Tax return 'backlog is still crushing the IRS,' report finds

Too many Americans are still waiting for their tax returns to be processed, a watchdog for the Internal Revenue Service testified on Wednesday, a day after the agency provided a rosier view of its backlog.

“The IRS has said it is aiming to crush the backlogged inventory this year, and I hope it succeeds,” National Taxpayer Advocate Erin Collins wrote in her mid-year report to Congress. “Unfortunately, at this point the backlog is still crushing the IRS, its employees, and most importantly, taxpayers.”

The report found the IRS still needs to process 10.5 million individual paper tax returns as of May this year — both original and amended returns — compared with 8.8 million left unprocessed at the same time last year. The agency would need to process 500,000 returns per week to get through the backlog this year, the report estimated, or more than double the pace of 205,000 returns the IRS clocked in May.

The IRS pushed back on the report, noting the inventory numbers “are neither the most accurate nor most recent figures,” according to a statement from the IRS. “Newer numbers through June 10 demonstrate that the IRS is ahead of tax return processing compared to a year ago.”

Processing the backlog is paramount for many taxpayer families who may be owed a refund and need it in a “timely” manner, Collins said, noting that a significant majority of taxpayers receive refunds.

“Particularly for lower income taxpayers who receive Earned Income Tax Credit benefits, tax refunds may constitute a significant percentage of their household income for the year,” Collins said. “Thus, these processing delays are creating unprecedented financial difficulties for millions of taxpayers and outright hardships for many.”

The report’s findings come after IRS Commissioner Charles Rettig offered a more upbeat update on Tuesday, when he said the agency will complete processing all original individual tax returns received last year by the end of this week. Rettig noted that completed returns will only include those filed without errors.

“Business returns filed in 2021 will be completed shortly thereafter, and the IRS will continue to work quickly to resolve the few remaining 2021 individual returns that have errors,” Rettig said in a letter to the congressional tax committees this week. “Completing the individual returns filed last year with no errors is a major milestone, but there is still work to do.”

Due to severe staffing limitations and challenges related to the pandemic, the IRS entered this filing season with a historic backlog of 8 million unprocessed paper tax returns filed during 2021. While the IRS has taken several steps to address the paper jam, some taxpayers who filed last year will still have to wait some more before their returns are processed.

As of June 10, the IRS has processed more than 143 million returns received in 2022, providing over $298 billion in refunds to Americans nationwide. According to the agency, electronic returns have been processed quickly, on average within 8-21 days.

But anyone who filed a paper return this year could wait up to 10 months to see their tax refund, the National Taxpayer Advocate warned. Before the pandemic, it took the agency four to six weeks to process and send refunds to paper filers.

Last year, about 17 million Americans filed their returns on paper. The reasons are myriad. Some don’t have access to e-filing options, while others must file a tax form or schedule that the IRS can’t accept electronically.

“Despite the progress, there are real challenges ahead,” Rettig told lawmakers. “Returns are largely processed in the order they are received. Because the IRS entered this filing season with a significant backlog, millions of paper returns received in 2022 have not been processed.”

To address the backlog and return the IRS to healthy levels of inventory by the start of 2023, employees have been working around the clock. According to Rettig, submission processing workers responsible for processing original returns have recorded around 500,000 hours of overtime this year. The IRS also shifted 2,000 employees from other departments to help process returns.

But what constitutes a “healthy level of inventory” according to the IRS? Collins wrote that although the IRS has yet to provide a clear definition, from a taxpayer perspective – a four-to-six week refund delivery period can be a “reasonable definition of ‘healthy.’”

Staffing remains a big obstacle. The IRS’ workforce has been thinned out to 1970s levels and strained further by the pandemic, Rettig told lawmakers. But the problems could run deeper – according to the National Taxpayer Advocate – as the current base salary for IRS employees is $24,749.

“It’s not surprising that the IRS is having difficulty finding enough suitable applicants,” Collins wrote in an address to Senate in February.

In the last four months, the IRS also held nine recruiting events, issued 3,000 job offers, and onboarded over 1,500 new employees and thousands of additional contractors for support.

“What the agency requires to avoid a crisis like this in the future is sustained, multi-year funding to invest in overhauling antiquated technology, improving taxpayer service, and increasing voluntary compliance,” Rettig said.

The Biden Administration asked Congress for $80 billion in funding over 10 years to modernize the Internal Revenue Service on Tax Day this year. However, the push for funding has been in a state of limbo since.

Despite the steps the IRS has taken to address the backlog, National Taxpayer Advocate notes that there were “missed opportunities” to act sooner.

“Had the IRS taken steps a year ago to reassign current employees to processing functions, it could have reduced the inventory backlog carried into this filing season and accelerated the payment of refunds to millions of taxpayers,” wrote Collins.

Having had those tools ready for the 2022 filing system would have reduced the need for employees to transcribe tax returns and inevitably create “bottlenecks” in paper filed correspondence. While the IRS has made some headway in that department, by launching the IRS Pilot program to test solutions and digitize tax forms — more work needs to be done.

On average, it took the IRS some 251 days to process a taxpayer’s mailed responses to its correspondence, up from 74 days in 2019. While the IRS implemented chat bots to address phone inquiries — of the 73 million calls received, only 1 in 10 reached an IRS worker.

“Had the IRS quickly used some of the $1.5 billion of additional funds provided by the American Rescue Plan Act of 2021, which was enacted 15 months ago, to hire and train additional employees,” Collins said, “it would have worked through the backlog.”

Editor’s note: The original version incorrectly stated the number of paper returns in the IRS backlog, according to the Taxpayer Advocate report.

Gabriella is a personal finance reporter at Yahoo Money. Follow her on Twitter @__gabriellacruz.

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