2020 was the weirdest year I have experienced in the tax profession. Now, 2021 may be even more strange than 2020. In 2020 we saw the impacts of the pandemic and the fire disasters on the filing of 2019 tax returns. For the first time, we saw the actual due date for tax returns move during a year for everyone, but then we also saw the due date extended twice more in response to the Walbridge Fire, and then later to the Glass fire. Complicating things, we saw new things added during the year including PPP loans applications and requests for forgiveness, EIDLs, employee retention credits and paid family leave provisions. This all happened after we initially expected “two weeks to flatten the curve.” Honestly, I never thought that it would be only two weeks, but I didn’t expect more than 2 months. Here we are past the one year mark and still counting.
Some of the same issues continue in 2021, with stay at home and Zoom meetings still being the order of the day. Now we have our first due date extension. The new COVID relief act includes tax changes which are retroactive to 2020, and no one is prepared. The IRS is scrambling and has probably invented some new curses to throw at Congress whose propensity is to shoot first and figure out the details later. I received a newsletter last week from a tax education service recommending extending ALL returns to give time for the IRS to catch up with the implications of the new law and for the software providers to update software so the returns match what the IRS expects to see.
For example, under the COVID relief act, if you received unemployment compensation in 2020 and your AGI is $150,000 or less, the first $10,200 is not subject to federal income tax. Unfortunately in the initial instructions, there was a circular argument resulting in households that had more than $139,800 of other income, or $129,600 if both spouses received unemployment compensation during 2020, not receiving the benefit of the provision. This was not the intent of relief act, and no phase out was contemplated, so the poor taxpayer who has AGI of one dollar over the limit and unemployment compensation is not going to be happy. Such is the craziness of poorly considered tax provisions that are hastily introduced. Last week the IRS and Treasury updated the calculation so that the $150,000 AGI limitation is considered without the unemployment income. However, a phase out was not addressed.
In further acquiescence to complexity, or maybe just self-preservation, the IRS has instructed taxpayers who have already filed their returns without claiming the exclusion for unemployment compensation are not to file amendments to correct their returns. The IRS will correct the returns through their systems and automatically issue refunds to taxpayers. It is no wonder they don’t want a flood of amended returns requesting refunds when they are still working on a backlog of correspondence from the initial shutdown last year.
So as we proceed into 2021, the order of the day should be “expect the unexpected.”