IRS delayed tax refund, partly because of huge backlog

At the end of May 2022, the Internal Revenue Service (IRS) had a backlog of 21.3 million unprocessed paper tax returns, an increase of 1.3 million since last year. This is according to a report by National Taxpayer Advocate (NTA) Erin M. Collins to Congress. The report also expressed concern about continued delays in processing paper tax returns and its impact on taxpayers’ refunds.

Huge IRS backlog, partly due to paper returns

The report from the independent tax authority’s watchdog indicated that the IRS had made no progress in clearing the paper backlog because the pace of processing paper tax returns has not kept pace with new receipts. Of the 21.3 million unprocessed paper tax returns, 7.4 million are still waiting for their refund.

More than 75% of individual income tax returns result in refunds that millions of taxpayers rely on to pay for their basic living expenses. Delays in processing tax returns can lead to financial hardship and frustration for many.

Taxpayers filing electronic returns have done relatively well; more than 85% of them have no problems. However, processing paper tax returns remains a challenge for the IRS, as the tax documents must be manually transcribed in its computer systems. In May, the IRS processed an average of about 205,000 individual income tax returns (Forms 1040) per week. Form 1040 backlog was 8.2 million at the end of May, with millions more paper tax returns unclassified or expected to arrive before the extended October 15 filing deadline. The report indicated that the IRS would have to process more than 500,000 forms per 1040 each week to clear the backlog this year.

Forms 1040 are just one part of the paper tax return processing backlog. Millions of corporate tax returns and amended tax returns, both private and corporate, are also filed on paper. The total order book has increased by 7% this year compared to last year.

Delays in tax refunds have also caused companies to wait longer to receive employee tax reservations for which they also qualify.

“That the backlog continues to grow is deeply concerning, especially as millions of taxpayers have waited six months or more to receive their refunds,” attorney Erin M. Collins wrote in the report.

Calls for more funding to increase capacity

The NTA’s Purple Book contains a list of legislative recommendations on how to improve service to US taxpayers. The NTA has recommended that the IRS receive additional funding to improve the taxpayer experience and modernize the IRS’s information technology systems. It noted that since 2010, the IRS budget has been slashed by nearly 20% after adjusting for inflation. This was largely the result of cuts in the processing capacity of the IRS.

For example, the IRS closed its 2021 filing season with a backlog of 35.3 million returns that required manual processing. When taxpayers called the IRS for help, only about 11 percent reached out to a customer service representative (CSR), with taxpayer wait times averaging about 23 minutes. The IRS’s outdated IT systems are also in dire need of upgrades.

In 2021, the IRS collected approximately $4.1 trillion with a budget of approximately $11.9 billion, yielding a notable average return on investment of approximately 345:1. Additional funding to the IRS would not only improve service to taxpayers, but would almost certainly increase revenue collection.

The National Taxpayer Advocate (NTA) submits two reports to Congress each year: an annual report, delivered in January, and a targets report, delivered in June.

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