Refund delayed? Our ability to help may be limited.
Good news: The IRS has reduced its tax year (TY) 2020 tax return inventory backlog down to about 10 million paper returns in need of processing and about 5.7 million returns in need of additional information from taxpayers before processing.
Bad news: The IRS still needs to process about 10 million 2020 tax returns and about 5.7 million returns still need additional information from taxpayers before processing. Also, the IRS anticipates receiving four million additional TY 2020 returns by the filing extension deadline on October 15, 2021.
During the 2021 filing season, the IRS had to temporarily scale back operations while also assuming new responsibilities in implementing important economic relief measures passed by Congress during the pandemic (i.e., delivering Economic Impact Payments and advance payments of the Child Tax Credit). Many taxpayers have experienced frustration caused by the high volume of manually processed returns, the limited information available about the status of their return processing, the refund delays, and the difficulty reaching IRS employees. Many of these challenges are a direct result of the impact the pandemic has had on both the IRS workforce and taxpayers. To illustrate this impact, between January and August 2021:
By the end of August, over 160 million individual returns were filed, of which over 90 percent were filed electronically, and over 122 million refunds were issued, amounting to over $335 billion.
There were other challenges, including accounting for and implementing tax law changes that took effect in the middle of the filing season. This new legislation not only impacted returns not yet filed but also returns filed during the first half of the filing season. Processing of the 2020 tax returns triggered downstream consequences that may have required the IRS to adjust the amount the taxpayer received for the third round of economic impact payments (EIP 3) and future monthly payments of the Advance Child Tax Credit (AdvCTC).
As discussed in NTA Blog: 2021 Filing Season Bumps in the Road: Part I and Part II, the IRS has been working through a backlog in its inventory, which in early 2021 included unopened mail, 2020 tax returns waiting to be processed, and tax returns suspended during processing (both paper and e-filed) and awaiting further review. In large part, the backlog in inventory is due to the changes in IRS operations required to manage the effects of the pandemic and legislative changes. The processing of returns has been further aggravated by inadequate staffing and aged technology. Despite these challenges, the IRS has made significant progress in reducing the size of the backlogged inventory; however, millions of returns have yet to be processed, meaning millions of taxpayers are still awaiting their refunds.
When we last reported on the backlogged inventory in the National Taxpayer Advocate’s Fiscal Year 2022 Objectives Report to Congress, there were slightly over 35 million returns awaiting processing as of May 22, 2021. As of September 11, 2021, there are about 17.6 million returns awaiting processing. This means that over the past three and half months, the IRS processed nearly 18 million returns of its backlogged inventory – slightly more than half. This is a notable improvement, but the fast-approaching October 15 filing extension deadline will bring another batch of returns. The IRS estimates another four million 2020 tax returns will be filed by October 15.
Figure 1 provides more detail about the current status of the backlogged inventory.
|Category||Sub-Category||Individual Cases||Business Cases||Unspecified Cases||Total Cases|
|Paper Returns Awaiting Processing||Received in CY 2020||0||32,000||32,000|
|Received in CY 2021||5.5 M||3.8 M||500,000||9.8 M|
|Total Awaiting Processing||5.5 M||3.8 M||500,000||9.8 M|
|Paper and E-File Returns Suspended During Processing||Error Resolution Cases (ERS) (generally, something on the return
does not match information that the IRS has on file)
|Processing Rejects (returns where a schedule is missing or where a
form has been omitted)
|1.1 M||266,000||1.4 M|
|Unpostables (return cannot be processed – commonly caused by entity
problems with the taxpayer’s identification number, name, or both)
|Suspected Identity Theft (As of August 31, 2021 for business and
September 1, 2021 for individuals)
|1.9 M||22,000||1.9 M|
|Total Suspended Returns||4.4 M||1.3 M||5.7 M|
|Unprocessed Amended Returns (Forms 1040X)||2.1 M||2.1 M|
|Total Returns Awaiting Processing||17.6 M|
This past filing season, the IRS experienced an unprecedented number of returns requiring a manual review by its Error Resolution System (ERS). The IRS systemically identifies potential errors made on a taxpayer’s return and then requires an ERS employee to manually review the return to address the identified error(s). During a typical filing season, the ERS employee can quickly determine if an error was made and move the return through the process – but this filing season is anything but typical. This year, compared to prior years, this review process was more extensive because ERS had to manually verify all returns where there is a discrepancy in the Recovery Rebate Credit, or where the taxpayer elected to use 2019 earnings for the purpose of claiming the Earned Income Tax Credit or Additional Child Tax Credit. This resulted in millions of returns being suspended, creating a huge backlog. If an error is confirmed, a notice will be sent to the taxpayer either requesting additional information or informing the taxpayer the error has been corrected through the IRS’s math error authority. The IRS has reduced the number of returns assigned to ERS from an historical high of 9.8 million on May 1, 2021, to the current level of 436,000 individual returns as of September 11, 2021.
Taxpayers have experienced processing delays with both e-filed and paper returns, but these delays are more significant for paper-filed returns because the information on paper returns must be manually input into IRS systems before processing. As of the end of August, it is estimated that over 15 million paper individual returns were filed, which is an increase of 35 percent from the last filing season. This manual process (i.e., open, sort, enter, and review) requires a devotion of human resources and results in considerably longer processing times when compared to returns filed electronically. Specifically, without encountering any major obstacles, a paper return will typically take about 6-8 weeks to process, while an electronically filed return will take about three weeks and will be processed even faster if the taxpayer selects direct deposit for his or her refund. Although there are obstacles for some taxpayers filing their returns electronically, it is overall an easier method for taxpayers to file their returns and a more expedient way for the IRS to process them.
Reminder: October 15 is the extended filing date for calendar year 2020 Forms 1040. Taxpayers who have not filed their 2020 return should make every effort to file their return electronically to speed up the processing and issuance of potential refunds.
Despite these manual processes, the IRS has made significant progress in working through its backlogged inventory of paper returns.
The IRS reports that all paper and electronic individual returns received prior to April 2021 have been processed if the return had no errors or did not require further review. For tax returns that need additional manual review, the IRS anticipates being back to its normal processing pace by the end of 2021, much to the dismay of many taxpayers.
As of July 10, 2021, the IRS had about 13.3 million paper returns still to be processed of which 7.3 million were individual Forms 1040. As of September 11, 2021, the IRS reduced the paper return backlog down to about 9.8 million returns, of which 5.5 million were individual Forms 1040. The IRS reports it has processed all Forms 1040 filed during the 2020 filing season (i.e., January 27, 2020 through July 15, 2020). However, TAS is aware of more than a thousand paper returns (original or amended) filed during the 2020 filing season still awaiting processing that are not reflected on IRS systems. We have also learned from congressional offices about additional returns filed in 2020 that are not reflected on the IRS system. We are working with the IRS to locate these missing returns and ensure they are processed.
If a taxpayer filed an original return during 2020 and has verified that the IRS has no record of receiving it, TAS recommends the taxpayer refile the original return on paper, attach a cover letter and/or a note across the top that the return is being resubmitted, and include information about when the first return was filed. If there is an outstanding tax due, the resubmission may trigger the failure-to-file and failure-to-pay penalties and interest. TAS is discussing potential penalty abatement options and recommends the IRS consider applying an abatement that will not result in the use of the taxpayer’s first-time abatement (FTA), which can only be applied once every three years, thereby preserving the FTA for future use.
Since filing a duplicative original or amended return could cause problems if the IRS finds the original return in the meantime, it is imperative that taxpayers make every effort to confirm whether the IRS has received the return before resubmitting another. If taxpayers have made such confirmation, they should refile the return and include the notations mentioned above.
(See the Wednesday, September 22 blog post for additional information on how to check the status of a filed return and next week for requesting and decoding an IRS transcript of account.)
A welcome addition to IRS.gov is the IRS’s operations page that provides general information and updates on its filing season information, progress, and steps to help taxpayers or tax professionals. Some of the issues addressed include:
To be continued tomorrow…
The views expressed in this blog are solely those of the National Taxpayer Advocate. The National Taxpayer Advocate presents an independent taxpayer perspective that does not necessarily reflect the position of the IRS, the Treasury Department, or the Office of Management and Budget.