The 2021 tax season could get ugly — file early and electronically

WASHINGTON » The surging pandemic. Confusion over who gets a stimulus payment. An overwhelmed IRS workforce still trying to catch up with last year’s delayed tax season.

This is not the year to procrastinate. File your federal tax return early — and electronically.

“More than ever, this is a great year to switch to filing electronically and choosing direct deposit,” said IRS spokesman Eric Smith. “About half of paper filers actually prepare their return with tax software. If you’re one of them, why not take the next step and e-file, rather than mailing your return to the IRS. It’s fast, and secure, and there are fewer mistakes, too.”

The tax season can be frustrating under normal circumstances, especially if you’re trying to reach an IRS representative on the phone. But this year may prove to be an extreme exercise in patience. We are going into an unprecedented tax season with a bevy of changes as a result of the novel coronavirus.

Last month, the IRS said “COVID-19 continues to cause delays in some of our services.” This includes processing paper returns, answering mail and calls from taxpayers, and reviewing electronic returns, the agency said.

“I would use the word bumpy as an adjective to describe the 2021 tax season,” said Eric Bronnenkant, head of tax at online financial adviser Betterment.

The IRS will be dealing with people who are desperate to get stimulus relief that was authorized last March and again at the end of December: Up to $1,200 for individuals ($2,400 for couples filing jointly) in the first round of relief, and half that much in the second. There’s additional money for a qualifying child under 17 ($500 for the first stimulus package, and $600 in the second).

Because the stimulus payments were based on people’s 2018 or 2019 returns, if they’ve lost a job or their income dropped significantly in 2020, they may be able to claim the COVID-related “Recovery Rebate Credit” on the 1040 form for 2020, Bronnenkant said.

And now, with a Democraticcontrolled House and Senate and President-elect Joe Biden in the White House, there’s a greater possibility that another stimulus package will be passed, with a third economic impact payment going to individuals struggling from the financial fallout of COVID-19.

Some people who got a direct deposit for their first stimulus payments may be confused if their funds aren’t sent to their bank account this time around.

“I spent close to four hours, most of it on hold, trying to sort this out with the IRS,” a reader wrote.

“Today, I got the name, routing, and account number for the bank it went to, called MetaBank.”

This has happened before. In the first wave of COVID relief, many people didn’t realize that the IRS was issuing stimulus payments on a prepaid debit card issued by MetaBank, which is the Treasury’s financial agent. This time around, the Treasury and IRS said they were mailing about 8 million economic impact payments loaded on prepaid debit cards.

There have also been some changes since the earlier Coronavirus Aid, Relief, and Economic Security (Cares) Act. The first time, couples who filed jointly were generally ineligible for a stimulus payment if only one of the spouses had a Social Security number — unless they were a member of the military. But the most recent stimulus measure reversed that decision, and now these couples can claim the rebate credit on their 2020 return.

Meanwhile, I’ve also heard from many readers who are still awaiting their regular 2019 tax refunds.

“My husband and I filed our taxes last March, electronically through our local credit union,” said Nicole Juarez from Greenville, North Carolina. “To this day, we still have not received our refund of $1,091.”

And because their 2019 return hasn’t been processed, the Juarez family didn’t get the second stimulus payment, which would bring them another $1,800. “It’s very frustrating,” Juarez said.

I’m also concerned that many people who received unemployment benefits for the first time in 2020 don’t realize the money is taxable by the federal government (and by most states). This includes the enhanced unemployment funds authorized under the Cares Act.

If you received unemployment benefits, look out for IRS Form 1099-G, “Certain Government Payments,” which will show the amount of unemployment you received last year.

Although states are required to inform all new unemployment claimants of their responsibility to pay income tax on their benefits, many people may have opted against having taxes taken out.

Another possible problem could arise from the Cares Act provision that allowed people to take money out of their retirement funds and spread the taxes owed over three years. This is how the IRS explains it: “For example, If you receive a $9,000 coronavirus-related distribution in 2020, you would report $3,000 in income on your federal income tax return for each of 2020, 2021, and 2022.”

If folks didn’t hold back funds to cover those taxes, I can only imagine their anxiety if they get an unexpected tax bill.

Another good reason to file early is to beat the scammers, Bronnenkant said.

“I hear more and more cases about someone having their identity stolen and a tax return filed in their name,” he said. “Ultimately it ends up taking them a year or more to get their refund, because the IRS effectively paid their refund to a fraudster. It’s a big headache.”

I’d say this tax season might be more than bumpy. It could get ugly.