National Taxpayer Advocate Erin Collins told lawmakers last Wednesday that 2021 was "the most challenging year taxpayers and tax professionals have ever experienced" and that she was "deeply concerned" about the upcoming filing season.
In her annual report to Congress, Collins said 2021 "provided no shortage of taxpayer problems," and more await the 2022 filing season.
"While my report focuses primarily on the problems of 2021, I am deeply concerned about the upcoming filing season," Collins added in releasing the report. "Paper is the IRS's Kryptonite, and the agency is still buried in it."
As of late December, Collins reported, the IRS "had backlogs of 6 million unprocessed original individual returns (Forms 1040), 2.3 million unprocessed amended individual returns (Forms 1040-X), more than 2 million unprocessed employer's quarterly tax returns (Forms 941 and 941-X), and about 5 million pieces of taxpayer correspondence — with some of these submissions dating back at least to April and many taxpayers still waiting for their refunds nine months later."
According to the 2021 annual report, "[t]he imbalance between the IRS's workload and its resources has never been greater."
When taxpayers file their 2021 tax returns, millions who received Advance Child Tax Credit (AdvCTC) payments will have to reconcile the monthly advance payments they received with the amounts for which they are eligible, Collins explained.
"Similarly, eligible taxpayers who did not receive some or all of the third round of stimulus payments, as authorized by the American Rescue Plan Act, will have to claim them as credits on their returns. Thus, the unprecedented processing and refund delays taxpayers experienced in 2021 could be as bad, and potentially worse, in 2022 if taxpayers do not file electronically or do not properly reconcile their monthly AdvCTC payments or the third stimulus payment with their 2021 return."
We professionals already know that the phone is never answered, that letters lie unopened for months, and that 90-day and similar notices are being incorrectly issued even though the IRS cashed the check months earlier. The response times to these duplicate letters will double or triple the announced IRS paper backlog and our fear is that we are in a state of collapse in the US income tax system.
Since the Taxpayer Advocate’s office announced on November 10th that they would not accept new cases we recommend all IRS issues be routed through the office of your elected Member of Congress. They seem to be ignoring or unaware of the problem, and they are the only solution. Additionally, all automated compliance actions and letters need to be stopped immediately.
Here are the top 10 worst problems encountered by taxpayers in 2021, as explained by Collins' annual report.
1. Processing and refund delays.
In 2021, tens of millions of taxpayers were forced to wait extraordinarily long periods for the IRS to process their tax returns, issue their refunds and address their correspondence. More than 75% of individual income tax return filings resulted in refunds. At the close of the 2021 filing season, the IRS had 35.3 million returns awaiting manual processing.
As the IRS prepares to begin the 2022 filing season, it will carry over millions of unprocessed returns and millions of pieces of taxpayer correspondence, resulting in even longer delays for taxpayers.
2. The "Where's My Refund?" tool often could not answer the question.
Taxpayers attempted to check the status of their refunds on IRS.gov more than 632 million times last year, but "Where's My Refund?" does not provide information on unprocessed returns. It does not explain any status delays, the reasons for delays, where returns stand in the processing pipeline, or what actions taxpayers need to take if any.
3. Telephone service was the worst it has ever been.
The combination of processing delays and questions about new programs like the AdvCTC caused call volumes to almost triple from the prior year to a record 282 million telephone calls. Customer service representatives only answered about 32 million, or 11%, of those calls.
"Among the lucky one in nine callers who were able to reach a CSR, the IRS reported that hold times averaged 23 minutes," the report says. "Practitioners and taxpayers have reported that hold times were often much longer, and frustration and dissatisfaction were high throughout the year with the low level of phone service."
4. The IRS took months to process taxpayer responses.
The IRS sent tens of millions of notices to taxpayers during 2021. These included nearly 14 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), and notices requesting a taxpayer authenticate his or her identity.
In many cases, taxpayer responses were required, and if the IRS did not process a response, its automated processes could take adverse action or not release the refund claimed on the tax return. The IRS received 6.2 million taxpayer responses to proposed adjustments and took an average of 199 days to process them — up from 74 days in FY 2019, the most recent pre-pandemic year.
5. Staff shortages hurt service.
The IRS's budget was reduced by nearly 20% in inflation-adjusted dollars from 2010 to 2021. From 2010 to 2020, the IRS lost over 33,000 full-time employees. Over the past year, the IRS faced several additional staffing-related challenges. In FY 2021, the IRS saw a spike in call volume resulting in the lowest telephone level of service on record, which it must address through a combination of measures, including additional online capabilities and personnel. Staffing challenges also impacted all aspects of IRS operations and are negatively affecting taxpayers and tax administration.
6. A lack of transparency led to confused taxpayers.
The IRS is not consistently transparent and does not provide clear and timely information about what taxpayers need to know, leaving many confused and frustrated. For example, taxpayers could not access the status details of IRS operations, such as a filing season backlog, delayed refunds, returns pulled for inconsistencies, or amended return processing delays.
Further, taxpayers are confused by unclear notices and IRS guidance, and they don't always understand the IRS's reasons for its decisions, as a rationale is not always provided.
7. Filing season delays.
The 2021 filing season can be described as the perfect storm; it was one of the most challenging filing seasons experienced by tens of millions of taxpayers. The COVID-19 pandemic highlighted severe problems with the IRS's reliance on antiquated systems and processes, such as manually processing millions of tax returns, which stymied tax administration and produced historically low service levels. On May 17, 2021, the postponed filing season due date, over 35 million returns were still awaiting manual processing.
8. E-filing barriers.
During the 2021 filing season, about 91% of individual returns and about 69% of business returns were e-filed through Oct. 23, 2021. While e-filing significantly benefits both taxpayers and the IRS, the IRS still receives a significant number of paper-filed returns. Paper returns require manual processing, resulting in processing delays and potential transcription errors. In contrast, e-filing significantly benefits taxpayers due to reduced transcription errors and quicker return processing and refund turnaround times.
9. Digital communications need to be expanded.
During the pandemic, the IRS made it easier for some taxpayers to securely sign and submit documents electronically, receive answers to questions through text chat, and access limited services through a mobile device. But the IRS and taxpayers would benefit from prioritizing and expanding those tools at a more rapid pace. Taxpayers who wish to use digital communication services should have expanded access to information and transactional interactions with the IRS.
10. Taxpayers who can't pay face hurdles in getting relief.
Many taxpayers have difficulty paying their tax liabilities. The IRS offers collection alternatives for financially struggling taxpayers, but the other options are underutilized. Some taxpayers seeking installment agreements do not receive the relief from user fees Congress intended because IRS procedures for identifying low-income taxpayers are flawed. Requests for offers in compromise have declined in seven of the past eight years.
The IRS continues to issue automated collection notices despite backlogs in processing taxpayer correspondence and amended returns. Some taxpayers are surprised to learn they cannot dispute the merits of their underlying liabilities at a collection due process hearing because IRS collection notices do not adequately explain their rights.
About the Taxpayer Advocate Service
TAS is an independent organization within the IRS that helps taxpayers and protects taxpayer rights. Your local advocate's number is available in your local directory and at Contact Us. You may also call TAS toll-free at 877-777-4778. TAS can help if you need assistance resolving an IRS problem, if your problem is causing financial difficulty, or if you believe an IRS system or procedure isn't working as it should. And our service is free. For more information about TAS and your rights under the Taxpayer Bill of Rights, go to the Taxpayer Advocate Service website. You can get updates on tax topics at YourVoiceAtIRS (Facebook), YourVoiceatIRS (Twitter) and TASNTA (YouTube).