The National Taxpayer Advocate has some good news for taxpayers and the Internal Revenue Service.
But it's not great news.
"The taxpayer experience vastly improved during the 2023 filing season," wrote National Taxpayer Advocate Erin M. Collins in her mid-year report to Congress issued today.
The main reason for the improvement, she noted, was that the IRS caught up in its processing of paper 1040 forms. The tax agency also did a better job this year in dealing with various business returns, generally issued refunds quickly, and upgraded its phone assistance lines so that callers were much more likely to get through and get the phone help without interminable times on hold.
"Overall, the difference between the 2022 filing season and the 2023 filing season was like night and day," said Collins.
But, while things were better earlier this year, the IRS still is encountering some problems.
One step forward, two back: Again, Collins cited the backlog issue.
The IRS reduced its backlog of unprocessed paper-filed original tax returns from 13.3 million at the end of the 2022 filing season to 2.6 million at the end of the 2023 filing season. That represents an 80 percent reduction of stacked-up filings, and marks a return to pre-pandemic levels.
However, as of June 3 the IRS inventory of unprocessed paper-filed original tax returns had grown to 4.1 million. About half of those old-school fillings were from individual taxpayers, and the other half from businesses.
Amended returns still backed up: Then there are Form 1040-X filings. These amended returns continue to put pressure on the IRS work flow.
Where the IRS made impressive progress, at least earlier this year, in getting original returns through the system, it's a totally different story with amended filings.
The agency's inventory of amended returns was 3.6 million in April 2022, noted Collins. A year later, that number was 3.4 million, a reduction of only six percent between the two periods.
The National Taxpayer Advocate's report says that the processing time for individual amended returns was about seven months as of the end of the 2023 filing season.
Fraud and amended business filings: On the business side, the IRS faced a special problem in processing amended returns. The agency discovered a large number of fraudulent Employee Retention Credit (ERC) claims.
The ERC is a refundable tax credit created as part of federal COVID-19 pandemic relief legislation. It was available for the 2021 tax year only, providing a tax break to companies that retained employees during the height of the coronavirus.
Many ERC claims are legitimate, but the IRS has also received a large number of fraudulent claims via amended return filings. These questionable claims pushed by ERC promoters were significant enough for it to make this year's Dirty Dozen list of tax scams.
"The influx of fraudulent claims has put the IRS between a rock and a hard place," Collins wrote in her report. "If the IRS pays out claims quickly without taking the time to review them individually, it will be making some payments to individuals potentially engaged in fraud. If it takes the time to review claims individually, legitimate businesses who need the funds Congress authorized to help them stay afloat may not receive them in time."
You also might find these items of interest:
- IRS tax return backlog is dwindling (November 2022)
- Business owners should look carefully at ERC promotions
- When the Taxpayer Advocate Service can, and can't, help
- IRS reveals how it plans to spend Inflation Reduction Act's added $80 billion