The 2021 tax filing season featured IRS administrative challenges that were unprecedented in scope but long-standing in their causes, the U.S. Government Accountability Office (GAO) said in a report released Monday.
And while the issues uncovered in the GAO's study mostly stemmed from the COVID-19 pandemic's continuing effects, they are likely to persist unless the IRS rethinks and refocuses some of its practices, the GAO said.
The report builds on earlier GAO analyses, most recently a preliminary assessment of the 2021 tax filing season released in mid-February and highlighted in testimony before the House Ways and Means Committee by the GAO's Jessica Lucas-Judy, director, Strategic Issues, the primary contact for both reports. The latest report, titled Tax Filing: 2021 Performance Underscores Need for IRS to Address Persistent Challenges, is directed to congressional tax-writing committee leaders but also included six recommendations to IRS officials intended to improve processing of returns and taxpayer correspondence as well as to assist taxpayers' information needs.
To assess the IRS's performance in processing tax returns and providing taxpayer service during the 2021 filing season, the GAO focused on tax returns pulled from processing because of errors. It also examined how a backlog of returns from 2020 that continued into 2021 led to longer processing times, requiring more interest payments on refunds, and the further burdens of much higher volumes of taxpayer correspondence and telephone calls.
Tax returns with errors
The IRS in 2021 suspended its electronic processing and shunted into a cumbersome manual process about 16 million more returns with errors than the average from 2017 to 2019, an increase of 86%, the GAO reported. The majority of these errors, 60%, were attributable to recent tax law changes intended to provide pandemic relief to taxpayers, including a second year of the rebate recovery credit (RRC) and, new for 2021, expansions and increased refundability of the earned income tax credit and child tax credit. The numbers of RRC errors caught the IRS off guard, the GAO findings indicated:
"Because IRS officials were not expecting such a large volume of RRC errors, they did not set up the appropriate programming in IRS's systems to enable automated corrections," the report stated. In other words, the IRS had math-error-correcting authority for the RRC but not its capability. As a result, about 11.5 million returns with RRC errors were held up for months. GAO auditors' interviews with IRS officials in December 2021 suggested the IRS was aware of this issue and had made computer programming improvements for the even greater anticipated volume of taxpayer errors with respect to additional new law provisions effective for the 2021 tax year reflected in returns to be processed this year, the report said.
Return processing and interest
For all returns, the IRS began the 2021 season with a backlog of 8 million individual and business returns from the previous year. The backlog grew to about 10.5 million returns as of the end of 2021.
One consequence of longer processing timelines was increased interest paid on refunds: In fiscal 2021, the IRS paid $3.27 billion in interest, an 8% increase from fiscal 2020. All of the increase was due to individual returns; interest paid on corporate returns went down by 18%, although it was higher than in 2019. Amended returns were a big driver of interest payments; although they were only about 4% of returns, they accounted for 42% of the total interest paid.
Corporate returns had a higher ratio of interest dollars to amended returns than individual returns, part of a years-long trend but also reflecting retroactive tax law changes affecting businesses, notably, net operating loss carrybacks. Another, for both individual and business amended returns, the GAO said, was that "unlike a typical tax return, IRS processes amended returns as taxpayer correspondence," which had its own momentous problems.
Taxpayer correspondence, phone calls, and other assistance
The correspondence inventory nearly tripled during the 2021 season, compared with that of 2019, and "telephone demand skyrocketed" from 39 million calls in the 2019 season to 195 million in 2021, five times higher, the GAO said. The majority of the calls in 2021, 53%, did not get through, however. Reasons for the much higher number of calls included taxpayer questions about delayed refunds and the new law provisions, including a retroactive change in taxability of unemployment compensation benefits.
"Taxpayers experienced a maelstrom of confusion when seeking assistance on their delayed refunds," the GAO concluded.
The IRS hired about 3,800 new customer service personnel to answer calls, but not in time to do so during the busiest part of tax season, the GAO said. Moreover, these positions experienced higher-than-normal attrition and absences, partly due to the pandemic.
Visits online to the IRS's "Where's My Refund" web portal increased by 52% over 2019, but, as National Taxpayer Advocate Erin Collins has also pointed out, the value to taxpayers of the information it provides is limited. User satisfaction with the portal, as measured by an IRS questionnaire, has declined steadily since 2018, to a new low in 2021 of 52% pleased with its ease of use and only 24% satisfied with its helpfulness, the GAO reported. Moreover, taxpayers seeking more information than the three statuses offered on the site, "return received," "refund approved," and "refund sent," then were likely to call the IRS, further choking the phone lines.
As incoming correspondence grew, so did the time the IRS required to answer it; by the end of the 2021 season, 46% of received letters, representing 2.7 million items, were older than the target 45 days.
Meanwhile, in-person assistance at the IRS's taxpayer assistance centers increased slightly to about 1 million taxpayers in calendar 2021 over the 700,000 in 2020, but both numbers represented part of a longer-term decline in visits, from 5.5 million in 2015, as the Service has emphasized newer channels for assistance. However, the GAO noted, the IRS's 2021 Taxpayer First Act Report to Congress included plans to keep in-person assistance in its repertoire, by implementing online videoconferences with IRS personnel and co-locating services at post offices and other federal government sites, pending additional funding.
The GAO recommended in the report that the IRS:
- Develop a process to identify, analyze, and address underlying causes for taxpayer errors on returns;
- Identify, monitor, and report to Treasury and Congress reasons for individual and business-related refund interest payments and amounts;
- To the extent within the IRS's control, take steps to reduce the amount of refund interest paid;
- Modernize and improve Where's My Refund to fully address taxpayers' needs;
- Periodically estimate, monitor, update, and communicate to taxpayers and other stakeholders its time frames for resolving its correspondence backlog;
- Develop and communicate a plan, including costs and benefits, to provide in-person taxpayer services, relative to its plans to expand virtual service options.
The IRS agreed with four of the recommendations but disagreed with the first recommendation regarding analyzing causes of taxpayer errors. That could cause it to have to duplicate work, the IRS responded, since it already has a "robust process" for doing so, and it informs taxpayers generally about common errors through mailings and information on its website. However, the GAO said, while the IRS may well be able to identify and address its own internal or technical issues, it needs to better understand how and why taxpayers make certain errors to help itself and Congress alleviate them.
The IRS also disagreed with the GAO's recommendation about studying and reporting on refund interest payments, saying that interest is required by statute, and the amount of interest paid is "not a reliable or meaningful business measure." Both those objections the GAO countered, noting that a requirement to pay interest is to some degree within the IRS's control. And in those cases, the information could help the IRS allocate its resources to prioritize its return processing to minimize interest payments, the GAO said.
The AICPA continues to advocate for better IRS services; visit the webpage describing AICPA advocacy efforts to learn more.
— To comment on this article or to suggest an idea for another article, contact Paul Bonner at Paul.Bonner@aicpa-cima.com.