With the April 18 deadline for filing 2022 federal income tax returns fast approaching, the Internal Revenue Service is barrelling toward a new tax season with plenty of change afoot.
The IRS is set to welcome a new commissioner in Danny Werfel, a career administrator who has been steeped in government administration, and the agency is now strapped with $80 billion in funding for the next 10 years to support collections and enforcement, as well as improve its operations, which includes some of the oldest computer systems in the federal government.
But despite the billions in new funding, the IRS has a long way to go to improve the predictability of the process for taxpayers. A new Morning Consult survey finds that only about 1 in 5 U.S. adults say they know both whether they will receive a refund or owe taxes and how much the respective check or bill will be, leaving the remaining public guessing.
That uncertainty reflects an accumulation of “decades of policies layered on to one another,” said Jean Ross, a senior fellow at the Center for American Progress who focuses on tax and fiscal policy issues. For example, a 2017 increase in the standard deduction allowed more people to file a simple return, but other recent changes such as the Child Tax Credit and the use of the tax system to administer COVID-19 relief added complexity back into the system.
“I think some of that lack of predictability reflects the big changes that were made during” the pandemic, she said, adding that most people who haven’t experienced major life changes with tax implications, such as a marriage or having children, are able to come pretty close to withholding the correct amount of tax throughout the year. “I think the last couple of years have been an anomaly because of the pandemic assistance.”
Dan Pilla, an attorney who runs taxhelponline.com and served as a consultant to the National Commission on Restructuring the IRS, concurred that a lack of predictability is a result of tax code complexity. Pilla noted that in 2000, the IRS code consisted of approximately 1.3 million words, but today has more than 4 million.
“We've got more than 6,000 code changes during that period of time,” he said, “and all of this is done under the name of tax simplification.”
Optimistic Americans hope the check is in the mail
Despite a warning from the IRS last year that refunds for the 2022 income tax year could be smaller due to the lack of pandemic economic assistance payments, a majority of taxpayers are expecting a refund. And the public at large has mostly positive feelings about filing 2022 returns: When asked how they feel about this year’s tax season, 57% said “confident” and 52% said “optimistic.”
Many will be depending on those checks to cover expenses: 3 in 10 of those who are expecting a refund say they are very dependent on that money to cover necessities such as groceries or housing.
Pilla said taxpayers’ inability to predict their refund with certainty is “a huge problem because people can't plan their affairs,” and those counting on the refund may be the very people who need the money most. He also noted that people with lower incomes may be making errors with their withholding forms and paying incorrect amounts each month. For someone who received a $3,500 refund for the year, that equates to $280 a month missing from their paycheck. “That’s a car payment,” he said.
Taxpayers who are optimistic about their refunds may need to heed the IRS warning about smaller checks: As of early February, the average refund totaled $1,963, about 11% lower than what taxpayers saw on average at the same time a year ago.
Keeping up with IRS developments is a full-time job for tax professionals, and it can be a challenge for taxpayers who are trying to predict their bill amid a steady flow of policy changes from the agency. In February, for example, the IRS instructed taxpayers who received inflation relief payments from their state to hold off on filing their returns until the agency figured out how to handle those funds. The issue was resolved for affected taxpayers in 20 states a few days later, but National Taxpayer Advocate Erin Collins called the agency’s handling of the situation “not acceptable.”
Ostensibly, the IRS is relying on tax professionals or news coverage to get the word out about changes — but it may be failing on its outreach efforts. The Morning Consult survey found that just 1 in 4 adults had seen, read or heard at least something about taxpayers who make $73,000 or less a year qualifying to file their taxes online for free. Among those specifically in households making $73,000 or less, 76% said they had heard little or nothing at all about the Free File option.
As part of the Inflation Reduction Act’s $80 billion in new IRS funding, the agency has begun investigating options to make filing more streamlined — and totally free. The IRA provided funding for a feasibility study to look at the possibility of a fully integrated tax filing system, and the results of that study are likely to be released in May, CAP’s Ross said.
“I think this is really a positive development,” she added, “because people who have a simple tax return shouldn't have to pay to file their taxes; they should just be able to go online and do it.”
Pilla, who is a proponent of axing the IRS altogether and moving to a national sales tax, said “if we're going to have an IRS that needs to be funded,” the lion’s share of that new funding should be going to taxpayer education and assistance.
“Right now, the overwhelming majority of Americans do their level best to comply with a massively complicated tax code that they cannot begin to understand,” he said.
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