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For IRS, Paper = Kryptonite

Recent written testimony by the National Taxpayer Advocate, Erin Collins, before The Congressional Subcommittee on Oversight, Ways and Means Committee, reviewed the current status of the massive IRS service failures wrought by COVID (with lots of help from Congress). Collins stated the number one priority of the IRS is to clean up the backlog of unprocessed tax returns. Here are some highlights from her testimony:

Paper is the IRS’s Kryptonite…the IRS is buried in it.

  • Taxpayers have been experiencing significant delays in receiving their tax refunds because of unprecedented IRS backlogs in the processing of original and amended tax returns.

  • Tens of millions of taxpayers were subject to delays in the processing of their returns … these delays have been substantial and ongoing.

  • For original returns submitted electronically, the IRS has mostly worked through the backlog. But the story is very different for paper returns.

  • If IRS systems detect any discrepancies and issues a math error notice with respect to a return, the taxpayer likely will end up waiting more than a year to receive a refund.

  • While taxpayers who e-filed their returns generally fared better than taxpayers who filed on paper, millions of e-filed returns were suspended during processing due to discrepancies between amounts claimed on the returns and amounts reflected on IRS records. The most common discrepancy involved RRC (recovery rebate credit) claims by taxpayers who did not receive some or all of their Economic Impact Payments the prior year. These returns had to be manually reviewed, and the IRS issued more than 11 million math error notices to taxpayers over RRC (recovery rebate credit) discrepancies with IRS records.

  • When a taxpayer disagreed with a math error notice and submitted a response, the correspondence added to the IRS’s mounting paper submission pile that awaited processing and generated more delayed responses.

  • The number of returns suspended and requiring manual processing will be extraordinarily high again in 2022.

  • The IRS has attempted to minimize discrepancies by sending notices to taxpayers who received economic impact payments and advanced child credit payments showing how much they received, but some of the notices were inaccurate and millions of discrepancies – and consequent math error notices – remain likely.

  • Customer service representatives only answered about 32 million, or 11 percent, of those calls.

  • Most callers could not obtain answers to their tax law questions, get help with account problems, or speak with a customer service representative about a compliance notice.

  • The IRS received 6.2 million taxpayer responses to proposed adjustments and took an average of 199 days to process them – up from 74 days in fiscal year (FY) 2019, the most recent pre-pandemic year.

  • Taxpayers found that the IRS’s Where’s My Refund? and Where’s My Amended Return? tools often could not answer those questions.

  • Taxpayers attempted to check the status of their refunds on more than 632 million times last year, but Where’s My Refund? does not provide information on unprocessed returns, and it does not explain any status delays, the reasons for delays, where returns stand in the processing pipeline, or what actions taxpayers need to take, if any.

Recommendations for IRS Improvement-

  • Prioritize the processing of original and amended paper tax returns through an “all- hands-on-deck” surge strategy.

  • Explore options to increase compensation for processing employees, minimize hiring lags, and utilize outside consultants to assist.

  • Suspend all automated collection notices until the IRS gets current in processing original and amended tax returns and taxpayer correspondence.

  • Defer automated collection activity until 45 days after the IRS addresses the merits of a taxpayer’s response to an adjustment, a proposed liability, or a math error assessment.

  • Provide penalty relief for all taxpayers whose returns were delayed in processing.

  • Improve online taxpayer accounts and allow taxpayers to communicate with the IRS routinely by secure email.

  • Deploy “customer callback” technology on all telephone lines, so taxpayers and tax professionals don’t have to wait on hold and can receive a return call when the next CSR is available.

Recommendations for Congressional Action –

  1. Provide the IRS with additional sustained, multi-year funding at levels sufficient to meet taxpayer needs.

  2. Refrain from making changes to the Internal Revenue Code just before, and particularly during, the filing season.

Conclusion -

The 2021 filing season presented unprecedented challenges for taxpayers and the IRS alike. Most of those challenges remain. Some arguably have grown worse. There are millions of tax returns and pieces of correspondence that the IRS received last year but could not process. It is starting the 2022 filing season in a deep hole. While there is no magic bullet, there are short-term steps the IRS can take to accelerate the processing of returns and treat taxpayers fairly, and with Congress’s support, there are steps the agency can and should take over the medium and longer-term to improve its operations going forward.

-Mark S Gleason CPA

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