The Internal Revenue Service will start the upcoming tax season with a backlog of at least 10 million unprocessed tax returns from last year, according to a new report from the National Taxpayer Advocate.
The remaining returns come from “the most challenging year taxpayers and tax professionals have ever experienced,” wrote attorney Erin M. Collins in her annual report.
While the backlog isn’t all that different from last season’s, it’s a far higher number than the unprocessed returns the IRS typically faced before the pandemic.
A key reason for the spike, according to the report, is that the federal government has tasked the IRS with administering various stimulus payments and other programs during the pandemic. That meant the agency, whose budget and staff had shrunk in recent years, had to reallocate many resources to implement these financial relief programs.
Those factors made for a “terrible” filing season in 2021 from a taxpayer perspective, Ms Collins wrote in her report sent to Congress on Wednesday. Last year, the vast majority of taxpayers – 77 percent – received refunds on their 2020 tax returns, but tens of millions of them experienced delays.
“Paper is the kryptonite of the IRS, and the agency is still buried in it,” Ms Collins said in a statement, referring to the millions of paper returns that make up most of the backlog. The Office of the Taxpayer Advocate, which Ms. Collins chairs, is an independent body within the IRS that focuses on taxpayer rights and services issues.
The IRS itself warned taxpayers this week that staffing shortages and backlogs would fuel another frustrating filing season, beginning Jan. 24 and running through April 18 (in most states).
In a briefing Monday, Treasury Department officials highlighted the lack of resources at the IRS and said lower levels of service are to be expected — including the time it will take staff to answer calls from taxpayers with questions. Treasury Department officials noted that in the first half of 2021 fewer than 15,000 staff were available to handle more than 240 million calls — one person for every 16,000 calls.
Officials blamed the budget constraints on Republican lawmakers, who have blocked efforts to increase the agency’s funding.
The Biden administration is seeking an additional $80 billion for the IRS over 10 years to increase its staff, upgrade its technology, and enhance its enforcement and customer service capabilities. That motion is part of the government’s Build Back Better Act, which has stalled in Congress.
“Additional resources are essential to help our employees do more in 2022 — and beyond,” Charles P. Rettig, the IRS commissioner, said in a statement Monday.
Ms Collins reiterated the agency’s recommendation that Congress give her enough money to do her job. Since 2010, the IRS’s staffing has decreased by 17 percent, according to the report. The workload, measured by the number of individual returns, has increased from 142 million in 2010 to 169 million last year – an increase of 19 percent.
Over the past two years, the agency has been tasked with administering several pandemic-related programs, including three stimulus rounds (totalling 478 million payments worth $812 billion) and $93 billion in advance payments for the Expanded Child Tax Credit more than 36 million families.
“One irony of the past year is that despite its challenges, the IRS has done well under the circumstances,” Ms. Collins wrote.
As of the end of December, the IRS still had six million original tax returns, 2.3 million amended tax returns, more than two million quarterly employer returns and five million taxpayer correspondence to process — with some filings dated as late as April and many taxpayers still awaiting refunds, according to the attorney’s opinion . In contrast, there are fewer than 1 million unaddressed returns in a more typical year, according to Treasury Department officials.
Even millions of electronically filed tax returns — which typically flow through the system more quickly — have been suspended in process due to discrepancies between the amounts claimed on the returns and the IRS’s records.
The problem was most common with the rebate credit, which taxpayers claimed when they had not received some or all of their economic stimulus payments from the previous year. These returns had to be manually reviewed by the agency, resulting in more than 11 million math error notifications. When the taxpayer disagreed with the error and filed a response, the report said, it went into the IRS’s paper-processing backlog, further delaying the refund.
Ms Collins wrote that those discrepancies are likely to resurface this tax season – this time for the third round of stimulus payments issued in March and the new early child tax credit – leading to more lagged returns. The IRS tries to avert these problems by sending notices to taxpayers who have received the stimulus and loan payments, showing how much they have received.
Alan Rappeport contributed to the coverage.