“We have begun to see the light at the end of the tunnel. I am just not sure how much further we have to travel before we see sunlight.”
“We have begun to see the light at the end of the tunnel. I am just not sure how much further we have to travel before we see sunlight.”
IR-2023-04, Jan. 11, 2023
WASHINGTON — National Taxpayer Advocate Erin M. Collins today released her 2022 Annual Report to Congress, saying taxpayers and tax professionals “experienced more misery in 2022” due to paper processing delays and poor customer service. But the report also says the Internal Revenue Service made considerable progress in reducing the volume of unprocessed tax returns and correspondence and is poised to start the 2023 filing season in a stronger position.
The Advocate’s report assesses taxpayer service during 2022, identifies the ten most serious problems taxpayers are experiencing in their dealings with the IRS, and makes administrative and legislative recommendations to address those problems. This year’s report recommends specific initiatives that Collins is urging the IRS to include in its plan showing how the additional funding it received in the Inflation Reduction Act will be spent. It also contains two research studies – one on ways to restructure the Earned Income Tax Credit to increase participation among eligible taxpayers while reducing improper payments, and the other designed to help the IRS improve its online operations by studying the functionality of online operations offered by over 40 states and several foreign countries.
Return processing and refund delays. For most taxpayers, the most important function the IRS performs each year is issuing timely tax refunds. In 2022, about two-thirds of individual taxpayers were entitled to refunds, and the average refund amount was nearly $3,200. The report says the IRS failed to meet its responsibility to pay timely refunds to millions of taxpayers for the third year in a row. About 13 million individual taxpayers filed paper returns. Because of paper processing delays, refunds for these taxpayers were delayed, generally by six months or longer. Millions of e-filed individual returns were “suspended” because they tripped IRS processing filters and required manual review by IRS employees before refunds could be released. Hundreds of thousands of business returns claiming the Employee Retention Tax Credit were delayed.
However, the report says the IRS will be starting the 2023 filing season in much better shape than the last two years. The IRS began 2022 with an unprocessed paper backlog of 4.7 million original individual returns (Forms 1040), 3.2 million original business returns, and 3.6 million amended returns (individual and business combined). When the Advocate’s report went to press in mid-December 2022, the IRS had reduced those backlogs to 1 million original individual returns, 1.5 million original business returns, and 1.5 million amended returns. By Dec. 23, the IRS had further reduced its unprocessed paper backlog of original individual returns to about 400,000 and original business returns to about 1 million. This significant reduction in the paper return inventory will enable the IRS to begin processing paper-filed tax year 2022 returns during the upcoming filing season. That contrasts with the previous two years, when the IRS was not able to process current-year returns until months after the filing season had ended.
The number of returns suspended during processing is the only significant return category in which inventories increased. The IRS entered 2022 with an inventory of 4.2 million suspended returns. The inventory grew to 5.9 million suspended returns by mid-December.
Cases involving suspected identity theft account for about half the inventory of suspended returns. In mid-December, the IRS reported 2.9 million identity theft cases in its inventory. While some will turn out to be fraudulent claims, the IRS website as of January 9 states: “[D]ue to extenuating circumstances caused by the pandemic, our identity theft inventories have increased and on average it is taking about 360 days to resolve identity theft cases.” The report calls a year-long delay “unacceptable” and urges the IRS to assign additional employees to process these cases.
Delays in processing taxpayer correspondence and other cases in the Accounts Management function. The IRS sent millions of notices to taxpayers during 2022. These included 17 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 identity where IRS filters flagged a return as potentially fraudulent, correspondence examination notices, and some collection notices. Notices often require written taxpayer responses. If the IRS did not process a taxpayer response, it may have taken adverse action against the taxpayer or not released the refund claimed on the tax return. During fiscal year (FY) 2022, it took the IRS an average of 193 days to process taxpayer responses to proposed tax adjustments – about six months. That compares with 89 days in FY 2019, the most recent pre-pandemic year. The report also calls the delays in resolving these cases unacceptable.
Difficulty reaching the IRS on its toll-free telephone lines. The IRS received 173 million calls during FY 2022. Only 22 million (13%, or roughly one out of eight calls) got through to an IRS employee. As a result, most callers could not get answers to their tax-law questions, receive help with their account problems, or speak with an employee about compliance notices. Those who got through waited an average of 29 minutes on hold before the call began.
Telephone service for tax professionals was worse than the prior year and hit an all-time low. Because tax professionals prepare the majority of tax returns and often call with complex account-specific questions, the IRS has established a Practitioner Priority Service (PPS) telephone line to handle their calls. In FY 2022, IRS employees answered only 16% of PPS calls (fewer than one out of six), and the average hold time for those who got through was 25 minutes. Telephone delays place tax professionals in the difficult position of billing clients for the time spent trying to reach the IRS or writing off that time. “Tax professionals are key to a successful tax administration,” Collins wrote. “The challenges of the past three filing seasons have pushed tax professionals to their limits, raising client doubts in their abilities and creating a loss of trust in the system.”
In the report’s preface, Collins predicted that taxpayer service will improve in 2023. “We have begun to see the light at the end of the tunnel,” she wrote. “I am just not sure how much further we have to travel before we see sunlight.”
The report cites three reasons for optimism: (1) the IRS has largely worked through its backlog of unprocessed tax returns, even though it remains challenged with a high volume of suspended returns and correspondence; (2) Congress has provided the IRS with significant additional funding to increase its customer service staffing; and (3) with the benefit of Direct Hire Authority, the IRS has recently hired 4,000 new customer service representatives, and it is seeking to hire 700 additional employees to provide in-person help at its Taxpayer Assistance Centers. Direct Hire Authority has enabled the IRS to reduce the number of days from the time it posts an announcement on USAJobs.gov until it onboards a new employee by more than half.
But Collins warned the improvements will not be immediate. “Staff increases come with growing pains,” she wrote. “As new employees are added, they must be trained. For most jobs, the IRS does not maintain a separate cadre of instructors. Instead, experienced employees must be pulled off their regular caseloads to provide the initial training and act as on-the-job instructors. In the short run, that may mean that fewer employees are assisting taxpayers, particularly experienced employees who are likely to be the most effective trainers.”
She also pointed out that until additional fully-trained employees are on board, taxpayer service will continue to be a zero-sum game. For example, customer service representatives in the Accounts Management function split their time between answering the phones and processing taxpayer correspondence. If the IRS assigns more employees to answer the phones, correspondence processing will be slower. If the IRS assigns more employees to process correspondence, phone service will decline.
“The IRS will have to perform a difficult balancing act with its current resources and will need to ensure it does not create a new paper backlog in 2023 by reassigning too many Accounts Management employees from processing case inventories to answering the phones,” Collins wrote. “The IRS needs to end the vicious cycle of paper backlogs. As employees are trained and report for duty, I expect we will start to see improvements in service, probably by the middle of 2023.”
In August 2022, Congress enacted the Inflation Reduction Act (IRA), which provided the IRS with funding of nearly $80 billion over the next ten years to supplement its annual appropriations. While the funding earmarked for tax law enforcement has been controversial, the legislation included supplemental funding of $3.2 billion for taxpayer services, including pre-filing assistance and education, filing and account services, and taxpayer advocacy services; $4.8 billion to enable the IRS to continue modernizing its information technology (IT) systems, including advancement of customer callback and other technology to provide a more personalized customer experience; and $25.3 billion to support taxpayer services and other operations. The report said that this additional funding could be a gamechanger for taxpayers and tax professionals.
“If spent wisely, this funding will give IRS management the tools it needs to bring U.S. tax administration into the 21st century by enabling it to hire and train the workforce of the future, replace antiquated IT systems, and generally revamp the taxpayer experience based on principles of fair and equitable tax administration,” Collins wrote.
In an August 17, 2022 memorandum, the Secretary of the Treasury directed the IRS Commissioner to produce an operational plan within six months that details how the additional IRA funding will be spent. In the report’s preface and in discussing the 10 most serious taxpayer problems, Collins recommends numerous initiatives for inclusion in the plan, including the following:
There are steps the IRS can take to address all three of these limitations. It can modernize its e-filing platform to accept all IRS forms and schedules and taxpayer attachments. It can accept and review returns that violate some IRS systems’ programming rules; otherwise, the taxpayer whose return is rejected must file it on paper, requiring the IRS to transcribe it. And if some software packages allow taxpayers to submit attachments and others do not, the IRS can post a list of software packages that allow attachments online. That way, taxpayers with attachments will know which packages they can use to e-file their returns. “If the IRS makes it possible for all taxpayers to e-file their returns,” the report says, “the number of paper-filed returns is likely to drop dramatically.”
The National Taxpayer Advocate’s 2023 Purple Book proposes 65 legislative recommendations for consideration by Congress. Among them are the following:
The report contains a taxpayer rights assessment that presents performance measures and other relevant data, a description of TAS’s case advocacy operations during FY 2022, a summary of key TAS systemic advocacy accomplishments, and a discussion of the 10 federal tax issues most frequently litigated during the preceding year. For the second year, the section on most litigated tax issues contains an analysis of substantially all cases petitioned in the Tax Court rather than simply decided cases, providing a much broader view of issues taxpayers bring to court. Also, for the second time, the report includes a section titled “At a Glance,” which provides concise summaries of the 10 “most serious problems.” It is intended to give readers a quick overview of each issue so they can decide which ones they want to read about in depth.
Please visit https://www.taxpayeradvocate.irs.gov/AnnualReport2022 for more information.
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