National Taxpayer Advocate Erin Collins issued a directive calling on the Internal Revenue Service to implement scanning technology as a way to reduce the backlog of unprocessed tax returns by 2023.
Collins wrote in a
“The delays in processing these returns result from the IRS’s archaic data intake process,” Collins wrote. “The IRS’s submission processing function today evokes images of what data transcription looked like in the 1960s — prior to the information age. Employees manually transcribe all paper tax returns. Transcription consists of keystroking every digit and every letter on the return. For a moderately complex return, several hundred digits may need to be transcribed. For longer returns with more forms and schedules, the number of digits may approach or exceed 1,000 digits. In the year 2022, this doesn’t just seem crazy. It is crazy.”
An analysis by the Taxpayer Advocate Service that Collins leads found that between 50 and 60% of the individual income tax returns submitted on paper over the past two years were prepared with tax return software and wouldn’t need to be transcribed if 2-D barcodes were added.
“Scanning technology would speed return processing, substantially reduce or eliminate transcription errors, and enable the IRS to reassign employees from data entry jobs to other positions, ultimately saving tens of millions of dollars,” Collins wrote.
The Biden administration in its
The Professional Managers Association, a group of management officials at the IRS, agreed with the extra funding request. “The IRS has longstanding technology and workforce issues that prevent it from functioning as efficiently and effectively as the American people need,” said PMA executive director Chad Hooper in a statement Wednesday. “Our members rely on a 60-year-old computer system to do their jobs and staff use sorting tables last updated in the Kennedy Administration to process paper tax returns. The proposed $14.1 billion in funding with $310 million for systems modernization will assist the IRS in addressing some barriers to success. PMA maintains that a single-year funding increase is insufficient to provide the IRS with the resources needed for long-term modernization. When PMA commended Congress for increasing funding to $12.6 billion in FY 2022, we also level-set expectations: At $12.6 billion in funding, the IRS is still nearly $4 billion below its 2011 peak of
It may be surprising that the IRS is not already using scanning technology to expedite processing of paper returns, even though bar codes and OCR technology have long been in use.
“2-D barcoding technology is well established,” Collins wrote. “In 2002 — fully two decades ago — we reported that 17 states were using 2-D barcoding for returns prepared with tax return software but filed on paper, and we recommended the IRS consider doing so as well. At the time, the IRS disagreed with our recommendation to incorporate 2-D barcodes onto Forms 1040, stating that doing so would undermine the goal of transitioning taxpayers to e-filing. In 2003, however, the IRS had begun working with tax return software developers on a 2-D project for other tax forms, and the IRS has implemented 2‑D barcoding for certain forms, including Schedules K-1.
In 2014, the IRS reversed its position regarding 2-D barcoding for Forms 1040, requesting that Congress provide it with authority to require taxpayers who prepare their returns with software but file them on paper to print their returns with a scannable 2-D barcode. In 2018, the House-passed version of the Taxpayer First Act contained a provision to require 2-D barcoding. By that time, the IRS had changed its position again. We have been told the IRS requested the provision be removed from the legislation to give it flexibility to adopt alternative scanning technologies like OCR. Congress removed the provision from the final version of the Taxpayer First Act that was enacted, but the IRS still has not implemented any type of scanning technology for Forms 1040.”
She believes it’s time for the IRS to begin using technologies that are already widely accepted. “Thus, 20 years after more than one-third of states were already using 2-D barcoding, 18 years after the National Taxpayer Advocate initially recommended it for Forms 1040, eight years after the Treasury Department requested that Congress provide the IRS with the authority to mandate 2-D barcoding, and four years after Congress sought to grant that authority and the IRS changed its position, the tax system finds itself in a crisis that might not exist, at least to this degree, if 2‑D barcoding or similar technology had been implemented,” said Collins.
OCR technology has some drawbacks, however, Collins admitted, and can sometimes confuse a 1 with a 7. However, it too has been used by state tax authorities in combination with 2-D barcoding. “In discussions with state tax agencies, we have been told that some states use both 2-D barcoding and OCR,” Collins noted. “Where a return is prepared with software and a barcode can be applied, the barcode provides near 100 percent accuracy. Where a return is not prepared with software or if a barcode cannot be read (e.g., where a taxpayer’s toner cartridge ran low or the barcode has smudged), OCR is used, and despite its slightly lower accuracy level, it still reduces the need for manual data transcription and eliminates errors attributable solely to human error in hitting the wrong key.”
