The 2022 season is in the works, and is expected to be a challenging season for taxpayers, preparers, and the IRS for paper returns and correspondence. The IRS has released guidelines that give advice on how taxpayers can avoid problems, and one important tip I can’t stress enough is that taxpayers should do their best to file their returns electronically (electronic file), especially during this difficult filing season, because they will The IRS will first process the 2020 paper returns backlog before it begins processing the 2021 paper returns.
The paper is IRS kryptonite, and the agency is buried in it. Processing paper returns and correspondence remains the agency’s biggest challenge, which will certainly continue throughout 2022. Taxpayers and tax preparers can help expedite processing by filing electronic returns, requesting direct deposit for refunds, and triple checking for errors. It is important to check accuracy when reporting tax items related to the following: Forms W-2, Form 1099, Earned Income Tax Credit, Recovery Deduction Credit, Child Tax Credit, and other refundable credits. As of April 1, 2022, the IRS had 11.4 million original unprocessed paper returns (including 3.3 million unprocessed returns received in 2021), 5.1 million paper and electronic returns held for manual processing, 3.7 million unprocessed adjusted returns, and 7.3 million pieces of correspondence and other forms submitted by taxpayers. Many unprocessed returns date back to at least April 2021 and millions of taxpayers are still waiting for refunds, with some taxpayers waiting up to a year. For the latest information on the status of returns processing, see IRS Updates.
Avoid delays and transcription errors by electronic filing
The IRS generally processes paper returns on a first-in, first-out basis. Therefore, taxpayers who file paper returns must wait until the IRS first processes the current backlog of paper returns. When the IRS finally processes the paper return, the IRS employee will manually copy the data from the return line by line, number by number, and this process introduces errors. Last year, IRS employees made errors on about 22 percent of the individual paper returns they copied, and these transcription errors can lead to unexplained compliance actions.
Taxpayers who file their returns electronically avoid severe processing delays and manual transcription errors associated with paper return processing. If no errors are detected, the return submitted by email will usually be pushed through the automated review process and any refund associated with it within 21 days.
So why do taxpayers keep filing paper returns?
Some taxpayers may not have access to the Internet, a computer or a smartphone, and others may simply prefer to use paper files. In addition, certain forms or schedules cannot be submitted electronically. Many taxpayers have indicated that they believe filing on paper is more secure. While this concern is certainly understandable, the IRS has strong safeguards in place to make electronic filing a safe and secure option. Indeed, paper filing presents significant risks and burdens to taxpayers, including avoidable compliance actions associated with significant paper processing delays, transcription errors, and refund delivery delays. Millions of taxpayers and preparers prefer to use electronic filing, but are unable to because MeF does not support electronic filing of some IRS forms. Taxpayers and other preparers attempt to file electronically, but the IRS’ updated Electronic File System (MeF) rejects their applications.
Electronic file rejection saves millions of returns
Many taxpayers and preparers who prefer to file electronically fail when they try to submit a return electronically, and unfortunately they may not understand why. Essentially, the IRS will reject returns submitted electronically if you violate one or more of the MeF’s business rules. Electronic file rejection is intended to prevent further downstream compliance issues and fraud.
Last year, the main reason for rejection of 2020 individual income tax returns was related to identity verification. MeF business rules require the primary taxpayer and the taxpayer’s spouse, if applicable, to accurately enter adjusted gross income (AGI) in the prior year’s report or provide a self-identified personal identification number (PIN). If the taxpayer or preparer used the same commercial program to prepare the previous year’s return, the commercial tax return preparation program usually provides the previous year’s AGI. If the taxpayer uses a program for the first time or uses a program different from the previous year, he must enter the previous AGI or PIN information manually. If the AGI or PIN amount does not match the IRS records, the return will not be accepted by the IRS for electronic filing.
Last year, as a result of the inventory buildup, many 2019 tax returns had not been processed by the time the taxpayer attempted to file the 2020 tax return electronically. If the IRS did not have a record of the reported AI due to an unprocessed 2019 return, it caused the 2020 electronic filings to return for the MeF business rule(s) trip and block the electronic filing. These electronic file rejections could have been avoided if taxpayers and preparers had understood the workaround on how to fix the problem. Once the issue arose, the IRS provided guidance that taxpayers with unprocessed 2019 returns must enter “0” as the 2019 AGI. However, many return preparers and taxpayers were not familiar with the guidance at the time of filing, and did not enter “0”, and had to file a paper 2020 tax return after the IRS rejected their electronic file attempt. Although this basic information is included on the IRS website, it has not been widely distributed or understood.
How to avoid electronic file rejection if your 2020 return is still unprocessed or if you use the Unclassified portal in 2021
Once again, the IRS has issued guidance for the 2022 filing season, instructing taxpayers and preparers what they need to do to avoid electronic file rejection.
Specifically, the IRS directs taxpayers and preparers that a $0 ($0) entry for the 2020 AGI must be entered if the 2020 tax return has not yet been processed. In addition, the IRS requires taxpayers to enter $1 as a 2020 AGI if they use the Non-Filer portal in 2021 to register for an advance child tax credit payment or a third economic impact payment.
Taxpayers and preparers can determine the status of their 2020 return by accessing the following IRS applications: (1) the online taxpayer account application; (ii) if time permits, Get Transcript by Mail (usually five to ten calendar days to receive a text); or (3) Where will my refund be made? Submit an application if your 2020 return requests a refund and you file it on or after July 1, 2021. All three applications will help determine whether the 2020 taxpayer return has been processed.
Most importantly, taxpayers can avoid rejection of the electronic identity verification file entirely by obtaining an Identity Protection Personal Identification (IP) number before filing their electronic return in 2021. If the taxpayer has an IP PIN, the interest will be validated. US taxes from taxpayer identification through an IP PIN instead of a previous year AGI order or a self-identified PIN.
Conclusion
In my 2021 Annual Report, I appealed to the IRS to address the barriers that taxpayers face when they want to file their electronic return, especially when the refusal is due to an inability to include an IRS required form or schedule with the return. To reduce the burden on taxpayers and the IRS, the IRS should explore how to reduce the incidence of electronic file denials. The IRS may be able to reduce certain electronic file denials by educating taxpayers and filers. When taxpayers and preparers attempt to file electronically but the return is denied because it has violated one or more MeF business rules, the most effective way to communicate with them is to provide clear warnings about potential issues through tax return preparation software products. Partnerships with the software industry is key to ensuring that taxpayers and preparers have the most up-to-date guidance on how to handle an electronic file refusal so that they can take corrective action and file it electronically.
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