The IRS National Taxpayer Advocate (NTA), Erin Collins, has a duty each year to submit to the Congressional tax writing committees a report listing the 10 most serious problems encountered by taxpayers. The report also makes administrative recommendations to alleviate these problems. While the IRS faced the same COVID-related challenges as every large organization or company, the IRS’s challenges were exacerbated by historically low staffing levels and an increase in the volume of returns to be processed. Amidst these challenges and during the regular filing season, the IRS had to implement new programs including several rounds of stimulus payments, Advance Child Tax Credit payments with an ‘opt-out’ portal, and automatic relief for taxpayers when Congress reduced the taxability of unemployment compensation. These additional responsibilities added to the delays and increased taxpayer frustration, which spilled over to an increased workload for the Taxpayer Advocate Service (TAS).
NTA identified the following problems and proposed certain recommendations to improve the taxpayer experience:
Processing and refund delays
As of mid-December, the IRS had 6.2 million unprocessed individual returns (Form 1040 for 2021) and 2.4 million unprocessed amended individual returns (Form 1040X). In addition to a tax return backlog, the IRS had not processed 4.75 million pieces of general taxpayer correspondence, which includes taxpayer responses to notices. Amended returns (Forms 1040X) were taking longer than 20 weeks to process instead of the usual 16 weeks. Forms 1045 and 1139, used for claiming a tentative refund relating to net operating loss carrybacks, by law have a 90-day processing period, but as of Dec. 21, the IRS couldn’t provide a timeline for what the processing time was for these forms. These unprecedented delays were mainly due to the pandemic legislation, which drove additional paper return filings. Congress enacted four major pieces of legislation to provide relief and stimulate the economy. The NTA recommends that the IRS create a dedicated team to process Forms 1139 and 1045 within 90 days of filing. Other recommendations include suspending all automated collections notices until the IRS is current on processing outstanding returns and improve online resources to provide taxpayers with specific information on the status of the refunds or reasons of delay.
IRS recruitment, hiring and training
The IRS has been severely understaffed due to complicated hiring processes, aging workforce and prior budget constraints. The NTA recommends that the IRS expedite hiring processes and develop training programs with the aid of outside accounting firms, law firms and other large organizations.
Telephone and in-person service
The IRS was only able to answer 11% of the calls received in 2021. The average wait time for calls was 23 minutes although through survey data tax practitioners reported wait times much longer with a low level of service and inexperienced representatives. The NTA recommends the implementation of callback technology with capacity across all telephone line departments that interact with taxpayers.
Transparency and clarity
With the increase in pandemic relief, the IRS saw an increase in traffic to its telephone lines and website. This increased traffic highlighted the IRS inability to provide timely and updated information to taxpayers. The IRS would often confuse and frustrate taxpayers by not providing the status of refunds and information on return processing. The NTA recommends that the IRS improve Where’s My Refund?, IRS2Go, and online accounts by providing specific information and in the cause of delay, estimated date on refund issue, and further action to take by taxpayer.
Filing season delays
In addition to implementing pandemic safety measures while trying to continue operations, the IRS had a substantial backlog of inventory carried over from the prior filing season. The postponed filing season deadline probably caused more problems with taxpayers than the intended relief of an extended due date. The delay caused confusion and diminished taxpayers’ trust in the tax system. The delay increased the number of returns that needed manual processing due to IRS system issues. The NTA recommends that the IRS set a goal of replying to notices within 45 days of receipt.
IRS online accounts were designed to focus on payments and compliance as standalone portals with no links to perform more complex tasks. Online accounts also focus on individual taxpayers and the IRS does not provide robust online access for business taxpayers. For example, online accounts do not provide a mechanism with which a taxpayer could upload correspondence or chat with a representative. The NTA recommends that the IRS update accounts to give tax practitioners the ability to upload documents and request transcripts on behalf of clients.
The experience of the pandemic has taught the IRS the importance of enhancing a means to communicate digitally. In-person communication was a difficult means of communication with COVID-19 restrictions. Overall communication with the IRS seemed impossible with long wait times and lack of call back technology. The digital communication currently offered to some taxpayers and tax professionals is limited and not allowed to everyone. The NTA recommends expanding these digital communication tools to ease the burden of relying on in-person telephone calls or meetings to resolve issues.
The IRS Modernized e-File (MeF) still does not accept some returns that are not compatible with its antiquated system. Millions of returns were rejected by the IRS’s software which added to the number of paper returns the IRS received during 2021. The NTA recommends that the IRS evaluate the need to reject returns and update its system to provide more approvals of electronically filed returns.
A large number of examinations conducted by the IRS are dependent on correspondence audit procedures. In a correspondence audit, a taxpayer receives computer generated mail that the IRS believes can resolve the case with little or no human intervention. Data has shown that this method of correspondence audit has the highest volume of no-response rates.
The IRS fails to properly identify low-income taxpayers and present collection alternatives for financially struggling taxpayers. The NTA recommends the IRS defer collection activity for a short period of time while waiting on a taxpayer’s correspondence or amended returns being processed.
The IRS’s delays frequently result in various tax controversy issues that taxpayers may need Tax Controversy professional’s advice. Please contact the drafters of this tax alert if you require assistance with any of issues outlined above.