2020 was a monumental year for the tax relief industry. Many clients with businesses experienced significant economic disruptions that also led to tax difficulties. Individuals also experienced a loss of employment or a reduction in salaries, and these factors made 2020 a tough tax year for some people. As a result, tax relief services have become more important than ever before, and this need is forecast to grow even more in 2021 as tax bills come due in the aftermath of the pandemic.
Tax Relief Trends in 2021
2021 will be characterized by several major trends that will transform the importance of tax relief and how tax relief is provided. Digital will become more important than ever before, and all parties will have to adapt to the “new normal” of the post-COVID-19 economy.
1. COVID-19 Recovery Strategies
Dealing with the aftermath of COVID-19 will be the most significant trend that the tax relief industry will have to manage. COVID-19 ushered in a seismic shift in consumer preferences, purchasing habits, and international trade. With such enormous changes, many businesses and individuals are being heavily impacted.
Unfortunately, people who formerly experienced no difficulties when paying their taxes on time could suddenly find themselves facing a large outstanding bill. Some assets entail heavy income taxes when they are disposed of, so many taxpayers who are reshuffling their holdings could experience a major tax event necessitating careful planning in response. Even taxpayers who were less impacted by COVID-19 will still need to revisit their tax strategies to account for changes in legislation and enforcement.
2. Likely Increase in Audits
The entire economic system was disrupted when COVID-19 became a pandemic in 2020. Although a substantial recovery has been realized since the market bottomed out in March, government tax revenue is still projected to decline precipitously. The government is also spending trillions of dollars more than it is taking in, and the money for this spending has to come from somewhere.
Tax experts believe that the government will substantially increase the number of audits that it conducts in 2021. Since audits often reveal tax discrepancies that go back several years, it is likely that audits will have an important role in shaping the tax relief industry next year. Many people who were formerly unlikely to be audited could suddenly face challenges to their tax filings. The cost of an audit is high, so people who get audited could end up with significant back taxes.
3. Changes in the International Tax Framework
Before the pandemic struck, governments around the world were transitioning to new forms of taxation that account for the reality of the interconnected digital economy. Businesses and individuals with substantial holdings overseas could incur tax liabilities that are higher than expected because of the new tax proposals.
Some countries are already implementing GST taxes on goods sold to their residents through cross-border e-commerce. However, the OECD is already five years into creating a new tax system that could replace the arms-length principle that has long governed tax liabilities in international transactions. If the arms-length principle is ended, taxpayers with an efficient international tax structure could experience catastrophic losses.
4. Impact of the CARES Act
The CARES Act has had a major impact on the U.S. business environment. Many businesses were able to take out large loans under the Paycheck Protection Program that the CARES Act introduced. In theory, businesses that plan ahead carefully should be able to avoid having to repay these loans.
Nevertheless, substantial tax uncertainty concerning PPP loans continues to exist. PPP loans are supposed to technically be “forgiven” in a way that normally would make forgiven loan amounts subject to taxation. The IRS has already clarified that it will not tax the $1,200 economic impact payments that were issued to consumers as part of the CARES Act. Business owners who took out PPP loans because they are struggling could experience hardship if the forgiveness of these loans ends up being considered a taxable event.
5. Continued Move to Digital
Tax accounting and tax preparation will continue to become more digitalized in 2021. Unlike in former years, tax relief professionals are increasingly having to meet with their clients through video calls. Although video calls make tax professionals more accessible, they are also associated with lower levels of engagement. Communication can also be hampered when a consumer has a slower internet connection.
The move to digital will also impact how tax professionals do their jobs. Taxes will become more digitalized than ever before in 2021. More transactions will be accounted for in the cloud, and information sharing will increase. The increased use of digital technology could impact the performance of tax professionals as early adopters of new products realize a substantial advantage over their competitors.
6. Increased Use of AI
Artificial intelligence will inevitably disrupt nearly every area of business. The field of tax relief is no exception to the growth of AI since many tax management applications that aim to automate routine tasks have already been developed. More advanced applications will continue to be introduced in 2021. These AI applications will help tax relief professionals to make data-driven decisions on behalf of their clients. With enhanced automation, professionals will be better able to provide their clients with tax relief that will help them to live more fulfilling lives.
7. The Introduction of Tax Relief Financing
With the increase in taxes owed to the government on there rise, more Americans are having a difficult time keeping up. This is where tax relief financing companies come into play. They can help you finance your taxes anywhere from $1,000 up to $10,000 and take the burden off of the tax payer for another year.
Tax Relief Financing Resources:
- Porter Wright
- Members Advantage Credit Union
- Nerd Wallet
- United Consumer Financial Tax Relief Services
- Optima Tax Relief
5 Must-Know Tax Relief Statistics for 2021
1. 5.5 Percent Reduction in Tax Revenue
A recent study by the Brookings Institute found that the tax revenues of state and local governments are projected to decline by 5.5 percent in 2020. In total, these governments will lose $155 billion in revenue. Worst of all, the study found that revenue for these governments will be reduced by another 5.7 percent in 2021. With reduced revenue, tax actions will increase. In turn, demand for tax relief assistance will rise.
2. 7.5 Percent Reduction in Income Tax Revenue
The same Brookings Institute study found that income tax revenue for state and local governments will be reduced by 7.5 percent in 2021. Most tax relief is necessary because of income taxes, so a higher reduction in income tax revenue will lead to more audits and collection efforts.
3. 14 Million People Owe Back Taxes
Before the pandemic began, 14 million people in the U.S. owed back taxes. With the economic challenges brought on by COVID-19, it is projected that the number of taxpayers who struggle to pay their tax burdens on time will increase. Consequently, more people will need tax relief services to stay afloat. If the world takes five or more years to fully recover, it is possible that the number of people owing back taxes could drastically increase.
4. 44 States With Deficit Spending
Before the COVID-19 pandemic began, 44 states were already facing budget deficits in 2019. Of course, the pandemic will put substantial strain on the budgets of the six states that managed to have a budget surplus before the crisis started. Therefore, state governments will be hungrier for tax revenue in 2021 than ever before, and this pressure will cause more taxpayers to require relief.
5. 20 Percent of Taxpayers Pay 87 percent of Taxes
People often assume that government tax revenue could easily be increased by simply hiking the tax burden on the wealthiest Americans. In reality, increasing revenue through elevated tax rates could be more infeasible than people commonly believe since wealthy Americans are already paying a relatively high effective tax rate, and the U.S. tax code is so airtight that it mostly limits planning to deferrals and avoiding double taxation. Therefore, tax burdens on the lower and middle classes are likely to become heavier in the years ahead as governments seek additional revenue, and this change will drastically increase the number of people requiring tax relief services.