National Taxpayer Advocate Erin M. Collins today released her 2021 Annual Report to Congress, calling calendar year 2021 “the most challenging year taxpayers and tax professionals have ever experienced.” The report says tens of millions of taxpayers experienced delays in the processing of their returns, and with 77 percent of individual taxpayers receiving refunds, “processing delays translated directly into refund delays.”
The report says “[t]he imbalance between the IRS’s workload and its resources has never been greater.” Since fiscal year (FY) 2010, the IRS’s workforce has shrunk by 17 percent, while its workload – as measured by the number of individual return filings – has increased by 19 percent. The report reiterates the National Taxpayer Advocate’s longstanding recommendation that Congress provide the IRS with sufficient funding to serve taxpayers well.
Major challenges for
taxpayers
“There is no way to sugarcoat
the year 2021 in tax administration,“ Collins wrote. “The year 2021 provided no
shortage of taxpayer problems.”
The Agency Is Still Buried In It.”
Although e-filed returns fared better than paper returns, the report says millions of e-filed returns were suspended during processing due to discrepancies between amounts claimed on the returns and amounts reflected on IRS records.
The report says processing delays led to a cascade of customer service problems:
The IRS’s “Where’s My
Refund?” tool often could not answer the question. Taxpayers attempted to check the status
of their refunds on IRS.gov more than 632 million times last year, but “Where’s
My Refund?” does not provide information on unprocessed returns, and it does
not explain any status delays, the reasons for delays, where returns stand in
the processing pipeline, or what actions taxpayers need to take, if any. For
taxpayers who experienced significant refund delays, the tool often did not do
its job.
Telephone service was the worst
it has ever been. The
combination of processing delays and questions about new programs like the
AdvCTC caused call volumes to almost triple from the prior year to a record 282
million telephone calls. Customer service representatives (CSRs) only answered
about 32 million, or 11 percent, of those calls. As a result, most callers
could not obtain answers to their tax law questions, get help with account
problems, or speak with a CSR about a compliance notice. “Among the lucky one
in nine callers who was able to reach a CSR, the IRS reported that hold times
averaged 23 minutes,” the report says. “Practitioners and taxpayers have
reported that hold times were often much longer, and frustration and
dissatisfaction was high throughout the year with the low level of phone
service.”
The IRS took months to
process taxpayer responses to its notices, further delaying refunds. The IRS sent tens of millions of
notices to taxpayers during 2021. These included nearly 14 million math error
notices, Automated Underreporter notices (where an amount reported on a tax
return did not match the corresponding amount reported to the IRS on a Form
1099 or other information reporting document), notices requesting a taxpayer
authenticate his or her identity where IRS filters flagged a return as
potentially fraudulent, correspondence examination notices and collection
notices. In many cases, taxpayer responses were required, and if the IRS did
not process a response, its automated processes could take adverse action or
not release the refund claimed on the tax return. The IRS received 6.2 million
taxpayer responses to proposed adjustments and took an average of 199 days to
process them – up from 74 days in FY 2019, the most recent pre-pandemic year.
The ten most serious
problems encountered by taxpayers.
By statute, the National Taxpayer Advocate is required to identify the ten most
serious problems encountered by taxpayers in their dealings with the IRS. This
year’s report details the following problems: processing and refund delays; challenges
in employee recruitment, hiring, and training; telephone and in-person taxpayer
service; transparency and clarity; filing season delays; limitations of online
taxpayer accounts; limitations in digital taxpayer communications, including
e-mail; e-filing barriers; correspondence audits; and the impact of collection
policies on low-income taxpayers. For each problem, the report includes an IRS
response.
Taxpayer Advocate Service administrative
recommendations to the IRS
The report makes numerous
recommendations to address taxpayer problems, including the following:
- Utilize
scanning technology and reduce barriers to e-filing. The IRS could reduce its backlog of paper tax returns
by using scanning technology to machine read returns, as many state tax
agencies have been doing for more than ten years. In addition, some
taxpayers who try to e file their returns are blocked for several reasons,
including when they need to file certain tax forms that the IRS has not
programmed its systems to receive electronically. These Taxpayer Advocate
Service (TAS) recommendations would reduce the need for IRS employees to
manually transcribe the data from paper returns – the primary cause of the
backlog and of transcription errors that led to math error notices and
refund delays. For individual taxpayers who filed on paper, the report
says “roughly one out of every four returns had a transcription error that
could trigger an unwarranted compliance action or an erroneous refund that
the IRS might later seek to recover.”
- Deploy
“customer callback” technology on all telephone lines, so taxpayers and
tax professionals don’t have to wait on hold and can receive a return call
when the next CSR is available.
Customer callback technology is not a cure-all for IRS telephone
operations because if the IRS workforce only has the capacity to answer 32
million telephone calls, as it did last year, customer callback will not
enable the IRS to handle the 250 million calls that went unanswered.
However, many taxpayers call the IRS multiple times before they get
through, and if effectively used, customer callback technology could
substantially reduce the need for repeat calls.
- Improve
online taxpayer accounts and allow taxpayers to communicate with the IRS
routinely by secure email.
The report says online taxpayer accounts are plagued by limited
functionality. For example, taxpayers generally cannot use their online
accounts to view images of past tax returns, most IRS notices, or proposed
assessments; file documents; or update their addresses. Similarly, the IRS
generally does not communicate with taxpayers by email. Limitations on
communicating with the IRS electronically frustrate taxpayers who have
been conducting comparable transactions with financial institutions for
more than two decades. This increases the number of telephone calls and
pieces of correspondence the IRS receives and leads to more paper
processing delays.
- Create
and update a weekly “dashboard” on IRS.gov to provide the public with
specific information about delays.
The IRS has created a webpage, IRS Operations During COVID-19: Mission-critical functions
continue, that provides certain high-level information. However, it
does not provide detailed information on processing backlogs, saying for
amended returns only that “[t]he current timeframe can be more than 20
weeks.” It does not provide detailed information on correspondence
backlogs, saying only that processing mail “is taking longer than usual,”
and “[t]he exact timeframe varies depending on the type of issue.” It does
not provide information on recent telephone delays, even though doing so
would give taxpayers a better sense of whether they should devote the time
to calling. TAS recommends that the IRS post a filing season dashboard,
updated at least weekly, that lists each category of work and the length
of time it is taking to complete it. This should include the number of
weeks to process original paper tax returns and amended paper tax returns,
the number of weeks to process math error and other taxpayer
correspondence by category, and the percentage of taxpayers who called the
IRS the previous week and reached an employee.
National Taxpayer Advocate
“Purple Book” of legislative recommendations
The National Taxpayer
Advocate’s 2022 Purple Book proposes 68 legislative recommendations for consideration
by Congress. Among them are the following:
- Provide
sufficient funding for the IRS to improve taxpayer service and modernize
its information technology systems.
The IRS receives its annual appropriation in four accounts: Taxpayer
Services, Enforcement, Operations Support, and Business Systems
Modernization. During the past year, there has been considerable
discussion about substantially increasing funding for the Enforcement
account and related activities in the Operations Support account. To address
taxpayer problems identified in this report, TAS recommends that Congress
substantially increase funding for the Taxpayer Services account.
- Extend
the period for receiving refunds when the IRS postpones the tax filing
deadline. When a taxpayer files a timely
refund claim, the IRS generally is permitted to refund only amounts paid
within the preceding three years. If a taxpayer files a return on April 15
in Year 1, the IRS generally may issue a refund until April 15 in Year 4.
In 2020, the IRS postponed the filing deadline for tax year 2019 tax
returns from April 15 to July 15 due to the COVID-19 pandemic. Taxpayers
who filed their returns on July 15, 2020, may reasonably believe they have
until July 15, 2023, to obtain full refunds. However, income tax withholding
and estimated tax payments for tax year 2019 are deemed paid on April 15,
2020. As a result, refund claims filed after April 15, 2023, will be
limited to the amounts taxpayers paid or were deemed to have paid by April
15, 2020. A similar issue will arise in 2024 because the IRS postponed the
2021 filing deadline to May 17. This result was not anticipated and will
prevent some taxpayers from receiving the full refunds to which they are
otherwise entitled. TAS recommends Congress clarify that a postponement of
the filing deadline extends the lookback period for paying refunds.
- Authorize
the IRS to establish minimum standards for paid tax return preparers. Most taxpayers hire tax return preparers to complete
their returns, and visits to preparers by Government Accountability Office
and Treasury Inspector General for Tax Administration auditors posing as
taxpayers, as well as IRS compliance studies, have found paid preparers
make significant errors that both harm taxpayers and reduce tax
compliance. Ten years ago, the IRS sought to implement minimum preparer
standards, including requiring otherwise non-credentialed preparers to
pass a basic competency test, but a federal court concluded the IRS could
not do so without statutory authorization. TAS recommends Congress provide
that authorization.
- Expand
the U.S. Tax Court’s jurisdiction to hear refund cases. Under current law, taxpayers who owe tax and wish to
litigate a dispute with the IRS must go to the U.S. Tax Court, while
taxpayers who have paid their tax and are seeking a refund must file suit
in a U.S. district court or the U.S. Court of Federal Claims. The Tax
Court is an easier forum to navigate, and it has established relationships
with the Low Income Taxpayer Clinics and other pro bono programs that
assist taxpayers when they litigate their cases in Tax Court. TAS
recommends that taxpayers be given the option to litigate all tax disputes
in the U.S. Tax Court.
- Restructure the Earned Income Tax Credit (EITC) to make
it simpler for taxpayers and reduce improper payments. TAS has long advocated for dividing the EITC into two
credits: (i) a refundable worker credit based on each individual worker’s
earned income unrelated to the presence of qualifying children and (ii) a
refundable child credit. For wage earners, claims for the worker credit
could be verified with nearly 100 percent accuracy by matching claims on
tax returns against Forms W-2, reducing the improper payments rate on
those claims to nearly zero. The portion of the EITC that currently varies
based on family size would be combined with a child credit into a larger
family credit. The National Taxpayer Advocate published a report making this recommendation in 2019, and TAS
continues to advocate for it.
- Expand the protection of taxpayer rights by
strengthening the Low Income Taxpayer Clinic (LITC) program. The LITC program effectively assists low-income
taxpayers and taxpayers who speak English as a second language. When the
LITC grant program was established in 1998, the law limited annual grants
to no more than $100,000 per clinic. The law also imposed a 100 percent
“match” requirement (meaning a clinic cannot receive more in LITC grant
funds than it is able to match on its own). The nature and scope of the
LITC program has evolved considerably since 1998, and those requirements
are preventing the program from providing high quality assistance to
eligible taxpayers. TAS recommends that Congress remove the per-clinic cap
and allow the IRS to reduce the match requirement to 50 percent where
doing so would provide coverage for additional taxpayers.
Other sections in the
report
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