There aren't any surprises in National Taxpayer Advocate Erin M. Collins' annual report to Congress on the 2021 filing season.
Something else that's not surprising is that Collins warns that things aren't likely to get any better for taxpayers, tax pros, or the Internal Revenue Service this year.
Unprecedented tax annus horribilis: "Calendar year 2021 was surely the most challenging year taxpayers and tax professionals have ever experienced," wrote Collins in the prologue of the required report issued today, Jan. 12.
The problems included long processing and refund delays, difficulty reaching the IRS by phone, correspondence that went unprocessed for many months, collection notices issued while taxpayer correspondence was awaiting processing, and limited or no information on delayed returns via the agency's online refund tracking tool.
Collins also didn't let her inside-the-IRS-but-independent agency off the hook. In the spirit of full disclosure, she noted that last year also meant many taxpayers had difficulty obtaining timely assistance from the Taxpayer Advocate Service.
IRS still buried in paper: Unfortunately for all of us, Collins expects much of the same in 2022.
"While my report focuses primarily on the problems of 2021, I am deeply concerned about the upcoming filing season," Collins said in releasing the report. "Paper is the IRS's Kryptonite, and the agency is still buried in it."
Here are the discouraging backlog numbers as of late December 2021 cited by Collins —
- 6 million unprocessed original individual returns (Forms 1040),
- 2.3 million unprocessed amended individual returns (Forms 1040-X),
- more than 2 million unprocessed employer's quarterly tax returns (Forms 941 and 941-X), and
- about 5 million pieces of taxpayer correspondence.
Some of the tax submissions, Collins said, date back at least to April, with many taxpayers still are waiting for their refunds nine months later.
E-file processing better, but not good: Collins echoed the IRS in discussing the filing methodologies. But still, the news wasn't good.
The Taxpayer Advocate's annual report noted that millions of electronically submitted tax returns were suspended during processing due to discrepancies between amounts claimed on the returns and amounts reflected on IRS records.
Of course, new legislation, specifically a law created in response to the COVID-19 pandemic, also was a problem.
The most common discrepancy last filing season involved Recovery Rebate Credit (RRC) claims by taxpayers who did not receive some or all of their stimulus payments, or economic impact payment (EIPs) the prior year. Collins notes that forced the IRS to then manually review the returns, and subsequently issued more than 11 million math error notices to taxpayers over these coronavirus-related credit claims.
And when taxpayers disagreed with the agency's error notice, that response then went into the IRS' already paper processing backlog, further delaying refunds.
Same tax song, 2022 verse: Collins is concerned that the number of returns suspended and requiring manual processing is likely to be high again in 2022.
The American Rescue Plan Act (ARPA) enacted in March 2021 authorized two advance tax credits, a third EIP and monthly payments during the six months of the year for half of the enhanced Child Tax Credit.
Taxpayers are getting, or soon will, letters from the IRS about the amounts they received. These notices, said Collins, may result in additional discrepancies between amounts claimed on tax returns and in IRS records.
Top 10 taxpayer problems: The continuing COVID chaos of 2021 meant was evident in Collins' list of the year's biggest difficulties for taxpayers, which the Taxpayer Advocate is required to submit to Congress.
Below is Collin's 2021 list of the 10 most pressing taxpayer problems.
- Processing and refund delays caused tens of millions of taxpayers were forced to wait extraordinarily long periods of time for the IRS to process their tax returns, issue their refunds, and address their correspondence. More than 75 percent of individual income tax return filings resulted in refunds that millions of taxpayers rely on to pay their basic living expenses. Therefore, processing delays caused financial hardships for some taxpayers and extreme frustration for many more.
- IRS recruitment, hiring, and training issues negatively affected all aspects of the agency's operations. The customer service impacts were seen in areas from pre-filing services to return processing and exam and collection activities. Taxpayers are not receiving the level of service they need and deserve, largely because of Congressional budget cuts (a nearly 20 percent reduction in inflation-adjusted dollars from 2010 to 2021) that hampered IRS hiring and training. "The IRS will need sustained multiyear funding and more hiring flexibilities to build the workforce of the future," wrote Collins.
- Telephone and in-person service declined during recent pandemic-affected years. "IRS phone service has gone from bad to worse during COVID-19, with calls reaching an all-time high and Level of Service falling to an all-time low," wrote Collins. Sufficient funding from Congress and effective execution of IRS plans, including some technological improvements already implements as part of the Taxpayer First Act, will go a long way toward improving the quality of customer service, she added.
- Transparency and clarity are insufficient, with the IRS last year not providing clear and timely information about what taxpayers need to know. For example, taxpayers could not access the status details of IRS operations, such as a filing season backlog, delayed refunds, returns pulled for inconsistencies, or amended return processing delays. Further, added Collins, taxpayers are confused by unclear notices and IRS guidance, and they don't always understand the IRS' reasons for its decisions, as a rationale is not always provided.
- Filing season delays produced was one of the most challenging filing seasons ever. The COVID-19 pandemic highlighted serious problems with the IRS' reliance on antiquated systems and processes, such as having to manually process millions of tax returns. It started early. By the time the delayed May 17, 2021, Tax Day arrived, the agency already was facing more than 35 million returns that required manual processing. Millions of taxpayers did not receive timely refunds. Neither did they get updates and adequate information about the delays. The result, said Collins, was tremendous confusion and frustration for taxpayers and eroded taxpayer trust and confidence in our tax system.
- Online accounts don't meet the needs of taxpayers and tax practitioners. U.S. citizens are used to an expect online access to financial accounts. They want the same secure and convenient online access to their tax data. While the COVID complications last year forced the IRS to deploy a number of online services and capabilities, many of these services were designed as standalone portals with limited and specific functionality. The IRS has yet to develop and adopt a one-stop solution for online and digital services, said Collins, who noted that "A truly robust IRS online account system would transform tax administration."
- Digital communications are too limited, making communicating with the IRS unnecessarily difficult. Recent tax season challenges underscore the need for the IRS to provide easy-to-use digital communication services, while simultaneously facing budget and human resource limitations, said Collins. During the pandemic, the IRS made it easier for some taxpayers to do things such as securely sign and submit documents electronically, receive answers to questions through text chat, and access limited services through a mobile device. But the IRS and taxpayers would benefit from prioritizing and expanding those tools at a more rapid pace.
- Filing barriers remain that increase taxpayers' burdens, as well as cause IRS processing delays and waste agency resources. Collins pointed out that through October 23, 2021, about 91 percent of individual returns and around 69 percent of business returns were e-filed. While electronic filing significantly benefits both taxpayers and the IRS, the tax agency still receives a significant number of paper-filed returns. The inability to e-file some tax forms, schedules, attachments, and other documents negatively impacts both taxpayers and the IRS. The IRS should remove barriers, think outside the box, and provide all taxpayers the option to e-file their returns.
- Correspondence audits create problems for many low-income taxpayers, particularly where the Earned Income Tax Credit (EITC) is involved. sues. Those issues subsequently produce more issues that hinder audit resolution, and add to the burdens on not just taxpayers, but also the IRS, the Taxpayer Advocate Service, and the U.S. Tax Court. In FY 2019, noted Collins, more than half of the taxpayers subject to correspondence audits had total positive incomes below $50,000, and most of these low-income taxpayers claimed the EITC. These taxpayers often face particular challenges navigating the correspondence audit process, which, because it was designed to expend the least amount of resources to conduct the largest number of examinations, results in the lowest level of customer service to taxpayers having the greatest need for assistance. If the IRS devoted additional resources at the beginning of the correspondence audit process, it could provide an appropriate level of customer service during the audit, avoiding unnecessary downstream costs and reducing the burden on some of the least affluent and most vulnerable taxpayers.
- Collection policies and procedures cause added problems for low-income taxpayers. Many taxpayers have trouble paying tax bills, but lower-income individuals in particular struggle to balance paying tax debts and basic living expenses. The IRS offers collection alternatives, but these resources are underutilized. They also face hurdles such as fees for installment agreements, and currently not collectible-hardship status and offset bypass refund relief are unnecessarily difficult to obtain. In addition, IRS collection notices in some cases do not adequately explain taxpayers' rights in collection due process hearings.
Collins goes into even more detail on each of the 10 most serious taxpayer problems. You can read the full discussion at this TAS website by clicking the "Read the Full Discussion" after the summary.
At the end of those multi-page online problem elaborations, you'll also find the IRS response to the Taxpayer Advocate's concerns. The inclusion of the IRS perspective, noted Collins, is in keeping with her role that she sees as "requiring continual efforts to improve taxpayer service and tax administration by working collaboratively with the IRS throughout the year on both newly identified problems and longstanding challenges."
You also might find these items of interest:
- Tax Season 2022 for individuals starts Monday, Jan. 24
- IRS began accepting e-filed business tax returns on Jan. 7
- When the Taxpayer Advocate Service can, and can't, help
- Slow tax refunds again make the annual Top 10 list of taxpayer problems