The IRS has been busy. In the past two years, the agency has processed trillions of dollars in pandemic relief funds, adjusted to often-changing tax deadlines, and dealt with several complex new tax laws. At the same time, funding was 20 percent lower than in 2010. Understaffed is the understatement of the century.
The perfect storm of COVID-19, lack of funding, and understaffing has resulted in record backlogs and delays in virtually every aspect of interacting with the agency. In fact, 2021 went down as the worst year ever for IRS customer service. When the 2022 tax season started, the agency still had 11.7M unprocessed tax returns. Since then, leaders have taken several steps toward corrective action for a better taxpayer experience including the mass hiring of new employees.
Still, the average Minnesota taxpayer may be left wondering if the experience will really be different and what they can expect in the second half of 2022. To help clients, prospects, and others, Smith Schafer, has provided a summary of the key details below.
What’s Been Going on at the IRS?
Backlogs are a routine part of tax return processing for the IRS; normal numbers are less than one million returns at the start of each tax season. Unprocessed returns often arise due to missing information, math errors or other mistakes, and manually processing paper returns.
In 2021, taxpayers dealt with issues like refund delays, an inability to connect with an agent on the phone or in-person, e-filing barriers, and lack of information about refund status online. An example of how poor customer service and systemic staffing issues came to a head was a Taxpayer Advocate report that one person at the IRS handled about 13,000 calls last year. It’s little wonder why most taxpayers who called in couldn’t ever connect with an agent.
This year, the nearly 12 million unprocessed returns in January 2022 could be traced back to changes involving COVID-19 tax laws and a lack of adequate staff to manage the change. The IRS responded by adding overtime, repositioning its workforce, and suspending some automatic notices.
Coming off tax season, while the IRS has slashed its number of unprocessed returns, refunds may still take longer than usual. The following are all contributing factors, including:
- Higher than average return errors because of Economic Impact Payments
- Temporary tax law changes related to the Earned Income Tax Credit
- Amended returns from 2020
The IRS in 2022
All that considered, the IRS is only on slightly better ground in the second half of 2022. The pandemic didn’t create holes in the agency so much as it revealed them. A June 2022 tweet featuring a picture of an IRS facility in Austin, TX with an entire cafeteria of paper returns waiting to be processed. The tweet’s author, a tax policy counselor for the U.S. Treasury, said that the IRS is largely still operating as a “paper-based agency with a heavy reliance on manual processing.”
Then there was the controversial decision to destroy 30 million paper information returns in March 2021, which became public in 2022.
As the federal agency that Americans tend to interact with the most, the IRS is already subject to high expectations for customer service. Clearly, there is more work to be done both internally with staffing, technology, and operations, and externally with the agency’s reputation among taxpayers.
And while the IRS has been diligent in alleviating the backlog of returns and trying to answer taxpayer questions promptly, delays are likely to persist for some time.
The IRS’s website has operational updates for common taxpayer questions and scenarios related to actions and follow-up requirements. Of note:
- “[A]ll paper and electronic individual returns received prior to October 2021 have been processed if the return had no errors or did not require further review.”
- As of June 1, 2022, 10.5 million unprocessed individual tax returns remained.
- 2 million returns have errors
- 2.1 million returns are amended individual tax forms 1040-X
- 8.5 million returns are paper returns that will be manually processed
These include both new 2021 tax year returns and those previously received. Any return that needs to be manually reviewed can expect a refund on average in 90 to 120 days, but that estimate can vary depending on the nature of the error.
Also of note, the IRS said, “If you filed before October 2021 and Where’s My Refund? does not have any information, your return has been opened but work on it has not begun.”
Status of Amended Payroll Tax Returns
Another area where business taxpayers have been negatively affected is retroactively claiming the Employee Retention Tax Credit for 2020 or earlier quarters in 2021. Some taxpayers have been waiting since 2020 for their ERTC refund. This has resulted in safe harbors and added relief for affected businesses unable to pay an artificial payroll tax bill if the ERTC refund hasn’t been processed yet.
As of June 8, 2022, there were still 3.5 million unprocessed Forms 941.
The total amount of unprocessed Forms 941-X sits at around 222,000, and the IRS said that some of these can’t be processed until the related 941s are processed first.
Two IRS service centers in Cincinnati and Ogden are handling these requests, as staff at those locations have been trained on COVID-19 tax credits.
Solving the Problems
Moving forward, the agency has two primary methods to improve the taxpayer experience: more funding and more people.
Congress granted the agency $12.6 billion – higher than its current budget, but still less than what was originally proposed. That means more money for taxpayer services, enforcement, operations support, new technology, and better business systems. It was also permitted to direct-hire thousands of new employees in 2022 and beyond. Fast-tracking new hires at in-person service centers across the country and elsewhere within the agency means more support for taxpayer questions – quicker.
Online and phone tools have also expanded since 2021. Phone callback rates increased 70 percent in 2022. Online self-service tools that taxpayers actually find useful have been more common: online pay and the ability to update personal information are just two of these.
Through the mail, the IRS hoped to prevent mistakes on returns before they even happened – and thus keeping refund times as low as possible – by sending taxpayers letters that calculated total amounts of economic impact payments or child tax credit advance payments.
Introducing some automated systems have also helped to reduce the backlog and improve taxpayer service. This has varied from online and phone chatbot assistance to help with common questions to a new tool that increases reviews of returns with errors from a few dozen processed returns per hour to 1.5 million returns per week.
While the IRS has taken significant steps to address the backlog, and other issues, it is not likely conditions will immediately improve. This means Minnesota taxpayers will need to exercise significant patience when dealing with the agency. If you have questions about the information outlined above or need assistance with a tax or accounting issue, Smith Schafer can help. For additional information, click here to contact us. We look forward to speaking with you soon.