National Taxpayer Advocate Erin Collins expressed deep concerns Wednesday about the upcoming tax filing season in her annual report to Congress on the 2021 filing season.
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The IRS itself and the Treasury Department are warning of tax refund delays this year due to staffing shortages stemming from budget cuts and the COVID-19 pandemic (
“While my report focuses primarily on the problems of 2021, I am deeply concerned about the upcoming filing season,” Collins said in releasing the report. “Paper is the IRS’s Kryptonite, and the agency is still buried in it.”
As of late December, the IRS had backlogs of 6 million unprocessed original individual returns (Forms 1040), 2.3 million unprocessed amended individual returns (Forms 1040-X), more than 2 million unprocessed employer’s quarterly tax returns (Forms 941 and 941-X), and about 5 million pieces of taxpayer correspondence — with some of the submissions dating back at least to April 2021 and many taxpayers still waiting for their refunds nine months later.
The report does credit the IRS with performing well under challenging circumstances. Since the beginning of the pandemic, the IRS, in addition to its traditional work, has implemented significant programs enacted by Congress. Among other things, it has issued 478 million stimulus payments (referred to as Economic Impact Payments or “EIPs”) totaling $812 billion and has sent Advance Child Tax Credit (AdvCTC) payments to over 36 million families totaling over $93 billion.
The report pointed out that “[t]he imbalance between the IRS’s workload and its resources has never been greater.” Since fiscal year (FY) 2010, the IRS’s workforce has shrunk by 17%, while its workload — as measured by the number of individual return filings — has increased 19%. The report reiterates the National Taxpayer Advocate’s longstanding recommendation that Congress provide the IRS with sufficient funding to serve taxpayers well.
“There is no way to sugarcoat the year 2021 in tax administration,“ Collins wrote. “The year 2021 provided no shortage of taxpayer problems.”
While electronically filed returns fared better than paper returns, the report found that millions of e-filed returns were suspended during processing due to discrepancies between amounts claimed on the returns and amounts reflected on IRS records. The most typical discrepancy involved Recovery Rebate Credit (RRC) claims by taxpayers who didn’t receive some or all of their stimulus payments as EIPs the prior year. Those tax returns had to be manually reviewed, and the IRS issued more than 11 million math error notices to taxpayers over RRC discrepancies with IRS records. When a taxpayer disagreed with a math error notice and submitted a response, the taxpayer’s response went into the IRS’s paper processing backlog, further delaying the refund.
Collins is worried that the number of returns suspended and requiring manual processing is likely to be high again in 2022. In March, Congress authorized two advance tax credits that could lead to more discrepancies between amounts claimed on tax returns and in IRS records. It authorized a third round of EIPs that may be claimed as RRCs by taxpayers who did not receive them, and it authorized monthly payments of the Advance Child Tax Credit (AdvCTC) for the second half of 2021, both of which will have to be claimed and/or reconciled on 2021 individual tax returns. The IRS is trying to minimize the discrepancies by mailing notices to taxpayers who received EIPs and AdvCTC showing how much they received, but millions of discrepancies — and math error notices — are still likely to occur.
As of the postponed filing deadline of May 17, 2021, the IRS was holding 35.3 million tax returns for employee review that was made up of roughly half unprocessed paper returns and half tax returns suspended during processing, leading to refund delays for many of these taxpayers.
“Refund delays have a disproportionate impact on low-income taxpayers,” said the report. “Earned Income Tax Credit (EITC) benefits are worth up to $6,660, Child Tax Credit benefits [were] worth up to $2,000 per qualifying child under tax year 2020 rules, and RRCs are potentially worth several thousand dollars for families who did not receive some or all of their EIPs. Millions of taxpayers rely on the benefits from these programs to pay their basic living expenses, and when refunds are substantially delayed, the financial impact can range from mild inconvenience to severe financial hardship.”
The report blamed processing delays for leading to an array of customer service problems:
The IRS’s “Where’s My Refund?” app often couldn’t answer the question of what happened to a tax refund. Taxpayers tried to check the status of their refunds on IRS.gov more than 632 million times in 2021, but “Where’s My Refund?” doesn’t give information on unprocessed returns, and it doesn’t explain any status delays, the reasons for the delays, where returns stand in the processing pipeline, or what actions taxpayers should take, if any. For taxpayers who experienced significant refund delays, the tool often didn’t do its job.
Telephone service was the worst it has ever been. The combination of processing delays and questions about new programs like the AdvCTC caused call volumes to nearly triple from the prior year to a record 282 million telephone calls. Customer service representatives (CSRs) only answered about 32 million, or 11 percent, of those calls. As a result, most callers could not obtain answers to their tax law questions, get help with account problems, or speak with a CSR about a compliance notice.
“Among the lucky one in nine callers who was able to reach a CSR, the IRS reported that hold times averaged 23 minutes,” the report said. “Practitioners and taxpayers have reported that hold times were often much longer, and frustration and dissatisfaction was high throughout the year with the low level of phone service.”
The IRS needed months to process taxpayer responses to its notices, further postponing refunds. The IRS mailed tens of millions of notices to taxpayers during 2021, including nearly 14 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 his or her identity where IRS filters flagged a return as potentially fraudulent, correspondence examination notices and collection notices. In many cases, taxpayer responses were required, and if the IRS did not process a response, its automated processes could take adverse action or not release the refund claimed on the tax return. The IRS received 6.2 million taxpayer responses to proposed adjustments and took an average of 199 days to process them, up from 74 days in fiscal year 2019, the most recent year before the pandemic.
