Backups, Delays, and Letters: What is Wrong with the IRS?

This week’s article is meant to address the extraordinary number of notices, letters, and corrections that many taxpayers have received from the IRS and state taxing authorities after filing their 2021 tax return.

At this point, we are unclear as to all of the issues. Whether this is due to automated computer systems or understaffed workers, we do not know. One thing we are clear about – our clients are receiving more unnecessary letters from government agencies than ever before.

The Internal Revenue Service is in the news again, and not for good reasons. In an average year, the IRS will enter a tax season with about 1 million returns that have yet to be processed. In 2022, the IRS entered the year with approximately 6 million unprocessed returns, and 2 million unprocessed amended returns. Now, the IRS has an even-greater amount of returns to process with the 2021 tax filing season wrapped up.

Last week, IRS Commissioner Charles Rettig told Congress the backlog of tax returns—currently sitting at tens of millions—is planned to be finished by December.

Rettig said this year’s filing season, which began January 24, got off to a better start than the 2020 filing season, as returns eligible for refunds were processed on a priority basis compared to returns with a balance due. This has helped to alleviate some of the tax refund concerns that many taxpayers experienced last year. The wait time for refunds to be processed for simple 1040’s was supposedly reduced in 2022.

Rettig explained that the Internal Revenue Service’s most experienced agents are assigned to the most complex tax returns, reiterating that the IRS audits high income taxpayers more than any other category. However, he acknowledged that the agency is being outplayed by major companies when it comes to the audit process: “These corporations can afford to spend large amounts on legal counsel, drag out proceedings and bury the government in paper…. People should not be able to game the system.”

Per Rettig, the IRS has struggled over the past few years due to their annual funding. Regarding the IRS process, Rettig stated “Absent consistent, timely, multi-year funding, we have largely been a paper-based organization operating in a digital-world environment.”

While they try to dig out of their current workload, another threat is posed to the IRS. According to Rettig, they are being hit with 2.4 million cyber-attacks per day and the IRS needs to continue to advance its cyber capabilities to “stay one step ahead of the bad actors who are attacking IRS systems.”

A recent congressional hearing was held with the intention to address the IRS phone call wait times. In 2021, only 7% of callers were able to speak with a live agent during the filing season. That’s because fewer than 15,000 workers were attempting to handle 240,000,000 incoming calls to the IRS.

Where is the Solution?

Until further funding is granted to the IRS, Rettig believes there is no immediate solution to the issues they are facing. In turn, taxpayers should expect longer delays in receiving refunds, erroneous letters, and impossible-to-reach IRS agents.

Regarding all the unnecessary letters that are going out, we are observing that the IRS and a few states are failing to recognize withholdings from certain tax documents, specifically 1099 income and IRA distributions. The best way to address this is to promptly provide them a copy of the documents that show the withholding that took place.

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