Tom Talks Taxes - December 3, 2021
Reconciling tax credits on 2021 tax returns plus a one-year anniversary update
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Avoid Credit Reconciliation Nightmares
Over the last few years, Congress has increased the number of tax credits for which taxpayers get advance payments. For tax year 2021, there will be three credits reconciled on the tax return:
Premium tax credit,
Child tax credit, and
2021 recovery rebate credit.
The IRS has math error authority to automatically correct reconciliation issues; however, if a taxpayer requests abatement of the change within 60 days, the IRS must withdraw the change, whether or not the taxpayer provides information to show the change is incorrect. The IRS is then free to reassert the change in a notice of deficiency, giving the taxpayer U.S. Tax Court rights.
Your goal is to do an accurate reconciliation for each of these credits in order to avoid refund delays and IRS notices. The key to this is to have accurate information to do the reconciliation.
For all three credits, there will be a tax form issued to the taxpayer that contain the advance amounts:
Form 1095-A, Health Insurance Marketplace Statement, for the premium tax credit,
Letter 6419, 2021 Total Advance Child Tax Credit Payments, for the child tax credit, and
Letter 6475, Your 2021 Economic Impact Payment, for the 2021 recovery rebate credit.
For the child tax credit and the 2021 recovery rebate credit, there are two additional options to get the advance payment information:
Request copies of the bank statement pages showing the direct deposit amounts from the IRS, and
Have the client provide their 2021 IRS account transcript using the self-service tool on the IRS website.
Can you trust your client’s recollection or representations? For Circular 230 due diligence purposes, you can if the information is not inconsistent with any information that you have. I think it is a best practice, however, to require all clients to provide documentation of all advance payments prior to filing of the tax return.
Due to the dramatic increase in IRS notices, and the marked decrease in the IRS’s ability to process notice responses, it is more important than ever to use readily available tools to avoid IRS math error adjustments of tax returns.
The above trends indicate an opportunity to begin offering additional paid services in conjunction with tax preparation to handle these issues proactively, such as:
Filing Form 8821, Tax Information Authorization, for clients to directly receive credit information and any IRS notices issued, or
A pre-paid notice response plan, which avoids client angst from having to pay you to respond to an IRS notice at your normal rates.
The tax industry is constantly evolving. We must regularly review and adapt our business practices, service offerings, and pricing due to these trends.
Share Your Thoughts!
If you are a paid subscriber, use the comments section below to discuss and ask questions about reconciling tax credits on 2021 tax returns.
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Not a huge fan of the pre-emptive authorization filing because the CAF units are already beyond capacity and most of the notices are going to require a call anyway. I prepare the authorization forms (so they're ready for a quick signature in the event of a notice) and offer a notice assurance program for an additional fee. I encourage clients to opt in by reminding them that notice assurance is only slightly more than what I would charge them JUST to file the authorizations. If they don't opt in, they get charged for filing authorizations and for handling the notice.
Excellent article, thank you!