Most people out there are well aware of Congress’ recent action to provide economic stimulus payments to most taxpayers. One unique characteristic about this stimulus plan compared to the rebates issued in 2001 as a result of EGTRRA is that the plan includes recipients of Social Security, certain veterans’ benefits, and certain Railroad Retirement benefits who have no other income.

IRS News Release IR-2008-18 explains how most taxpayers do not need to do anything special to have their information entered into the “system” that is used to distribute stimulus payments. However, those taxpayers that receive Social Security, certain veterans’ benefits, and certain Railroad Retirement benefits may need to file a 2007 return, even if they were not required to file under all the other filing requirements.

This year, I am a volunteer instructor and counselor for the AARP TaxAide program. We use TaxWise software to prepare returns electronically and transmit them to the IRS. Through TaxAide I have the opportunity to interact with a variety of taxpayers, many of whom live solely on Social Security and nominal interest from CDs and mutual fund dividends.

Now normally, taxpayers with no earned income and Social Security benefits under $25,000 ($32,000 for MFJ) have no need to file a tax return. But this year, these taxpayers must file a return even if no tax is owed in order to get entered into the “system” for stimulus payment processing. The problem is, when we enter a return into TaxWise with no earned income and just Social Security benefits, TaxWise does not permit the electronic filing of the return.

No efile, are you kidding?!? That means all of these individuals must paper file a tax return with $0 tax. The most recent numbers I’ve seen are north of 23 million taxpayers. Here’s what the IRS is currently saying about this issue:

If you do not have to file a tax return but are doing so in order to get a stimulus payment, you may not be able to electronically file at this time. Most people filing regular tax returns can continue to use Free File. However, a limited group of taxpayers — generally, people who are not required to file a tax return — cannot currently electronically file to qualify for a stimulus payment.

People in this category include recipients of Social Security, Railroad Retirement or Veteran’s benefits who do not have to file a tax return as well as taxpayers who do not make enough money to have to file a tax return. Until the IRS updates its processing systems to accept these returns electronically, if you want to qualify for a stimulus payment, you can file a tax return reflecting your “qualifying income” for a stimulus payment by using a paper Form 1040A.

Incredible. I do truly hope that a solution at the IRS end is reached quickly. I can only imagine the additional staff required to open, process, and key in 23 million plus returns simply for the purpose of identifying those eligible for stimulus checks. Why the IRS and Social Security can’t talk with one another is beyond me, especially now in the 21st century.

I can say that a temporary solution has been identified within many of our local TaxAide sites, but I’m not going to discuss the details of that here. Needless to say, we shouldn’t need to be implementing any workarounds or tricks, but we find ourselves at the mercy of a system that moves at a glacial speed. If the IRS doesn’t design an electronic solution soon, they’re going to be faced with the arrival of tens of millions of paper tax returns over the next two months.

(Updated February 25, 2008) One more thing.  Not only will the IRS need to hire additional staff to process the 23+ million additional paper returns, just think of the backlog the processing will create for those that do paper file.  Normally one can anticipate a refund of an overpayment within about 4-6 weeks of filing a paper return.  What will the additional load of paper returns to do this turnaround time?

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This entry was posted on Friday, February 22nd, 2008 at 10:44 pm and is filed under Taxes. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.