The Internal Revenue Service has substantially improved taxpayer services and has good plans for improvement, but it continues to struggle with such problems as paper processing, response times for tax professionals, and ID theft and the Employee Retention Credit conundrum, according to the
“Overall, the magnitude of successes exceeded the areas of weakness in 2023, and most metrics showed significant improvement from the depths of the [COVID-19] pandemic,” Collins writes in the report’s preface. The report adds that the IRS virtually eliminated its backlog of unprocessed original [1040s] and substantially improved telephone service.”
Still, problems remain.
1. Kryptonite. The IRS received more than 11 million individual returns and 15 million business returns on paper last year.
“When I released the National Taxpayer Advocate’s 2020 report, I wrote that the IRS in most cases ‘can effectively handle whatever it can automate,’ and when I released our 2021 report, I wrote that, ‘Paper is the IRS’s kryptonite,'” Collins said. “Those observations continued to hold true in 2023.”
Tasos Katopodis/Bloomberg
2. Headline news. At the end of FY23, nearly half a million taxpayers with cases pending in the IRS Identity Theft Victims Assistance unit (many of them low-income taxpayers) were also waiting an average of almost 19 months for the agency to resolve their problems. “If it weren’t for the significant number of challenges affecting larger groups of taxpayers, this would be headline news, and it should be,” Collins writes.
3. ‘Overage’ and out. Despite the IRS eliminating its overhang of paper-filed 1040s, backlogs in processing Forms 1040-X, amended business tax returns and correspondence continued. At the end of calendar 2019 (the most recent pre-pandemic year), the report said, the IRS backlog of unprocessed amended returns was 500,000. The backlog as of late October 2023 was 1.9 million. Taxpayer correspondence and related cases more than doubled over the same period, to 4.3 million. The percentage of “overage” correspondence cases in 2023 reached its highest level in recent years: Nearly 70% of pending cases exceeded normal processing times as of late October.
4. Hurry up and wait. The report attributes much of the paper inventory backlog to the Treasury Department’s decision to prioritize answering telephone calls over processing amended returns and correspondence, meaning that IRS customer service representatives were “simply sitting around waiting for the phone to ring.”
During the 2023 filing season alone, CSRs spent 1.27 million hours (34% of their time) waiting to receive calls. That translates to more than 650 unproductive staff years in which these employees could have been processing paper and reducing response times for amended returns and correspondence.
“The IRS cannot easily shuffle employees back and forth between answering phones and processing correspondence, so unproductive employee time was the price it had to pay to improve telephone service levels,” Collins writes.
5. Professional liability. The report adds that service for tax pros was below average, with an average wait time of 16 minutes. “Roughly 500,000 tax professionals prepare tax returns for more than 85 million taxpayers, so the IRS derives considerable benefit from working collaboratively with the pool of tax professionals,” the report says. “Requiring tax professionals to call back repeatedly and wait on hold not only inconveniences them but often results in additional costs to taxpayers for the time their tax professionals bill for waiting on hold.”
6. Credit crunch. Employers who file eligible Employee Retention Credit claims are often waiting six months or longer to receive their credits or refunds. TAS has received several thousand ERC cases, and some have involved nonprofit organizations that provide medical or other critical services and are depending on ERC refunds to stay afloat. As of early December, the IRS had a backlog of approximately 1 million ERC claims.
The report acknowledges the IRS is between a rock and a hard place in handling ERC claims. “If it pays claims quickly without adequate review, it could pay billions of dollars to nonqualifying persons. If it takes the time to review claims carefully, eligible employers will experience significant delays in receiving the credit, and in extreme cases, employers who need the funds immediately could go out of business,” the report says.
What to do
The TAS suggests the IRS take several steps to address the biggest problem areas. Among them:
- Improvement of online accounts for individual taxpayers, business taxpayers and tax pros should be the highest priority. During 2023, individual taxpayers filed more than 160 million income tax returns, yet only 16.8 million users accessed individual online accounts.
- Improve the ability to attract, hire and retain qualified employees. The report says the IRS continues to struggle to hire qualified candidates in many key areas. It says three of the main reasons are failure to advertise positions to the optimal target audience by job series, the slow pace of the hiring process and non-competitive pay.
- Upgrade the back end of the “Document Upload Tool” to fully automate the processing of taxpayer correspondence. The IRS has created and implemented the DUT to allow taxpayers to upload documents electronically in response to an IRS notice, letter, telephone conversation or visit. Once the documents reach the IRS, though, they’re still processed as if they came in on paper.
- Enable all taxpayers to e-file their federal tax returns. About 150 to 200 IRS forms still are not eligible for e-filing.
