Personal finance

Here’s what every taxpayer needs to know this season, according to experts

Tom Werner | DigitalVision | Getty Images

There’s a growing list of essential things for taxpayers to know as the IRS embarks on a challenging season with limited staffing and a backlog from 2021 that’s still millions of returns deep.

There were 6 million unprocessed individual returns as of Dec. 31, according to the IRS, and those with notices or stalled refunds are struggling to reach the agency by phone.

Fewer than 15,000 agents were available to answer the 240 million incoming calls during the first half of 2021, one person for every 16,000 calls, according to the National Taxpayer Advocate.

That’s why it’s critical to avoid mistakes on your 2021 return. Here’s what to know before filing this season.

1. Skip the paper

Given that backlog of millions of returns, the IRS continues to emphasize the importance of electronic filing this tax season. 

“Paper is the IRS’ kryptonite, and the agency is buried in it,” said National Taxpayer Advocate Erin Collins this week in a hearing with the House Ways and Means Oversight Subcommittee.  

“The IRS still transcribes paper returns line by line, number by number,” she added. “They received around 17 million original paper returns last year, and the processing delays have run as long as 10 months.”

Paper is the IRS’ kryptonite, and the agency is buried in it.
Erin Collins
National Taxpayer Advocate

However, you may receive your refund within 21 days by filing an online return with direct deposit for payment, assuming there are no issues.

“The IRS has stressed this for years,” said certified financial planner Larry Harris, director of tax services at Parsec Financial in Asheville, North Carolina, pointing to the efficiency and security of electronic filing.

Electronically filed tax returns also provide another key benefit: a digital confirmation of receipt from the IRS, he said.

2. Double-check tax forms with IRS transcripts 

Although the IRS is moving away from facial recognition, you may still have to go through a few “uncomfortable” steps to access your online account, Harris said.

After logging in, however, you’ll have access to tax records, including IRS transcripts you can use to verify details and avoid mistakes that may flag your return, he said.

“The big one is the wage and income transcript,” said Tommy Lucas, a CFP and enrolled agent at Moisand Fitzgerald Tamayo in Orlando, Florida. ”This will particularly help self-employed individuals or gig workers with income from many different sources.”

If you’re tracking down multiple 1099-NEC forms to verify your earnings, the wage and income transcript shows all the forms the IRS has received in one place.

How to access IRS transcripts online

1. You must register or login to your IRS Online Account.

2. After signing in, click “Get Transcript Online” here.

3. Pick a reason from the drop-down menu.

4. Select your IRS transcript by year and download .pdf.

You may also use transcripts to verify details from past returns or commonly missed tax forms submitted on your behalf.

While some of the transcripts use a three-digit transaction code with a brief description to identify each entry, you can use the Transaction Codes Pocket Guide to check any line items that may be unclear. Of course, you can also tap a tax professional.

3. Reconciling child tax credit and stimulus payments

While error-free tax returns are critical this season, the IRS has already warned about two problem areas: the advance child tax credits and stimulus payments.

“We urge extra attention to those who received an economic impact payment or an advance child tax credit last year,” IRS Commissioner Chuck Rettig said in a statement. “People should make sure they report the correct amount on their tax return to avoid delays.”

The IRS issued 7.4 million “math error” notices for stimulus payment errors from Jan. 1 through July 15, 2021, delaying refunds, and many filers are still waiting for a resolution.

We urge extra attention to those who received an economic impact payment or an advance child tax credit last year.
Chuck Rettig
IRS Commissioner

Although the IRS is sending Letter 6419 for child tax credits and Letter 6475 for stimulus checks, experts suggest verifying these payments online in the “records” section and on your accounts transcript.  

However, if you’re a married couple filing together, you may receive separate letters, each reflecting one-half of these payments, Lucas said. You should see the total on your account transcript and that number goes on your return.

4. Answering the ‘virtual currency’ question

Millions of Americans own cryptocurrency, and they’ll soon face an important question about “virtual currency” on Page 1 of their tax return.

The yes-or-no question reads: “At any time during 2021, did you receive, sell, exchange or otherwise dispose of any virtual currency?”

You’ll need to answer yes if you sold, exchanged, mined digital assets or used it for purchases in 2021. However, it’s important to check no if you only bought and held crypto, Lucas said. 

“If you check yes, you’re flagging yourself, and the IRS is going to be looking for some sort of capital gain or loss on your Schedule D,” he said, explaining how it may send your return into the pile needing a manual review.

5. Last year’s adjusted gross income

If you’re filing electronically, you must validate your return with your 2020 adjusted gross income. However, if you’re one of the millions with last year’s return still in limbo, the agency has other guidance.

With a pending 2020 return, you need to enter $0 for your 2020 AGI for electronic returns, according to the IRS, and if you don’t enter $0, the agency may reject the filing.

“They’ll kick it back,” Lucas said, explaining how filers will receive an email from their tax-filing software and may not know how to resolve it.

And if you used the non-filer tool in 2021 to claim the advance child tax credit payments or your stimulus check, you’ll need to put $1 for last year’s AGI, the IRS says.      

“It’s going to be a pain, so it’s really important for those who are still waiting or used the non-filer tools to follow these special instructions from the IRS,” said Lucas.

6. Saturday hours at Taxpayer Assistance Centers

It’s no secret that reaching the IRS by phone has been difficult. While the agency claims an average hold time of 23 minutes, filers and tax professionals have reported waiting much longer.

However, the IRS is adding monthly walk-in hours on select Saturdays at certain Taxpayer Assistance Centers starting on Feb. 12. Normally, these offices are open Monday through Friday by appointment.

“They want to serve the public, and they want to make filing a tax return easier,” said Harris. “That’s a good move on their part.”

You’ll need to bring government-issued photo identification, Social Security cards or your Individual Taxpayer Identification Number and any IRS letters or notices, he said. Staff may also ask for your mailing address, email and banking details for direct deposit payments.

“Seeing someone in person, especially after two years of the pandemic, might be attractive to some people,” said Harris.

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