By the end of May 2022, the Internal Revenue Service (IRS) had a backlog of 21.3 million unprocessed paper tax returns, up by 1.3 million since last year. This is according to a report by National Taxpayer Advocate (NTA) Erin M. Collins to Congress. The report also expressed concern about continuing delays in processing paper-filed tax returns and their impact on taxpayer refunds.
Massive IRS Backlog Partly Blamed on Paper Returns
The report by the tax agency’s independent watchdog indicated that the IRS had failed to make progress in eliminating its paper backlog because its pace of processing paper tax returns has not kept up with new receipts. Out of the 21.3 million unprocessed paper tax returns 7.4 million businesses are still waiting for their refunds.
More than 75% of individual income tax return filings result in refunds that millions of taxpayers rely on to pay their basic living expenses. Delays in processing tax returns can result in financial difficulties and frustration for many.
Taxpayers who file electronically have fared relatively well with more than 85% of them having no problems. Processing paper tax returns however continues to be a challenge for the I.R.S. as the tax documents must be manually transcribed into its computer systems. In May, the IRS processed an average of around 205,000 individual income tax returns (Forms 1040) per week. The Form 1040 backlog by the end of May stood at 8.2 million, with millions more paper tax returns not yet classified or expected to arrive before the extended filing deadline of October 15. The report indicated that the IRS would have to process well over 500,000 Forms 1040 per week to eliminate the backlog this year.
Forms 1040 are just one component of the paper tax returns processing backlog. Millions of business tax returns and amended tax returns both individual and business are also filed on paper. The overall backlog this year has increased by 7% from last year.
Delays in tax refunds have also resulted in businesses waiting extended periods of time to receive Employee Tax Retention Credits for which they are eligible as well.
“That the backlog continues to grow is deeply concerning, primarily because millions of taxpayers have been waiting six months or more to receive their refunds,” Erin M. Collins advocate, wrote in the report.
Calls for More Funding to Increase Capacity
The NTA’s Purple Book contains a list of legislative recommendations on how to improve taxpayer services in the U.S. The NTA has recommended that the IRS be provided with additional funding to help improve taxpayers’ experience and modernize the IRS’s Information Technology systems. It noted that since 2010, the IRS budget has been reduced by nearly 20% after adjusting for inflation. This was largely as a result of budget reductions the IRS’ processing capacities were limited.
For example, the IRS finished the 2021 filing season with a backlog of 35.3 million returns that required manual processing. When taxpayers called the IRS for assistance, only about 11 percent reached a Customer Service Representative (CSR), with hold times for taxpayers who got through averaging about 23 minutes. The IRS’s antiquated IT systems also desperately need upgrades.
In 2021, the IRS collected about $4.1 trillion on a budget of about $11.9 billion, producing a remarkable average return on investment of about 345:1. Additional funding for the IRS would not only improve taxpayer service but would almost surely increase revenue collection.
The National Taxpayer Advocate (NTA) submits two reports to Congress each year: an Annual Report, delivered in January, and an Objectives Report, delivered in June.
Given the problems with paper-filed returns in previous years, I’m surprised this many filed paper returns at all.