The Internal Revenue Service improved its performance during this year's tax season, catching up on much of its backlog, but is still behind on dealing with all the amended returns and correspondence it received this year, according to a new report.
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However, the report also found the IRS is still behind in processing amended tax returns and taxpayer correspondence. Employees in the IRS's Accounts Management function usually perform two roles: answering phone calls and processing taxpayer correspondence, amended returns and other cases.
The report said the IRS was much more effective in answering taxpayer calls this year, "but [that] could only be accomplished by prioritizing the phones over other IRS operations, and it resulted in greater delays in the processing of paper correspondence."
As of June 3, the inventory of unprocessed paper-filed original returns has grown to 4.1 million, divided equally between individual returns and business returns.
In contrast to the 80% reduction in the backlog of paper-filed original tax returns, the inventory of amended returns was 3.6 million in April 2022 and 3.4 million in April 2023, a decrease of only 6% between the two periods.
The report found the IRS performed much better overall this year, however, thanks to the extra funding from the Inflation Reduction Act and the relative lack of major pandemic-related tax relief to deal with this year.
"What a difference a year makes!" Collins wrote in her preface to the report. "In submitting this report, I'm finally able to deliver some good news: The taxpayer experience vastly improved during the 2023 filing season. The IRS caught up in processing paper-filed original Forms 1040 and various business returns; refunds were generally issued quickly; and taxpayers calling the IRS were much more likely to get through — and with substantially shorter wait times. Overall, the difference between the 2022 filing season and the 2023 filing season was like night and day."
For individual amended returns (Forms 1040-X), the IRS's processing time was about seven months as of the end of the 2023 filing season. On the business side, a large portion of the delay in processing amended returns could be attributed to Employee Retention Credit claims. Many ERC claims are legitimate, but the IRS has also received many fraudulent claims and has placed promoter claims involving the ERC on its "
"The influx of fraudulent claims has put the IRS between a rock and a hard place," Collins wrote. "If the IRS pays out claims quickly without taking the time to review them individually, it will be making some payments to individuals potentially engaged in fraud. If it takes the time to review claims individually, legitimate businesses who need the funds Congress authorized to help them stay afloat may not receive them in time."
In addition to answering telephone calls and processing amended tax returns, Accounts Management employees at the agency process taxpayer responses to IRS notices and many types of taxpayer requests, such as applications for Employer Identification Numbers, a high percentage of Identity Theft Victim Assistance cases, and tax return preparer authorizations.
The IRS has not made notable progress in reducing its paper inventories in the Accounts Management function over the past year, according to the report. In April, it was taking the agency 130 days to process adjustment cases. That represents a substantial improvement from the 214 days it was taking last year, but it's still well above the standard processing time of 45 days.
For victims of identity theft, the delays have been especially long and frustrating. The average cycle time for ID theft cases closed in April 2023 was 436 days, amounting to nearly 15 months. That is about three months longer than the 362-day cycle time for cases closed in April 2022.
On the positive side, the IRS made a great deal of progress in improving its telephone service this filing season, answering a substantially higher percentage of calls and significantly reducing wait times.
The IRS reached the Treasury Department's goal of an 85% "level of service" on the Accounts Management phone lines. However, IRS employees only answered 35% of all calls received. Calls to certain telephone lines, including the collection lines and the installment agreement/balance due line, were answered at lower rates than the overall level of service.
"Despite these areas of relative weakness," the report said, "the big picture shows taxpayers had a much easier time reaching the IRS this filing season, reducing the need for repeat calls and lengthy wait times — a welcome relief for millions of taxpayers."
Looking forward
Of the roughly $79 billion in funding the IRS received under the Inflation Reduction Act, only $3.2 billion was allocated for taxpayer services and only $4.8 billion was allocated for business systems modernization. In late May, the debt limit deal in the Fiscal Responsibility Act of 2023 and a related side agreement reduced the IRA funding level to about $58 billion. The report said the Taxpayer Advocate Service would continue to advocate for adequate funding for taxpayer services, business systems modernization, and the operational overhead that supports those programs.
The report urged the IRS to prioritize information technology upgrades that will improve the taxpayer experience. While the COVID-19 pandemic was an unexpected development, the refund delays and service challenges taxpayers experienced over the past three years would have been substantially less severe if the IRS had better technology.
"To achieve and sustain transformational improvement over the longer term, the IRS must focus like a laser beam on IT," Collins wrote. "The IRS must give taxpayers robust online accounts that are comparable to accounts provided by banks and other financial institutions. It must make it possible for all taxpayers to e-file their tax returns. It must limit the number of rejected electronic tax returns. It must provide faster relief for victims of identity theft. It must make it possible for taxpayers to receive and submit responses to information requests electronically in all interactions with the agency. For taxpayers who prefer to submit returns or correspondence by mail, it must digitize all paper upon receipt. It must replace its 60 discrete case management systems that currently have limited ability to communicate with each other with an integrated, agency-wide system. And it must complete the modernization of its Individual Master File and Business Master File, which were originally deployed in the 1960s and are the repository for official taxpayer records. It must transform the way it performs its tax administration mission and become a responsive and trusted agency. Improved IT is imperative to achieving that goal."
Collins believes the IRS will be able to make major strides in the near future: "With adequate funding, leadership prioritization, and appropriate oversight from Congress, I believe the IRS will make considerable progress in the next three to five years in helping taxpayers comply with their tax obligations as painlessly as possible."
