IRS watchdog ‘deeply concerned’ about upcoming filing season

National Taxpayer Advocate Erin M. Collins, head of the IRS’s in-house watchdog, shared concerns about the upcoming filing season in releasing her office’s recent report detailing the major problems that plagued millions of taxpayers last year.

“There is no way to sugarcoat the year 2021 in tax administration,” Collins wrote in her office’s 2021 Annual Report to Congress, which was released early Wednesday. “The year 2021 provided no shortage of taxpayer problems.”

The report found that tens of millions of taxpayers encountered delays when it came to processing returns, many of which it said “translated directly into refund delays,” as less than 80 percent of individual taxpayers received refunds.

The report found that the IRS “performed well under the circumstances” overall in the past year, as it continued to handle heavy operations via programs enacted by Congress amid the ongoing pandemic, while still carrying out its traditional duties.

The report said the IRS doled out 478 million stimulus payments, also known as Economic Impact Payments, amounting to more than $800 billion. The agency handled distribution of more than $93 billion in advance child tax credit payments sent to over 36 million families.

But the report also found that “[t]he imbalance between the IRS’s workload and its resources has never been greater,” given the decrease in the agency’s workforce in roughly the past decade, despite its significant increase in workload.

“Budget cuts, an aging workforce, and often complicated hiring processes have left the IRS severely understaffed and unable to adequately recruit, hire, and train much-needed new employees,” the report stated, adding that inadequately trained employees could give taxpayers “incorrect information, make erroneous determinations, or record inaccurate information in IRS databases.”

“The ongoing problems surrounding recruitment and hiring compromise the IRS’s ability to deliver tax benefits, provide taxpayer services, and collect revenue, which may cause the tax gap to widen, eroding confidence in the tax system and over time leading to noncompliance,” the report said. 

While Collins noted her report “focuses primarily on the problems of 2021,” she said she is “deeply concerned about the upcoming filing season,” before going on to call the paper “the IRS’s Kryptonite.”

A breakdown of the agency’s backlogs as of late last month found the IRS had 6 million unprocessed original individual returns, 2.3 million unprocessed amended individual returns, over 2 million unprocessed employer’s quarterly tax returns, and nearly 5 million pieces of taxpayer correspondence.

“The IRS currently has 4.75 million pieces of paper correspondence that have not been worked. This reflects the lack of digital communication options (e.g., secure email) that taxpayers can readily use. Taxpayers would benefit from digital options,” the report stated.

The report also said that refund delays have had a “disproportionate impact on low-income taxpayers.”

“Earned Income Tax Credit (EITC) benefits are worth up to $6,660, Child Tax Credit benefits [were] worth up to $2,000 per qualifying child under tax year 2020 rules, and RRCs are potentially worth several thousand dollars for families who did not receive some or all of their EIPs,” the report stated. 

“Millions of taxpayers rely on the benefits from these programs to pay their basic living expenses, and when refunds are substantially delayed, the financial impact can range from mild inconvenience to severe financial hardship,” it added.

In addition to the challenges faced by taxpayers and the agency last year, the report also provided a list of dozens of legislative recommendations, ranging from providing more funding to the IRS to improve operations, extending the period for receiving refunds when the agency postpones the tax filing deadline, and authorizing the office to implement minimum standards for federal tax return preparers.