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‘They went down hard’: IRS’ tax season woes rooted in pandemic, long funding slide

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Missing refunds. Angry members of Congress. Thousands of unanswered phone calls.

Welcome to the 2022 tax filing season.

The IRS is a huge mess this year, thanks to a pandemic that is entering its third year, a decade of budget cuts and out-of-date technology.

“They’re thinly strapped,” said former IRS commissioner Mark Everson.

“Then you have the pandemic itself, and what happened is they went down early and they went down hard, and they haven’t come back,” he said.

Millions of taxpayers are still awaiting refunds from last year, part of a paperwork pileup that the agency is struggling to get a handle on. Veteran IRS workers have been reassigned to mail duty and the agency is about to go on a hiring binge to reduce the backlog.

Taxpayers caught up in the bureaucratic mess have faced roadblocks for mortgage applications and other types of consumer borrowing like car and college loans, tax preparers say, since lenders often require borrowers to submit their latest tax returns to prove their incomes and job status.

As many taxpayers take a hit to their pocketbooks and others worry about what awaits them this filing season, scores of lawmakers are badgering the IRS on behalf of constituents they’ve been hearing from for almost two years.

They jawboned the IRS into cutting the number of automated collection letters being sent to taxpayers, often in error. But the agency has resisted calls for bolder action like suspension of fines.

“While this was welcome news, there is a continued risk that low- and middle-income filers will receive confusing notices while they wait for IRS to process their correspondence or returns,” said Rep. Linda Sánchez (D-Calif.). “At this time, we need more clarity into which additional notices the IRS plans to suspend as well as those it does not have the authority to suspend so that Congress can work with the Department of Treasury to provide further relief where needed.”

Even deficit hawks are calling for an infusion of money for the agency to deal with its near-term problems, though congressional Republicans have shown little willingness to go along.

How we got here:

At the onset of the pandemic in March 2020, the IRS temporarily shut down its offices and processing sites — causing disruptions in a workflow that has yet to return to normal.

In a typical year, more than three-quarters of individual and household filers get refunds that average more than $2,000. But in many cases, refunds due in 2021 haven’t been issued yet because returns filed last year haven’t been fully processed.

Thousands of businesses are in the same boat, including some who are still awaiting emergency pandemic-related economic aid approved in March 2021 in President Joe Biden’s American Rescue Plan legislation.

Amid those struggles, Congress heaped a range of extra responsibilities on the IRS to help deliver pandemic relief, well beyond the agency’s core revenue collection mission.

Everson said the agency capably distributed pandemic relief like stimulus payments and monthly Child Tax Credit payments. But those extra obligations diverted some technical processing and management resources.

The IRS remained well behind the ball entering this year’s filing season, which started Jan. 24.

“Too many of their people are still working from home,” Everson said.

Some 53,000 IRS employees are still on remote work — about two-thirds of the agency’s workforce, which an IRS spokesperson characterized as “a maximized telework posture.”

But privacy rules prevent remote processing of the millions of paper tax returns mailed to the IRS, as well as the examination of returns with discrepancies from IRS records, the issuance of refunds and dealing with other taxpayer mail. Some taxpayer advocates are urging a full return to offices for IRS employees, in part to address the backlog more efficiently.

Numbers to chew on:

The accumulated work awaiting processing includes at least 10 million individual tax returns, 4 million business tax returns and about 8 million additional pieces of mail in a category that includes taxpayer responses to IRS letters that many erroneously received.

Among those waiting are tens of thousands of businesses that have yet to get special tax credits Congress created for pandemic relief, including a break for keeping employees on their payrolls during the economic downturn. Leaders of the National Restaurant Association recently told Treasury Secretary Janet Yellen and IRS Commissioner Chuck Rettig that 83 percent of respondents to a poll by the group said they hadn’t received any funds despite applying for the credit more than six months ago.

The delays compound the very cash flow problems the credit was meant to help businesses avoid.

To apply, companies had to file amended returns on paper, which the IRS said are being worked on at two sites by specially trained staff. But the situation could have been handled better, according to Roger Harris, president of a small business accounting firm called Padgett Business Services that has clients still waiting on millions of dollars worth of claims.

Harris said tax preparers suggested the IRS open a special P.O. Box for business taxpayers filing for the employee retention credit but that never happened.

Flashing lights ahead:

This year’s tax filing season runs through April 18 for most taxpayers, and Treasury Department officials warned beforehand that taxpayers should expect more frustrations than usual.

Questions about claiming the Child Tax Credit and other uncertainties are likely to prompt more calls to the IRS this year, but its phone service is running at far lower levels than normal. Call volume nearly tripled and only 11 percent of callers connected with a customer service representative in 2021, according to the IRS’ National Taxpayer Advocate office.

IRS leaders expect the agency to receive more than 160 million individual income tax returns this year after getting close to 170 million each of the past two years. (The number often fluctuates from year to year.)

The IRS has processed 43.8 million individual income tax returns of the 45.4 million it received through the week ending Feb. 25, the most recent period available. About 30 million refunds worth $3,473 on average were issued in the same time frame, mostly by direct deposit, and refunds will jump in coming weeks after the IRS releases claims for the Earned Income Tax Credit and Child Tax Credit.

Requesting refunds via direct deposit is among three leading recommendations by IRS and Treasury officials to help taxpayers. They’ve also urged accurate, electronic filing to help taxpayers stay out of paper processing, though some 10 percent of taxpayers have continued filing paper returns. Processing paper returns is labor-intensive for IRS workers, who also must contend with e-filed tax returns flagged for errors that require manual review.

National Taxpayer Advocate Erin Collins is pressing for more use of scanning technologies commonly used by banks and other financial companies to help speed paper processing. To date, the IRS has only used scanning in limited situations.

Trying to relieve pressure:

Democratic and Republican lawmakers began taking notice of the issue in the second half of 2020, when the pileup first started, and their scrutiny has increased lately as constituent complaints have surged.

Hundreds of members on both sides of the aisle have signed letters pushing the IRS to clear the backlog and let taxpayers off the hook for penalties, fines and interest they’ve incurred because the agency has yet to process material they sent in on time. Tax preparer organizations also have petitioned the IRS for such relief.

But Rettig has so far resisted blanket penalty relief, though he’s told Congress some targeted reprieves are under consideration.

Meantime, the IRS has taken several other steps to help reduce the backlog. In a Feb. 7 letter to House Speaker Nancy Pelosi , Rettig said the IRS is committed to returning inventories “to a healthy level before entering the 2023 filing season.” In normal times, the backlog runs less than a million.

The agency has stopped sending millions of automatically generated letters that tell individual and business taxpayers they’re late in filing returns or making payments, which should keep recipients from mailing back responses and adding more paper to the pile.

Taxpayer service sites nationwide, which are typically only staffed Mondays through Fridays, are now open on weekends too.

Rettig has also begun shifting 1,200 workers from their current jobs to deal with the backlog and the agency hopes to bring 10,000 new employees aboard through 2023.

But union leaders representing IRS workers as well as the head of an IRS managers’ group have warned that concentrating on the mail backlog will likely disrupt other agency functions by creating new vacuums until workers get off the backlog duty.

Longer-term problems:

Rettig has said the IRS is in this position because the agency hasn’t gotten sustained, multiyear funding needed to improve its technology and operating systems, and he has championed Biden’s $80 billion funding increase for the IRS over the next decade.

Most of the proposal is tabbed for enforcement and less for service, though.

Fundamental troubles at the IRS go back to the early 2010s, the start of a 10-year period in which the IRS budget was slashed by 20 percent and its personnel headcount also plunged by about 20 percent while work demands have risen. Those challenges are magnified by the outmoded technology that underpins IRS operations — a setup largely held together by belts and suspenders, Collins recently testified on Capitol Hill.

Following the disclosure in 2013 that the IRS targeted tax-exemption applications by conservative groups for stricter scrutiny than others, Republicans in Congress spearheaded punishing budget cuts to the agency. Now Republicans are leveraging the backlog to try to politically damage Biden and Democrats in Congress.

“The IRS is finally recognizing that this historic backlog is not due to a lack of funding, but due to its neglect in using the tools it has,” said Rep. Kevin Brady (R-Texas), the GOP’s top Ways and Means Committee member, after word surfaced on the latest IRS hiring plans, which would use extra funds for the agency Congress approved a year ago.

The prior funding and headcount drops have led to a plunge in IRS audits for several years, particularly for higher-income taxpayers, and in far-reaching service woes like the difficulties taxpayers face in reaching IRS representatives by phone.

“Before any of us ever knew what Covid was, many of us had concerns about the IRS, its ability to effectively do their job,” said Harris of Padgett Business Services. “Because they were dealing with budget restraints, technology restraints and people restraints.”

Deeper trouble awaits if nothing changes, warned Everson, who’s now vice chair for the tax consulting firm alliantgroup.

“Millions of people sent in tax returns and they haven’t gotten their refunds,” he said, “and that cannot do anything except erode compliance and, furthermore, damage faith in government as a whole.”

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