National Taxpayer Advocate Erin M. Collins released her statutorily mandated mid-year report to Congress. The report says the tax-return filing season generally ran smoothly this year, urges the IRS to prioritize a broad array of technology upgrades, and sets forth key objectives of the Office of the Taxpayer Advocate for the upcoming fiscal year.
The Filing Season. The report analyzes the IRS’s effectiveness in processing original returns, amended returns, and taxpayer correspondence and answering taxpayer telephone calls.
“What a difference a year makes!” Collins wrote in her preface to the report. Reflecting on the challenges taxpayers experienced in recent filing seasons due to the COVID-19 pandemic, she said, “In submitting this report, I’m finally able to deliver some good news: The taxpayer experience vastly improved during the 2023 filing season. The IRS caught up in processing paper-filed original Forms 1040 and various business returns; refunds were generally issued quickly; and taxpayers calling the IRS were much more likely to get through – and with substantially shorter wait times. Overall, the difference between the 2022 filing season and the 2023 filing season was like night and day.”
Despite these improvements, the report says the IRS is still behind in processing amended tax returns and taxpayer correspondence. Typically, employees in the IRS’s Accounts Management (AM) function perform two roles – they answer telephone calls and they process taxpayer correspondence, amended returns, and other cases. The report says the IRS was much more effective in answering taxpayer calls this year, “but [that] could only be accomplished by prioritizing the phones over other IRS operations, and it resulted in greater delays in the processing of paper correspondence.”
Processing of original tax returns. 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 a reduction of 80 percent and marks a return to pre-pandemic levels. As of June 3, however, the inventory of unprocessed paper-filed original returns had grown to 4.1 million, consisting of about half individual returns and half business returns.
Processing of amended tax returns. In contrast to the 80 percent reduction in the backlog of paper-filed original tax returns, the inventory of amended returns was 3.6 million in April 2022 and 3.4 million in April 2023, a reduction of only six percent between the two periods.
For individual amended returns (Forms 1040-X), the IRS’s processing time was about seven months as of the end of the 2023 filing season. On the business side, a large portion of the delay in processing amended returns is attributable to Employee Retention Credit (ERC) claims. The ERC is a refundable tax credit that Congress authorized to encourage employers to retain employees during the COVID‑19 pandemic. Employers may receive up to $26,000 per employee if they meet certain conditions. Many ERC claims are legitimate, but the IRS has also received a large number of fraudulent claims and has placed promoter claims involving the ERC on its “Dirty Dozen” list of tax scams.
Processing of taxpayer correspondence and other Accounts Management cases. In addition to answering telephone calls and processing amended tax returns, AM employees process taxpayer responses to IRS notices and many types of taxpayer requests, such as applications for Employer Identification Numbers, a high percentage of Identity Theft Victim Assistance cases, and tax return preparer authorizations.
The IRS has not made notable progress in reducing its paper AM inventories over the past year. The inventory is just six percent lower than at the same time last year. In April, it was taking the IRS 130 days to process its adjustments cases. That represents a substantial improvement from the 214 days it was taking last year, but it is still well above the IRS’s standard processing time of 45 days.
For victims of identity theft, the delays have been particularly long and frustrating. The average cycle time for Identity Theft Victim Assistance cases closed in April 2023 was 436 days – nearly 15 months. That is about three months longer than the 362-day cycle time for cases closed in April 2022.
Telephone service The IRS made considerable progress in improving its telephone service this filing season. It answered more calls, answered a substantially higher percentage of calls, and significantly reduced wait times.
The IRS reached the Treasury Department’s goal of an 85 percent “Level of Service” (LOS) on the AM telephone lines. However, IRS employees only answered 35 percent of all calls received. As the report details, the LOS measure does not account for the significant majority of taxpayer calls and is not the best measure of overall service levels. The report also points out that calls to certain telephone lines, including the collection lines and the installment agreement/balance due line, were answered at lower rates.
Inflation Reduction Act Funding and IRS Strategic Priorities
The report addresses the IRS’s Strategic Operating Plan to utilize funding the agency received under the Inflation Reduction Act (IRA). Of the roughly $79 billion in IRA funding the IRS received, only $3.2 billion was allocated for Taxpayer Services and only $4.8 billion was allocated for Business Systems Modernization (BSM). (The Fiscal Responsibility Act of 2023 and a related side agreement have reduced the IRA funding level to about $58 billion.) The report says TAS will continue to advocate for adequate funding for Taxpayer Services, BSM, and the operational overhead that supports those programs.
The report urges the IRS to prioritize information technology upgrades that will improve the taxpayer experience. It says that although the COVID-19 pandemic was an unexpected development, the refund delays and service challenges taxpayers experienced over the past three years would have been substantially less severe if the IRS had better technology.
Taxpayer Advocate Service Objectives for Fiscal Year 2024
As required by law, the report identifies TAS’s key objectives for the upcoming fiscal year. The report describes 17 systemic advocacy objectives, four case advocacy and other business objectives, and five research objectives. Among the objectives the report identifies are:
- Protect taxpayer rights as the IRS implements its Strategic Operating Plan.
- Improve correspondence audit processes, taxpayer participation, and agreement and default rates.
- Implement systemic first-time penalty abatement but allow substitution of reasonable cause.
IRS Responses to National Taxpayer Advocate Administrative Recommendations
The National Taxpayer Advocate made 46 administrative recommendations in her 2022 year-end report and then submitted them to the Commissioner for response. The IRS has agreed to implement 38 (or 83 percent) of the recommendations in full or in part. The IRS’s responses are published on the TAS website at https://www.TaxpayerAdvocate.irs.gov/arc-recommendations-tracker.