By Richard Rubin 

WASHINGTON -- Congress is about to change a piece of the tax code affecting the returns being filed by as many as 40 million Americans -- a month after the tax-filing season started.

The move, approved by the Senate on Saturday and headed for House passage on Tuesday as part of the coronavirus-relief bill, would exempt the first $10,200 of 2020 unemployment benefits from income for households that made under $150,000. That could save households about $25 billion, but implementing the change would be a challenge for the already-burdened Internal Revenue Service, and it could lead to unusual disruptions.

As of late February, the IRS had already received more than 45 million tax returns, some of which will now likely have to be amended. And the IRS will need to reprogram its computers to include the new, retroactive change as people file returns to take advantage of it. That is happening during an already messy tax season complicated by the coronavirus pandemic, remote work and a pile of other tax-law changes.

"We're trying to stay on top of this -- on top of everything else we're trying to stay on top of," said Jack Dalton, an accountant at the Richards Group in Puyallup, Wash. He said his firm had already contacted six or seven clients whose returns were almost ready to file and told them they would have to wait to see what Congress and the IRS do.

Some lawmakers and tax preparers are pushing for a delay in the April 15 tax deadline. Last year, as the pandemic was starting and disrupting tax preparers and the economy, the IRS delayed the deadline until July 15

"It makes it really hard on the tax practitioners," said Wayne Landau, an accountant in Garden City, N.Y. "Nobody really cares about us, but it just makes it so difficult. You're laughing. We cry."

Beyond all that, the IRS is still working through a backlog of 2019 returns and has been struggling with some erroneously issued notices.

Still, before the latest proposals on unemployment insurance, IRS Commissioner Charles Rettig had said that a blanket extension of the April 15 deadline was unnecessary. A Treasury Department spokeswoman declined to comment. The IRS doesn't comment on pending legislation. Taxpayers in Texas and Oklahoma already have until June 15 because of the storms in those states.

"Facing enormous strain and anxiety, taxpayers need flexibility now," Rep. Richard Neal (D., Mass.), chairman of the tax-writing House Ways and Means Committee, and Rep. Bill Pascrell (D., N.J.) said in a Monday statement. "We demand that the IRS announce an extension as soon as possible."

Former IRS Commissioner John Koskinen said that after the law is enacted, the agency would likely have to stop accepting tax returns for at least a few days so it can reprogram and test its computer systems.

"You really are trying to fix the plane when you're flying it," he said.

Unemployment insurance has generally been considered taxable income for several decades, because it is seen as a substitute for earned income. But state rules for withholding from unemployment benefits vary, and advocates were warning that millions of people would face surprise tax bills.

Some Democrats, including Sen. Richard Durbin of Illinois and Rep. Cindy Axne of Iowa, had been pushing for the tax exemption, but party leaders left it out of the first versions of the relief bill.

Senators added the proposal late last week as part of an agreement reached to secure the vote of Sen. Joe Manchin (D., W.Va.). Someone in the 12% tax bracket could save more than $1,200. Those in higher brackets could save more, while those without income tax liability would get little if any benefit.

"The inclusion of our provision is welcome news to the millions of Americans using unemployment benefits to keep a roof over their head, put food on the table, and pay for health care and other necessities," Mr. Durbin said in a written statement.

The change applies to tax year 2020, not tax year 2021.

The IRS opened the tax-filing season this year on Feb. 12, a few weeks later than usual. The agency cited late tax-law changes that Congress created in December. Before the IRS starts accepting returns, it must program its computers and test them. One recent technological improvement could help the IRS: It has started accepting some amended returns electronically instead of requiring paper.

The change will also cascade into state tax systems, except for those that already lack income taxes or already exempt unemployment benefits from income. Some states automatically adopt federal definitions of income, while others don't.

States will need to adjust their own computer systems, alert taxpayers and prepare to accept amended returns, said Verenda Smith, deputy director of the Federation of Tax Administrators, an association of state tax agencies.

But states don't want an extended deadline either, because that brings its own costs in staffing and delayed revenue.

"I'm going to call it a mess," Ms. Smith said. "They'll figure it out. This is what they do for a living."

Write to Richard Rubin at


(END) Dow Jones Newswires

March 08, 2021 13:47 ET (18:47 GMT)

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