Tax season could bring more refund confusion

The second tax filing season under President Trump’s tax law is kicking off on Monday, and much of the attention will be on tax refunds, a source of frustration for many taxpayers last year.

Reports of people unexpectedly owing the IRS instead of receiving refunds, and taxpayer uncertainty over how they were going to be impacted by the Trump law, led tax preparers to report increased anxiety from their clients during last year’s filing season.

IRS data ultimately showed that on average refund amounts stayed about the same under the new law. But talk of confusion over the tax law’s changes and disappointment over refunds drew headlines throughout the filing season. 

The tax world is hoping to avoid a repeat of that this filing season and the IRS has undertaken efforts to help prevent taxpayers from getting unpleasantly surprised over their refund.

But how the new season plays out could largely depend on the extent to which people who were unhappy last year adjusted the amount of taxes withheld from their paychecks.

If people didn’t adjust their withholding, “they are highly likely to get a similar outcome to last year,” said Kathy Pickering, chief tax officer at H&R Block. 

The results could even be more pronounced because the post-Trump tax law withholding guidance was in effect for more of 2019 than 2018, she added. 

The tax law Trump signed in 2017 included a number of tax changes for individuals and most people in the near term are receiving tax cuts under the law.

The size of people’s refunds have nothing to do with whether or not they got a tax cut. Instead, people get a refund if they have too much in taxes withheld from their paychecks throughout the year.

Still, people often judge their tax returns based on the size of their refunds, and count on their refunds for savings or to make household purchases.

The IRS had issued guidance shortly after the Trump law was passed updating tax withholding from people’s paychecks to reflect key provisions in the measure, but the guidance did not account for every tax-code change. The combination of the changes to the tax code and the updated withholding guidance impacted some taxpayers’ refunds.

News reports seized on data from the first few weeks of last year’s filing season which showed a drop in average refund amounts.

But subsequent data showed a more complete picture where average refunds were only slightly smaller in 2019 than they were the previous year. IRS data through late December 2018 and 2019 showed that the average refund amount was only 1.4 percent smaller in 2019. In 2019, 71.8 percent of processed tax returns had refunds, compared to 72.5 percent in 2018.

Still, every person’s own tax situation is different, so some people last year ended up with larger refunds than before while others went from having a refund to unexpectedly having a balance due to the IRS.  

The IRS has taken steps to address the uncertainty over refunds.

Last year, the IRS provided penalty relief for some taxpayers who didn’t have enough withheld in taxes, and that relief was expanded to more taxpayers during the filing season after a push from both Democratic and Republican lawmakers.

This year, the IRS has not yet announced any underpayment penalty relief. However, it has been encouraging taxpayers who were upset they owed the agency money to use an updated withholding calculator and make adjustments. The IRS revamped its withholding calculator last year in an effort to make it more user-friendly.

Whether the IRS’s efforts to encourage people to examine and update their withholding will be enough remains to be seen. It’s unclear how many people adjusted their withholding, since people submit withholding updates to their employers.

Some tax preparers predicted that there would continue to be taxpayers negatively surprised about the size of their refunds compared to the refunds they received prior to the 2017 tax law.

“We’re still going to keep Kleenex on our desks,” said Robert Kerr, executive vice president of the National Association of Enrolled Agents (NAEA).

Ty Gaines, an enrolled agent based in Virginia who serves on an NAEA task force, said that if people adjusted their withholding after filing their taxes last spring, they would have still spent some of last year under their old withholding level. Some people may not have made any withholding adjustments, she added.

“There’s still going to be quite a bit of confusion,” Gaines said.

Others are hoping that people are more used to the Trump tax code and made adjustments to their withholding.

“If they got an unexpected result, hopefully they did some adjustment on their end,” said April Walker, lead manager for tax practice and ethics at the American Institute of CPAs.

“I think people have a better understanding of their specific issues this year,” said Tony Nitti, a partner at the accounting firm RubinBrown in Colorado. 

Brian Streig, a CPA in Texas, said he expected to still see taxpayers with smaller refunds than they were used to but expected there to be fewer surprises. He also said that he’s uncertain that people who used the IRS’s withholding calculator will end up receiving the refund size they desired.

“I think it’s a combination of the calculator being new and everybody still adjusting to the tax-reform act,” he said. “There are still a lot of moving variables. We’re still trying to figure it all out.”

The political stakes are also high. The confusion over refunds may have contributed to polls finding last year that only a small percentage of taxpayers thought that they got a tax cut under Trump’s law, even though a majority of taxpayers did.

Republicans were frustrated with media coverage and comments from Democrats about refunds last year, since many taxpayers with smaller refunds still got tax cuts under Trump’s law and since overall average refund amounts were ultimately comparable in 2019 and 2018.

Michael Zona, a spokesman for Senate Finance Committee Chairman Chuck Grassley (R-Iowa), said that “we’d like to avoid a repeat of the debunked misinformation campaign surrounding taxpayer refunds that happened last year.”

Democrats have had concerns about the IRS’s withholding guidance. The top Democrat on the Finance Committee, Sen. Ron Wyden (D-Ore.), said he plans to monitor “whether taxpayers continue to be shocked by much smaller than expected refunds.” 

Legislation Congress passed late last year could add a complication to this year’s filing season. That law retroactively renewed several tax breaks that had expired at the end of 2017, so tax preparers will have to check to see if it makes sense for their clients to file amended returns for 2018 that claim any of those breaks.

But the IRS faced some challenges last filing season that it’s not facing again this year. It doesn’t have to deal with as many legislative changes to the tax code. Last year’s filing season also came in the wake of a 35-day government shutdown, while this year there was no such funding lapse.

Still, the agency has long faced customer service and technology issues and been hampered over the last decade by funding cuts.

“With filing season about to begin, I’m concerned about the IRS’s ability to provide adequate customer service to taxpayers,” Wyden said.