The Internal Revenue Service has been working to reduce its backlog of millions of unprocessed tax returns from last year, as it comes under pressure from Congress and accounting groups to perform better as another hectic filing season comes to a close.
IRS Commissioner Chuck Rettig testified last week during a Senate Finance Committee hearing about the IRS’s plans to get caught up by the end of the year. “With respect to our current 2022 filing season, we are off to a healthy start in terms of tax processing and the operation of our IT systems,” he said. “Through April 1, we have processed more than 89 million returns and issued more than 63 million refunds totaling more than $204 billion. However, there are essentially two distinct filing seasons. Taxpayers who choose to electronically file and who request a direct deposit are receiving their refunds within approximately 21 days. Many individuals have received those refunds within three or four days of the submission of their electronic file. With respect to taxpayers who submit paper returns, our processing is first in, first out. We are processing approximately 2.7 million returns still that were received in calendar year ’21, so taxpayers who during this filing season choose to file paper returns end up at the end of that particular stack.”
That would be a big improvement over earlier this tax season, when the amount of backlogged tax returns was estimated by different sources to be anywhere from 10 million to more than 20 million.
Rettig, whose term ends in November, assured the lawmakers that the IRS is working on the problem. “I want everyone to know that everyone at the IRS, including myself, are doing the best we can,” he said. “We may not always have gotten it right, but we have tried our best. We have put taxpayers first as the No. 1 priority, and I believe that following my term the agency will continue to head in that direction. Our mitigation efforts as to our inventory are working. They’re making a difference.”
The pandemic relief passed by Congress and the many tax law changes prompted a flood of phone calls to the IRS in recent years, and the IRS fell behind in responding to calls. “At one point, we were receiving phone calls at the rate of 1,500 per second, and that built up such an inventory and a backlog that we’ve never recovered from that,” said Rettig. “We need to crush our paper inventories. We need to crush our return backlog because the folks who answer the phones also process paper. When we can get through the paper, we can get all those folks full time back onto the phones and handle that. We’re committed to getting into that position by the end of calendar year 2022.”
The IRS has set up “surge teams” where it has moved employees from other functions to help with processing tax returns. Rettig has also announced plans to hire 10,000 more employees over the next year to staff up the agency, and it is benefiting from its new direct-hiring authority to recruit new employees more quickly, including at a job fair last week at its processing center in Ogden, Utah.
The agency is also adding more technology and hopes to be able to get money in its budget to implement scanning and barcoding technology to read in information from paper returns, like the kind called for in a recent directive from National Taxpayer Advocate Erin Collins, instead of forcing employees to transcribe the information manually (
“The president’s budget supports our ability to scan and electronically convert paper into something that [is] machine readable and [that we can] hopefully process automatically,” said Rettig. “With respect to the 2D barcode, the congressional budget justification for each year between 2013 and 2017 requested funding for 2D barcode, and that funding was never provided, and the agency then pivoted into focusing on electronic filing. Currently we’re running around 96% e-filed income tax returns in our current filing season.”
Details of the problem
The IRS backlog is certainly not a new phenomenon. The Government Accountability Office released a
The “IRS reduced the backlog, but still had millions of new 2021 returns to process by year's end,” said the report. “Taxpayers faced refund delays due to an unprecedented volume of returns requiring manual review — most with similar tax credit errors.”
The delayed refunds cost the agency a considerable amount of interest. The IRS has paid nearly $14 billion in refund interest in the last seven fiscal years, the GAO reported, with $3.3 billion paid in fiscal year 2021. However, the IRS disputed those findings, pointing out the figure was for all tax overpayments, not just from delayed processing of refunds.
During the 2021 filing season, the GAO report noted, taxpayers also struggled to get help from the IRS as telephone demand skyrocketed, online tax refund information was scant, correspondence nearly tripled and in-person service declined.
Many of the problems were due to the pandemic relief programs that the IRS had to deal with last year, such as Economic Impact Payments and new and expanded tax credits.
“IRS began the filing season with a backlog of 8 million individual and business returns from the prior year that it processed alongside incoming returns,” said the report. “IRS reduced the backlog of prior year returns, but as of late December 2021, had about 10.5 million returns to process from 2021. Further, IRS suspended and reviewed 35 million returns with errors primarily due to new or modified tax credits. As a result, millions of taxpayers experienced long delays in receiving refunds. GAO found that some categories of errors occur each year; however, IRS does not assess the underlying causes of taxpayer errors on returns. Doing so could help reduce future errors, refund delays and strains on IRS resources.”
Last year, the IRS answered more phone calls than in previous years, but taxpayers still had a hard time reaching someone at the IRS due to the high call volumes. The IRS encouraged taxpayers to consult its “Where’s My Refund” online tool to check the status of their missing refunds, but the tool only provided limited information on refund status and delays. However, the IRS doesn’t have plans to modernize “Where’s My Refund,” though the GAO noted that that could help the IRS better serve taxpayers, lower call volume and reduce costs.
The IRS’s correspondence inventory was 5.9 million by the end of filing season last year, and grew to more than 8 million by the start of this year. The agency doesn’t have a plan or estimates for reducing this backlog, according to the GAO, although doing so could help reduce the demands on the IRS. The report also noted that in-person service has significantly declined since 2015, and that the IRS hasn’t fully considered alternatives for its current in-person service model. But the agency's plans to improve the taxpayer experience, for example by expanding virtual services, could further contribute to a decrease in in-person visits with the IRS.
The GAO made six recommendations in its report, suggesting the IRS should assess the reasons for tax return errors and refund interest payments and take action to reduce them. The report also recommended that the IRS modernize its “Where’s My Refund” application, address its backlog of correspondence, and assess its in-person service model. The IRS agreed with four of the GAO’s recommendations and disagreed with two of them. The IRS said its process for analyzing errors is robust and that the amount of interest paid is not a meaningful business measure. However, the GAO contended that those recommendations were still warranted.
The IRS pointed out that the pandemic led to the backlog. “From an operational standpoint, we continue to work toward eliminating the rolling backlog of inventory that developed during the closures of our [Submission Processing Centers] from late March through June and July 2020,” wrote Douglas O’Donnell, deputy commissioner for services and enforcement at the IRS, in response to the report. “During that time, the SPCs were subject to local evacuation orders and employees were not permitted inside the facilities. This caused a complete stoppage of the handling of incoming mail receipts, which included tax returns, tax payments, amended returns and other correspondence. The stoppage also extended to paper tax returns that were already in process at varying stages of completion.”
