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This is Part Three of a blog series on IRS Processing and my recent experience at the IRS’s Kansas City campus, where I had the privilege of working alongside mailroom employees. We posted Parts One and Two last week. On reflection, not only was I fortunate to meet so many wonderful and dedicated people working to assist taxpayers, but I was also able to personally observe the overwhelming amount of paper through which the IRS must work. Seeing seemingly endless carts of paper while knowing that documents buried within those carts represent delayed refunds for millions of taxpayers in need is beyond difficult for our employees. This blog provides updates on the IRS’s progress in working through its paper backlog.
Near the end of October, more than 164 million individual tax returns were filed (92 percent filed electronically), and nearly 109 million refunds were issued totaling nearly $345 billion. Tax refunds are a lifeline for some taxpayers and important for almost all. Some taxpayers will use refunds to care for their families or just to meet basic living expenses. Others will use refunds to pay employees or keep their businesses operating. To state the obvious, the 2022 filing season was another frustrating one for taxpayers, tax professionals, and the IRS. Because the book on the 2022 filing season is long and reads similarly to the previous couple of filing seasons in terms of delays, here is how the book’s back cover summary might read:
Millions of taxpayers continued to endure unreasonably long refund delays, as the IRS administered another filing season while simultaneously trying to catch up on its backlog of work carried over from the previous year. Paper remains a serious problem and is its Achilles heel. The IRS is getting closer to meeting its objectives, but unfortunately, millions of individual and business returns still await processing, millions more have been pulled out due to errors or discrepancies that must be addressed, and millions of amended returns and correspondence are still awaiting processing. For some, this filing season may have felt like Groundhog Day. We will soon find out whether the upcoming filing season adds a similar chapter to this series or whether the IRS can work through its backlog, process tax returns and correspondence quickly, and answer its phone calls at a level that substantially improves the taxpayer experience during the next filing season.
Because of how the IRS tracks data, the more useful way to view inventory levels is to look at the calendar year when the IRS received the tax return from the taxpayer, not the tax year for which the return is filed. Using the calendar year of receipt tells us how many returns the IRS received during a definitive timeframe and, importantly, how many are carried over to be worked the next year. The IRS had its calendar year (CY) 2022 inventory backlog down to under eight million individual and business paper returns in need of processing as of October 21, whereas it had about seven million CY 2021 individual and business paper tax returns in its inventory around this same time last year. However, with around six million CY 2022 tax returns held in suspension in need of error correction or employee involvement before processing can be finalized, the IRS finds itself with about 400,000 more tax returns held in suspension for special processing in comparison to this time last year. So, numerically the IRS is in about the same place that it was around the same time last year.
However, the IRS deployed additional resources to address the processing backlog this year and aims to be “healthy” by year-end. In recent weeks, the IRS has been processing between 900,000 to 1.1 million total individual and business returns per week and has about six weeks left before it shuts down its systems to prepare them for the upcoming filing season. The key question is how the IRS defines “healthy?”
I look at the numbers and see millions of taxpayers that are still waiting for their returns to be processed. As of October 21, the IRS had about three million individual returns and north of four million business returns awaiting initial processing, as well as about two million amended individual and business returns. In total, it has over 6.3 million returns in suspense, with about two million in unpostable status, 1.1 million processing rejects, a half-million in error resolution, and nearly three million still waiting to be worked for potential identity theft. Most math errors involved reconciliation of the Recovery Rebate Credit or the Child Tax Credit, and through October 10, the IRS had sent nearly 14 million notices mostly concerning those issues. Regardless of the IRS’ definition, none of the above taxpayers will see the IRS as “healthy” until their return is worked.
The IRS regularly updates information on its public webpage, IRS Operations During COVID-19: Mission-Critical Functions Continue, to provide taxpayers with general information concerning service delays, of which the delays include live phone support, processing paper tax returns and taxpayer correspondence, and reviewing tax returns. As of November 7, 2022, the IRS states it is:
…opening mail within normal time frames, and we’ve processed all paper and electronic individual returns in the order received if they were received prior to April 2022 and the return had no errors or did not require further review.
That means individuals who filed paper Forms 1040, U.S. Individual Income Tax Return, have now been waiting nearly two-thirds of a year to receive their refunds. Individuals who filed returns that were not error-free or that required review may have been waiting even longer. The IRS had north of three million unprocessed individual tax returns that require IRS employee involvement.
As noted, many individual taxpayers have had their refunds delayed for extended periods of time. Some are even still waiting for pandemic relief benefits as the IRS continues to review and process unemployment compensation exclusion corrections and systemically issue corresponding refunds and notices to taxpayers on tax year 2020 returns. As I touched on in Part One, the exclusion required a tremendous amount of necessary yet unexpected duplicative work on millions of tax returns.
The IRS is also delayed in processing individual amended returns and currently says it may take more than 20 weeks to process them. It doesn’t provide a maximum number of weeks, and many taxpayers have been waiting much longer than 20 weeks. As of October 21, the IRS had 1.3 million unprocessed individual amended returns.
Likewise, business taxpayers are continuing to feel the strain of delays in IRS processing. Some business taxpayers are still waiting for pandemic relief benefits, as the IRS has over 250,000 unprocessed Forms 941-X, Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund, in its inventory. Unfortunately, some cannot be processed until the related Form 941, Employer’s Quarterly Federal Tax Return, is processed first, and as of November 2, the IRS still had about 2.5 million Forms 941 in its inventory awaiting processing. I suspect a large portion of the Form 941-X amended returns relate to the Employee Retention Tax Credit authorized by the Coronavirus Aid, Relief, and Economic Security (CARES) Act (2020) and extended by the Consolidated Appropriations Act (2021). Other taxpayers are still waiting for tentative refunds claimed on Forms 1139, Corporation Application for Tentative Refund, or Forms 1045, Application for Tentative Refund, to be processed. These forms generally were filed many months ago to carry back losses to generate refunds.
There will always be a need for the IRS and taxpayers to correspond together. The conundrum is that taxpayers mostly respond via the only method the IRS usually offers, regular mail – and paper is constantly flowing in. Even though the IRS may be opening mail within its normal timeframes, it’s important to keep in mind that responses are not likely to be timely processed. Currently, the IRS has about 4.5 million pieces of correspondence awaiting processing. Notably, many of these documents are scheduled to be worked by the customer service representatives (CSRs) who split their time during the filing season between answering phones and processing amended returns and correspondence.
Paper. Although the IRS has committed to clearing the paper backlog by the end of the year, there is little time left on the clock. A swift reduction in paper provides the only hope for accomplishing that lofty goal. Scanning technology would help drastically and would provide cause for optimism. To press the IRS to accelerate the development and implementation of scanning technology, I issued a Taxpayer Advocate Directive (TAD) to the IRS Deputy Commissioners in March, and I appealed their response to the Commissioner in July. I have posted my TAD, my appeal, and the two responses on my March 30, 2022 blog and my August 4, 2022 blog.
I am hopeful that the IRS will initiate scanning next filing season and by 2024 will have established a scanning process for all paper returns. It is my understanding the goals for next filing season will be to process refund returns first and to start scanning some returns for uploading into its system. If the IRS can do this, it will be good news for taxpayers awaiting refunds. Although good news, my concern is the IRS will need to process the carryover returns first and therefore, it must put the backlog behind us once and for all.
Because CSRs divide their time between two key roles during the filing season: (1) answering calls on the toll-free line and (2) assisting with processing amended returns and taxpayer correspondence, the more time spent working one means less time spent working the other. In addition, the IRS will soon pull many seasoned CSRs offline before the beginning of the next filing season to provide training for new hires and updates for existing CSRs and, albeit short-term, that will further strain limited resources. It is well-known the percentage of calls the IRS answered prior to the COVID-19 pandemic was already unacceptably low, and with the high volume of calls the last couple of years, the percent of phone calls answered has plummeted even lower – around ten percent.
TAS has historically recommended the IRS improve telephone customer service levels to reach an 85 percent level of service for answering calls, and the IRS has stated it will seek to achieve that level of service during the 2023 filing season. While that commitment should feel like good news, I am concerned about the collateral effects of the potential sacrifices the IRS may have to make to achieve that goal. Logically, to achieve an 85 percent level of phone calls answered, the IRS will have to assign most or even all CSRs to answer phone calls. Remember, time CSRs spend answering phone calls means time CSRs are not spending on their other key filing season role: processing amended returns and correspondence. Taxpayers, many quite literally, cannot afford to have the IRS take steps that have potential for increasing or creating a new paper backlog.
Answering taxpayer phone calls and processing tax returns and correspondence are two core aspects of the IRS mission that it must be able to handle. However, the IRS must continue to learn from the lessons of past filing seasons to improve taxpayer service, avoid causing self-inflicted challenges, and not aim to achieve the highest level of phone service if it comes at a cost of creating paper backlog. Although it will result in fewer calls being answered in the short term, I recommend that CSRs rotate between both key roles during the 2023 filing season to provide the best possible service for taxpayers in the long term. I believe we all share the goal of a fully staffed and modernly equipped IRS that operates with 21st century technology and efficiency.
As the National Taxpayer Advocate, I want the best possible service for taxpayers and will continue to provide my input as the IRS creates its Operational Plan with the increased funding provided by Congress under the Inflation Reduction Act (IRA22).
The views expressed in this blog are solely those of the National Taxpayer Advocate. The National Taxpayer Advocate presents an independent taxpayer perspective that does not necessarily reflect the position of the IRS, the Treasury Department, or the Office of Management and Budget.