The 2021 tax filing season presented IRS administrative challenges of unprecedented magnitude but long standing in their causes, the U.S. Government Accountability Office (GAO) said in a report released on Monday.
And while the issues uncovered in the GAO study stem primarily from the ongoing effects of the COVID-19 pandemic, they likely will persist unless the IRS rethinks and refocuses some of its practices, the GAO said.
The report builds on previous GAO analyses, most recently a preliminary assessment of the 2021 tax filing season released in mid-February and highlighted in testimony before the House Ways and Means Committee by Jessica Lucas-Judy, director, Strategic Issues, of GAO, the primary contact for two reports. The latest report, titled Tax filing: 2021 performance underscores need for IRS to address lingering challengesis directed to the leaders of the Congressional Tax Drafting Committee, but also includes six recommendations to IRS officials aimed at improving the handling of taxpayer returns and correspondence as well as meeting taxpayer information needs .
To assess the IRS’ performance in processing tax returns and providing taxpayer services during the 2021 filing season, GAO focused on tax returns withdrawn from processing due to errors. It also looked at how a backlog of returns from 2020 that carried over into 2021 resulted in longer processing times, requiring more interest payments on refunds, and the added burdens of much higher volumes of correspondence and telephone calls from taxpayers.
Tax returns with errors
In 2021, the IRS suspended its electronic processing and embarked on a cumbersome manual process with about 16 million returns with errors more than the 2017-2019 average, an increase of 86%, the report reported. GAO. The majority of these errors, 60%, were attributable to recent tax law changes aimed at providing pandemic relief to taxpayers, including a second year of the Rebate Recovery Credit (RRC) and, new for 2021, expansions. and increased refundability of earned income. tax credit and child tax credit. The number of RRC errors caught the IRS off guard, according to the GAO’s findings:
“Because IRS officials did not expect such a high volume of RRC errors, they did not implement the appropriate programming in IRS systems to allow for automated corrections,” says The report. In other words, the IRS had the power to correct mathematical errors for the RRC, but not the ability. As a result, around 11.5 million declarations containing RRC errors were blocked for months. GAO auditors’ interviews with IRS officials in December 2021 suggested that the IRS was aware of this issue and had made computer programming improvements for the anticipated even greater volume of taxpayer error in this regarding additional new legislation effective for the 2021 tax year reflected in returns to be processed this year, according to the report.
Treatment of returns and interest
For all returns, the IRS started the 2021 season with a backlog of 8 million individual and business returns from the previous year. The backlog has grown to around 10.5 million returns by the end of 2021.
One consequence of longer processing times has been increased interest paid on refunds: In fiscal year 2021, the IRS paid $3.27 billion in interest, a 8% increase compared to FY20. The entire increase was due to individual declarations; interest paid on corporate yields was down 18%, although higher than in 2019. Modified yields were a major driver of interest payments; although they accounted for only about 4% of returns, they accounted for 42% of total interest paid.
Corporate returns had a higher ratio of interest dollars to modified returns than individual returns, which is part of a multi-year trend but also reflects retroactive tax law changes affecting corporations, including carrybacks of net operating losses. Another, for amended returns from individuals and businesses, the GAO said, was that “unlike a typical tax return, the IRS treats amended returns as taxpayer correspondence,” which posed its own significant problems. .
Correspondence with taxpayers, telephone calls and other forms of assistance
Correspondence inventory nearly tripled in the 2021 season, compared to 2019, and “telephone demand skyrocketed” from 39 million calls in the 2019 season to 195 million in 2021, that’s five times more, the GAO said. The majority of appeals in 2021, 53%, however, were unsuccessful. Reasons for the much higher number of appeals included questions from taxpayers about late repayments and new provisions in the law, including a retroactive change in the taxation of unemployment benefits.
“Taxpayers experienced a whirlwind of confusion when they sought help with their delayed refunds,” the GAO concluded.
The IRS has hired about 3,800 new customer service staff to answer calls, but not in time to do so during the busiest part of tax season, the GAO said. Additionally, these positions have seen higher than normal attrition and absences, in part due to the pandemic.
Online visits to the IRS’ Where’s My Refund web portal are up 52% from 2019, but, as National Taxpayer Advocate Erin Collins also pointed out, the value to taxpayers of information it provides is limited. User satisfaction with the portal, as measured by an IRS questionnaire, has steadily declined since 2018, reaching a new low in 2021 of 52% satisfied with its ease of use and only 24% satisfied with its usefulness , reported the GAO. Additionally, taxpayers seeking more information than the three statuses offered on the site, “return received,” “refund approved,” and “refund sent,” were then likely to call the IRS, further choking the phone lines.
As incoming correspondence increased, the time required for the IRS to respond to it also increased; at the end of the 2021 season, 46% of mail received, representing 2.7 million mailings, was older than the 45-day target.
Meanwhile, in-person assistance at IRS Taxpayer Assistance Centers increased slightly to around 1 million taxpayers in 2021 from 700,000 in 2020, but both numbers represented part of a longer-term decline in visits, from 5.5 million in 2015, as the service has focused on new support channels. However, the GAO noted that the IRS 2021 Report on the First Taxpayer’s Law to Congress included plans to maintain in-person assistance in its roster, implementing online video conferencing with IRS staff and colocation services at post offices and other federal government locations, pending additional funding.
The GAO recommended in the report that the IRS:
- Develop a process to identify, analyze and address the underlying causes of taxpayer errors in returns;
- Identify, monitor, and report to the Treasury and Congress the reasons for payments and reimbursement interest amounts related to individuals and businesses;
- To the extent of the IRS’s control, take steps to reduce the amount of refund interest paid;
- modernize and improve Where’s My Refund to fully meet the needs of taxpayers;
- Estimate, monitor, update and periodically communicate to taxpayers and other stakeholders its timelines for resolving its backlog of correspondence;
- Develop and communicate a plan, including costs and benefits, for providing in-person taxpayer services, versus its plans to expand virtual service options.
The IRS agreed with four of the recommendations, but disagreed with the first recommendation regarding root cause analysis of taxpayer errors. That could require it to duplicate work, the IRS replied, because it already has a “robust process” for doing so, and it typically notifies taxpayers of common errors through direct mail and information about its website. However, the GAO said, while the IRS can identify and fix its own internal or technical problems, it needs to better understand how and why taxpayers make certain mistakes to help itself and Congress mitigate them.
The IRS also disagreed with the GAO’s recommendation to investigate and report interest refunds, saying interest is required by law and the amount of interest paid is not ” not a reliable or meaningful trade measure”. Both of these objections, the GAO countered, noting that the obligation to pay interest is to some extent within the control of the IRS. And in those cases, the information could help the IRS allocate its resources to prioritize its processing of returns to minimize interest payments, the GAO said.
The AICPA continues to advocate for better IRS services; visit the webpage describing AICPA’s advocacy efforts for more information.
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