IRS still has ways to go in modernizing, improving service, watchdog report says

The Internal Revenue Service is not yet out of the woods, the agency’s watchdog revealed on Wednesday in a report to Congress, signaling several areas of chronic weakness including its long battle with paper returns and flawed customer service.

This year’s report from the National Taxpayer Advocate credits the IRS for its “all hands on deck” approach during the 2023 tax filing season, noting that $80 billion in increased federal funding from the Inflation Reduction Act, continued recruitment initiatives, and new digital solutions have helped address processing and customer service shortfalls.

Still, thousands of American taxpayers continued to face delays last year, particularly victims of tax-related identity theft, with some still waiting an average 19 months for the IRS to resolve their problems, the report found.

National Taxpayer Advocate Erin M. Collins called these delays “unconscionable,” urging the IRS to quickly prioritize resolving these cases.

Employee shortages and hiring delays also played a role in some of the continued backlogs that have bled into 2024, the report found, as IRS employees were shuffled from processing returns to answering taxpayer phone calls to meet the Treasury Department’s goal of 85% “level of service” on toll-free lines.

While the IRS did meet that goal, the metric itself was misleading, excluding many types of calls the agency receives and routes to other departments. According to the report, IRS employees answered just 29% of all calls received during 2023.

“When I released the National Taxpayer Advocate’s 2020 report, I wrote that the IRS in most cases ‘can effectively handle whatever it can automate,’ and when I released our 2021 report, I wrote that ‘paper is the IRS’s Kryptonite,” Collins said in a press statement. “Those observations continued to hold true in 2023.”

Collins added: “The areas in which taxpayers continued to experience delays were primarily those that required employees to process tax returns and taxpayer correspondence,” she wrote.

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Shuffling employees caused processing delays

After years of pain during recent filing seasons, the IRS finally cleared its massive backlog of paper-filed 1040 forms by the end of 2023.

The agency had been drowning in paper since the pandemic, with 17 million paper-filed 1040 Forms needing to be transcribed manually by the end of 2021. That figure shrunk to just 4.7 million at the start of the 2022 filing season, and was finally cleared last year.

“Overall, the magnitude of successes exceeded the areas of weakness in 2023, and most metrics showed significant improvement from the depths of the pandemic,” Collins wrote.

Still, backlogs in processing amended individual tax returns (Forms 1040-X), amended tax returns, and correspondence have continued to drag on. As of October 2023, the IRS had an inventory of 6.2 million unprocessed amended tax returns — virtually unchanged from December 2022.

At the same time, taxpayer correspondence and related cases more than doubled over that timeframe from 1.9 million to 4.3 million. The percentage of correspondence cases classified as “overage” in 2023 also reached its highest level in years, with nearly 70% of pending cases exceeding normal processing times as of October.

“Delays in processing amended returns translate into delays in receiving refunds,” the report noted. “Much of the paper inventory backlog [is attributed] to the Treasury Department’s decision to prioritize answering telephone calls over processing amended returns and correspondence.”

‘Waiting for the phone to ring’

The IRS did a better job of answering taxpayer phone calls in 2023 compared to previous years, according to the Taxpayer Advocate. However, it still has a long way to go.

Customer service representatives were shifted from processing returns to answering calls to achieve service goals, but often were “simply sitting around waiting for the phone to ring.”

“The IRS cannot easily shuffle employees back and forth between answering phones and processing correspondence, so unproductive employee time was the price it had to pay to improve telephone service levels,” Collins wrote.

During the 2023 filing season alone, IRS customer service representatives spent 1.27 million hours (34% of their time) waiting to receive calls. That amounted to more than 650 staff years during which those employees could have been processing returns, the report noted.

“Going forward, the IRS needs to find a way to move employees between those two functions more nimbly,” Collins wrote.

Identity theft victims wait more than a year for tax refunds

Taxpayers arguably most in need of the agency’s help have had to wait the longest.

Nearly half a million taxpayers with pending cases of self-reported identity theft last year were waiting an average of almost 19 months for the agency to resolve their problem and send their tax refund.

The IRS closed the year with an inventory of roughly 484,000 identity fraud cases, the report found.

“If it weren’t for the significant number of challenges affecting larger groups of taxpayers, this would be headline news, and it should be,” Collins wrote. “Many taxpayers depend on their tax refunds to meet their living expenses, particularly low-income taxpayers who receive Earned Income Tax Credit benefits that [approached] $7,000 for tax year 2022.”

According to the report, 69% of taxpayers whose identity theft cases resolved had adjusted gross incomes at or below 250% of the federal poverty level. These delays were again largely due to the IRS prioritizing telephone service.

During the 2023 filing season, the IRS reassigned 572 employees who previously had been handling identity theft cases to answer phones, the report said.

‘The IRS has a tall mountain to climb’

The IRS expects more than 128.7 million individual tax returns to be filed by April 15, 2024, this year’s tax deadline, and it seems like it's better poised to tackle that task this year.

With $80 billion in new funding, the IRS set plans to replace and rebuild some of its antiquated technology — some systems dated 25 years or older — and implement scanning technology. Historically, IRS employees have transcribed paper filings manually.

The IRS also announced plans to ramp up hiring in August 2023, setting a goal to add a cumulative 20,000 new employees by the end of 2024.

Still, the National Taxpayer Advocate noted other areas that need improvement:

• Prioritizing the improvement and promotion of online accounts for taxpayers. In 2023, individual taxpayers filed 160 million income tax returns, but just 16.8 million users accessed their online accounts — just 10%.

• Improve its ability to hire, attract, and retain qualified employees. According to the report, selected candidates must wait three months or longer for background checks and related onboarding prerequisites to be fulfilled. The federal pay wasn’t as competitive for some job categories, the report also noted.

• Enable all taxpayers to e-file their federal tax returns. In 2024, the IRS is launching its pilot free direct filing system, which will be limited by tax scope.

“Realistically,” Collins wrote, “the IRS has a tall mountain to climb to achieve its goals of rebuilding the agency, modernizing its systems, and providing the quality service taxpayers deserve.”