National Taxpayer Advocate Erin Collins released her
The report suggests several initiatives the IRS should pursue to use the $80 billion in extra funding it will be receiving over 10 years as a result of last year's Inflation Reduction Act. The report also includes two research studies on ways to restructure the Earned Income Tax Credit to increase participation among eligible taxpayers while decreasing improper payments, and the other study on helping the IRS improve its online operations by looking at those offered by more than 40 states and several foreign countries.
In 2022, approximately two-thirds of individual taxpayers were entitled to refunds, and the average refund amount was nearly $3,200. The report found the IRS failed to meet its responsibility to pay timely refunds to millions of taxpayers for the third year in a row. Nearly 13 million individual taxpayers filed paper returns, but because of paper processing delays, refunds for these taxpayers were delayed, generally by six months or longer. Millions of e-filed individual returns were "suspended" because they fell afoul of IRS processing filters and needed manual review by IRS employees before refunds could be released. Hundreds of thousands of business returns claiming the Employee Retention Tax Credit were delayed.
However, the report predicted the IRS will be starting the 2023 filing season in far better shape than the past two years.
"The main focus of this year's report is the elephant in the room – the continuing customer service challenges taxpayers are experiencing and the negative impact of the filing season backlog," Collins wrote. "Last year, I reported that the period since the start of the COVID-19 pandemic has been the most challenging that taxpayers and tax professionals have ever faced. The bad news is that taxpayers and tax professionals experienced more misery in 2022. The good news is that since the close of the 2022 filing season, the IRS has made considerable progress in reducing the volume of unprocessed returns and correspondence. We have begun to see light at the end of the tunnel. I am just not sure how much further we need to travel before we see sunlight."
The IRS began 2022 with an unprocessed paper backlog of 4.7 million original individual returns (Forms 1040), 3.2 million original business returns, and 3.6 million amended returns (individual and business combined). As of mid-December 2022, the IRS had reduced those backlogs to 1 million original individual returns, 1.5 million original business returns, and 1.5 million amended returns. By Dec. 23, the IRS had further reduced its unprocessed paper backlog of original individual returns to about 400,000 and original business returns to about 1 million. That big reduction in paper returns will allow the IRS to start processing paper-filed tax year 2022 returns during the upcoming filing season, in contrast with the previous two years, when the IRS was not able to process current-year returns until months after the filing season had ended.
The number of returns suspended during processing is the only significant return category in which inventories increased. The IRS started 2022 with an inventory of 4.2 million suspended returns. The number increased to 5.9 million suspended returns by mid-December.
Cases involving suspected identity theft account for about half the number of suspended returns. In mid-December, the IRS reported 2.9 million identity theft cases in its inventory. While some will turn out to be fraudulent claims, the IRS website as of January 9 states: "[D]ue to extenuating circumstances caused by the pandemic, our identity theft inventories have increased and on average it is taking about 360 days to resolve identity theft cases." The report calls a year-long delay "unacceptable" and urges the IRS to assign additional employees to process these cases.
Tax notices
The IRS sent millions of notices to taxpayers last year, included 17 million math error notices, Automated Underreporter notices (where an amount reported on a tax return did not match the corresponding amount reported to the IRS on a Form 1099 or other information reporting document), notices requesting a taxpayer authenticate identity where IRS filters flagged a return as potentially fraudulent, correspondence examination notices, and some collection notices. Notices often require written taxpayer responses. If the IRS did not process a taxpayer response, it may have taken adverse action against the taxpayer or not released the refund claimed on the tax return. During fiscal year (FY) 2022, it took the IRS an average of 193 days to process taxpayer responses to proposed tax adjustments — about six months. That compares with 89 days in FY 2019, the most recent pre-pandemic year. The report also calls the delays in resolving these cases unacceptable.
Phone delays for taxpayers and tax pros
The IRS received 173 million calls during FY 2022. Only 22 million (13%, or roughly one out of eight calls) got through to an IRS employee. As a result, most callers could not get answers to their tax-law questions, receive help with their account problems, or speak with an employee about compliance notices. Those who got through waited an average of 29 minutes on hold before the call began.
Telephone service for tax professionals in 2022 was worse than 2021 and hit an all-time low. Because tax professionals prepare the majority of tax returns and often call with complex account-specific questions, the IRS has a Practitioner Priority Service telephone line dedicated to handling their calls. However, in FY 2022, IRS employees answered only 16% of PPS calls (fewer than one out of six), and the average hold time for those who got through was 25 minutes. Telephone delays place tax professionals in the difficult position of billing clients for the time spent trying to reach the IRS or writing off that time.
"Tax professionals are key to a successful tax administration," Collins wrote. "The challenges of the past three filing seasons have pushed tax professionals to their limits, raising client doubts in their abilities and creating a loss of trust in the system."
The IRS reacted to the report. "The National Taxpayer Advocate plays a vital role for the nation's tax system, and the IRS will be carefully reviewing the annual report to Congress," the IRS said in a statement emailed to Accounting Today. "The IRS appreciates the Advocate's comments acknowledging the hard work of IRS employees to make substantial progress during 2022 on unprocessed tax returns and many other areas. The agency has worked to overcome unprecedented obstacles caused by the pandemic to continue delivering for the nation while also processing record amounts of tax returns. While much work remains, the IRS is poised to deliver a better 2023 tax season for the nation with more services for taxpayers, helped by critically needed new resources provided by the Inflation Reduction Act. We look forward to working with the Advocate and others as we work to transform the IRS; many of the ideas outlined in the report can be possible given the consistent, multi-year funding provided in the Inflation Reduction Act."
Outlook for 2023
Collins predicted that taxpayer service will improve in 2023, citing three reasons for optimism: (1) the IRS has largely worked through its backlog of unprocessed tax returns, even though it remains challenged with a high volume of suspended returns and correspondence; (2) Congress has provided the IRS with significant additional funding to increase its customer service staffing; and (3) with the benefit of Direct Hire Authority, the IRS has recently hired 4,000 new customer service representatives, and it is seeking to hire 700 additional employees to provide in-person help at its Taxpayer Assistance Centers. Direct Hire Authority has enabled the IRS to reduce the number of days from the time it posts an announcement on USAJobs.gov until it onboards a new employee by more than half.
But Collins warned the improvements will not be immediate. "Staff increases come with growing pains," she wrote. "As new employees are added, they must be trained. For most jobs, the IRS does not maintain a separate cadre of instructors. Instead, experienced employees must be pulled off their regular caseloads to provide the initial training and act as on-the-job instructors. In the short run, that may mean that fewer employees are assisting taxpayers, particularly experienced employees who are likely to be the most effective trainers."
She also noted that until additional fully trained employees are on board, taxpayer service will continue to be a zero-sum game. For example, customer service representatives in the accounts management function split their time between answering the phones and processing taxpayer correspondence. If the IRS assigns more employees to answer the phones, correspondence processing will be slower. If the IRS assigns more employees to process correspondence, phone service will decline.
"The IRS will have to perform a difficult balancing act with its current resources and will need to ensure it does not create a new paper backlog in 2023 by reassigning too many accounts management employees from processing case inventories to answering the phones," Collins wrote. "The IRS needs to end the vicious cycle of paper backlogs. As employees are trained and report for duty, I expect we will start to see improvements in service, probably by the middle of 2023."
