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Irs Tax Season Troubles Are Rooted in a Pandemic and a Sustained Funding Fall, According to One Source.

Refunds that have gone missing. Enraged members of Congress. Thousands of calls have gone unanswered.

Welcome to the tax filing season of 2022.

The IRS is in a major mess this year, because of a three-year pandemic, a decade of budget cuts, and outdated equipment.

Mark Everson, a former IRS commissioner, described them as “thinly constrained.”

“Then there’s the epidemic itself,” he explained, “and what happened was that they went down early and hard, and they haven’t come back.”

Millions of taxpayers are still waiting for refunds from last year, due to a backlog of paperwork that the IRS is straining to manage. Veteran IRS employees have been moved to postal duty, and the agency is planning a hiring spree to help clear the backlog.

Mortgage applications and other types of consumer borrowing, such as car and college loans, have been hampered for taxpayers caught up in the bureaucratic quagmire, according to tax preparers, because lenders frequently require borrowers to submit their most recent tax returns to prove their incomes and employment status.

As many taxpayers feel the pinch and others fear about what lies ahead this filing season, a slew of politicians is hounding the IRS on behalf of constituents they’ve heard from for nearly two years.

Irs Tax Season Troubles Are Rooted in a Pandemic and a Sustained Funding Fall, According to One Source.

They bullied the IRS into reducing the number of automated collection letters sent to taxpayers, which were frequently incorrect. However, the agency has resisted requests for more drastic measures, such as the suspension of fines.

“While this is excellent news, the possibility of low- and middle-income filers receiving confusing messages while waiting for the IRS to process their communications or returns remains,” said Rep. Linda Sánchez (D-Calif.). “At this time, we need more information on which more notices the IRS expects to postpone, as well as which notices it does not have the authority to suspend, so Congress can work with the Department of Treasury to give additional relief where it is needed.”

Even fiscal hawks are clamoring for a cash infusion to help the agency deal with its immediate challenges, though legislative Republicans have shown little interest in doing so.

How we got here: When the epidemic hit in March 2020, the IRS briefly shut down its offices and processing locations, disrupting a system that hasn’t fully recovered.

More than three-quarters of individual and household filers receive refunds of more than $2,000 on an annual basis. However, refunds due in 2021 haven’t been issued in many cases since last year’s returns haven’t been properly completed.

Thousands of businesses are in the same predicament, with some still waiting for emergency pandemic-related economic relief granted by President Joe Biden’s American Rescue Plan legislation in March 2021.

Amid these difficulties, Congress gave the IRS a slew of new tasks to aid with pandemic relief, far beyond the agency’s core revenue collecting role.

Everson said that the agency handled pandemic assistance, such as stimulus funds and monthly Child Tax Credit payments, with ease. These additional responsibilities, however, diverted some technical processing and management resources.

The IRS is still behind schedule for this year’s filing season, which began on January 24.

Everson stated, “Too many of their workers are still working from home.”

A total of 53,000 IRS employees are still working remotely, accounting for almost two-thirds of the agency’s staff, according to an IRS representative.

However, privacy laws restrict the IRS from remotely processing millions of paper tax returns, as well as the investigation of returns with inconsistencies from IRS data, the issuance of refunds, and dealing with other taxpayer correspondence. Some taxpayer activists are advocating for IRS personnel to return to their offices in full, in part to clear the backlog more quickly.

Numbers to mull over: The backlog of work includes at least 10 million individual tax returns, 4 million corporate tax returns, and roughly 8 million extra items of mail, including taxpayer responses to IRS mailings, many of which were sent incorrectly.

Tens of thousands of businesses are still waiting for special tax credits authorized by Congress for pandemic relief, including a cut for maintaining staff on their payrolls during the recession. Despite applying for the credit more than six months ago, 83 percent of respondents to a poll conducted by the National Restaurant Association told Treasury Secretary Janet Yellen and IRS Commissioner Chuck Rettig that they had not received any monies.

The delays exacerbate the cash flow issues that the financing was supposed to assist firms in avoiding.

Companies have to file revised returns on paper to apply, which the IRS said are being worked on by specially trained workers at two locations. However, according to Roger Harris, owner of Padgett Business Services, a small business accounting firm with clients still waiting on millions of dollars in claims, the matter could have been handled better.

According to Harris, tax preparers recommended that the IRS set up a specific P.O. Box for businesses submitting for the employee retention credit, but this was never done.

The tax filing season for most taxpayers runs through April 18 this year, and Treasury Department officials cautioned taxpayers ahead of time that they could expect more hassles than usual.

More calls to the IRS are likely to be made this year due to questions about claiming the Child Tax Credit and other issues, but the IRS’s phone service is operating at significantly lower levels than usual. According to the IRS’ National Taxpayer Advocate office, phone volume nearly tripled in 2021, with just 11% of callers connecting with a customer support person.

The Internal Revenue Service expects to receive more than 160 million individual income tax returns this year, up from close to 170 million the previous two years. (The figure varies a lot from year to year.)

The IRS has processed 43.8 million of the 45.4 million individual income tax returns it received for the week ending Feb. 25, the most recent period for which data is available. In the same time frame, around 30 million refunds for an average of $3,473 were granted, largely via direct deposit, and refunds will continue to rise in the following weeks as the IRS releases claims for the Earned Income Tax Credit and Child Tax Credit.

Requesting refunds via direct deposit is one of the IRS and Treasury officials’ top three suggestions for assisting taxpayers. They’ve also advised taxpayers to use correct, electronic filing to save paper processing, however, 10% of taxpayers have persisted to file paper forms. Processing paper returns is time-consuming for IRS employees, who also have to deal with e-filed tax returns that have been flagged for problems and must be reviewed manually.

Erin Collins, the National Taxpayer Advocate, is pushing for wider use of scanning technologies like those used by banks and other financial institutions to help speed up paper processing. The IRS has only used scanning in a few instances thus far.

Attempting to relieve pressure: Democratic and Republican lawmakers first became aware of the issue in the second part of 2020, when the backlog began, and their scrutiny has grown in recent months as constituent complaints have risen.

Hundreds of members from both parties have signed letters urging the IRS to remove the backlog and absolve taxpayers of penalties, fines, and interest paid as a result of the agency’s failure to process paperwork they submitted on time. Organizations of tax preparers have also petitioned the IRS for such relief.

Rettig, on the other hand, has rejected blanket penalty reduction so far, but he has notified Congress that some tailored relief is being considered.

Meanwhile, the IRS has taken several other efforts to assist in the reduction of the backlog. In a letter to House Speaker Nancy Pelosi dated Feb. 7, Rettig stated that the IRS is committed to restoring inventories “to a healthy level” by the 2023 filing season. The backlog is usually less than a million at regular times.

The IRS has halted the distribution of millions of automatically generated letters informing individuals and businesses that they are late in filing returns or making payments, which should prevent recipients from sending back responses and adding to the pile of paper.

Taxpayer assistance centers across the country, which were previously only open Monday through Friday, are now open on weekends as well.

To deal with the backlog, Rettig has begun transferring 1,200 staff from their existing roles, with the agency hoping to hire 10,000 more personnel by 2023.

However, IRS workers’ union leaders and the chairman of an IRS managers’ group have warned that focusing on the mail backlog will likely disrupt other agency tasks by creating new vacuums until the staff is relieved of their backlog responsibilities.

Longer-term issues: Rettig has claimed that the IRS is in this situation because it hasn’t received the sustained, multiyear financing it needs to upgrade its technology and operational systems, and he has backed Biden’s $80 billion funding boost for the IRS over the next ten years.

However, the majority of the idea is aimed at enforcement rather than service.

Fundamental problems at the IRS date back to the early 2010s, when the IRS budget was lowered by 20% and its human number was reduced by 20%, all while job demands increased. Collins recently testified on Capitol Hill that the outdated technology that powers IRS operations — a structure essentially held together by belts and suspenders — exacerbates those issues.

Following the revelation in 2013 that the IRS scrutinized conservative tax-exemption applicants more closely than others, Republicans in Congress spearheaded harsh budget cutbacks to the IRS. Republicans are now using the backlog to try to harm Biden and Democrats in Congress politically.

“The IRS is now understanding that this unprecedented backlog is due to its carelessness in using the tools it has,” said Rep. Kevin Brady (R-Texas), the GOP’s top Ways and Means Committee member, following news of the newest IRS hiring plans, which would use extra monies approved by Congress a year ago.

Prior funding and manpower cuts have resulted in a decline in IRS audit for several years, particularly for higher-income taxpayers, as well as a slew of other service issues, such as taxpayers’ inability to reach IRS representatives by phone.

“Many of us had worries about the IRS, its capacity to successfully execute their job before any of us ever knew what Covid was,” said Harris of Padgett Business Services. “Because they were working under budgetary, technological, and personnel constraints.”

If nothing changes, Everson, who is now vice-chair of the tax consulting business alliantgroup, said, there will be even more difficulties.

“Millions of people filed tax forms and have yet to receive their refunds,” he said, “and this can only undermine compliance and, more importantly, degrade trust in government as a whole.”

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