National taxpayer advocate appeals IRS response on scanning tech

By Paul Bonner

National Taxpayer Advocate Erin Collins escalated her push for the IRS to adopt barcode scanning of paper tax returns, which she had directed the Service to implement by 2023, by appealing its response, which she called disappointing.

Collins described the developments in a blog post Thursday on the Taxpayer Advocate Service's website. On Tuesday, she said, "due to the magnitude of this issue and the unprecedented backlog of paper returns," she "took the unusual step" of sending a memo to IRS Commissioner Charles Rettig appealing the IRS's response to her Taxpayer Advocate Directive (TAD) 2022-1.

In the memo, Collins told Rettig that, while she thanked IRS employees and managers for their "tireless efforts" in recent years to overcome challenges of processing a "daunting and massive mountain" of paper returns, "our taxpayers and employees deserve a 21st century tax administration that utilizes technology to streamline tax administration. ... As such, I was disappointed in the [IRS's] response to my TAD."

Collins issued the TAD on March 29 under her authority to mandate IRS administrative or procedural changes to improve its functional operation or grant relief to taxpayers to protect their rights or provide them an essential service. In it, she repeated prior warnings that paper returns represent an archaic and unworkable systemic problem for the IRS, one that also burdens taxpayers, especially those awaiting refunds.

Collins directed the IRS to expedite the processing of tax returns prepared with tax software but filed on paper, by working with return software providers to develop a plan for the companies to voluntarily place 2-D barcodes on returns prepared with their products, beginning during the 2023 filing season, and to notify her and congressional tax-writing committees within 45 days if the companies do not agree to do so. She further directed the IRS to develop a plan to implement systems to automate the processing of these returns by the start of the 2023 filing season or, if that is not feasible, by the start of the 2024 filing season.

Barcoding has been in use for decades by state revenue agencies. After Collins issued the TAD, members of the Senate Finance Committee also wrote Rettig urging its adoption.

The IRS's response, dated July 18 and signed by Douglas W. O'Donnell, deputy commissioner for services and enforcement, and Jeffrey J. Tribiano, deputy commissioner for operations support, described three scanning pilot programs the Service has undertaken and noted that it has also further expanded e-filing. The deputy commissioners said, however, that they "will not implement any single option until we are confident in the delivery of that option."

Therefore, they said, they were "revoking" Collins's TAD with respect to implementing scanning technology on the timetable she set and modifying it with respect to working with the software companies, with which it would "engage" and "report back to you with the results."

Their goal, they said, was to "accelerate" one of the pilot programs to scan certain tax year 2022 returns, those the memo called "V-coded returns." In this system, a taxpayer prepares a return using software and prints and mails it to the IRS.

As of the memo's writing, however, the V-code pilot program, involving scanning by a vendor, had not been universally successful.

"Our experience to date has been mixed, and we continue to work with vendors to improve the likelihood of successful, error-free processing of tax returns," the deputy commissioners wrote.

A second pilot involves having Treasury's Bureau of the Fiscal Service scan payroll tax returns, with the result that the IRS will begin scanning and e-filing a portion of these returns this month and work toward a larger portion in 2023. The third involves two relatively uncommon forms: Form 8918, Material Advisor Disclosure Statement, which the IRS released a barcoded version of in late 2021, and Form 8886, Reportable Transaction Disclosure Statement, which it plans to release this month.

In her appeal, Collins noted that the response did not commit the IRS to implementing scanning to machine-read V-coded returns and rejected doing so with respect to handwritten returns. Nor did it specify a percentage of 2022 returns it would scan.

And her reasons for directing the IRS to implement the technology remained, she said. These include return processing delays of 10 months or more and resulting inconvenience and frustration for affected taxpayers, especially the approximately three-quarters of taxpayers who anticipate refunds.

Collins recalled Rettig's own expressed intention to clear a return processing backlog by the end of 2022. She noted that, despite IRS administrative changes to speed up processing, "there remains a significant imbalance between the number of paper-filed returns the IRS must process and the IRS's processing pace."

In the blog, Collins pointed out that the IRS carried over a backlog of 4.7 million paper-filed individual returns from 2021 into 2022, which it was able to clear only in June this year. With a projected 13.2 million more to be received during 2022, plus 4.2 million amended returns, the IRS "will have to … almost triple its pace during the first half of the year" to meet its goal.

"While we all hope the IRS can work through the backlog this year, I often say that hope is not a business plan," she wrote.

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.

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