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IRS ‘Buried’ in Paper Tax Returns: Taxpayer Advocate

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What You Need to Know

  • As of early February, the IRS had about 17.6 million tax returns and about 5.9 million pieces of taxpayer correspondence that require manual processing.
  • Short-term steps can be taken to process returns more quickly, IRS Taxpayer Advocate Erin Collins said.
  • Collins suggests increasing pay for IRS employees processing returns, who typically start at less than $25,000 a year.

Paper processing remains the Internal Revenue Service’s “biggest challenge, and that will continue throughout 2022,” Erin Collins, the IRS taxpayer advocate, told senators Thursday.

As of late December 2021, the IRS “still had backlogs of 6 million unprocessed original individual returns (Form 1040 series) and 2.3 million unprocessed amended individual returns (Forms 1040-X) — with some return submissions dating back at least to April and many taxpayers still waiting for their refunds 10 months later,” Collins testified before the Senate Finance Committee.

In addition, “more than 2 million employers’ quarterly tax returns (Forms 941 and 941-X) remained unprocessed,” she said.

As of early February, the IRS “had in its inventory about 17.6 million tax returns and about 5.9 million pieces of taxpayer correspondence/Accounts Management cases (excluding amended tax returns) that require manual processing,” Collins testified.

In releasing the annual report to Congress, “I said that paper is the IRS’s Kryptonite and that the IRS is still buried in it. There is no doubt that paper processing remains the agency’s biggest challenge, and that will continue throughout 2022,” Collins said.

Short-Term Recommendations

Processing delays “are the most serious problem facing taxpayers,” Collins said, and the IRS “is developing plans to work through its backlog as quickly as possible.”

Some immediate steps, Collins explained, can be implemented to process returns more quickly. They include:

  • Prioritizing the processing of original and amended paper tax returns. The IRS has begun temporarily reassigning employees from other areas to its accounts management function and is providing them with training to process tax returns.
  • Exploring options to increase compensation for processing employees, minimize hiring lags and use outside consultants to assist if necessary. Submission processing employees are generally hired at or around the GS-3 level. The current annual base pay for GS-3 employees is $24,749. In this economy, it is not surprising that the IRS is having trouble finding enough suitable job applicants. Recently, the IRS announced 5,000 positions in its campuses, but only 179 positions have been filled so far.
  • Providing penalty relief for 2020 and 2021 tax returns. The penalties for failure to file, failure to pay and failure to deposit must be abated if a taxpayer can show that the failure to comply was “due to reasonable cause and not due to willful neglect.” Where the taxpayer does not make this showing, the IRS can abate these penalties under its “first-time abatement” procedures, which require that the taxpayer is otherwise compliant and has not used an FTA penalty waiver in the preceding three years.
  • Creating and updating a weekly “dashboard” on IRS.gov to provide the public with current and specific information about delays. The IRS has created a webpage, IRS Operations During COVID-19: Mission-critical functions continue, and it provides certain high-level information. It does not, however, provide detailed information on processing backlogs.