IRS poised for a better start to the tax-filing season after 'misery in 2022,' watchdog report says
The Internal Revenue Service is set to start this year’s tax-filing season on better footing than the last few years, a new report found, even as challenges from the pandemic years remain.
This year’s report from the National Taxpayer Advocate credits the IRS for making significant progress in shrinking its massive paper jam from 4.7 million unprocessed returns at the end of 2021 to 400,000 as of Dec. 23, 2022. It further noted that increased federal funding, recruitment initiatives, and new digital solutions should help to address processing and customer service shortfalls.
Still, millions of American taxpayers endured unreasonably long refund delays last year, with some still waiting, and the report predicts it will take until midyear before major improvements in service are seen.
“The bad news is that taxpayers and tax professionals experienced more misery in 2022. The good news is that since the close of the 2022 filing season, the IRS has made considerable progress in reducing the volume of unprocessed returns and correspondence," National Taxpayer Advocate Erin M. Collins said in a press statement accompanying the release of her 2022 annual report to Congress.
“We have begun to see light at the end of the tunnel," she wrote. "I am just not sure how much further we need to travel before we see sunlight.”
Some returns continue to ‘sit in a pile of mail’
For many taxpayers, getting their tax refund on time is critical – especially as many households count on the extra cash to help offset the rising costs of food, housing, or childcare or mitigate an unexpected emergency.
In 2022, about two-thirds of individual taxpayers were eligible for refunds, which averaged $3,200. However, the IRS failed to pay timely refunds to millions of taxpayers for the third straight year, the report found.
“It’s been frustrating, clients think we have special access or have some contact directly with the IRS… and when the IRS is overwhelmed, I often can’t talk to anyone, either,” Rus Garofalo, president and founder of Brass Taxes, told Yahoo Finance. “You’re essentially advising people with this opaque barrier where we can’t communicate across these lines.”
Overall, roughly 13 million individual taxpayers filed paper returns, which faced delays of six months or longer, the National Taxpayer Advocate found. Millions more who had filed returns electronically had their returns suspended because the agency's processing filters malfunctioned, requiring a manual review.
Last year, the number of returns in suspended status jumped from 4.2 million to 5.9 million, due to an increase of 1.3 million suspected identity theft cases. By mid-December, roughly 2.9 million returns remained suspended due to identity theft.
“My sister lives overseas, so she had no choice but to file a paper return. Four months passed and the status of her return has not showed up in her IRS online account,” Eric Bronnenkant, head of tax at Betterment, told Yahoo Finance. “It’s not even about the refund anymore, it makes us wonder if they even processed it yet? I’m not sure, it may just be sitting in a pile of mail at the moment.”
IRS takes steps to improve
Still, the IRS made significant strides in reducing its backlog of unprocessed returns and correspondence.
According to the report, the IRS entered the 2022 tax year with an excess of 4.7 million original individual paper returns and 3.2 million original paper business returns. By Dec. 23, those figures had been cut down to 400,000 and 1 million, respectively, a larger reduction than in typical years.
"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," according to the press release accompanying the report.
For amended returns, the IRS cut its backlog from 2.4 million to 600,000 for individuals and from 1.2 million to 900,000 for businesses. Additionally, the IRS also reduced its inventory of correspondence/ accounts management cases — meaning inquiries received by mail or phone — from 6.3 million to 5.1 million. These 5.1 million cases will be carried over into the 2023 tax year, the report found.
Much of that progress was thanks to the agency’s all-hands-on-deck approach, according to the report. These initiatives included hiring new employees, working overtime, and testing and implementing digital solutions that could help process and scan returns and correspondence.
"The IRS appreciates the Advocate’s comments acknowledging the hard work of IRS employees to make substantial progress during 2022 on unprocessed tax returns and many other areas," the IRS said in a statement responding to the report. "The agency has worked to overcome unprecedented obstacles caused by the pandemic to continue delivering for the nation while also processing record amounts of tax returns."
The IRS also received $80 billion in federal funding through the Inflation Reduction Act, which the agency will use to improve its taxpayer services and modernize its technology over the next 10 years.
“The size of what the IRS is doing is hard to comprehend,” Garofalo said. “But I appreciate that the IRS was a bit more communicative about what was going on this year compared to years prior. Really, they are just trying to do an important job with limited resources and funding.”
‘Growing pains in 2023’
Last year, the IRS hired 4,000 new customer service representatives, and it plans to hire an additional 700 employees to provide in-person help at its Taxpayer Assistance Centers. The agency also reassigned existing employees to help with tax processing or answering calls, the report said.
While those are positive improvements, it doesn’t mean the inventory problems will be cleared overnight.
“Staff increases come with growing pains,” Collins wrote in the report. “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 caseholds to provide 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.”
The report also underscored that as these recruitment initiatives continue, it's likely that taxpayer services will remain limited. For instance, customer service representatives in accounts management split their time between processing returns and answering calls.
“I try to avoid telling my clients to call the IRS because I know they are going to have a hard time,” Garofalo said. “One of my clients filed a return, forgot about it, and 16 months later received their refund. We had previously exhausted all of our ways of communicating with the IRS and got no answer.”
IRS employees answered over 10 million fewer calls compared with the year prior, but the percentage of calls answered jumped slightly from 11% in 2021 to 13% in 2022. Those figures still mean that 7 out of 8 callers did not get through to a telephone representative, the report said. Time on hold increased to 29 minutes in 2022, up from 23 minutes the previous year.
According to the National Taxpayer Advocate, the IRS will have to “balance its act” to ensure they don’t create a new paper backlog in 2023 by reassigning too many employees to answer phones.
“As we enter 2023, the IRS must focus its resources on its core taxpayer mission — processing tax returns, paying refunds, answering and addressing calls, and providing in-person assistance to taxpayers who seek it,” Collins said. “It is crucial that the IRS eliminate the filing season backlog once and for all.”
As employees get trained and report for duty, Collins expects “to see improvements in service, probably by the middle of 2023.”
The agency itself also predicts a better tax-filing season this year.
"While much work remains, the IRS is poised to deliver a better 2023 tax season for the nation with more services for taxpayers, helped by critically needed new resources provided by the Inflation Reduction Act," the IRS said in its statement. "We look forward to working with the Advocate and others as we work to transform the IRS."
Gabriella is a personal finance reporter at Yahoo Finance. Follow her on Twitter @__gabriellacruz.
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