While the pandemic and law changes were primarily responsible for the IRS's inability to meet timeliness standards for the majority of taxpayers' cases last year, inefficiencies in staffing, equipment, and procedures also contributed to the lag, the Treasury Inspector General for Tax Administration (TIGTA) said in an audit report.
The report, titled Program and Organizational Changes Are Needed to Address the Continued Inadequate Tax Account Assistance Provided to Taxpayers (Rep't No. 2022-46-027), focuses on the IRS's Accounts Management operation, which is responsible for processing returns and taxpayer correspondence. As of the end of the April to November 2021 audit period, the IRS had 7.8 million cases in Accounts Management, 56.8% of which were overaged, meaning they were past the 45-day processing period from receipt after which, for a return, interest is generally payable to the taxpayer on any refund or credit due.
Systemic problems in Accounts Management, TIGTA said, included that the majority of its personnel split their time between working cases and answering toll-free telephone calls.
Another factor in the backlog was that much of Accounts Management's mail is received by the IRS's centers where returns are also processed, which lengthens the time for it to be ultimately scanned into a computer system by 53 days more than if it had gone to one of Accounts Management's own campus support sites, TIGTA said. Redirecting the mail accordingly would also help free the return processing centers to more quickly perform their main function. More than 14.6 million returns were awaiting processing on Nov. 20, 2021, TIGTA reported.
Amended returns and carryback claims
In an appendix, the report detailed the types and ages of cases Accounts Management held as of Oct. 30, 2021. The largest type by both volume and overaged percentage was amended returns and forms related to a carryback claim, such as resulting from a net operating loss. Of these nearly 2.3 million items, 73.7% were overaged, TIGTA found. After that in volume was general correspondence from taxpayers, including responses to IRS notices and letters. Of these 1.9 million items, 45.6% were overaged.
Many of the amended returns were filed to take advantage of pandemic-inspired taxpayer relief new law provisions, TIGTA noted, including the carryback claims. The employee retention credit, for example, was created by the Coronavirus Aid, Relief, and Economic Security Act, P.L. 116-136, to provide an employment tax credit for employers carrying on a trade or business that experienced a 50% decline in gross receipts during a quarter in 2020 from the same quarter in calendar 2019 or that fully or partially suspended operations due to orders from a government authority. Because the Consolidated Appropriations Act, 2021, P.L. 116-260, retroactively modified the 50% decline in gross receipts to 20%, many employers filed one or more amended returns, Form 941-X, Adjusted Employer's Quarterly Federal Tax Return or Claim for Refund.
And while a retroactive measure by the American Rescue Plan Act, P.L. 117-2, that excluded up to $10,200 in unemployment compensation from income of taxpayers with modified adjusted gross incomes under $150,000 was largely handled by the IRS without those taxpayers having to file an amended return, some affected taxpayers did have to file Form 1040-X, Amended U.S. Individual Income Tax Return, to claim a tax credit that they became eligible for as the result of the unemployment exclusion, TIGTA noted.
Processing these amended returns (including some unrelated to the special provisions) was among the tardiest of Accounts Management's tasks, TIGTA found. Its inventory held 708,251 Forms 1040-X, of which 79% were overaged as of Nov. 27, 2021, and 411,610 Forms 941-X, of which 91% were overaged as of Nov. 30, 2021. Interest paid on the two forms combined totaled $166.4 million as of Aug. 26, 2021.
"We anticipate that the IRS will pay significantly more interest on Forms 1040-X and 941-X claims given the number of returns remaining to be processed," TIGTA said.
TIGTA recommended that the IRS dedicate adequate staffing to separate assignments of answering the phones or working the Accounts Management caseload, to which the IRS agreed. Segregating those duties as of March 2021 could have enabled Accounts Management to clear its entire inventory by the beginning of October last year, TIGTA estimated.
Inadequate equipment also impeded timely processing, TIGTA found. For example, the IRS for the most part is unable to directly import a faxed document from a taxpayer into its computer systems but must print it out and scan it (it also generally scans all paper correspondence received). IRS managers in response to TIGTA's recommendation asked the Service's information technology office last October to implement an electronic connection for faxes, but as of early January this year, the technology had not been implemented, TIGTA reported.
Scanners also were not always deployed efficiently and generally lacked sufficient processing capacity, TIGTA reported.
In addition to recommending that taxpayer correspondence be received at Accounts Management's campus support sites, TIGTA recommended that the IRS develop and implement ways for taxpayers to correspond with the IRS electronically, including uploading documents directly.
"This could provide taxpayers instant confirmation that the IRS has received their documents and reduce the time it takes for the correspondence to reach Accounts Management," TIGTA said.
The IRS agreed with this recommendation and noted it has used electronic taxpayer communications in pilot programs.
TIGTA noted, however, that, while the IRS plans to expand such abilities under its Taxpayer Experience Strategy, that initiative "is being implemented for IRS enforcement functions first, and as of December 13, 2021, there is no planned date for implementation within Accounts Management."
Other recommendations focused on oversight and recordkeeping, including changes needed for the IRS to accurately know how much of its Accounts Management inventory is held at each of its sites, due to inconsistencies in how each site prepares its inventory report.
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.