The IRS prides itself on its efficiency, saying it collects trillions of dollars every year at a cost of less than 50 cents for every $100 it brings in. It does this through a finely-tuned process it calls “The Pipeline,” which originally involved transferring all the information received on paper into its computer-based system. However, now that 90 percent of all individual tax returns are submitted electronically, employees can spend less time on data entry and more on checking and approving returns.
Whether you’re e-filing or mailing your return, though, you’re likely curious about the process, since it determines how quickly you get your refund.
Read More: Filing Your Income Tax Return
How Is Paper-Based Return Processing Treated?
Long before electronic returns became the norm, the IRS was using technology to manage the massive volume of mail that arrived every day between January and April. A machine presorts and opens all incoming mail, separating returns that include payments from those that do not by detecting magnetic ink on checks. Employees then further manually sort returns, entering checks for deposit. Once payments have been input, returns are sorted into work blocks so that employees can process them.
As it comes in, each return is stamped with an identifying number so that it can be followed throughout the process. The important information on every paper-based return must be manually entered into a computer, where it is then automatically checked for accuracy.
If all is correct, a refund can be issued. If there are errors, representatives correct them if they can. If the IRS has questions about a return, the taxpayer will need to be contacted by mail for clarifying information.
Is Electronic Tax Return Processing Safe?
The now-popular e-file process bypasses the vast majority of the pipeline. Taxpayers can now use tax software, a professional tax preparer or go directly to the IRS website to access free fillable forms that they can submit directly. This has shifted IRS employees from manually entering information to checking returns and approving them.
Once verified, an incoming electronic return is sent to the computing center for processing. If there are errors, it goes back to the preparer for more information.
Although e-filing has eliminated the need to have so many employees typing away on the keyboard all day, the work has by no means been eliminated. In addition to the many employees who personally verify incoming electronic returns, there is a large technical staff, responsible for ensuring taxpayer information remains secure as it moves through the system.
The IRS also engages in extensive testing, along with maintaining strict requirements for every software solution that submits returns to the IRS. Before tax season, systems must be tested to make sure there are no glitches since it’s important that everything runs smoothly once January arrives.
How Long Is the IRS Refund Processing Schedule?
The IRS does not operate solely on a traditional Monday through Friday schedule, especially during tax season. There are workers who keep a regular schedule, sure, but they also have the option of logging overtime hours, if approved by a supervisor. Additionally, seasonal employees are brought in to handle the additional workload. Workers also have the option of seeking approval to stagger work times so that some come in earlier and some work later to cover the extra hours needed to help the public.
Taxpayers are mostly concerned about whether the IRS will process their refunds on weekends. The answer is yes, both the system and employees are working hard seven days a week throughout tax season. The holdup, though, will be in tracking your refund, no matter what day of the week you’re checking.
Taxpayers use “Where’s My Refund?” to check the status of their payment, and that system only updates every 24 hours – usually overnight. So, if you’re checking on weekends, you’ll only get one update per day.
What Is the IRS Return Process Timeline?
Of course, most taxpayers are interested primarily in how the IRS’s turnaround affects them. If you owe, you likely aren’t too concerned about the process from one year to the next. However, when you’re anxiously awaiting a refund, you want to know when you can expect it. For that reason, it can help to know how long it takes the IRS to process tax returns.
The IRS is all too aware that taxpayers want to know when they’ll get their money. They release a schedule each year stating the estimated refund date based on the day your tax return is accepted. If you filed your return electronically, then your refund should be received within three week.
Direct deposit refunds typically are received more quickly than mailed checks. If the filing was on paper, perhaps it was an amendment for a prior year, that return can take up to 16 weeks to process. If it has been over four weeks since your filing, then you can visit the "IRS Where's My Refund?" page for an update on when to expect your refund.
Processing your return is fairly quick, especially if you submit electronically. But when the "Where’s My Refund?" tracker shows your return accepted, it still takes a few days to a week for your refund to be processed, so it’s safe to allow at least a month for a paper check to arrive. A direct deposit will be in your account within two to three weeks of your return showing as accepted in "Where’s My Refund?"
If instead you owe taxes, you can mail a check or pay by credit card on the "IRS Paying Your Taxes" page. Although there’s a fee associated with using your credit card to pay your taxes, it will likely be cheaper than an IRS penalty, so check into that option. Currently, the IRS’s payment processors charge a flat fee of between $2 and $3.95 plus 1.87 percent to 1.99 percent.
When Does the IRS Delay Refund Processing?
Although the IRS refund schedule is helpful, there’s no guarantee your refund will arrive within it. According to the IRS, nine out of 10 tax refunds are issued within 21 days. However, there are things that can delay this, including instances where someone else has filed a tax return using the same Social Security number and factors like holidays that can slow things down. For the 2019 and 2020 tax seasons, refunds were commonly delayed due to constraints resulting from the Coronavirus.
Certain tax credits can also delay processing if, for some reason, there’s a slowdown in processing those credits in that particular year. In 2018, for instance, those filing for the Earned Income Tax Credit saw a slowdown if they filed early since those credits could not be processed until February.
The most common reason for a delay, though, is an error in the taxpayer’s return. If a tax return is incomplete or contains errors that can’t be easily corrected, the agency will send a letter to the taxpayer to get more information. Processing will be put on hold until you respond to the request with the information necessary to proceed.
How Does the IRS Process Audits?
Just because your tax return and refund are processed, doesn’t mean you can’t be audited, unfortunately. Long after Tax Day, you can receive a notice in the mail that the IRS needs more information. The IRS does state that it tries to audit returns as quickly as possible after they’ve been filed, but this means they audit within two years, not two days. They can go back as far as six years if there are substantial errors, but most audits go back only three years.
When taxpayers think of an “audit,” they imagine an intimidating person showing up at their house to go through all their paperwork, looking for mistakes. In actuality, the most common type of audit is simply a mailed request for more information. You simply follow the instructions to get the information they need to them, usually by mail. If you want a face-to-face interview based on the letter you received, you can request one, but in most cases, you’ll never have to meet with an auditor.
Even the face-to-face interview is more flexible than people assume. You can opt to meet at an IRS office, at your own office, at your taxpayer’s office or in your home. If you used a tax preparer, often you’ll be able to have that person work with the auditor, which will take most of the pressure off you. Some tax preparers even guarantee their work in the case of an audit, but you’ll be responsible for any information you withheld from your preparer.
How Are Late Tax Returns Penalized?
What does the IRS do when they process your return and it’s late? To start, the IRS recommends everyone file a return by the due date, even if they owe money. This can offset any fees for failing to file. But if you fail to file by the deadline, you won’t just hear radio silence until the Tax Man knocks on your door someday.
The IRS makes every effort to get you to file and pay the taxes owed. If you miss the deadline, the next thing that will happen will probably be a notice in the mail, reminding you to pay. You’re expected to respond to that notice within 30-60 days.
If you continue to ignore the IRS, they can then take further action, including keeping your Social Security payments and placing a lien on your property. You may also receive a summons to appear in court to answer for any money you owe. You can be penalized for filing late and for late payment.
The penalty for filing late is assessed at five percent of the total owed each month up to a total of 25 percent, plus the lesser of $35 or the total tax owed if the filing is over 60 days late. It is best to file an extension if you cannot file on time, however, you must still pay your tax liability by the deadline or make your first payment if you have negotiated installments with the IRS.
What if you’re due a refund and simply neglected to file? The good news is that you won’t owe a penalty since the IRS is the one that owes you money. However, you won’t get your refund until you file a tax return.
In future years, when you file and are owed a refund, you may find processing time takes longer as the IRS tries to work out why you didn’t file a tax return in previous years. It is also important to note that prior year returns can only be filed within three years of their original due date.
Read More: Tips for Filing Multiple Year Tax Returns
How Are Late Tax Payments Penalized?
Many asking how the IRS processes returns are concerned because they know they owe, but they simply don’t have the money to pay it. The IRS realizes this and has advice for taxpayers who can’t afford to pay. First and foremost, the agency urges everyone to file on time to avoid exorbitant failure-to-file penalties.
Do not ignore IRS notices regarding owed taxes, doing so will escalate the problem and potentially forfeit any recourse or negotiation options. When filing, you should pay as much as you can afford to reduce the amount of money you’ll pay penalties on.
The late payment penalty is half a percent each month up to 25 percent of the tax owed. That half percent goes up to one percent if you receive a notice and do not pay within ten days. Approved payment plans are reduced to a quarter of a percent per month.
Be aware that taxes that are not properly withheld each quarter from wages or other income are also subject to the late payment penalty. If you have both failure to file and failure to pay penalties, the failure to file percentage will be adjusted to include the failure to pay amounts for each month that both apply.
What if it Is Not Possible to Pay Taxes on Time?
You can also easily apply online for one of IRS’s payment plans on the "IRS Paying Your Taxes" page. You can set up either a short-trm payment plan, where you pay the amount due within 180 days, or a long-term plan that allows you to pay in installments over a longer time period. Be aware that payments are prioritized by first paying the tax owed, then penalties, and finally interest.
Lastly, if you are suffering a financial hardship, the IRS is willing to work with you. You may qualify for an Offer in Compromise, in which you settle with the IRS for less than the amount due. You’ll need to meet the IRS’s eligibility requirements, but you can determine whether you do or not using the IRS’s Offer in Compromise Pre-Qualifier. Before applying for an Offer in Compromise, you’ll need to be up to date on filing all of your tax returns for previous years.
Stephanie Faris has written about finance for entrepreneurs and marketing firms since 2013. She spent nearly a year as a ghostwriter for a credit card processing service and has ghostwritten about finance for numerous marketing firms and entrepreneurs. Her work has appeared on The Motley Fool, MoneyGeek, Ecommerce Insiders, GoBankingRates, and ThriveBy30.