IRS faces delays, risks for tax season amid pandemic

The Internal Revenue Service needs to take action to avoid processing delays this filing season due to the COVID-19 pandemic, according to a new government report.

The report, released Monday by the Government Accountability Office, pointed to the numerous challenges confronting the IRS last tax season, including the closure of its processing facilities for weeks at the start of the pandemic. That led to millions of pieces of unopened mail, including paper-based tax returns. The GAO report pointed out that many tax forms, especially for businesses, are still paper based and need to be mailed to the IRS.

The report comes amid concerns about this tax season, which started about three weeks late after the IRS had to focus on first distributing the $600 Economic Impact Payments authorized by Congress in last December’s COVID relief package. The Biden administration and Democrats in Congress are now working on passing an even bigger follow-up package with $1,400 stimulus payments that’s expected to pass before the middle of this month. Democrats on the tax-writing House Ways and Means Committee wrote to IRS Commissioner Charles Rettig last month asking him to extend the deadline for tax season until July 15 (see story). So far, the IRS has not announced an extension, except for victims of the Texas power outage who now have until June 15 to file and pay taxes, but pressure is mounting from accounting and tax groups. The National Association of Tax Professionals wrote to Rettig last week asking for an extension beyond April 15, citing a poll in which 71 percent support an extension. The American Institute of CPAs wrote to Rettig last week asking for certainty about whether the tax filing and payment deadline will be extended beyond April 15.

Andrew Harrer/Bloomberg

The GAO report noted that the IRS extended its filing deadline last year until July 15. Last year, even with the extension, the IRS faced a variety of difficulties, although it still managed to hold up well despite the many challenges.

“IRS's 2020 processing of e-filed returns was generally on par with prior years,” said the report. “However, IRS's overall 2020 performance was significantly impacted by its reliance on manual processes such as for paper returns, and its limited ability to process returns remotely while processing centers were closed. As a result, as of December 2020, IRS had a significant backlog of unprocessed returns and taxpayer correspondence. Additionally, costs increased including interest on delayed refunds which exceeded $3 billion in fiscal year 2020. IRS has not revised its estimates for addressing all of the backlog due to operational uncertainties created by the pandemic. Doing so would help IRS determine how best to address the backlog and perform 2021 filing season activities.”

The IRS will still need to deal with many paper-based processes this tax season, even though the agency has moved many of its functions online and many of its employees have been able to work remotely from home during the pandemic. The IRS’s modernized electronic filing system enables both individual and business taxpayers to file many of their tax returns online, but 40 percent of business-related tax forms can’t be electronically filed and need to be mailed to the IRS for processing. “Other functions require manual intervention by IRS staff,” said the GAO report. “For example, when IRS identifies issues with a taxpayer’s return — such as errors or suspected identity theft — the taxpayer is typically required to provide supporting documents via correspondence or appear in person at an IRS office.”

The report offered seven recommendations for the IRS, including that the agency revise its estimates for addressing its 2020 backlog of work, identify alternate work assignments for staff on paid leave due to the pandemic, and identify, assess and address the risks to the 2021 filing season.

An IRS official disputed the report’s contention that it’s not ready to handle this tax season and pointed to the way the agency handled last tax season, including processing the stimulus payments mandated by the CARES Act and other legislation, while safeguarding the health and safety of IRS employees. “We are not in agreement with the statement that the IRS has not fully identified and assessed risks to the 2021 Filing Season,” wrote Sunita Lough, deputy commissioner for services and enforcement at the IRS, in response to the report.