The IRS, for the first time since the start of the COVID-19 pandemic, will be in a better position to improve its performance this year than in the years prior, according to an agency watchdog.

National Taxpayer Advocate Erin Collins, in an annual report to Congress released Wednesday, said the IRS made considerable progress digging out from a backlog of unprocessed tax returns and correspondence in 2022, “and is poised to start the 2023 filing season in a stronger position.”

The report, however, warns that the IRS faces many challenges in the coming years rebuilding its workforce, modernizing its legacy IT and improving its level of customer service to taxpayers — even with the agency receiving $80 billion over the next decade to accomplish these goals.

“We have begun to see the light at the end of the tunnel,” Collins wrote. “I am just not sure how much further we have to travel before we see sunlight.”

Collins told lawmakers that the IRS over the past three years “failed to meet its responsibility to pay timely refunds to millions of taxpayers,” but is getting close to getting to a healthy state with its backlog of unprocessed tax returns.

Collins found that by Dec. 23, the IRS reduced its backlog of unprocessed paper tax returns to 400,000 individual returns and 1 million business returns.

“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,” Collins wrote. “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.”

Former IRS Commissioner Chuck Rettig told Congress the IRS would reach a “healthy” state with its tax return backlog by the end of calendar year 2022.

An IRS spokesperson told Federal News Network in December that the agency has made 15,000 new hires since fiscal 2022, and processed more of its tax return inventory in the last 12 months than at any other 12-month period in its history.

The IRS started 2022 with an unprocessed paper backlog of 4.7 million original individual returns and 3.2 million original business returns. Collins said much of the backlog comes from the IRS processing paper tax returns, which she previously called the agency’s “kryptonite.”

IRS employees spend many hours manually inputting data from tax returns, and are able to process electronically filed returns in a fraction of the time.

That manual input from IRS employees has caused delays for individuals and businesses filing paper tax returns. Approximately 13 million individual taxpayers who filed paper returns last year generally saw delays lasting six months or longer.

Collins said millions of electronically filed tax returns were also “suspended,” because they tripped IRS processing filters, some of them meant to flag suspected identity theft. These suspended returns also require manual review by IRS employees before the agency can issue a refund.

Collins said about half of the IRS’s inventory of suspended returns — about 3 million cases — involved suspected identity theft.

The IRS website states that “due to extenuating circumstances caused by the pandemic, our identity theft inventories have increased and on average it is taking about 360 days to resolve identity theft cases.”

Collins said the year-long delay was “unacceptable” and urged the IRS to assign additional employees to process these cases.

Addressing staffing shortages

In addition to digging out from the backlog, Collins said the IRS is in a better position for reform now than in recent years because of the $80 billion in the Inflation Reduction Act and direct authority from Congress, which has cut the onboarding time for new hires in half.

The IRS, using its direct hire authority, has hired 4,000 new customer service employees, and is looking to hire 700 additional staff to provide in-person tax help at Taxpayer Assistance Centers throughout the country.

The National Taxpayer Advocate, however, finds the IRS has a long way to go before more staffing translates into better taxpayer experience.

In order to train new hires, the IRS needs to pull experienced employees off their regular caseloads.

“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,” she wrote.

Until the IRS has a significant number of fully trained new employees, improving taxpayer service “will continue to be a zero-sum game,” that requires pulling staff away from other essential functions.

“If the IRS assigns more employees to answer the phones, correspondence processing will be slower. If the IRS assigns more employees to process correspondence, phone service will decline,” Collins wrote.

Among her top recommendations, Collins urged the IRS to focus on addressing staffing shortages within its Human Capital Office (HCO).

HCO, she wrote, coordinates all IRS hiring, but does not have enough staff to review and approve new position descriptions, post job announcements and screen incoming applications.

“Without HCO involvement, other IRS divisions cannot hire employees even when they have funding,” Collins said.

Beyond beefing up its human resources office, Collins said the IRS faces the greatest staffing shortages in taxpayer services and IT.

Now that the agency has additional funding from the Inflation Reduction Act, Collins said it should quickly bolster its HCO staff and, in the interim, allow IRS business units to do their own hiring. She also urged HCO to expedite security checks and the onboarding of new employees.

Poor taxpayer experience the ‘elephant in the room’

Collins said continuing customer service challenges and the tax return backlog remain the “elephant in the room” for the IRS, and that taxpayers and tax professionals “experienced more misery in 2022” because of delays processing delays and poor customer service.

The IRS received 173 million calls in fiscal 2022, but only 13% of callers got through to an IRS employee, and on average, waited nearly 30 minutes on hold before getting through to a representative.

“As a result, most callers could not get answers to their tax-law questions, receive help with their account problems, or speak with an employee about compliance notices,” Collins wrote.

Phone service for tax professionals hit an “all-time low” last year, with only 16% of tax preparers getting through to an IRS employee.

On average, tax professionals spent 25 minutes on hold. Collins said those long waits put tax professionals in the “difficult position of billing clients for the time spent trying to reach the IRS or writing off that time.”

The IRS will have to “perform a difficult balancing act” in the upcoming filing season. The agency will need to pull some IRS employees away from processing tax returns to answer phone calls, but not too many, for fear of seeing the backlog of paper tax returns increase again.

“The IRS needs to end the vicious cycle of paper backlogs. As employees are trained and report for duty, I expect we will start to see improvements in service, probably by the middle of 2023,” Collins wrote.

Among her recommendations, Collins urged the IRS to detail how it will spend the $80 billion from the Inflation Reduction Act will be spent

“If spent wisely, this funding will give IRS management the tools it needs to bring U.S. tax administration into the 21st century by enabling it to hire and train the workforce of the future, replace antiquated IT systems, and generally revamp the taxpayer experience based on principles of fair and equitable tax administration,” Collins wrote.

Treasury Secretary Janet Yellen in August directed the IRS to produce an operational plan with details of how the additional IRA funding will be spent. That report is due in mid-February.

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