IRS management blamed for tax return backlog

Accounting

Continuing delays in management actions are contributing to the backlogs of millions of unprocessed tax returns and tax transcript requests at the Internal Revenue Service, according to a new report.

The report, released Wednesday by the Treasury Inspector General for Tax Administration, found that backlogs of tax returns and other types of tax account work from the 2020 filing season were still affecting the IRS’s ability to provide timely service to taxpayers in this year’s filing season. At the end of 2021, the IRS had more than 8.2 million tax returns and about 2.6 million tax account transactions that remained in inventory. More recently, the IRS reported that as of Sept. 9, 2022, it had 7.2 million unprocessed individual returns received this year, including tax year 2021 returns and late-filed prior-year returns. Of those, 1.6 million returns need error correction or other special handling, and 5.6 million are paper returns waiting to be reviewed and processed. 

Despite the IRS’s efforts to catch up on the backlog, including by expediting its hiring and setting up “surge teams” this past tax season of employees from other departments to help with processing tax returns, the report faulted IRS officials for delays in processing tax transcripts, amended returns and other work. 

A man walks past the IRS headquarters in Washington, D.C.
The IRS headquarters in Washington, D.C.

Andrew Harrer/Bloomberg

“Management has not taken steps to either reallocate staff or realign work to address the backlog of tax transcript requests,” said the report. “As a result, taxpayers who need these transcripts to validate information for mortgages or apply for student and small business loans will continue to be burdened. In addition, the IRS’s mail-processing equipment is 20 years old. Although IRS management previously agreed to take the necessary actions to replace this outdated equipment, as of May 11, 2022, funding has yet to be allocated. Until the funding is allocated and equipment replaced, the federal government will continue to lose millions of dollars in interest revenue. Finally, a strategy is needed to address the delays in processing amended returns, which is not only causing significant burden on taxpayers but also results in the Federal Government continuing to pay substantial amounts of interest.” 

As a result of the recently enacted Inflation Reduction Act, the IRS is set to receive an extra $80 billion over the next 10 years, which is set to be used to improve taxpayer service, hire additional workers and replace retiring staff, upgrade the IRS’s aging technology and do more audits and examinations to collect additional tax revenue, especially from high-income taxpayers and corporations.

The report pointed out that the IRS continues to have significant inventory backlogs at its Tax Processing Centers, and efforts to reduce the backlogs are being held back in part by ongoing hiring shortfalls of employees needed to fill critical positions in IRS tax processing centers. On March 10, the IRS announced plans to address the continuing backlog of tax returns and other tax account work during the 2022 filing season. The initiatives, referred to as the Get Healthy Plan, aim to return the IRS to healthy inventory levels by the end of this year. The report noted that the IRS defines “healthy” inventory levels as pre-pandemic inventory levels. The backlog has differed across processing centers. As of Dec. 10, 2021, the Kansas City Tax Processing Center had over 751,000 unprocessed transcript requests compared to a little more than 145,000 unprocessed transcript requests at the Ogden Tax Processing Center. However, the IRS had an imbalance between its available staff (183 employees in Ogden versus 70 employees in Kansas City) and the assigned inventory of unprocessed transcript requests. 

“As of March 2022, about three months after TIGTA brought this concern to management’s attention, no actions had been taken to address the significant backlog of transcript requests at the Kansas City Tax Processing Center,” said the report. “The Tax Processing Centers also had almost 1.8 million amended individual returns in inventory as of April 25, 2022. The IRS sent approximately 300,000 amended individual returns to Accounts Management, which also has a significant backlog of amended individual returns.”

In a previous report, TIGTA recommended that the IRS ensure that efforts to evaluate and purchase updated or new mail opening and sorting technology are executed on a timely basis. IRS officials agreed with that recommendation, saying they planned to take the necessary actions. However, because the procurement actions depended on funding, IRS management is reevaluating this effort if implementation is not successful within three years. In March 2022, IRS management told TIGTA that steps are being taken to conduct market research and complete a statement of work related to the replacement of the mail-processing technology. 

Last week, Treasury Secretary Janet Yellen announced that the IRS would automate the scanning of millions of individual paper returns into a digital copy next filing season to speed processing and provide faster refunds (see story). 

“The IRS will also build online capabilities to enable taxpayers to fully interact with the agency digitally,” she said during a speech at an IRS facility in New Carrollton, Maryland. Currently, when taxpayers receive a notice from the IRS, they generally must respond via mail. During this coming filing season, millions of taxpayers will be able to receive and respond to notices online.”

TIGTA made nine recommendations in the report to the IRS, including actions to immediately take steps to address the imbalance of tax processing center staffing for transcript requests, and evaluate alternatives for using employees detailed from the Small Business/Self-Employed Division to address the backlog of amended returns in the submission-processing function. The IRS agreed with all nine of the report’s recommendations. The IRS said it plans to address the imbalance of certain transcript requests; however, TIGTA noted that the action described by the did not specifically address its concerns. TIGA said it would continue to monitor this in its continuing coverage of the IRS backlogs.

In response to the report, Kenneth Corbin, commissioner of the IRS’s Wage and Investment Division, acknowledged that the pandemic and the tight labor market have affected the IRS’s ability to process the backlog of tax returns. The processing of pandemic relief in the form of Economic Impact Payments also contributed to the backlog last year. 

“During the 2021 filing season, as we were processing individual returns for tax year 2020, we experienced a high rate of errors made by taxpayers when reconciling their Economic Impact Payments received in 2020 and calculating additional amounts of Recovery Rebate Credits due to them,” he wrote. “These errors caused the returns to stop processing while waiting for an employee to manually review them. The volume of returns that were in the queue overwhelmed available staff, which led to substantial processing delays as the inventory was being worked down.”

For the 2022 filing season, the IRS automated the process and as of July 8, 2022, nearly 12.5 million returns with those types of errors were corrected and released, eliminating the need for manual review. The IRS has also been pursuing other automation solutions for processing tax account and tax return transcript requests through its Income Verification Express Service  and third-party authorizations that designate taxpayer representatives, such as practitioners. Those automated programs eliminated the need to print over 48 million faxed documents it receives each year through the two programs and process them electronically. The IRS is planning to use the extra funding it’s getting from Congress to use optical character recognition technology to automate processing of paper documents. For processes where handling paper can’t be eliminated, such as processing incoming mail, Corbin said the IRS is seeking a comprehensive solution that will extend beyond replacing its current mail-sorting and processing equipment to encompass the full extraction and digitalization of paper documents and correspondence.

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