IRS Will Face Processing Backlogs and Employment Delays in 2021.

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By late that year, millions of tax returns from the 2020 filing season remained unprocessed, jeopardising the IRS’s ability to provide timely service in 2021 and likely contributing to ongoing backlogs in the current filing season, the Treasury Inspector General for Tax Administration (TIGTA) stated in an audit report.

The study, Results of the 2021 Filing Season, produced last week cautioned that unless the Service took “extraordinary actions” to alleviate the backlogs, they would continue to grow. TIGTA provided ten suggestions aimed at resolving issues it identified with the IRS’s return processing, taxpayer interactions, and implementation of tax law changes in 2021, all of which the IRS agreed to adopt.

 

IRS

 

According to TIGTA, the IRS predicted that as of Dec. 25, 2020, it would have more than 11.7 million unprocessed paper-filed individual and company tax returns to carry over into the following filing season. This includes almost 3.54 million original paper returns, which was more than 19 times the 183,000 paper returns that remained unprocessed as of Dec. 28, 2019.

There were additional increases of over 1,200 percent above 2019 levels for revised returns and e-filed but rejected returns awaiting settlement. These disparities, along with backlogged correspondence and other work that was carried over into 2021, demonstrated the IRS’s struggles to recover from the COVID-19 epidemic, the report stated, “and will continue to have a major impact on the related taxpayers.”

 

Personnel shortages

TIGTA reported that the Service’s inability to reach its employment goals exacerbated the piling of unfinished work. This challenge was magnified in its submission processing procedures, which were directly responsible for the majority of returns.

TIGTA noted that while the IRS has implemented new hiring initiatives and strategies, they have failed to close the hiring gap, which will “continue to result in millions of tax returns being processed late, refunds being issued late, and taxpayers receiving assistance with their tax account issues late.” It was not immediately obvious whether that evaluation took into consideration the IRS’s announcement last week that it will use an expedited federal hiring protocol to fill 5,000 positions in its service centres.

TIGTA highlighted in its assessment of the IRS’s customer service in fiscal 2021 that the IRS established a goal of hiring 5,000 new employees, 4,000 of whom would be trained to answer toll-free telephone calls. The IRS, however, reduced that figure to 3,100 less than two months into the fiscal year, citing fewer applicants than projected and difficulties in fingerprinting and processing them. TIGTA reported that as of Jan. 20, 2021, the Service had hired roughly 3,000 extra personnel to answer toll-free telephone calls and had no plans to hire more.

Changes to the tax code

TIGTA also examined the IRS’s performance in administering several tax law changes that provided pandemic relief: the ability of taxpayers to use tax year 2019 earned income in calculating their earned income tax credit (EITC) and additional child tax credit (ACTC) for 2020; an exclusion from income of up to $10,200 in unemployment compensation for taxpayers with less than $150,000 in modified adjusted gross income (MAGI) in 2020; and the issuance of two rounds of economic impact payments (EIPs).

TIGTA examined 8.3 million of the over 13.5 million EIPs totaling $6.3 billion and determined that “the payments were accurate.”

 

IRS

 

However, TIGTA observed that taxpayers’ reconciliation of EIPs with any recovery rebate credit claimed on their returns was frequently erroneous. The IRS referred over 42% of returns claiming a recovery rebate credit to its error resolution function due to differences between the taxpayer’s stated EIP and the IRS’s data. There, many of these returns languished, with more than 500,000 still outstanding as of Sept. 2, 2021. The issue was exacerbated by the fact that correcting the error often required manual inspection by a tax examiner and discussion with the taxpayer.

A similarly perplexing administrative issue was taxpayers’ option to use 2019 earned income for calculating their EITC and/or ACTC. As of May 27, 2021, about 14 percent of nearly 26 million e-filed returns claiming an EITC or ACTC have made the election, resulting in EITCs totaling more than $8 billion and ACTCs totaling more than $5.1 billion.

TIGTA ruled that the bulk of these were correctly calculated and approved by the IRS. However, in 191 instances, tax examiners recorded inaccurate figures, inflating ACTCs from approximately $350,000 to ten times that amount, $3.5 million.

The error’s magnitude was exacerbated by the fact that TIGTA flagged the same type of error in a December 2020 audit report and recommended processes and procedures that would limit entries in these fields to statutory amounts, which the IRS stated at the time would be addressed through programming controls. The IRS agreed to the recommendations once more and stated that they would be adopted for the 2022 filing season.

TIGTA notified the IRS in May 2021 that, based on a review of forms filed by April 22, 2021, 4,838 returns decreased or omitted unemployment income despite having a disqualifying MAGI of more than $150,000.

TIGTA stated that the IRS responded that its systems’ programming was unable to correlate unemployment compensation recorded on a return to income reported on the line for “other income.” This was line 8 of the 2020 Form 1040, United States Individual Income Tax Return, which imported a total from Part 1 of Schedule 1, Additional Income and Adjustments to Income, which included unemployment compensation. In other words, the IRS was unable to tell the difference between unemployment compensation and other forms of income recorded on line 8.

“IRS administration suggested that the detected problems are an unavoidable consequence of late legislation,” TIGTA stated. “Tax regulations changed following the start of the filing season, and existing software was unable to verify taxpayers’ compliance with the changes.”

 

Customer support

TIGTA contrasted the IRS’s performance in calendar year 2021 (as of May 28) with the previous year (as of May 29). The volume of call attempts increased from 74.1 million in 2020 to 185 million in 2021, including those made after business hours. The number of assistor calls responded increased somewhat, from 6.6 million to 11.4 million, and automated calls replied significantly less, all of which contributed to a decline in service quality from over 60% in 2020 to 15.5 percent in 2021. The average response time increased from 12 to 19 minutes.

 

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While internet visitors to irs.gov climbed by 14% in both years (as of the week ending May 29), usage of two dedicated online products, Interactive Tax Assistant and Tax Withholding Estimator, dropped. The number of times “Where’s My Refund?” was used increased by 15.6 percent, from 431.4 million in 2020 to roughly 498.9 million in 2021.

The AICPA continues to push for improved IRS services; for additional information, visit the webpage summarising the AICPA’s advocacy initiatives.

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