The 2022 filing season is underway and it is anticipated to be a challenging one for taxpayers, preparers, and the IRS for paper filed returns and correspondence. The IRS has issued guidance providing tips on how taxpayers can avoid problems, and one important tip that I cannot stress enough is that taxpayers should make every effort to electronically file (e-file) their returns, especially during this challenging filing season, because the IRS will first process the backlog of 2020 paper returns before it begins processing 2021 paper returns.
Paper is the IRS’s kryptonite, and the agency is buried in it. Processing paper returns and correspondence remains the agency’s biggest challenge, which will certainly continue throughout 2022. Taxpayers and tax preparers can help speed up processing by e-filing returns, requesting direct deposit for refunds, and triple checking for errors. It is crucial to check for accuracy when reporting tax items related to the following: Forms W-2, Forms 1099, the Earned Income Tax Credit, the Recovery Rebate Credit, Advance Child Tax Credit, and other refundable credits. As of April 1, 2022, the IRS had 11.4 million unprocessed original paper individual and business returns (including 3.3 million returns received in 2021), 5.1 million paper and electronic returns suspended for manual processing, 3.7 million unprocessed amended returns, and 7.3 million pieces of correspondence and other forms submitted by taxpayers. Many of the unprocessed return submissions date back to at least April 2021 and millions of taxpayers are still waiting for their refunds, with some taxpayers waiting as long as a year. For the latest information on the status of return processing, see the IRS updates.
The IRS generally processes paper returns on a first-in, first-out basis. Therefore, taxpayers who file paper returns must wait for the IRS to first process the existing backlogged paper returns. When the IRS eventually processes their paper return, an IRS employee will manually transcribe the data from the return line by line, number by number, and this process introduces errors. Last year, IRS employees made errors on about 22 percent of the paper individual returns they transcribed, and these transcription errors could trigger unwarranted compliance actions.
Taxpayers who e-file their returns avoid the extreme processing delays and manual transcription errors associated with paper return processing. If no errors are detected, the e-filed return sails though the automated review process and any related refund will usually be paid within 21 days.
Some taxpayers may not have access to the internet, a computer or smart phone, and others may simply prefer to paper file. In addition, certain forms or schedules cannot be e-filed. Many taxpayers have indicated they believe that filing by paper is more secure. While this concern is certainly understandable, the IRS has strong safeguards in place to make e-filing a safe and secure option. In fact, paper filing introduces significant risks and burdens to taxpayers, including the avoidable compliance actions associated with substantial paper processing delays, transcription errors, and refund delivery delays. Millions of taxpayers and preparers prefer to e-file, but are unable to because MeF does not support e-filing some IRS forms. Other taxpayers and preparers attempt to e-file, but the IRS Modernized e-File (MeF) system rejects their submissions.
Many taxpayers and preparers who prefer to e-file are unsuccessful when they attempt to transmit the return electronically, and unfortunately, they may not understand the reason. Basically, the IRS’s system rejects electronically submitted returns if they break one or more of the MeF business rules. E-file rejections are meant to prevent more downstream compliance problems and prevent fraud.
Last year, the top reason 2020 individual income tax returns were rejected involved identity verification. The MeF business rules require the primary taxpayer and the taxpayer’s spouse, if applicable, to accurately enter the adjusted gross income (AGI) reported on the prior year return or provide a self-select PIN. If the taxpayer or preparer used the same commercial software to prepare the prior year return, the commercial tax return preparation software typically provides the prior year AGI. If a taxpayer uses a software program for the first time or used a different software program than the previous year, they need to enter the prior AGI or PIN information manually. If the AGI amount or PIN does not match IRS records, the return is not accepted by the IRS for e-filing.
Last year, as a result of the inventory backlog, many 2019 tax returns were not yet processed by the time the taxpayer attempted to e-file their 2020 tax return. If the IRS’s system did not have a record of the AGI reported due to the unprocessed 2019 return, it caused the e-filed 2020 return to trip the MeF business rule(s) and prevented the e-filing. These e-file rejections could have been avoided if taxpayers and preparers understood the workaround on how to fix the problem. Once the issue surfaced, the IRS provided guidance that taxpayers with unprocessed 2019 returns should have entered “0” as their 2019 AGI. However, many return preparers and taxpayers were unaware of the guidance at the time of filing, did not enter “0,” and had to file a paper 2020 tax return after the IRS rejected the e-file attempt. Although the IRS’s website included this key information it was not widely distributed or understood.
Once again, the IRS has issued guidance for the 2022 filing season, instructing taxpayers and preparers what they need to do to avoid an e-file rejection.
Specifically, the IRS is instructing taxpayers and preparers that they should enter $0 (zero dollars) for the 2020 AGI if the 2020 tax return has not yet been processed. In addition, the IRS is instructing taxpayers to enter $1 as the 2020 AGI if they used the Non-Filer portal in 2021 to register for an advance Child Tax Credit payment or third Economic Impact Payment.
Taxpayers and preparers can determine the status of their 2020 return by accessing the following IRS applications: (1) the taxpayer’s Online Account application; (2) time permitting, the Get Transcript by Mail application (it generally takes five to ten calendar days to receive the transcript); or (3) Where’s My Refund? application if your 2020 return claimed a refund and you filed on or after July 1, 2021. All three applications will assist in determining if the taxpayer’s 2020 return has been processed.
Most importantly, taxpayers can avoid this identity verification e-file rejection altogether by obtaining an Identity Protection (IP) PIN before e-filing their 2021 return. If the taxpayer has an IP PIN, the IRS will verify the taxpayer’s identity through the IP PIN instead of requiring the prior year AGI or self-select PIN.
In my 2021 annual report, I implored the IRS to address the barriers taxpayers face when they want to e-file their return, especially when the rejection is due to the inability to include an IRS required form or schedule with the return. To reduce the burden imposed on taxpayers and the IRS, the IRS should explore how it can minimize the rate of occurrence of e-file rejections. The IRS may be able to reduce certain e-file rejections by educating taxpayers and preparers. When taxpayers and preparers attempt to e-file but the return is rejected because it broke one or more MeF business rules, the most effective way to communicate with them is to provide clear warnings of potential issues through the tax return preparation software products. Partnership with the software industry is key to ensuring that taxpayers and preparers receive the most recent guidance on how to address an e-file rejection so they may take corrective action and file electronically.
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.