Tax 'filing trap': How your stimulus payment could delay your refund

While many American households were concentrated on making sure they received their economic impact payments from the IRS – some may have inadvertently become ensnared in a “trap” that has led to millions having their 2019 refunds delayed.

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The IRS launched its non-filer tool in April to help some individuals transmit information to the agency in order to get an accurate economic stimulus payment.

However, the tool in effect filed a limited tax return on behalf of users as a formality, as noted by Democratic Colorado Sen. Michael Bennett. So when these individuals later tried to file their 2019 return – including to claim the child tax credit or earned income tax credit – they were unable to do so online.

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Bennett, who referred to the glitch as a "filing trap," said the issue affects up to 10 million households, and for some people, refunds and tax credits may well exceed what was given in the form of economic impact payments.

During recent testimony on Capitol Hill, IRS Commissioner Charles Rettig said guidance for these people was forthcoming, but it would include having to file a paper return marked “amended EIP return.”

“We will extract those from the mail and process those on an expedited basis,” Rettig told lawmakers.

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But even that expedited process could take a while, as paper returns are backlogged and facing “extreme delays.”

The IRS stopped processing paper returns at the end of March as it began adjusting operations in order to keep employees safe and to comply with coronavirus-related social distancing and stay-at-home guidelines.

The IRS had 20 million pieces of unopened mail as of May 16, about half of which were paper returns, according to a report from the National Taxpayer Advocate. The agency estimated it had a backlog of about 4.7 million paper returns at that time – and taxpayers have until July 15 to file.

The agency had only processed about 2.7 million paper returns as of May 22.

The IRS’ Taxpayer Protection Program has also “mistakenly” flagged some returns as potential identity theft, so these people are likely still waiting for their refunds.

Rettig said as of mid-July, all of the IRS’ processing centers should be open.

Meanwhile, lawmakers are discussing potentially issuing another round of direct payments to American households as coronavirus cases continue to spike in some states throughout the U.S.