TIGTA Releases Report on IRS Tax Return Backlog
The Treasury Inspector General for Tax Administration (TIGTA) recently released an audit report sharing the results of its continued assessment of IRS efforts to address the backlog of tax returns and other related work.
The report found that backlogs from the 2020 filing season were still affecting the IRS' ability to provide timely service during this year's filing season. At the close of 2021, the IRS reported over 8.2 million tax returns and 2.6 million tax account transactions in inventory. As of Sept. 9, the IRS has 7.2 million unprocessed individual returns, including tax year 2021 returns and late-filed prior-year returns. Of those, 1.6 million returns need error correction or other special handling, and 5.6 million are paper returns. Although the IRS expedited its hiring and set up surge teams to help with processing returns, the report said that IRS officials did not take appropriate measures to address delays in processing tax transcripts, amended returns and other work.
Per the TIGTA report, the IRS continues to have significant inventory backlogs at its tax processing centers, and efforts to reduce the backlogs are being delayed partially due to ongoing hiring shortfalls. The Tax Processing Centers had almost 1.8 million amended individual returns in inventory as of April 25. The IRS sent approximately 300,000 amended individual returns to Accounts Management, which also has a large backlog of amended individual returns.
The backlog has differed across processing centers due to the number of available staff at each center. As of Dec. 10, 2021, the Kansas City Tax Processing Center had over 751,000 unprocessed transcript requests compared to a little more than 145,000 unprocessed transcript requests at the Ogden Tax Processing Center. The IRS had an imbalance between its available staff at these centers, with 183 employees in Ogden versus 70 in Kansas City. The report said that as of March 2022, about three months after TIGTA brought this concern to management's attention, no actions had been taken to address the Kansas City backlog. On March 10, the IRS announced plans to address the continuing backlog of tax returns and other account work during the 2022 filing season. The aim is to return to healthy inventory levels, which the IRS defines as pre-pandemic levels, by the end of 2022.
In a prior report, TIGTA recommended the IRS evaluate and purchase updated or new mail opening and sorting technology on a timely basis. IRS officials agreed with the recommendation and told TIGTA in March that the agency was taking steps to conduct market research and complete a statement of work regarding the replacement of the technology, which is 20 years old. As of May 11, funding had yet to be allocated, the report said. Because the procurement actions depend on funding, IRS management said it will re-evaluate this effort if implementation is not successful within three years.
TIGTA made nine recommendations in the new report, including actions to take steps right away to address the imbalance of tax processing center staffing for transcript requests and weigh alternatives for using employees detailed from the Small Business/Self-Employed Division to address the backlog of amended returns in the submission-processing function. The IRS agreed with all of the report's recommendations. The IRS stated it plans to address the imbalance of certain transcript requests; however, TIGTA noted that the action described did not specifically address its concerns. TIGA said it would continue to monitor this issue.
In response to the report, the IRS said the pandemic and the labor market have affected its ability to process the backlog of tax returns. The processing of Economic Impact Payments also contributed to the backlog last year, the agency said. IRS officials said that individual returns for tax year 2020 had a high rate of errors made by taxpayers when reconciling their Economic Impact Payments received in 2020 and calculating additional amounts of Recovery Rebate Credits due. These errors caused the returns to stop processing while waiting for an employee to manually review them. The volume of returns in the queue overwhelmed available staff, which led to substantial processing delays, the IRS said. For the 2022 filing season, the IRS automated the process and as of July 8, nearly 12.5 million returns with those types of errors were corrected and released.
The IRS has been pursuing other automation solutions for processing tax account and tax return transcript requests through its Income Verification Express Service and third-party authorizations. Those automated programs eliminated the need to print over 48 million faxed documents the IRS receives each year. Additionally, the IRS is planning to use the extra funding it is receiving via the Inflation Reduction Act to use optical character recognition technology to automate the processing of paper documents. For processes where handling paper cannot be eliminated, the IRS is seeking a solution that will extend beyond replacing its current mail-sorting and processing equipment to include the full extraction and digitalization of paper documents. Last week, Treasury Secretary Janet Yellen announced the IRS will automate the scanning of millions of individual paper returns into digital copies during the next filing season.