IRS Help to Prepare for Tax Season

Believe it or not, yet another tax filing season is upon us. Pretty soon, you’ll start getting your 2021 year-end wage, investment, and mortgage interest statements. Between now and when you are ready to fill out those lovely tax forms, you can take three steps to get a jump on tax season and feel more confident. Most of the tips you need are on the IRS website. For free! Well, not exactly for free – our tax dollars pay for the IRS. 

Get your money’s worth with these three tips to be prepared for tax season:

  • Plan Ahead

You can take steps now to get a jump on filing your 2021 income tax return. Use this link to access a list of documents you’ll need to file, check on your tax withholdings, verify your bank information, and reconcile your Advance Child Tax Credit. This page also has a link to potential issues that can delay the processing of your 2021 income tax return. https://www.irs.gov/individuals/steps-to-take-now-to-get-a-jump-on-next-years-taxes

  • Check Your Online Account

Every taxpayer can access her or his online account to see the information that the IRS has on file. Your individual account information includes any outstanding tax balances, a five-year history of payments made, and copies of your tax records. You can even view the details of any payment plans in place with the IRS. https://www.irs.gov/payments/your-online-account

  • Expectations for IRS Operations

The IRS is just as overworked and under-resourced as it was during the last two tax seasons. Service delays include phone support call wait times, paper return processing times, and manual reviews of electronically filed returns. While they are reporting that mission-critical functions are continuing during COVID-19, this link provides periodic updates on expected wait times to reduce frustration and potential complaints. https://www.irs.gov/newsroom/irs-operations-during-covid-19-mission-critical-functions-continue

Tax season is almost here. The IRS has tips to help you prepare and feel more confident about filing an accurate return, and to make the filing process go more smoothly for everyone. Being prepared can help you prevent a delay in processing your return and help manage your expectations for IRS operations during tax filing season. Sure, filing your taxes is not a lot of fun, but getting prepared now will make the process easier and less stressful.

IRS Announces 2022 Standard Mileage Rates

Do you use your personal vehicle for business, charitable, or medical purposes? If the answer is “yes,” you could qualify for an income tax deduction. How much you can deduct and how you report the deductible expense depends on your situation. Generally, you can deduct qualified vehicle expenses that total the greater of actual expenses or a standard rate. Whether you deduct the standard rate or actual expenses, you must track your miles driven during the year.

Most people deduct their mileage deduction based on the standard rate because it’s easier and often results in a larger deduction amount. The standard deduction rate per mile is determined each year by the Internal Revenue Service based on data about the cost of operating and maintaining a vehicle, including passenger cars, vans, pickups, and panel trucks. 

In recent years, the rate per mile has risen and fallen based on the price of gasoline. With gas prices up significantly since 2020, the mileage rates are up for next year, too. The IRS recently issued the new standard mileage rates for 2022 that reflect those higher gas pump prices. 

Beginning on January 1, 2022, the standard mileage rates are:
 

  • 58.5 cents per mile driven for business use, up 2.5 cents from the rate for 2021
  • 18 cents per mile driven for medical or moving purposes, up 2 cents from the 2021 rate
  • 14 cents per mile driven for charitable purposes to serve a qualified tax-exempt organization. The charitable rate is set by statute, so it doesn’t change.

Using the standard mileage rate can really add up to a substantial tax deduction. Remember that you always have the option of calculating the actual costs of using your vehicle and deducting the higher of the two options. Also, you can choose the standard mileage rate one year and actual expenses the next year, whichever is more beneficial for you. 

No matter which of the two expense methods you choose, you must track your overall mileage driven during the year, and track the miles by category (e.g., business and personal). And if you use more than one vehicle, mileage must be tracked for each vehicle you use for business, charitable, or medical.

Taking vehicle deductions for business, charitable, or medical purposes involves a lot of tracking, but the effort can be worth it. You can use mileage tracking apps to help. Once you get your tracking system down, you’ll see that those mileage deductions can add up and reduce the bottom line on your taxes.

DIY Access to Your Tax Information

With tax-filing season coming up soon, you might have started to get your 2021 tax information together. Or you could have been looking for last year’s tax return to update your Advance Child Tax Credit information on the IRS portal. You might have been looking for older tax return copies to submit with a mortgage application. Regardless of your tax information need, you can’t always find what you need when you need it.

The IRS has you covered with new DIY tools to access your tax information. Their old online sign-in process to verify your identity and access your information is clunky and difficult to navigate. The new process recently launched by the IRS allows more people to securely access and use online tax information tools. Plus, it’s mobile-friendly.

Using the new verification process allow you to access several IRS online services including:

Access to more DIY tax services is scheduled to transition from the existing process to the new identity verification process in 2022. The new process is designed to be even more secure than the old one to make sure that tax information is only provided to the authorized taxpayer.

The new process uses a secure verification service called ID.me. Taxpayers create an ID.me account and use it to upload identity documents. The new process also has increased the amount of help desk assistance for taxpayers who run into a snag when verifying her or his identity online. Most people shouldn’t have a problem, though. 

You only need two things to verify your identity with ID.me:

  • A photo of your driver’s license, state-issued identification, or passport.
  • A selfie using a smartphone or a computer with a webcam.

Once you verify your identity, you can securely access IRS online services listed above. If you need help verifying your identity or experience another issue, you can visit the ID.me IRS Help Site.

This is all great news. Getting DIY access to your tax information is a huge step forward to preparing for tax filing season, updating your Advance Child Tax Credit information, or applying for a mortgage. Create and access Your Online Account at https://www.irs.gov/payments/your-online-account. Quick, easy, and mobile-friendly. Can’t get better than that.

IRS Backlog Delays Tax Refunds

If you’ve been waiting for your federal tax refund, don’t hold your breath. Tax return processing backlogs are at historic highs. Between the COVID-19 pandemic, multiple tax law changes, and outdated systems, the IRS is overburdened and under-resourced. Additional funding for IRS staffing and infrastructure proposed in early versions of the Build Back Better infrastructure bill was stripped out during Congressional negotiations. As of now, it doesn’t look like additional IRS funding will re-appear in the final bill, assuming there is one. 

Over the summer, the IRS reported a backlog of 35 million unprocessed 2020 individual income tax returns. That’s a 500% increase over pre-pandemic times, just for initial return filings. Last month, the IRS had a backlog of over 2.7 million unprocessed amended returns. Business and employment return processing is significantly backlogged, too. 

The IRS’ website explains some of the reasons why a tax return might take longer to process than others, including corrections to the Recovery Rebate Credit, the Earned Income Tax Credit or an Additional Child Tax Credit using 2019 income, and the need for general review. These issues require manual review by an IRS representative. Staffing issues prolong the backlog for manual reviews. 

So, what can you do if your tax refund hasn’t arrived after weeks of waiting? Unfortunately, not much. Calling the IRS is not practical – there are long waiting times on hold and the agents can’t see information in their systems if the return is not processed. Individual taxpayers are directed to check the refund status from original returns at https://www.irs.gov/refunds. For amended individual returns, the link is https://www.irs.gov/filing/wheres-my-amended-return. Businesses need to check their online account for information. More details and contacts are at https://www.irs.gov/businesses.

Income tax return processing at the IRS is backlogged like it’s never been before. If your return included the Recovery Rebate Credit, other tax credits, or just needed a manual review, your patience is being sorely tested right now. Unfortunately, all you can do is check the IRS website periodically to get a status update. Don’t even think about calling the IRS to find out what’s going on. After waiting on hold for up to an hour, the agent who answers probably can’t assist you because unprocessed returns aren’t visible in their system.

It’s a frustrating but understandable situation, given that the IRS is overburdened and under-resourced. Unless the IRS gets more funding for staffing and systems, conditions cannot improve any time soon. The need for taxpayers to be patient will be necessary for quite some time to come.

How to Respond to an IRS Notice

You’re flipping through the mail when you see it. An envelope with an IRS return address. OMG! What’s this about? Sure, you’re nervous but don’t stick it in a drawer. No matter what, it’s information that needs your attention. Whether you rip it open immediately or wait until you’ve sat down, you eventually see it – a Notice from the IRS with potential unwelcome news.

Now what? Your IRS Notice may be long and difficult to decipher, but it explains the reason they are contacting you and instructions on how to handle the issue. Maybe information reported by a third party does not match your return or you made a math error. The IRS might just be asking for clarifying information. 

Regardless, let’s simplify how to respond with a little Q&A:

  • Why did the IRS send me a Notice?

The IRS sends Notices to taxpayers who have a balance due, are due a different refund than originally reported, their return has been changed, or additional information is needed. Notices may also communicate the need to verify taxpayer identity or a delay in processing the return. Details are in the Notice. Read it carefully.

  • How should I respond?

Typically, you only need to respond if you don’t agree with the information in the Notice, if the IRS requested additional information, or if you have a balance due. If the income or payment information reported to the IRS doesn’t match your tax return, check to see if you made a mistake. It happens. Just pay the amount due, or at least as much as you can.

  • What if I don’t agree?

Sometimes the IRS makes a mistake or does not understand the information on your tax return. If that’s the case, make copies of any schedules or other clarifying documentation. Complete the Notice Response Form and include any necessary explanations. Don’t assume that the IRS can understand your documents without an explanation.

  • When should I respond?

IRS Notices require you to respond by a specific date. There are two main reasons you’ll want to meet that deadline – to minimize the accrual of any additional interest and penalty charges, and to preserve your appeal rights if you don’t agree. Keep copies of all Notices and your response (with support documents) for future reference.

Getting an IRS Notice is nerve-wracking but ignoring it will only make it worse. Read the Notice carefully and respond with an explanation by the due date if you don’t agree. Made a mistake? Pay the amount due, or as much as you can, to reduce additional interest and penalties. When you know what to do, getting a Notice from the IRS won’t make your heart skip a beat.

Want more details? Check out the IRS website.

Check Tax Withholding Now to Avoid Expensive Surprises

It’s hard to believe that we are already into the last quarter of the 2021 calendar year. Time for sweaters, pumpkin spice, and income tax withholding reviews. Yes, income tax withholding. Checking your tax withholding before year-end can save you an expensive surprise when you file your 2021 income tax returns. 

The IRS, states, and the District of Columbia expect you to pay your tax obligation as your income is received. Failing to pay the minimum required tax amount can result in an underpayment penalty and interest on the unpaid balance. Alternatively, overpaying on your tax liability means giving the tax agencies an interest-free loan of your money. Who wants to do that? Knowing about that big refund in advance gives you an opportunity to reduce your tax withholding and get some extra money in your paycheck.

Even if you didn’t get a large refund or pay an underpayment penalty for 2020, it’s advisable to review your tax withholding now. Tax law changes related to COVID-19 were enacted for 2020 and 2021 that could impact your tax situation. Plus, life can bring changes to individual financial situations that could impact your tax filing status or how the rules apply to you. Examples include change in marital status, birth or adoption of a new child, a home purchase, and the impact of a major disaster.

The IRS Tax Withholding Estimator (available in English and Spanish) makes it easier for everyone to have the right amount of tax withheld. The tool offers workers, as well as retirees, self-employed individuals and other taxpayers, a user-friendly, step-by-step way to effectively tailor the amount of income tax they have withheld from wages and pension payments. In other cases, such as for self-employed individuals, taxpayers can see if they should change their last planned estimated tax payment for 2021.

In between getting out the holiday sweaters and watching football, the last quarter of the 2021 calendar year is the perfect time to check on your income tax withholding. It could save you an expensive surprise when you file your 2021 income tax returns or provide an opportunity to get some extra holiday shopping money in your last few paychecks. 

Want more information about taxes, estimated taxes, and tax withholding? The IRS has it for you at https://www.irs.gov/newsroom/give-tax-withholding-a-fresh-look-as-2021-year-end-nears.

Tax Collector or Scam Artist?

For years, the IRS and law enforcement have warned taxpayers about scam artists posing as revenue agents. Imposters call and threaten whoever answers with arrest for past-due income taxes. Warnings from law enforcement tell taxpayers to hang up and report the call to the IRS and the Federal Trade Commission (FTC). However, the next time you get a call about past-due taxes, it could be legitimate. 

Here’s why you might not want to hang up on a call about past-due taxes. Beginning Thursday, Sept. 23, 2021, some taxpayers with unpaid tax bills started to get calls from one of three private agencies contracted by the IRS to help with collection efforts. Four facts you need to know before you decide whether to hang up on that caller:

  • The IRS always notifies taxpayers in writing multiple times before transferring their account to a private collection agency, or PCA. The IRS also sends a letter to the taxpayer informing them that their account was assigned to a PCA and giving the name and contact information for the PCA. Following IRS notification, the PCA will send its own letter to the taxpayer confirming the account transfer. 
  • Help with collection efforts is not new for the IRS. The program was established in 2016, as authorized under federal law. At that time, the agency contracted with several agencies to collect certain unpaid tax debts on the government’s behalf. Persistent understaffing, compounded by the pandemic, made it necessary to use private collections as an option to pursue past due income taxes. 
  • The three Private Debt Collection agencies contracted by the IRS are CBE Group, Inc., Coast Professional, Inc., and ConServ. All private collectors will identify themselves as contractors collecting taxes on behalf of the IRS. For taxpayer protection, collection agencies employees must follow the provisions of the Fair Debt Collection Practices Act, must be courteous, and must respect taxpayer rights.
  • Private firms are not authorized to take enforcement actions against taxpayers, like IRS employees can do. The private firms are only authorized to discuss payment options with taxpayers, including setting up payment agreements. All tax payments must be made directly to the IRS, never to the private firm or anyone besides the IRS or the U.S. Treasury.

Despite warnings about scam artists posing as revenue agents, some calls about past due taxes are legitimate. The IRS recently contracted with three private collection agencies to help them out, so it might not be the IRS calling. You’ll want to remember the four facts explained above to determine if that caller is a valid tax collector or a scam artist, so you don’t hang up when you should stay on the line.

Need to Pay Estimated Income Taxes?

The IRS requires taxpayers to pay their income tax liability as their income is earned. States that charge income tax and the District of Columbia have similar rules. Employers withhold and remit income taxes to cover their employees’ tax liability on wages and other compensation. Job done. But taxpayers with non-compensation income like interest, dividends, capital gains, prizes and awards may have to make estimated tax payments to cover the related income tax liability.

Taxpayers with profits from self-employment must regularly assess their need to make estimated income tax payments, as well as other taxes such as the self-employment tax. “Regularly” means at least quarterly. All the necessary details about making payments, when and how much are at https://www.irs.gov/businesses/small-businesses-self-employed/estimated-taxes

It’s a lot to read, so let’s boil it down to three important things to know:

  1. When are Estimated Taxes Due?

For estimated tax purposes, the year is divided into four quarters. Although some payment due dates changed temporarily due to COVID, estimated tax payments are generally due on April 15, June 15, September 15, and January 15 of the following year. If the payment due date falls on a Saturday, a Sunday, or a legal holiday, the payment is due the next business day.

  1. How Much Do You Need to Pay?

Estimated tax payments are based on estimated income and resulting tax liability. An estimated tax payment is due if the liability is at least $1,000, after subtracting withholding and refundable credits. Withholdings or estimated payments must equal or exceed the smaller of 90% of your 2021 tax liability, or 100% of your 2020 tax liability. Calculate your 2021 tax liability at this link https://www.irs.gov/forms-pubs/about-form-1040-es

  1. What if You Don’t Pay Enough?

Interest is due on any unpaid balance, accrued daily from the time the tax liability was created (i.e., by receiving income) until the tax is paid. Interest accrues daily, which can really add to your tax bill. Clearly, the IRS is serious about getting paid on time. Figure your 2021 federal income tax bill by using the IRS Withholding Estimator at https://www.irs.gov/individuals/tax-withholding-estimator.

Taxpayers who paid a lot when filing their 2020 income tax return and those who receive income with no tax withholdings should look at whether 2021 estimated income tax payments are needed. The IRS has all the tools to figure it out at https://www.irs.gov/businesses/small-businesses-self-employed/estimated-taxes.