IRS will start tax season with huge backlog

The Internal Revenue Service will kick off the approaching tax season with a backlog of at least 10 million unprocessed returns from last year, according to a new report by the national taxpayer advocate.

The pile of returns remaining are from the “most challenging year taxpayers and tax professionals have ever experienced,” the advocate, Erin Collins, wrote in her annual report.

Although the backlog is not too different from last season’s, it is a far higher number than the unprocessed returns the IRS typically faced before the pandemic began.

One big reason for the pileup, according to the report, is that the federal government charged the IRS with administering various stimulus payments and other programs during the pandemic. That meant the agency, which has had its budget and workforce shrink in recent years, had to reallocate a lot of resources to implement those financial relief programs.

Those factors led to a “horrendous” filing season in 2021 from the standpoint of taxpayers, Collins wrote in her report, which was 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 IRS’ kryptonite, and the agency is still buried in it,” Collins said in a statement, referring to the millions of paper returns that account for most of the backlog. The Office of the Taxpayer Advocate, which Collins leads, is an independent entity within the IRS that focuses on issues of taxpayer rights and services.

The IRS warned taxpayers this week that staffing shortages and backlogs would translate into another frustrating filing season, which begins Jan. 24 and runs through April 18 (in most states).

In a briefing Monday, Treasury Department officials highlighted the lack of resources at the IRS and said that a lower level of service should be expected — including the amount of time it will take staffers to answer phone calls from taxpayers with questions.

Treasury officials noted that in the first half of 2021, fewer than 15,000 employees were available to handle more than 240 million calls — one person for every 16,000 calls.

Officials blamed Republican legislators, who have blocked efforts to increase funding at the agency, for the budgetary constraints.

The Biden administration is seeking an additional $80 billion over a decade for the IRS to increase its staff, upgrade its technology and improve its enforcement and customer service capacity. That request is part of the administration’s Build Back Better Act, which is stalled in Congress.

“Additional resources are essential to helping our employees do more in 2022 — and beyond,” Charles Rettig, the IRS commissioner, said in a statement Monday.

Collins reiterated the agency’s recommendation that Congress provide it with enough money to do its job. Since 2010, the IRS’ staffing is down 17 percent, according to the report. Its workload, measured by the number of individual returns, is up from 142 million in 2010 to 169 million last year — an increase of 19 percent.

Over the past two years, the agency has been charged with administering several pandemic-related programs, including three rounds of stimulus (totaling 478 million payments worth $812 billion) and another $93 billion in advance payments for the expanded child tax credit to more than 36 million families.

“One irony of the past year is that, despite its challenges, the IRS performed well under the circumstances,” Collins wrote.

As of late December, the IRS had yet to finish processing 6 million original tax returns, 2.3 million amended returns, more than 2 million employer’s quarterly returns and 5 million pieces of taxpayer correspondence — with some submissions dating to April and many taxpayers still waiting for refunds, according to the advocate’s report. In contrast, there are usually less than 1 million unaddressed returns in a more typical year, according to Treasury officials.

Even millions of returns filed electronically — which usually flow through the system more quickly — were suspended during processing because of discrepancies between the amounts claimed on returns and what the IRS had on record.

The issue arose most frequently with the “recovery rebate credit,” which taxpayers claimed when they did not receive part or all of their economic incentive payments from the prior year. Those returns had to be manually reviewed by the agency, which resulted in more than 11 million math error notices. When the taxpayer disagreed with the error and submitted a response, the report said, it went into the IRS’ paper processing backlog, further delaying the refund.

Collins wrote that these discrepancies are likely to crop up again this tax season — this time for the third round of stimulus payments, issued in March, and the new advanced child tax credits — resulting in more delayed returns. The IRS is trying to head those problems off by sending notices to taxpayers who received the stimulus and credit payments, showing how much they received.