Millions of tax returns from the 2020 filing season still awaited processing by late that year, hampering 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) said in an audit report.
The report, Results of the 2021 Filing Season, issued last week warned that the backlogs could continue to snowball unless the Service took "unprecedented steps" to address them. TIGTA made 10 recommendations toward remedying problems it identified in the IRS's processing of returns, interactions with taxpayers, and implementation of tax law changes during 2021, all of which the IRS agreed to undertake.
The IRS estimated as of Dec. 25, 2020, that it had more than 11.7 million still-unprocessed paper-filed individual and business tax returns to carry over into the next filing season, TIGTA noted. That included about 3.54 million original individual paper returns, which was more than 19 times the 183,000 individual paper returns still awaiting processing on Dec. 28, 2019. Increases of over 1,200% above 2019 levels also were registered for amended returns and e-filed but rejected returns awaiting resolution. These differences, as well as backlogged correspondence and other work that wound up being carried over into 2021, largely reflected the IRS's woes in recovering from the COVID-19 pandemic, "and will continue to have a significant impact on the associated taxpayers," the report stated.
Exacerbating the accumulation of unfinished work was the Service's inability to meet its goals of hiring new staff, TIGTA reported. This difficulty was particularly acute in its submission processing functions directly responsible for handling most returns.
TIGTA noted that the IRS has undertaken new hiring initiatives and strategies but said these have not succeeded in filling its hiring gap, which will "continue to result in millions of tax returns not being timely processed, refunds not being timely issued, and taxpayers not timely receiving assistance with their tax account issues." It was not immediately clear whether that assessment takes into account a plan the IRS announced, also last week, to fill 5,000 positions in its service centers using an expedited federal hiring protocol.
In assessing the IRS's customer service during 2021, TIGTA noted that the IRS had set a goal for fiscal 2021 to hire 5,000 new employees, 4,000 of whom would be trained to answer toll-free telephone calls. However, less than two months into the fiscal year, the IRS cut that number to 3,100, citing fewer applicants than expected and delays in fingerprinting and processing them. As of Jan. 20, 2021, the Service had hired nearly 3,000 additional staff to answer toll-free telephone calls and did not intend to hire more, TIGTA reported.
Tax law changes
TIGTA also analyzed the IRS's performance in administering several tax law changes providing pandemic relief: the ability of taxpayers to use tax year 2019 earned income in computing 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 in 2020 for taxpayers with less than $150,000 in modified adjusted gross income (MAGI); and issuing two rounds of economic impact payments (EIPs).
Of the latter, TIGTA reviewed 8.3 million of the more than 13.5 million EIPs worth $6.3 billion and concluded that "the payments were accurate."
Taxpayers' reconciliation of the EIPs with any recovery rebate credit claimed on their returns, however, was often inaccurate, TIGTA reported. The IRS sent more than 42% of returns claiming a recovery rebate credit to its error resolution function because of discrepancies between the EIP amount reported by the taxpayer on the return and that in the IRS's records. There, these returns languished in many cases, with more than half a million still pending as of Sept. 2, 2021. Part of the problem was that resolving the error generally required manual review by a tax examiner and correspondence with the taxpayer.
A similarly thorny administrative problem was the election by taxpayers to use 2019 earned income to calculate their EITC and/or ACTC. As of May 27, 2021, of nearly 26 million e-filed returns claiming an EITC or ACTC, taxpayers in nearly 14% of those returns made the election, for EITCs totaling more than $8 billion and ACTCs totaling more than $5.1 billion.
The majority of these were calculated and allowed by the IRS correctly, TIGTA determined. However, in 191 cases, tax examiners entered incorrect amounts that inflated ACTCs from the correct amounts totaling about $350,000 to 10 times that figure, $3.5 million. The magnitude of the mistake was compounded by the fact that in a December 2020 audit report, TIGTA flagged the same type of error and recommended processes and procedures that would limit entries in these fields to statutory amounts, which the IRS said then that it would address through programming controls. The IRS again agreed to the recommendations, which it said it implemented for the 2022 filing season.
TIGTA alerted the IRS in May 2021 that its analysis of returns filed by April 22, 2021, found that 4,838 returns reduced or excluded unemployment income despite having a disqualifying MAGI of more than $150,000. The IRS replied that its systems' programming was unable to make a connection between unemployment compensation reported on a return and income reported on the line for "other income," TIGTA said. On the 2020 Form 1040, U.S. Individual Income Tax Return, this was line 8, importing a total from Part 1 of Schedule 1, Additional Income and Adjustments to Income, on which unemployment compensation was reported. In other words, the IRS could not distinguish unemployment compensation from other types of income reported on line 8.
"IRS management indicated that the errors identified are the inevitable result of late legislation," TIGTA said. "Tax laws changed after the filing season began, and programming in place could not confirm taxpayers' compliance with the changes."
TIGTA compared the IRS's performance in answering toll-free telephone calls in calendar 2021 (as of May 28) with the year before (as of May 29). The volume of call attempts (including those after business hours) burgeoned from 74.1 million in 2020 to 185 million in 2021. The number of assistor calls answered also rose, but by less, from 6.6 million to 11.4 million, and automated calls answered increased only slightly, all contributing to a degradation in the level of service from nearly 60% in 2020 to 15.5% in 2021. The average speed of answer rose from 12 minutes to 19 minutes.
Online visits to irs.gov increased by 14% (as of the week ending May 29 for both years), but uses of two dedicated online tools, Interactive Tax Assistant and Tax Withholding Estimator, decreased. Uses of "Where's My Refund?" were 15.6% higher, increasing from 431.4 million in 2020 to nearly 498.9 million in 2021.
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.