Contributed by: Laura O’Keefe, Supervisor
With the IRS backlog of tax returns more than tripled over last year, many Americans are still waiting for their 2020 tax refunds.
At the end of the 2021 tax filing season (for the 2020 tax year), the IRS held 35.3 million individual and business tax returns for manual processing. That is a 230% increase from the prior year. More than 14 million individual returns require further review for taxpayers claiming stimulus payments, the Earned Income Tax Credit or the Child Tax Credit.
The backlog problem does not seem to be resolving anytime soon. The IRS lost over 21,000 employees from 2010-2018, and its budget was slashed by 20%. The agency and budget were increased slightly in 2020 but are still below 2010 levels.
Furthermore, the pandemic legislation resulted in many middle-of-the-season tax changes, plus the distribution of the 163 million stimulus payments and pending legislation.
So, what can you do now to avoid waiting for your refund after filing your 2021 taxes?
The best way is to pay the right amount of tax throughout the year, thus resulting in a minimal refund when it comes time to filing your 2021 tax return. This can be achieved in the following ways:
For W-2 Employees:
- Review your tax withholding and adjust, if necessary, by submitting a new Form W-4, Employee’s Withholding Certificate to you employer.
The Form W-4 was revised in December 2020, and the new design is meant to reduce the form’s complexity and increase the accuracy of the withholding system. It includes a reference to an online ‘estimator” that can be accessed at www.irs.gov/W4App. This provides the most accurate estimate of withholding and is fairly easy to use. According to the IRS, you can just follow these simple steps to get the most accurate estimate of your required withholding:
- Gather documents: You should have a copy of your most recent pay stub and tax return and other sources of income (investment statements, year-to-date profit and loss statements from your business).
- Answer the questions: Just click on the answers to some fairly basic questions about your specific tax situation.
- Review the results: Use the estimator’s results to determine if you need to complete a new Form W-4.
For Retirees receiving pensions or IRA distributions:
- Use the same online estimator at www.irs.gov/W4App. If you determine you need to change your withholding from your pension or IRA, you can complete and submit a form W-4P to the payer.
For Self-Employed taxpayers:
- Use the online estimator to determine if you are paying in enough (or too much) in quarterly estimated tax payments, and adjust if necessary.
While many people prefer to over withhold their income tax to receive a ‘gift” from the IRS or to avoid any unexpected tax bills in April, it is important to remember that doing so essentially offers an interest-free loan to the IRS — which you may be waiting for well into the summer or beyond to receive.