IRS Still Has Backlog of 21.3 Million Tax Returns

At the end of May 2022, the agency had a backlog of 21.3 million
unprocessed paper tax returns, an increase of 1.3 million over the
same time last year.

On June 22, National Taxpayer Advocate Erin M. Collins released her
statutorily mandated mid-year report to Congress. The report expresses
concern about continuing delays in the processing of paper-filed tax
returns and the consequent impact on taxpayer refunds. At the end of
May, the agency had a backlog of 21.3 million unprocessed paper tax
returns, an increase of 1.3 million over the same time last year.

“The IRS has said it is aiming to crush the backlogged inventory this
year, and I hope it succeeds,” Collins wrote. “Unfortunately, at this
point, the backlog is still crushing the IRS, its employees, and most
importantly, taxpayers. As such, the agency is continuing to explore
additional processing strategies.”

The report points out that the significant majority of individual
taxpayers receive refunds. “At the end of the day, a typical taxpayer
cares most about receiving his or her refund timely,” Collins wrote.
“Particularly for lower-income taxpayers who receive Earned Income Tax
Credit benefits, tax refunds may constitute a significant percentage
of their household income for the year. Thus, these processing delays
are creating unprecedented financial difficulties for millions of
taxpayers and outright hardships for many.”

Among business taxpayers, many have been waiting extended periods to
receive Employee Tax Retention Credits for which they are eligible, in
addition to their regular refunds. Key taxpayer challenges this year
have included return processing delays, correspondence processing
delays, and difficulty reaching the IRS by phone.

Backlog of Unprocessed Paper Tax Returns

More than 90% of individual income taxpayers e-file their returns, yet
last year, about 17 million taxpayers filed their returns on paper.
Some choose to file on paper. Some have no choice because they
encounter e-filing barriers, such as when they are required to file a
tax form or schedule the IRS cannot accept electronically. Before the
pandemic, the IRS typically delivered refunds to paper filers within
four to six weeks. Over the past year, refund delays on paper-filed
returns have generally exceeded six months, with delays of 10 months
or more common for many taxpayers.

The report says the IRS has failed to make progress in eliminating its
paper backlog because “its pace of processing paper tax returns has
not kept up with new receipts.” During the month of May, the IRS
processed an average of about 205,000 individual income tax returns
(Forms 1040) per week. Its Form 1040 backlog at the end of May stood
at 8.2 million, with millions more paper tax returns not yet
classified or expected to arrive before the extended filing deadline
of October 15. The report says the IRS would have to process well over
500,000 Forms 1040 per week – more than double its current pace – to
eliminate the backlog this year. “The math is daunting,” the report

Forms 1040 are just one component of the paper tax returns processing
backlog. Millions of business tax returns and amended tax returns
(both individual and business) are also filed on paper. The overall
backlog has increased by 7% over the past year as shown in Figure 1.

The IRS has publicly committed to reducing its paper tax return
backlog to a “healthy” level by the end of the year, but it has not
provided a definition of “healthy.” “Historically, the IRS has paid
refunds resulting from paper-filed returns within four to six weeks,”
Collins wrote. “From a taxpayer perspective, returning to a
four-to-six-week refund delivery period is a reasonable definition of

Largely because of the likelihood that the IRS will carry a large
inventory of unprocessed paper tax returns into the 2023 filing
season, Collins issued a Taxpayer Advocate Directive (TAD) in March
directing the IRS to implement 2-D barcoding or other scanning
technology to automate the transcription of paper tax returns. “Today,
the digits on every paper return must be manually keystroked into IRS
systems by an employee,” Collins wrote. “In the year 2022, that
doesn’t just seem crazy. It is crazy.” The IRS’s response to the TAD
is due on June 27, 2022.

The report credits the IRS with taking recent steps to address the
backlog but notes “missed opportunities” to have acted earlier. “The
IRS’s paper processing delays were evident more than a year ago, and
the IRS could have addressed them more aggressively at that time,”
Collins wrote. “Had the IRS taken steps a year ago to reassign current
employees to processing functions, it could have reduced the inventory
backlog carried into this filing season and accelerated the payment of
refunds to millions of taxpayers. Had the IRS implemented 2-D
barcoding, optical character recognition, or similar technology in
time for the 2022 filing season, it could have reduced the need for
employees to engage in the highly manual task of transcribing paper
tax returns. Had the IRS quickly used some of the $1.5 billion of
additional funds provided by the American Rescue Plan Act of 2021
(ARPA), which was enacted 15 months ago, to hire and train additional
employees, it could have worked through the backlog, answered more
taxpayer telephone calls and otherwise improved taxpayer service.”

At the end of May 2021, the IRS had an additional 15.8 million returns
that had been suspended during processing and required manual review
by IRS employees. The suspended returns consisted largely of e-filed
returns on which taxpayers claimed Recovery Rebate Credit amounts that
differed from the allowable amounts shown on IRS records. As of May
2022, the IRS had reduced the number of suspended returns to 5.4
million. The report credits the IRS with developing procedures to
reduce delays among suspended returns, in part by automating the
review process. However, e-filed returns suspended during processing
did not generally result in extended refund delays. By contrast,
unprocessed paper-filed tax returns have resulted in refund delays of
six to 10 months or longer.

Correspondence Processing Delays

When a taxpayer receives a notice and is requested to respond or
chooses to respond, the taxpayer must generally do so by mail. Through
May 21, the IRS processed 5 million taxpayer responses to proposed
adjustments. It took an average of 251 days to do so – more than eight
months. That is more than triple the processing time of 74 days in the
fiscal year 2019, the most recent pre-pandemic year. “When a math
error or similar notice is generated in connection with a paper-filed
tax return,” the report says, “the combination of the return
processing delay and the correspondence processing delay may mean that
the taxpayer must wait well over a year to get the issue resolved and
receive the refund due.”

There are currently over 336,000 taxpayers who could not file their
returns or receive their refunds because identity thieves had already
filed a return using their identifying information. These taxpayers
must submit affidavits and other documentation to substantiate their
identities. They now generally must wait at least a year to receive
their refunds. The IRS website states: “[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.”

Telephone Challenges

During the 2022 filing season, the IRS received about 73 million
telephone calls. Only one out of 10 calls reached an IRS employee.
Compared with the 2021 filing season, IRS employees answered less than
half as many calls, but the percentage of calls answered remained
about the same because they also received less than half as many
calls. The time the average taxpayer spent waiting on hold rose from
20 minutes to 29 minutes. A comparison of telephone services during
the 2021 and 2022 filing seasons is shown in Figure 2.

“The combination of more than 21 million unprocessed paper tax
returns, more than 14 million math error notices, eight-month backlogs
in processing taxpayer correspondence, and extraordinary difficulty
reaching the IRS by phone made this filing season particularly
challenging,” Collins wrote.

TAS Objectives for FY 2023

As required by law, the Advocate’s report identifies TAS’s key
objectives for the upcoming fiscal year. The report describes 14
systemic advocacy objectives, six case advocacy and other business
objectives, and three research objectives. In light of the challenges
taxpayers have been facing over the last two years, Collins wrote that
TAS will be placing heavy emphasis on working with the IRS to improve
the processing of tax returns and taxpayer service generally. Among
the objectives the report identifies are the following:

Automating the processing of paper tax returns. On March 29, as noted
above, Collins issued a Taxpayer Advocate Directive (TAD) directing
the IRS to implement scanning technology by the start of the 2023
filing season so that paper tax returns can be machine-read and
employees will not have to keystroke each digit on the return into IRS
systems. After obtaining an extension for responding, the IRS’s answer
to the TAD is now due on Monday, June 27. IRS leaders have indicated
they are not likely to implement 2-D barcoding, but Collins has
strongly urged them to implement a plan to achieve automation of paper
processing in time for the next filing season. “Doing so is critical,”
Collins wrote. “It is unacceptable that the agency is still paying
thousands of employees to keystroke the data from millions of tax
returns, digit by digit, into IRS systems – creating the current
processing backlog and producing an error rate in transcribing
individual returns last year of 22 percent.”
Reducing barriers to e-filing tax returns. Some taxpayers still prefer
to file paper tax returns. However, many paper filers, perhaps the
majority, would prefer to e-file their returns but are not able to do
so. Among the barriers: some taxpayers must file IRS forms or
schedules that the IRS does not accept through its e-file system; some
taxpayers must include attachments (e.g., appraisals or disclosure
statements) that cannot be filed by their tax software packages; some
software packages block returns from e-file if the taxpayer overrides
certain entries; IRS systems reject certain returns during the e-file
process and require affected taxpayers to mail their returns instead,
and some taxpayers live in areas of the country without broadband
internet access or lack computer access and thus face greater
difficulty in preparing and e-filing their returns. The report says
the IRS must reduce e-filing barriers so that more taxpayers can
e-file and there will be fewer paper tax returns to transcribe or
Improving the IRS’s hiring and training processes. In FY 2022,
Congress increased the IRS’s overall budget by almost 6% and the
taxpayer services portion of the budget by nearly nine percent. Many
of the IRS’s challenges stem from inadequate staffing, including
limited staffing in Submission Processing and telephone call centers.
The report says that hiring and adequately training new employees will
enhance the taxpayer experience.
Improving telephone service. Some taxpayer issues may be resolved
through technology channels, and enhancing those channels must be a
priority. But some issues are best resolved through a conversation,
and some taxpayers are not comfortable with technology. The report
says it is critical that taxpayers be able to reach the IRS by phone.
As discussed above, IRS employees were only able to answer 10% of
taxpayer telephone calls this filing season. “If a private company
failed to answer nine out of 10 customer calls, customers would go
elsewhere,” Collins wrote. “That, of course, is not an option for U.S.
taxpayers, so it is critical that the IRS increase staffing in its
telephone call centers to handle the volume of calls it receives.”

IRS Responses to National Taxpayer Advocate Administrative Recommendations

The National Taxpayer Advocate is required by statute to submit a
year-end report to Congress that, among other things, makes
administrative recommendations to resolve taxpayer problems. Section
7803(c)(3) of the Internal Revenue Code authorizes the National
Taxpayer Advocate to submit administrative recommendations to the
Commissioner and requires the IRS to respond within three months.
Under this authority, the National Taxpayer Advocate annually
transmits to the Commissioner all administrative recommendations
proposed in her year-end report for a response.

The National Taxpayer Advocate made 88 administrative recommendations
in her 2021 year-end report and then submitted them to the
Commissioner for a response. The IRS has agreed to implement 61 (or
69%) of the recommendations in full or in part.

The IRS’s responses are published on the TAS website at National
Taxpayer Advocate’s Annual Report to Congress Tracker.

The National Taxpayer Advocate is required by statute to submit two
annual reports to the House Committee on Ways and Means and the Senate
Committee on Finance. The statute requires these reports to be
submitted directly to the Committees without any prior review or
comment from the Commissioner of Internal Revenue, the Secretary of
the Treasury, the IRS Oversight Board, any other officer or employee
of the Department of the Treasury, or the Office of Management and
Budget. The first report must identify the objectives of the Office of
the Taxpayer Advocate for the fiscal year beginning in that calendar
year. The second report must include a discussion of the ten most
serious problems encountered by taxpayers, identify the ten tax issues
most frequently litigated in the courts, and make administrative and
legislative recommendations to resolve taxpayer problems.

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