transparency in pricing when using online services, there is a "lack of transparency" when it comes to in-person services, the NCLC report said. Those fees could be avoided if eligible taxpayers use free alternatives for tax preparation.
Read more: Here's what to do if you haven't gotten your stimulus check
Some taxpayers choose to pay those fees out of their tax refund. To do so, their refund first goes into a temporary tax preparer account. But could pose a problem if a third round of stimulus checks is sent out and deposited in that temporary account. If they can, taxpayers should choose to use direct deposit into their bank account for their refund and pay the tax preparation fee upfront.
"You avoid any hidden fees for that loan of the tax prep fee and you also eliminate the problems of the IRS not sending the money directly to your account," Saunders said.
Denitsa is a writer for Yahoo Finance and Cashay, a new personal finance website. Follow her on Twitter @denitsa_tsekova.
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