Tax Advocate points out IRS filing season problems

NTA Blog: 2021 Filing Season Bumps in the Road: Part I

The National Tax Advocate (NTA) has pointed out IRS’s problems in processing tax returns this filing season and in communicating to taxpayers the status of their returns. It has also made suggestions for improved communications.

Problems processing tax returns. The NTA notes that there have been larger-than-usual processing delays and attributes this situation to a combination of the high volume of 2020 tax returns requiring manual processing, the backlog of unprocessed 2019 paper tax returns, congressional mandates to issue economic impact payments (EIPs) and provide other relief to taxpayers during the pandemic, limited resources, and technology issues.

Some new complexities this year necessitated manual reconciliation of returns, slowing down processing times. For example, any inconsistencies between IRS’s records for the EIP and the recovery rebate credit (RRC) reflected on a taxpayer’s 2020 Form 1040 or Form 1040-SR, U.S. Tax Return for Seniors, require manual review and corrections before processing. And the Consolidated Appropriations Act, 2021 included a lookback rule allowing taxpayers to elect to use their 2019 income for the purpose of calculating their Earned Income Tax Credit (EITC) or Additional Child Tax Credit (ACTC) on their 2020 tax return. A manual review of a tax return is also required if the taxpayer elected the 2019 “income lookback” to calculate the EITC or the ACTC.

Any corrections to the RRC or verification of the 2019 lookback election are being manually processed by IRS’s Error Resolution System (ERS) unit, and IRS is placing the associated return in “suspense” until an IRS employee can review it to verify the 2019 income or the prior EIP. Essentially, the return is in a queue waiting to be reviewed and processed, and during this time, it is not evident on IRS systems why the return is being held.

Holding returns has resulted in a significant increase in ERS inventory and delays in taxpayer refunds. As of the week ending April 9, 2021, more than eight million individual returns (Form 1040 or 1040-SR) were in suspense status awaiting review and manual processing. For context, during a normal filing season when the ERS unit is fully operational, it does not suspend returns, as it is able to review and process them as they come in.

In addition to the eight million returns of individuals in the IRS ERS unit, there were millions of other returns in other IRS units also awaiting manual processing:

• 5.3 million individual 2019 and 2020 paper returns;
• 4.7 million individual returns with processing errors or fraud identification issues requiring responses from taxpayers; and
• 11 million business and other returns.

In total, IRS was holding over 29 million returns for manual processing. As one would expect, IRS employees are stretched thin working through the manual processing of these returns, so if a taxpayer’s return is pulled for manual processing, there will be delays.

Problems in communicating to taxpayers. IRS has advised taxpayers to check the status of their refunds by using the Where’s My Refund? tool on IRS.gov or on the IRS2GO app on their smartphones. The NTA says that the usefulness of this advice is limited, since these tools only tell taxpayers that their return is being processed but fail to provide any details as to whether they need to provide additional information or when the refund will be released.

Many frustrated taxpayers may attempt to call IRS for a status update on their tax refund. This filing season, IRS has seen an increase in calls to its Accounts Management (AM) toll-free lines of over 300%. As of April 10, 2021, IRS employees have answered about 2% of the roughly 70 million taxpayer calls to IRS’s 1040 telephone line, and IRS has reported an official “Level of Service” of 5%. In other words, only about one out of every 50 calls has gotten through to a telephone assistor, and the taxpayers who managed to get through have waited on hold an average of 20 minutes.

To date, the 1040 toll-free line accounts for about 60% of the incoming AM calls. Overall, IRS has received about 115 million calls on its AM lines; employees have answered approximately 7% of all such calls, and IRS has reported an official “Level of Service” of 14%. If a taxpayer is one of the lucky ones to get through, it’s unlikely the assistor can provide much useful information regarding the reason for the delay because IRS systems don’t identify why the return needed manual intervention by an ERS employee.

Similarly, Taxpayer Advocate Service employees are frustrated as they cannot identify the potential problem with the return or how they can best assist the taxpayer, leaving both the employee and the taxpayer with unanswered questions.

Suggestions for improving communications. The NTA says that even if the delays are unavoidable, there are steps IRS can take to mitigate their impact. Most immediately, IRS can provide taxpayers with more specific information so they know what to expect and, where possible, they can make adjustments to manage their finances. Specifically, to ease taxpayer concerns, IRS should be more transparent and specific regarding the status of taxpayer refunds.

For example, IRS should directly inform taxpayers that if they claimed the RRC and the claim conflicts with IRS records, or if they used their 2019 earnings to calculate the EITC or ACTC on their 2020 return, their return will require additional review and manual processing, resulting in a refund delay. IRS should also provide information on the number of returns in backlog or suspense status and the anticipated timeframes for working through them, while acknowledging that the situation is fluid and the timeframes may change along with circumstances.

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