IRS Backlog Looms As Tax Season Begins

It’s obvious that the IRS is going to begin this tax season in the hole. Many are still waiting on refunds from their 2020 income tax returns.

The main reason is that the Service is still working remotely. Also, given the hiring freeze, there are even less people processing returns.

Anything that requires human hands or eyes such as paper returns, telephone calls, or error correction is subject to significant delays. As of December 18, 2021, the IRS still had 6.3M individual returns and 2.3M amended returns to process. In addition, there are millions of other returns that require special handling.

Also, there’s still the prospect of retroactive tax legislation and pandemic era tax law changes that could be passed this month regarding last year. Returns are again due in mid-April for the first time in the past three years, but that could change in the next few weeks.

The IRS will be sending notices at the end of this month showing how much stimulus or advanced child tax credit money was sent to each taxpayer. This should stop most of the errors we were expecting on mis-reporting these payments.

Let me leave you with this.

Anyone who has ever worked with me knows that I’m not a fan of electronic filing. We certainly provide the service, but it isn’t something that I recommend.

Why? Because it leads to more audits. Let me explain.

On a business return, one of the ways the Service chooses it’s audit targets is an electronic process that compares similar returns filed in a similar geographic area. This makes sense, right?

Why compare a caterer in Chicago to an accountant in Arkansas? Nothing would match, so they compare businesses with the same SIC Code that are geographically similar to each other.

Let’s say that they compare two such businesses. One takes a deduction for meals equal to 1% of it’s income. The other takes a deduction that equals 10% of it’s income.

The larger deduction is red-flagged in the algorithm as being too large because every other similar business in that same area only takes around 1%. The IRS now has three possible courses of action.

1 – Let it pass. Maybe the deduction is reasonable because the taxpayer’s income is so low.

2 – Send out a line item audit asking us to prove the deduction. In other words they want to see the canceled checks, credit cards statements, etc. to support the claim.

3 – They send out an auditor to audit the entire return.

Knowing what you now know about how the Service chooses it’s audit targets, why would you never want to electronically file a return? Because it makes it easier for them to check. And with the decreases in man-hours, most mailed returns are probably not entered into the system to be checked in the first place.

If you’re getting a large refund or you need to get a return on file so that you can get a mortgage, we’ll be happy to electronically file. I just don’t recommend it.

Certainly, there’s a law that says if you prepare 10 or more returns annually for payment, that you must electronically file. Given the 500 we file annually, we’re certainly past that number. But there’s also an exception to the rule that says if a client requests the return to not be electronically filed, and signs a letter to that effect, that we can comply.

Once again this year, let’s mail in returns and be patient about the refunds. I’m in no hurry to deal with any audits.

We’re all going to get through this. Let’s get through it together.

Accounting Solutions Ltd. stands ready to complete our mission and purpose of protecting you, your family, and your business. Whether you need Employee Retention Credits, PPP Loan Forgiveness, Payroll Services, or Accounting and Tax Work, you have but to ask. I’m here and I remain,

Sincerely yours,

Chris Amundson
Accounting Solutions Ltd.

Note that the only professional services provided by Accounting Solutions Ltd. are those specified in a written communication from our office detailing the scope of services to be rendered and the terms and conditions applicable to the engagement.