IRS Announces New Feature to Get Some Tax Refunds Faster

IRS Announces New Feature to Get Some Tax Refunds Faster
The Internal Revenue Service (IRS) has announced a new feature that will let millions of taxpayers get their tax refund money faster.

For the first time, people who electronically file their Form 1040-X (Amended U.S Individual Income Tax Return) will have the option to receive their refund through direct deposit, instead of waiting for a paper check.

With approximately 3 million amended returns filed each year, this update will reduce processing time for amended returns and increase convenience for taxpayers, the IRS says.

“This important update will cut refund time and reduce inconvenience for people who file amended returns,” IRS Acting Commissioner Doug O’Donnell said in a statement.

“We always encourage direct deposit whenever possible. Getting tax refunds into taxpayers’ hands quickly without worry of a lost or stolen paper check just makes sense,” he added.

It takes the IRS over 20 weeks to process amended returns, regardless of whether they are filed electronically or on paper. That’s because amended returns are processed by hand.

The benefit of filing electronically is that it cuts out mailing time. And, with the new changes, if taxpayers include direct deposit information, they can expect to get their refunds even faster.

Taxpayers still have the option to submit a paper version of the Form 1040-X and receive a paper check. However, direct deposit is not available on amended returns submitted on paper.

IRS Urges Some Americans to Wait Before Filing
The IRS has advised millions of taxpayers who qualify for special state rebate and refund payment programs to hold off on filing their income tax returns as the agency decides how to process such returns.

The reason the IRS is telling such taxpayers to wait with filing is because the agency is clarifying whether these special state tax rebates should be taxed federally.

The “rules surrounding them are complex” and will require more time to figure out the tax implications, according to a recent IRS statement. “We expect to provide additional clarity for as many states and taxpayers as possible next week.”

The agency also advised that anyone who has already filed a 2022 tax return should not file an amendment for now.

While it remains unclear which states need more guidance on how to treat the special rebates, the Urban-Brookings Tax Policy Center (pdf) says that at least 18 enacted one-time refunds in 2022: Arkansas, California, Colorado, Connecticut, Delaware, Georgia, Hawaii, Idaho, Illinois, Indiana, Maine, Massachusetts, New Mexico, New York, Oregon, Rhode Island, South Carolina, and Virginia.

Eligibility for Tax Credit

The IRS recently issued an advisory indicating that millions of Americans are eligible for a tax credit that last year averaged over $2,000.

The Earned Income Tax Credit (EITC), which was first approved by Congress in 1975, was paid out last year to some 31 million Americans, totaling around $64 billion.

But around 20 percent of eligible taxpayers didn’t claim the tax credit, the IRS said in a statement.

People especially prone to overlooking the tax credit include those living in nontraditional homes (such as a grandparent raising a grandchild), those whose earnings declined or whose marital or parental status changed, people living in rural areas, veterans, the self-employed, and those with earnings below the tax return filing requirement.

The EITC is considered a tax credit for lower-income filers, although there are a number of variations of income, filing status, and the number of dependents that have an impact on eligibility.

In order to navigate EITC eligibility, the IRS has a tool called the EITC Assistant that people can use to check if they qualify and how much they can expect to receive.

Changed Definition of ‘SUV’

The IRS and Treasury recently modified the regulatory definition of a sport utility vehicle (SUV) to make more vehicles eligible for an electric vehicle (EV) tax credit of up to $7,500.

In a notice issued on Feb. 3, the IRS and the Department of the Treasury jointly changed the vehicle classification standard by which vans, SUVs, pickup trucks, and some other vehicles are defined, making more models eligible for federal tax credits.

Of particular note is the fact that the changes mean vehicles that automakers consider crossover SUVs now qualify for the credit.

New Question on Tax Forms

In a recent advisory to taxpayers, the IRS said that tax filers must answer a new digital assets question of 2022 federal income tax returns or face the prospect of delayed refunds or even penalties.

The IRS said in a Jan. 24 release that a key change on 1040 forms this year is that the agency has replaced the term “virtual currency” with “digital assets,” in addition to some other modifications to the wording.

The “Yes” or “No” question, which was expanded and revised this year to update terminology, reads as follows: “At any time during 2022, did you: (a) receive (as a reward, award or payment for property or services); or (b) sell, exchange, gift or otherwise dispose of a digital asset (or a financial interest in a digital asset)?”

The question appears at the top of tax forms 1040, Individual Income Tax Return; 1040-SR, U.S. Tax Return for Seniors; and 1040-NR, U.S. Nonresident Alien Income Tax Return.

“All taxpayers must answer the question regardless of whether they engaged in any transactions involving digital assets,” the agency cautioned.

It is a legal requirement to accurately report all income, including income from digital assets, on federal income tax returns. Failure to do so could result in non-compliance with tax laws and possible penalties.

By Tom Ozimek