Tax season brings bigger tax refunds and 'no unexpected problems' so far

With tax day a month away, what was feared to be a rough filing season for the beleaguered Internal Revenue Service has gone smoother than expected — so far.

The IRS has processed 5.9% more returns at the end of the second week of March compared with a year ago, though it has received 3.9% fewer returns so far from taxpayers. More refunds have been processed and, on the whole, they are larger versus 2021, according to the latest stats, which also shows that 97.5% of refunds went into direct deposit.

“The good news is for the current tax filings, there’s been no unexpected problems at this point,” National Taxpayer Advocate Erin Collins, told Yahoo Money. “Electronic returns are being processed timely and refunds are getting out the door. The biggest challenge the IRS faces is paper.”

Still, some early hiccups emerged with the Child Tax Credit, and the IRS still has a larger-than-usual backlog of individual returns from the previous tax season, potentially creating delays for newly received paper returns.

Processing returns

As of March 11, the IRS has processed nearly 98% of the 63,474,000 returns it's received so far. At this time last year, it had processed about 89% of the 66,065,000 returns it had received.

In addition to staying on top of processing, the IRS has rolled out other efforts to streamline the filing season. It launched a special new page online to provide the latest details and information regarding the 2022 filing season and the agency continues to update its FAQ pages for taxpayers seeking answers.

To alleviate the historically high tax return backlog, the IRS repurposed 700 IRS employees at the Austin, Ogden, and Kansas City facilities to tackle unprocessed paper tax returns. This “surge team” adds to the agency’s earlier effort in February to move 800 existing personnel to work directly with unprocessed tax returns or correspondence.

“IRS employees have been working tirelessly to process backlogged returns and taxpayer correspondence," IRS Commissioner Charles Rettig said previously. "To ensure inventory is back to a healthy level for next filing season, we are leaving no stone unturned — taking an all-hands-on-deck approach to ensure as many employees as possible are dedicating time to return processing."

Higher refunds so far

The average refund this year is $3,352, compared with $2,967 this time last year — a 13% increase. There are a handful of reasons for this.

“More people worked in 2021 than in 2020 and with more wages comes more withholdings,” Janet Lee Krochman, a CPA, told Yahoo Money. That could mean that more workers had too much withheld from their paychecks during the year and they're receiving the difference as a tax refund.

Key changes stemming from pandemic-era tax legislation also meant taxpayers were eligible for credits they previously didn’t qualify for in previous years that could be boosting refunds.

“Many are getting higher refunds this year with tax credits for dependents in college through the higher education tax credit, child and dependent care credits for working spouses, stimulus payments not yet received but entitled to under the recovery rebate credit, and credits for electric vehicle purchases,” Dwight Nakata, CPA, CFP at Yamada & Nakata CPAs, told Yahoo Money.

The expanded Earned Income Tax Credit (EITC) also may add more money to people's tax refunds.

There were earlier concerns about smaller refunds for those whose tax refund is largely based on the Child Tax Credit. However, other tax credits or itemizing your tax return may make up for any decrease in your refund.

“Taxpayers who were ‘clued in to’ their tax situations knew ahead of time whether the child tax credit would be a win-win for them or not," Krochman said, "and those taxpayers logged into the IRS website and ‘opted out’ of receiving the six months of payments leaving potentially larger refunds ‘on the table.’”

CTC hiccups

As tax season kicked off, millions of taxpayers who received Paycheck Protection Program loans and the advance Child Tax Credit (CTC) payments faced some snafus.

Some parents who got monthly CTC payments from July to December last year reported that the tax forms from IRS documenting those payments contained inaccurate amounts. Reporting the wrong amount in CTC payments on a return could trigger delays, reduce their refund, or get no refund at all.

“I advised my clients to not take the advance and receive the full amount in the refund,” Lynne Fuentes, head of Fuentes and Angeles CPA, told Yahoo Money. “It could avoid headaches if there’s a back and forth with the IRS. We just haven’t been able to get calls through as they are understaffed and managing a crisis with backlogs.”

The solution: The IRS urged taxpayers to use its online portal to get the most accurate information on the CTC payments and double check that amount by comparing it with your bank statements.

“The Child Tax Credit is high on the list this year as far as hiccups,” Krochman said.

Paper returns face delays

Don't let the backlog at the IRS delay your filing. Folks who haven't had last year’s tax return processed yet should enter $0 for the 2020 AGI on their 2021 tax return to avoid a rejection when filing electronically, Collins told Yahoo Money. If you used a non-filer tool last year to collect the advance CTC payments, the IRS said to put $1 for last year’s AGI on your current return.

“Not enough people know that is a work-around if your return hasn’t been processed yet," Collins said. "What we’re seeing with a lot of taxpayers is that if their prior tax return wasn’t processed, their new returns are getting rejected. Since they are not able to electronically file it, taxpayers get discouraged and put their return in the mail."

And mailing in a paper return is the last thing you want to do this year.

Paper returns are being processed on a first in, first out basis, according to the National Taxpayer Advocate. That means a return filed this year won’t be processed until the IRS gets through the paper backlog from last year. It’s unclear how long that will take due to severe understaffing issues at the agency.

“Please do everything possible, especially if you have a refund situation, to file electronically,” Collins said. “It’s a difference of a two or three week payment compared to 10 months or longer.”

Ronda is a personal finance senior reporter for Yahoo Money and attorney with experience in law, insurance, education, and government. Follow her on Twitter @writesronda

Gabriella is a personal finance reporter at Yahoo Money. Follow her on Twitter @__gabriellacruz.

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