WASHINGTON — As the Internal Revenue Service grapples with a backlog of approximately nine million unprocessed tax returns from prior years and struggles to answer taxpayer phone calls, the 2023 tax filing season officially starts Jan. 23.
The tax collector’s woes were documented in the National Taxpayer Advocate’s annual report to Congress, which detailed how years of cuts to the IRS budget has hobbled its ability to enforce the tax code and serve taxpayers.
In her report delivered on Jan. 11, taxpayer advocate Erin M. Collins wrote that the IRS was inundated with 16 million unprocessed tax returns on Dec. 31, 2021, but pared that number to approximately 9 million as of Dec. 31, 2022.
Meanwhile, refunds for taxpayers who did not file electronically were delayed by more than six months.
The IRS still employs outdated manual practices and a human assembly line for its paper processing operations.
For the past two and a half years, millions of taxpayers have experienced significant delays waiting for the IRS to process paper-filed tax returns and issue corresponding refunds. These unprecedented delays are the product of the IRS falling behind during the pandemic, combined with its reliance on antiquated processing technology and manual data entry.
Collectively this resulted in backlogs that overwhelmed the agency and even resulted in transformation of a campus cafeteria, conference rooms, and hallways into makeshift paper storage space, Collins wrote.
The IRS “needs to modernize its antiquated paper processing procedures to clear the paper backlogs, streamline processing for the future, and improve related taxpayer services and the taxpayer experience,” she suggested.
The watchdog report offered optimism that the $80 billion in additional funding allocated from the Inflation Reduction Act last year indicates improvements lay ahead. “We have begun to see light at the end of the tunnel,” Collins wrote. “I am just not sure how much further we need to travel before we see sunlight.”
After the GOP assumed control of the U.S. House of Representatives, Republicans promptly voted to rescind much of the $80 billion that Democrats approved last year. Nevertheless, the proposal stands little chance of being enacted.
Overhaul of the IRS is key to the Biden administration’s plan to shave the $7 trillion tax gap – payments individuals and businesses owe but are expected to go uncollected over the next decade. Republicans are up in arms over IRS plans to hire 87,000 new employees to conduct more audits and expand customer service.
Paper processing delays
In her 2022 annual report, Advocate Collins said taxpayers and tax professionals “experienced more misery in 2022” due to paper processing delays and poor customer service. But the report also said the IRS made considerable progress in reducing the volume of unprocessed tax returns and correspondence and is poised to start the 2023 filing season in a stronger position.
The report assessed taxpayer service during 2022, identified the 10 most serious problems taxpayers experience in their dealings with the IRS, and made administrative and legislative recommendations to address those problems.
For most taxpayers, the most important function the IRS performs each year is issuing tax refunds in a timely manner.
In 2022, about two-thirds of individual taxpayers were entitled to refunds, and the average refund amount was nearly $3,200. For low-income taxpayers entitled to the Earned Income Tax Credit and Child Tax Credit, “refunds may sometimes be closer to $10,000 and may serve as a lifeline that enables them to afford housing, transportation, food, or medicine,” the Advocate reported.
The advocate’s report said the IRS failed to meet its responsibility to pay timely refunds to millions of taxpayers for the third consecutive year.
Approximately 13 million individual taxpayers filed paper returns. Because of processing delays, refunds for those taxpayers were delayed, generally by six months or longer.
Reduction in the paper return inventory will enable the IRS to begin processing paper-filed tax year 2022 returns during the upcoming filing season. That contrasts with the previous two years, when the IRS was unable to process current-year returns until months after the filing season had ended.
Millions of e-filed individual returns were “suspended” because they tripped IRS processing filters and required manual review by IRS employees before refunds could be released. Hundreds of thousands of business returns claiming the Employee Retention Tax Credit were delayed.
The number of returns suspended during processing is the only significant return category in which inventories increased. The IRS entered 2022 with an inventory of 4.2 million suspended returns; that number grew to 5.9 million suspended returns by mid-December.
Cases involving suspected identity theft account for approximately half the inventory 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 Jan. 9 stated, “[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 Advocate’s report calls a year-long delay “unacceptable” and urges the IRS to assign additional employees to process these cases.
Few calls answered,
lengthy wait times
As for customer assistance, only 11% of callers in 2021 reached a telephone assistor. In 2022 the percentage ticked up slightly to almost 13%. That still meant that about seven out of every eight calls did not get through to a telephone assistor. For those who did get through, the average time spent on hold increased from 23 minutes to 29 minutes.
IRS employees answered more than 10 million fewer calls in 2022 than in 2021, but the percentage of calls answered inched up because the IRS received about 109 million fewer calls.
As part of the Inflation Reduction Act, the IRS has hired more than 5,000 new telephone assistors and added more in-person staff to help support taxpayers. “We’ve trained thousands of new employees to answer phones and help people,” Acting IRS Commissioner Doug O’Donnell said.
The IRS also struggled last year to process taxpayer correspondence.
During 2022 the agency sent millions of notices to taxpayers. These included some 17 million math error notices, Automated Under-reported 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. Written taxpayer responses often were required.
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.
The advocate’s report includes a research study designed to help the IRS improve its online operations by examining the functionality of online operations offered by more than 40 states and several foreign countries.
2023 filing deadline
will be April 18
Jan. 23 will begin the nation’s 2023 tax season, when the Internal Revenue Service will begin accepting and processing 2022 tax year returns. More than 168 million individual tax returns are expected to be filed, with the vast majority of those coming before the April 18 tax deadline.
Taxpayers have three extra days to file this year. The due date is Tuesday, April 18, because April 15 falls on a Saturday and the District of Columbia’s Emancipation Day holiday falls on April 17. Taxpayers requesting an extension will have until Oct. 16, 2023, to file.