Why California taxpayers could get an unpleasant surprise if they file for this deduction


As short-term interest rates soar and banking fears rise, more investors are stashing their cash in short-term Treasury securities, either directly or through government money market funds.

Last month, yields on six-month Treasury bills topped 5% for the first time in 16 years only before a burst of panic buying in the wake of Silicon Valley Bank’s failure pushed yields below that threshold this week.

In addition to being backed by the U.S. government, the interest on Treasury securities is exempt from state (but not federal) income taxes. That’s a nice perk in California, where the top tax rate is 13.3%, highest in the nation.

If you buy Treasurys directly – through a brokerage account or the government website TreasuryDirect.gov – you’ll pay federal tax on the interest but can deduct it on your California tax return.

If you own shares in a government mutual fund, you generally can deduct on your state taxes the percentage of annual dividends that came from Treasurys and a small number of other government securities.

However, if you live in California, New York or Connecticut, which have a tougher rule for these dividends, you may get no state-tax deduction. 

This was especially true in 2022, as some California investors may discover when they prepare their tax returns. 

For example, T. Rowe Price has two government money funds: Government Money and U.S. Treasury. On their 2021 returns, shareholders everywhere could deduct 86% and 87% of their dividends, respectively. For 2022, shareholders in most states could deduct only 27% and 21%, respectively. But those in California, New York and Connecticut got zero state-tax exemption.

To understand why, it’s important to know what these funds invest in, their confusing nomenclature and California’s special rule.

Money market funds invest in short-term, high-quality securities. Although they’re not guaranteed, they’re generally considered a relatively safe place to put money you may need within a few years. They are sold by mutual fund companies and should not be confused with money market deposit accounts offered by banks, which are guaranteed, up to a limit, by the Federal Deposit Insurance Corp. 

There are three types of money market funds.

• “Prime” funds hold cash and securities issued by the government, government agencies, corporations and in certificates of deposit. Their dividends are largely taxable at the federal and state level. You won’t find government or Treasury in their names.

• “Municipal” or “tax-exempt” funds buy securities issued by state and local governments.  Their dividends are exempt from federal tax, and from state tax to the extent they came from securities issued in your home state.

• “Government” funds normally invest at least 99.5% of assets in cash, U.S. government securities and/or repurchase agreements that are fully collateralized by cash or government securities. 

Some of these U.S. government securities are exempt from state and local taxes, namely Treasurys and a limited number of government-agency securities. Other government securities, such as those issued by Fannie Mae and Freddie Mac, are not exempt from state and local tax.  Repurchase agreements are also not exempt. Nicknamed “repos,” these are essentially short-term – often overnight – lending agreements.

“Treasury” money market funds are a type of government fund that normally invest in cash, Treasurys and/or Treasury-backed repos, but not other government securities. Funds labeled “Treasury Only” or “100% Treasury” generally invest only in Treasurys, not repos.

Each year, fund companies issue a report showing the percentage of dividends that came from government securities eligible for a state-tax exemption, so shareholders can figure out how much of their federally taxed dividends they can deduct on their state return.

For example, if 80% of a fund’s dividends came from eligible securities (primarily Treasurys),  80% of dividends are generally exempt from state tax. 

California, however, only allows a state-tax exemption if at least 50% of the fund’s assets at the end of each calendar quarter were in these eligible government securities. (New York and Connecticut have this same rule.)

If the fund meets that 50% of assets test, then shareholders in these three states can deduct whatever percentage of dividends came from eligible securities, just like shareholders in other states.

But if the fund fails the 50% test, none of its dividends are exempt from state tax in the three states.

In 2022, many government money funds shifted a much larger percentage of assets from Treasurys (which are state-tax exempt) into repurchase agreements (which are not). 

As a result, shareholders in many government money funds got a much smaller state-tax deduction. And because of the 50% rule, many in California got zero deduction.

Let’s take a look at Vanguard’s Federal and Cash Reserves Federal money funds, which are the nation’s largest and third-largest government money funds, respectively, according to Crane Data.

In 2021, they each derived almost three-fourths of dividends from eligible government securities. And both met the 50% of assets test, so investors in all states could deduct nearly three-fourths of their dividends on their state-tax returns.

But in 2022, Vanguard Federal and Cash Reserves Federal got only 38% and 53% of dividends, respectively, from eligible securities. Both failed the 50% test, so shareholders in California, New York and Connecticut got no state-tax deduction, while investors in other states could deduct 38% of dividends and 53% of dividends, respectively.

Notice that a fund, like Cash Reserves, could get more than 50% of its dividends from Treasurys but still fail the 50% of assets test. 

Investors in the firm’s third government fund, Vanguard Treasury, could deduct 100% of dividends in 2021 and 2022.

So why did so many fund managers favor repos over Treasurys last year, which cut into state-tax deductions?

Money market funds can enter into repurchase agreements with the Federal Reserve Bank of New York as part of its program to maintain the target federal funds rate. These agreements are backed by the New York Fed’s Treasury holdings. Most other investors cannot access this program.

During the pandemic, “you had a ton of stimulus money coming into the system,” said Doug Spratley, a T. Rowe Price fund manager. Municipalities, corporate treasurers and individuals who had excess cash gobbled up short-term Treasurys. This “pushed yields on Treasury bills below overnight repos, sometimes by one-fourth of a percent or more,” he said. 

So money funds piled into the New York Fed’s repurchase program.

Also, when interest rates are rising, investors want to be in short-term securities, so when their investments mature, they can reinvest at higher rates. Overnight repos are the shortest term possible.

The New York Fed program “is the single biggest holding in money funds now,” said Peter Crane, publisher of Money Fund Intelligence.

Buying a “Treasury” money fund doesn’t guarantee a tax exemption in California because many of these funds can invest in repos.

California investors who want a guaranteed state-tax deduction should look for money funds that invest in Treasurys only, not repos. Sometimes you can tell by their names (such as 100% Treasury or Treasury Only), but not always.

For example, the Schwab Treasury Obligations Money Fund invests in repurchase agreements while the Schwab U.S. Treasury Money Fund does not, Schwab spokesman Mike Peterson said via email.

Investors should also compare the yields on Treasury-only funds to other government and prime funds. 

Normally, yields on Treasury-only funds lag yields on funds that can buy repos and other government securities, but they could still be higher on an after-tax basis. Today, their yields are very close.

As of Monday, the average seven-day yield for retail money funds was 4.33% for prime funds, 4.06% for government funds and 4.12% for Treasury funds (including Treasury-only funds), according to Crane Data.

Investors can also guarantee themselves a state-tax deduction by buying Treasurys directly, but they’ll have to take charge of reinvesting the proceeds as they mature, unless they set up automatic reinvestment.

Normally, a Treasury-only money market fund would be considered one of the safest bets out there. But because of the looming fight in Congress over the federal debt ceiling, there are some concerns.

Treasury-only money funds “have higher relative risk to a U.S. government default than prime and government (money funds) that can diversify investments into other instruments,” Fitch Rating said in a report.  (Fitch is owned by Hearst, which also owns The Chronicle.)

Since Jan. 19, when the U.S. government hit its debt limit, the U.S. Treasury has been using extraordinary measures to meet its obligations. At some point, called the X date, it will exhaust those and could conceivably default on some obligations, including Treasury securities.

The X date is likely between July and September, but could hit as early as June.

Treasury-only funds “could face increased volatility in the Treasury market and heightened investor redemptions as the debt ceiling deadline approaches,” Fitch wrote.

To reduce this risk, fund managers would likely cut back on Treasurys maturing around the expected X date, Fitch said. It currently expects the ceiling will be raised or suspended to avoid a default, although that opinion could change.

Pete Gargiulo, a director with Fitch, said he can’t give investment advice, but “if you are buying Treasury bills directly,” the debt ceiling “is a consideration. The timing can be very challenging.” He said “fund managers have been through debt-ceiling standoffs before. They have navigated these waters. That’s one benefit of being in a Treasury-only money market fund.”

But Crane said he doesn’t think the “state-tax bonus” of being in a Treasury-only fund is worth the risk. “Wait until after the debt ceiling is raised, or better yet, buy a California municipal money market fund,” he said.

California extends deadline to file 2022 income taxes to match IRS decision


California announced Thursday that it will follow the lead of the Internal Revenue Service and extend tax filing deadlines to Oct. 16 for almost all people and businesses in the state.

Those taxpayers will have until Oct. 16 to file their 2022 federal and state income tax returns and pay any taxes due without penalty. The new deadline also applies to other tax payments this year.

In January, the IRS postponed tax deadlines until May 15 for residents and businesses in most of California and parts of Georgia and Alabama that were declared federal disaster areas because of winter storms. The California Franchise Tax board went along with the May 15 postponement.

On Friday, the IRS went further and extended tax deadlines for these areas until Oct. 16.  The state has now conformed to those deadlines.

The disaster declarations include 51 of California’s 58 counties (including all nine in the Bay Area) and cover storms in December and January, which caused flooding, landslides and mudslides.

“The state is aligning with the Biden Administration and extending the tax filing deadline in addition to the tax relief announced earlier this year,” Gov. Gavin Newsom said in a press release.

The Oct. 16 extension applies to tax deadlines falling between Jan. 8 and Oct. 15. It includes:

  • Individuals whose tax returns and payments are due on April 18.

  • Quarterly estimated tax payments due on Jan. 17, April 18, June 15 and September 15.

  • Business entities whose tax returns are normally due on March 15 and April 18.

  • Elective tax payments for pass-through-entities due on June 15.

In an updated winter storm page on its website, the FTB says, “If your principal residence or place of business is in one of the counties that are part of the declared disaster area, you are an affected taxpayer and entitled to relief. No supporting documentation is required.” 

Individuals and businesses who suffer an uninsured or unreimbursed loss in a federally declared disaster can take a deduction for it on their federal and state tax returns. They can claim the loss on either the return for the year the loss occurred or the return for the prior year, the IRS and FTB both say. 

California taxpayers claiming a disaster-loss deduction should write the name of the disaster in blue or black ink at the top of their tax return to alert FTB. If filing electronically, they should follow the software instructions. If a taxpayer receives a late filing or payment penalty notice related to the postponement, they should call the number on the notice to have the penalty abated, it said.

The California counties covered by the disaster declarations include: 

Alameda, Alpine, Amador, Butte, Calaveras, Colusa, Contra Costa, Del Norte, El Dorado, Fresno, Glenn, Humboldt, Inyo, Kings, Lake, Los Angeles, Madera, Marin, Mariposa, Mendocino, Merced, Mono, Monterey, Napa, Nevada, Orange, Placer, Riverside, Sacramento, San Benito, San Bernardino, San Diego, San Francisco, San Joaquin, San Luis Obispo, San Mateo, Santa Barbara, Santa Clara, Santa Cruz, Siskiyou, Solano, Sonoma, Stanislaus, Sutter, Tehama, Trinity, Tulare, Tuolumne, Ventura, Yolo and Yuba.

“If you are not in a covered disaster area but your tax records necessary to meet a filing or payment tax deadline are located with your tax practitioner in a covered disaster area, you still qualify for the disaster relief,” the FTB says.

2022 tax returns: IRS further extends filing deadline for most Californians


The Internal Revenue Service has further extended its tax filing deadline for Californians affected by the winter storms pounding the state — which means the entire Bay Area and most of the rest of the state have until the fall to file and pay their federal taxes. 

The agency set Oct. 16 as the new deadline for eligible individuals to file their 2022 federal individual and business tax returns and to make tax payments, the IRS announced Friday. Residents, households and business owners in 44 California counties listed in a federal emergency declaration earlier this year are eligible for the extension. All nine Bay Area counties are on the list, along with the rest of the state's major population centers.

The new deadline replaces the May 15 extension granted in early January after deadly “atmospheric river” storms devastated large swaths of the state. The original deadline was April 18.

California officials are reviewing the IRS announcement and will provide information on the Franchise Tax Board website “soon” on whether they also plan to extend the deadline for state tax returns and payments, said Andrew LePage, a spokesperson for the Franchise Tax Board, on Monday.

The Franchise Tax Board followed suit when the IRS announced its first deadline extension earlier this year.

Here are key details about the new federal extension: 

What is the IRS extension, and what does it affect?

The new extension postpones until Oct. 16 most tax filing and payment deadlines for individual and business returns for the 2022 calendar year. 

For eligible taxpayers, the Oct. 16 deadline applies to:

• Individual income tax returns, originally due on April 18; various business returns, normally due March 15 and April 18; and returns of tax-exempt organizations, normally due May 15.

• Contributions to IRAs and health savings accounts.

• Returns and payment of any taxes due by farmers who do not make estimated tax payments and normally file their returns by March 1.

• Estimated tax payment for the fourth quarter of 2022, originally due on Jan. 17, 2023.  Taxpayers can skip that payment and include it with the 2022 return they file on or before Oct. 16.

• 2023 estimated tax payments, normally due on April 18, June 15 and Sept. 15. 

• Quarterly payroll and excise tax returns normally due on Jan. 31, April 30 and July 31.

How do I know if I qualify for the IRS extension?

Everyone who lives in or has a business in one of the 44 California counties listed by the IRS qualifies for the deadline extension.

The counties are: Alameda, Alpine, Amador, Butte, Calaveras, Colusa, Contra Costa, Del Norte, El Dorado, Fresno, Glenn, Humboldt, Inyo, Los Angeles, Madera, Marin, Mariposa, Mendocino, Merced, Monterey, Napa, Nevada, Placer, Sacramento, San Benito, San Joaquin, San Luis Obispo, San Mateo, Santa Barbara, Santa Clara, Santa Cruz, San Diego, San Francisco, Siskiyou, Solano, Sonoma, Stanislaus, Sutter, Tehama, Trinity, Tulare, Tuolumne, Ventura and Yolo.

Do I have to request the extension?

If your address on record with the IRS is within the disaster area, you do not have to make a request — the extension is automatic.

If you qualify but receive a notice of late filing or late payment penalty, the IRS says you should call the number listed on the notice to have the penalty removed.

Opinion The IRS should not be running on 60-year-old technology

February 22, 2023 at 3:14 p.m. EST

Sixty-four years old. That’s the age of the technology that parts of the Internal Revenue Service currently rely upon to process tax returns. It’s time to retire it.

As the IRS has lurched from crisis to crisis in recent years, many of its woes have become well known: It answered only 13 percent of calls last year. It has a paperwork backlog that includes millions of unprocessed returns. It is beset by ongoing staffing shortages, notably the fewest auditors since World War II. There’s been some improvement. The IRS has hired 5,000 more workers to answer calls and significantly reduced the backlog, but huge challenges remain.

Its outdated technology has yet to be addressed. A new Government Accountability Office (GAO) report highlights just how dire the IT situation is. Not only are the applications and hardware ancient, but some of the software it uses are up to 15 versions behind the current one. “These legacy assets will continue to contribute to security risks, unmet mission needs, staffing issues, and increased costs,” the GAO concludes.

A key problem is the “Individual Master File” that has been in use since 1970, when Richard M. Nixon was president and the Chevrolet Chevelle was a hot car. They both are long gone, but the Individual Master File is still the main database to collect and store taxpayer information. It was built with antiquated programming languages COBOL and Assembly. The IRS says it finally updated some code last year, but COBOL remains in use. Until the master file is fully modernized, it will remain a colossal task to get real-time information on refunds and processing status to taxpayers, not to mention assure the latest safety and fraud precautions. The target date to entirely replace the master file is now 2030, but the GAO warns it’s unlikely the IRS will meet that deadline. (The IRS declined to provide a new date to The Post.)

This is unacceptable. Democrats passed the Inflation Reduction Act last year, giving the IRS almost $80 billion to improve operations. Half that money is for more auditors to pursue corporate and high-earning tax cheats, but about $30 billion is for improving basic services, including IT and staffing. These upgrades are urgently needed. House Republicans are wrong to attempt to strip away this funding, but lawmakers in both parties should press for faster results.

Tax filing season is underway and there have already been problems. The IRS told people to wait to file their returns if they lived in about 22 states that sent out some type of inflation relief payment last year. This is because the IRS was deliberating on the question of whether these payments count as income on federal tax returns. That’s a valid issue, but one the IRS should not have waited until after tax season began to decide. (It finally said on Feb. 10 that the payments would not be taxed.)

Amid stumbles such as that one, it might be all too easy to put IT upgrades on the back burner again. But for an agency that has lost so much of the public’s confidence, those upgrades would represent a badly needed step forward — into the 21st century.


IRS warns taxpayers to hold off filing returns in 20 states as it checks if it can tax special refunds

Susan Tompor
February 10, 2023 

Well, so much for early promises by the IRS that taxpayers could expect to "experience improvements" as they file their 2022 returns this year.

Taxpayers in more than 20 states were to hold off filing their tax returns for now until the IRS irons out how the taxpayers in those specific states should report, if at all, money received from their states through special tax refunds or payments in 2022.

We're looking at one mind-boggling blunder that puts tens of millions of taxpayers on the hook in states that include California, Massachusetts and Virginia.

Taxpayer advocate blog blames IRS

The National Taxpayer Advocate issued a highly critical blog Thursday that questioned why the IRS waited so long to address whether special tax refunds or payments will be treated as taxable income on a federal income tax return. The same blog also stated that the IRS failed to provide timely guidance involving a change in reporting of payments of more than $600 on platforms, like Venmo and PayPal.

Wait to file: IRS says hold off if you received an inflation relief checks in 2022

Free filing options: Your 2023 guide to free tax prep services

The ongoing uncertainty about how to report one's special tax refund immediately touches the lives of taxpayers in several states.

And I'd suggest that down the road it could add to the paper backlog at the IRS if people in several states aren't clear on how to correctly report their taxes soon.

"This was a known issue," wrote advocate Erin Collins, who is the "voice of the taxpayer" within the IRS.

"The failure to have identified and resolved this issue before the filing season suggests that someone, or everyone, was asleep at the switch," Collins wrote.

When waiting to file a return is recommended

Taxpayers are stuck in a filing season ditch. If they're depending on getting a decent size federal income tax refund early in the season, forget it. They need to delay filing a return as the IRS works out what experts say could be fairly complex guidance. The IRS is expected to issue some word in the coming days.

If these taxpayers file early anyway, they risk doing their taxes wrong.

Tax software companies and tax professionals are waiting to see what move the IRS takes next, too.

Collins wrote that the impact of this type of delay is "hard to overstate." She said the IRS has known for months that there is uncertainty about the tax treatment of special state refunds or payments, which were handled in a variety of ways in different states.

Some tax software companies, she wrote, have concluded that some state tax payments are not taxable and have programmed their software so the payments are not reported.

Tax professionals told me that there likely isn't a one-size-fits-all answer here that can apply to every state. But general guidelines and tax rules will be taken into account to address how states paid out the money.

Car prices may fall but insurance won't: Here's why.

Collins concluded that there is ample reason to "believe that many of these payments are not taxable for federal income tax purposes — either if the taxpayer did not receive a tax benefit in an earlier year or under the 'general welfare exclusion.' "

Virginia provided a one-time tax rebate, for example, she noted, and the state's department of taxation's website states that taxpayers who itemized deductions may be required to report the rebate as income received on their federal income tax returns. Virginia says it will send a 1099-G in the mail, the same as if someone received a state tax refund.

Roughly 9 out of 10 taxpayers take the standard deduction; the rest itemize deductions on a federal income tax return.

Payment apps could confuse some ahead

Collins also addressed some confusion on the 1099-K issue involving payment platforms.

Taxpayers across the country will wait and see again how the IRS handles a new reporting requirement involving third-party payments. Payment apps, like Venmo and PayPal, are used for personal reasons — like sending a child birthday money — and business reasons, like money paid to freelancers and others for goods and services.

You'd pay taxes on money received in a gig job or business — not the kid's birthday cash. But users need to know how to distinguish and separate such payments. You don't want to be in a situation where you have to dispute a 1099-K and say it is erroneous and ask a payment provider to issue a corrected 1099-K.

Congress wants to make sure that taxable income is taxed and upped the paperwork requirements for when 1099-K forms are issued as part of the American Rescue Plan Act of 2021. New reporting was to apply to transactions made in 2022 and after.

Collins said the IRS made the right decision to pull the plug and delay implementing the new 1099-K threshold until the 2024 filing season. But she said the IRS could have done more by working early on with the tax industry and others to implement the legal requirement. The IRS did issue guidance on Dec. 28 that will be useful ahead.


Why the IRS says Californians may want to hold off on filing tax returns

I.R.S. Tells Millions Who Received State Rebates: Don’t File Just Yet

Tax season is underway. But the Internal Revenue Service is still figuring out whether taxpayers who received rebates last year should count them as taxable income.

If you’re one of the millions of taxpayers who received a one-time tax payment from your state last year, the Internal Revenue Service has some advice: Hold off on filing your federal income tax return.

Even though tax season started on Jan. 23, the I.R.S. is still determining whether the payments — sent last year to taxpayers in nearly two dozen states as a way to provide relief from spiraling inflation — should be treated as taxable income on their federal returns.

Late last week, the I.R.S. said it was working with state tax officials and expected to provide more guidance “for as many states and taxpayers as possible” this week.

“There are a variety of state programs that distributed these payments in 2022, and the rules surrounding them are complex,” the I.R.S. said in a statement. “For taxpayers uncertain about the taxability of their state payments, the I.R.S. recommends they wait until additional guidance is available or consult with a reputable tax professional.”

It is an arduous task for the I.R.S. to untangle what is federally taxable because each state that sent checks to residents in 2022 classified those payments in its own way, and had different eligibility requirements and varying reasons for doing so.

In California alone, nearly 17 million taxpayers received a one-time “middle-class tax refund” of up to $1,050 for relief against rising prices. The payments do not need to be claimed as income on California state income tax returns, according to a spokesman for California’s Franchise Tax Board. In South Carolina, the payments, also called “rebates,” were based on taxpayers’ 2021 tax liability.

Various tax policy groups are also doing their own calculations of how many states could be affected, based on their readings of the payments and how they define the term “rebate.”

The Tax Policy Center, a nonprofit research group, counts 18 states that sent one-time income tax rebates 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.

But according to a list compiled by the Tax Foundation, a nonprofit tax policy group, 22 states may be affected. It also included Minnesota’s rebate, which went only to its frontline workers — a small portion of the population.

These special payments have caused confusion because the I.R.S. must sort through each state’s program to determine their taxability. For example, disaster relief payments are not taxable, which is why stimulus payments sent out during the coronavirus pandemic were not treated as income, said Jared Walczak, vice president of state projects at the Tax Foundation.

Social benefit programs that help low-income households are also generally not considered taxable income. But the states generally characterized last year’s payments to taxpayers as inflation relief, and in other cases they sent the money because they had state surpluses, tax experts said.

“Ultimately, it is the I.R.S.’s job to determine what the true function is,” Mr. Walczak said. “It may be all taxable or not taxable in some states, while in other states taxability may differ based on whether a taxpayer itemized or took the standard deduction.”

TurboTax, the giant online tax preparation service, has made a determination of its own. Based on “currently available information” and its “own expertise,” it said it believed that the payments were not taxable at the federal or state level — and it has not dissuaded its customers from filing.

“We are providing guidance to our customers and are hopeful for additional clarification in the near future,” said Lisa Greene-Lewis, an accountant and tax expert with TurboTax.

But many other tax preparers across the country are frustrated that the guidance wasn’t sorted out before tax season opened.

Dan Herron, an accountant and financial planner in San Luis Obispo, Calif., said he had held back on filing for taxpayers who received the middle-class tax credit in their state given all of the confusion.

“It is so frustrating considering these kinds of payments have been sent out during 2022, yet the I.R.S. didn’t worry about it until … NOW,” he said in an email. “Clients express their frustration to us, which makes us frustrated with the I.R.S. It’s not a fun situation to be in.”


Three moves to get your tax refund faster in 2023

January 27, 2023 at 7:00 a.m. EST
Avoid calling the IRS on Mondays, triple-check for errors, don’t mail a return if you don’t have to, and other tax advice for this year’s tax season

The last few tax seasons were dominated by backlogs. Here’s hoping this year will be different.

Or at least, in the words of National Taxpayer Advocate Erin M. Collins, it’s “the year we stopped talking about a backlog.”

In her annual report to Congress earlier this month, Collins commended the IRS for making “considerable progress in reducing the volume of unprocessed returns and correspondence.” The agency has slashed its massive backlog of unprocessed tax returns by nearly two-thirds, to about 4 million, in the past year.

But Collins expects the IRS will continue to struggle with customer service.

“We have begun to see light at the end of the tunnel,” she wrote. “I am just not sure how much further we need to travel before we see sunlight.”

Here are the questions I’m asked most often when a new tax season starts. Here’s what I know:

When are tax returns due?

The government started accepting tax returns Monday. If you owe the IRS, you must file by April 18. Failing to pay what you owe on time can result in penalties.

The IRS said some disaster victims and Americans living overseas might have more time. Storm victims in Alabama, California and Georgia have until May 15 to file their federal individual and business tax returns and pay what’s owed.

If you request an extension, you have until Oct. 16 to submit your returns. But filing an extension doesn’t give you more time to pay.

If you are due a refund, you aren’t penalized if you don’t file by April 18. However, by law, taxpayers have only a three-year window from the original return due date to claim their refunds. Last year, the IRS estimated it owed $1.5 billion in refunds to 1.5 million taxpayers who hadn’t filed their 2018 returns.

How soon can I expect my refund after filing?

There are three key things you can do to help speed up your refund — check for errors on your return, file electronically and choose direct deposit.

“We still say generally within 21 days, if there are no issues with the return, you’ll get your refund,” according to IRS spokesman Eric Smith.

Do your best to triple-check everything on your tax form so it’s not pulled for a manual review.

How do I check on the status of my refund?

Track the status of your refund with the “Where’s My Refund?” tool at irs.gov.

But you don’t have to check multiple times a day. Updates are made daily, usually overnight.

You can also call the IRS refund hotline at 800-829-1954.

What should I do if I don’t have the money to pay my tax bill?

Don’t hide from the problem. File your return on time, and pay as much as you can.

Visit irs.gov/Payments, and you’ll find a section with options if you can’t pay your tax bill in full.

If you need a payment agreement, you can usually get one if you owe $50,000 or less. You can use Form 9465 (Installment Agreement Request), or it can be set up online.

You may be eligible for a temporary collection delay if you’re dealing with a financial hardship. If approved, you would be put in a status called “Currently Not Collectible.” For more information at irs.gov, search for “Temporarily Delay the Collection Process.”

But being currently not collectible does not mean the debt is forgiven or that penalties and interest aren’t charged. It’s an indication that the IRS recognizes that you do not have the ability to pay your basic living expenses and pay taxes owed at this time.

What is the Child Tax Credit for 2022?

The child tax credit for 2022 reverted to the pre-pandemic maximum of $2,000 per child younger than 17.

You qualify for the full credit for each qualifying child if you meet all eligibility factors and your annual income is $200,000 or less ($400,000 if filing a joint return). Guardians and parents with incomes above these thresholds may be eligible to claim a partial credit.

The IRS has an interactive tax assistant tool online (irs.gov/help/ita) that helps check whether you qualify for the child tax credit. On the page, scroll down to the section on credits.

Why hasn’t the IRS processed my refund or return?

The IRS is still processing older returns that need to be done manually due to errors, the agency said.

“Most [returns] have been processed, though there are some where we are still corresponding with those affected,” Smith said.

If you’re looking for the status of an amended return, try using the “Where’s My Amended Return?” tool on the IRS website.

Will my phone call go unanswered?

If you need help, yes, call the IRS. But it’s very likely that the endeavor will result in a long wait or probably a hang-up after an automated voice thanks you for your patience.

The IRS said more than 5,000 “telephone assisters” have been hired to help taxpayers.

When is the best time to call the IRS?

Calling early in the morning or later in the week might increase your chance of reaching a live person at the IRS.

Mondays or after a holiday weekend (Presidents’ Day is Monday, Feb. 20) are generally bad, even in good times, according to the agency.

Expect longer delays around the April filing deadline.

Should I still file even if the IRS hasn’t processed the previous year’s return?

“Each return is processed separately,” Smith says.

So, yes, file your 2022 return even if the IRS is still working on an older one.

When you file electronically, one of the verification questions asks for your adjusted gross income, or AGI, from the previous year. If your 2021 return has not been processed, enter $0 (zero dollars) for your prior-year AGI.

Should I avoid filing a paper return?

Some people must file a paper return. But avoid doing so if you can.

“My recommendation would be if at all possible, file electronically if you’re waiting for a refund,” says Collins, the taxpayer advocate.

What happens if I sold more than $600 of goods and services on a payment site?

The 1099-K reporting rule has been delayed until 2024.

Starting with this tax season, third-party payment processors such as PayPal, Venmo and Cash App were supposed to report earnings for goods and services above $600 a year in an effort to capture income from gig workers and entrepreneurs with side hustles.

Under a previous rule, companies were required to submit an IRS Form 1099-K only for gross payments exceeding $20,000 and transactions totaling more than 200.

There’s been a lot of concern from people who use these platforms for personal payments, such as splitting the cost of a dinner with friends. To give users and companies more time to adjust to the new reporting rule, the IRS has delayed its implementation until next year.

This means the 1099-K reporting threshold of $20,000 in payments from more than 200 transactions will apply to 2022 returns.


As Tax Season Starts, a Beleaguered I.R.S. Looks to Bolster Customer Service

The Biden administration is focusing on making the agency more responsive amid concerns that a funding increase will result in more audits.

WASHINGTON — The Biden administration is aiming to significantly improve customer service at the Internal Revenue Service as the 2023 tax season begins on Monday, a pivotal moment for an agency at the center of a political fight over $80 billion in additional funding it was awarded by Congress last year.

As the filing season begins, the I.R.S. is racing to prepare 5,000 recently hired agents to answer the telephones and respond to questions from taxpayers. It is also rolling out new automated systems and staffing up its brick-and-mortar taxpayer assistance centers.

The upgrades are intended to highlight the initial impact of the money it received through last year’s Inflation Reduction Act legislation and allay fears fanned by Republicans that the funds will be used to ramp up audits on middle-class Americans and small businesses.

“These improvements showcase how we are modernizing both technology and customer service to bring the I.R.S. into the 21st century,” Wally Adeyemo, the deputy Treasury secretary, said during a briefing with reporters.

The money comes as the I.R.S. has struggled to perform its most basic responsibilities. At the end of 2022, the agency still had a backlog of nine million tax returns that needed to be processed. Only 13 percent of 173 million calls reached an I.R.S. representative last year, and the average hold time was 29 minutes.

A report from the National Taxpayer Advocate this month expressed optimism that there was “light at the end of the tunnel” at the I.R.S. but said the agency continued to need major upgrades after years of neglect and funding cuts.

Treasury officials say that the I.R.S. is trying to reduce the time that callers spend on hold with the agency to 15 minutes and that they are hopeful that enhanced automated systems and more staffing will make it easier for people to reach a representative. The agency is also initiating plans to begin automatically scanning paper tax returns and rolling out a system to make it easier for taxpayers to respond to written notices from the I.R.S. online rather than by mail.

At the request of Treasury Secretary Janet L. Yellen, the I.R.S. must produce a plan detailing how it intends to use the $80 billion by February. It is not clear if the Treasury Department will publicly release the report at that time.

Since taking control of the House of Representatives this month, Republicans have made scrutinizing the I.R.S. a priority and passed legislation to rescind much of the $80 billion that it was just allocated. They have seized on plans to beef up the agency’s enforcement capacity to scare taxpayers about being audited or harassed.

President Biden has pledged to veto any legislation that would roll back the I.R.S. funding and accused Republicans of trying to make it easier for the rich to avoid paying taxes.

But as the fight over the I.R.S. funding continues, the Biden administration is emphasizing the ways that it is aiming to make the agency more responsive and user-friendly.

“Our goal this tax season is to effectively and efficiently serve as many taxpayers as possible,” Mr. Adeyemo said.


I.R.S. Backlogs Continue as Republicans Mount Offensive

The National Taxpayer Advocate expressed hope that better days were ahead for the tax collection agency.

WASHINGTON — The Internal Revenue Service will begin the 2023 tax season bogged down in about 10 million unprocessed tax returns from prior years and struggling to answer taxpayer phone calls, putting the embattled tax agency in a fraught position as Republicans try to gut its funding.

The tax collector’s struggles were outlined on Wednesday in the National Taxpayer Advocate’s annual report to Congress, which detailed how years of cuts to the I.R.S.’s budget has crippled its capacity to enforce the tax code and serve taxpayers.

The watchdog report offered optimism that the $80 billion in additional funding that was allocated from the so-called Inflation Reduction Act last year meant that improvements lay ahead.

“We have begun to see light at the end of the tunnel,” Erin M. Collins, the taxpayer advocate, wrote in the report. “I am just not sure how much further we need to travel before we see sunlight.”

Yet Republicans, who assumed control of the House, voted to rescind much of the $80 billion that Democrats approved last year. The proposal, which has little chance of being enacted, would add $114 billion to the deficit, according to the Congressional Budget Office.

That is just the beginning. House Republicans are expected to soon vote on the Fair Tax Act, which would abolish the I.R.S. entirely.

The Biden administration’s overhaul of the I.R.S. is central to its plan to narrow the $7 trillion tax gap — payments that individuals and businesses owe but that are expected to go uncollected over the next decade. Republicans have seized on plans to hire 87,000 new employees to conduct more audits and expand customer service and accused President Biden of creating a “shadow army” to target conservatives.

It remains highly uncertain how fast the planned agency overhaul will give the I.R.S. the tools to prioritize audits of wealthy taxpayers and big corporations over middle class taxpayers and small businesses that are unable to mount legal resistance. The agency is expected to deliver a plan to Treasury Secretary Janet L. Yellen by next month laying out the new initiatives and timelines for its modernization plan.

The taxpayer advocate report noted that as of mid-December, the I.R.S. had made substantial progress in reducing its backlog of unprocessed tax returns in the last year, when it was working through more than 20 million filings. Total unprocessed tax returns were down to about 10 million by the end of last year, and in the last month since the report was compiled, another million returns were completed. However, refunds for taxpayers who did not file electronically were delayed by more than six months.

Telephone calls to the I.R.S. seeking customer service are still going largely unanswered. In 2022, only 13 percent of 173 million calls reached an I.R.S. representative. That was up from 11 percent in 2021, but average hold times increased to 29 minutes from 23 minutes.

The Treasury Department said that the troubles at the I.R.S. were the result of years of underfunding and that the lack of investment had led to a loss of talent at the agency. As a result, the I.R.S. audits nearly 80 percent fewer millionaires than it did 10 years ago. Treasury said that families that had questions about their refunds or tax credits were suffering through delays.

The I.R.S. has met its goal of hiring 5,000 additional customer service workers for the upcoming tax season using funds from the Inflation Reduction Act. However, the Treasury Department said that the report released on Wednesday underscored the need for resources.

“The National Taxpayer Advocate’s report reiterates the urgent need for resources provided by the Inflation Reduction Act to deliver the service taxpayers deserve this filing season and in years to come,” Ashley Schapitl, a Treasury Department spokeswoman, said. “House Republican efforts to rescind these resources would preserve the status quo, and deny honest taxpayers timely assistance, refunds, and benefits.”

The report included several recommendations for improving the I.R.S., including upgrades to its website, clearer communication about processing delays and a streamlined hiring process to more efficiently bring on and train new staff.

The Biden administration said this week that it would veto any legislation that makes it easier for the wealthiest Americans or the largest corporations to evade taxes.

Mark W. Everson, who served as I.R.S. commissioner from 2003 to 2007, said that the political attention on the agency was unfortunate for taxpayers.

“The point here is that you need adequate services, you need a competent I.R.S.,” said Mr. Everson, who is now a vice chairman at the business consulting firm Alliantgroup.