The IRS faces a considerable backlog of 24 million tax returns from businesses and individuals, on top of new responsibilities Congress dropped on the agency in the middle of this year’s filing season.
About 2.4 million individual tax returns filed before January 2021 are in the agency’s backlog, and the agency is processing another 7.3 million returns.
IRS Commissioner Chuck Rettig said he expects the agency will be able to resolve the current backlog no later than this summer. He said part of his reason for pushing back this year’s filing season from April 15 to May 17 came from the agency’s backlog of taxpayer correspondence.
The IRS, he told members of the House Ways and Means Committee on Thursday, has 5 million returns from the 2019-2020 filing season on hold, and are cases where the IRS has reached out to taxpayers to request additional forms, remedy computational errors or vet identity theft concerns.
“We sent out and requested information from that pool of taxpayers. Some of those certainly would have sent correspondence back to us,” Rettig told the oversight subcommittee.
But the IRS receives up to 1.5 million pieces of correspondence every week, which is about the maximum the agency can process in a week, resulting in delays.
IRS employees at its Kansas City campus handle error resolution, but cases that used to take 3-5 business days now take the agency 10-14 business days.
Meanwhile, the agency has seen an increase in calls to its tax-help hotlines.
“We are still working through the impacts of COVID-19, which created staffing shortages and closures at the same time,” Rettig said.
While the tax filing season remains a top priority for the IRS, the agency is also issuing third-round Economic Impact Payments, and must implement new tax changes that Congress approved in the latest COVID-19 spending bill. Those include retroactively exempting up to $10,200 in unemployment benefits from taxable income.
“I don’t remember the last time that Congress changed the tax filing rules in the middle of the filing season,” former IRS Commissioner John Koskinen said in an interview.
The IRS must also, for the first time, start issuing monthly payments for the expanded child tax credit in the American Rescue Plan.
“You put all that together, with a very thin workforce, and you got a major set of challenges that I would have thought the Congress would have been more aware of,” Koskinen said.
Despite these challenges, Rettig said he was reluctant to extend this year’s filing season deadline, and told lawmakers that extended filing seasons “cannot be a pattern” for the agency. The IRS pushed last year’s filing season deadline to July 15, and gave taxpayers until Oct. 15 if they requested an extension.
The extension will give taxpayers more “breathing room” to figure out their finances, but Rettig said it will also cut into the amount of time the agency has to stand up an online portal to roll out expanded child tax credits this summer under the American Rescue Plan.
Rettig said the same IT staff at the IRS who support income tax processing also handle the Economic Impact Payments that have gone to most U.S. households.
They’re also the same IT staff who will need to create the child-tax credit portal, but Rettig said the IRS doesn’t have the resources to create that portal, which the IRS must have ready by July 1, until the tax season ends.
“We now have one month less to do the development … Many any of these people haven’t slept since last March,” he added.
Citing these complications, Rettig said the IRS could have some trouble getting these child tax credit payments out in regular, monthly installments, as Congress intended in the latest COVID-19 spending bill. “It might be a challenge to get into the monthly right out of the box,” Rettig said, adding that the American Rescue Plan as written calls for “periodic payments,” and gives the agency some flexibility in rolling out these expanded tax credits.
Since March 12, the IRS has received more than 66 million individual tax returns and issued 42 million refunds worth $126 billion in refunds.
But the agency, which was already stretched thin handling the filing season and issuing Economic Impact Payments, must implement another provision in the last COVID spending bill that exempts up to $10,200 in unemployment benefits from taxable income this year.
Rettig said taxpayers who received unemployment insurance benefits and already filed this year’s tax return should not file an amended return.
“Those folks who may have already had other refund activity will receive the first refund, and then we’ll go back and do a recovery, so they would receive a second refund associated with the tax on the $10,200,” Rettig said.
Congress over the past decade has expanded the IRS’s mission while also giving the agency less money to accomplish its work. The agency’s current budget is $2 billion less than what it was in 2010, and the IRS has seen its workforce shrink by 30,000 employees.
Koskinen led the agency when Congress tasked it with implementing the Affordable Care Act. But to do that, the agency had to catch up on more than $1 billion in deferred IT work that Congress had zeroed out of the budget for years. He said the IRS had to take that $1 billion from taxpayer services and enforcement, which made those operations less effective.
Koskinen said he always made the filing season his “highest priority” for resources, but after that, he said the agency has to manage its statutory mandates from Congress.
“There’s no choice, you have to do that. What it’s going to push to the back is the normal work on responding to paper filings, answering the phones. I tried to get the Congress to understand at some point, you can’t do more with less, you end up doing less with less,” Koskinen said. “If nothing else, all of this should remind Congress that you can’t underfund an agency for 10 years, and then keep giving it new things to do and be surprised when it takes a little longer than the agency would like.”
For every dollar invested in the IRS, Rettig said the agency collects $5-7 in revenue, but oversight subcommittee Ranking Member Mike Kelly (R-Pa.) said the IRS received a $400 million increase in its topline budget for 2021, and received more than $3 billion in COVID spending bills to implement these programs.
“I know every agency would like as much funding as they can get – I understand that. But it’s also clear to me that at this stage, the challenges the IRS faces will not be solved with just more money,” Kelly said.
Despite these challenges, Koskinen said the IRS workforce “continues to pull rabbits out of the hat,” and will do everything to handle this increased workload.
“This is a dedicated workforce that believes in the mission and understands the critical nature of the agency,” Koskinen said.
Rettig, his successor, also touted the hard work of the IRS workforce.
“Our employees, with me as well, will work as hard as we can possibly work to get through this. The importance of getting through this is not lost on anyone in the Internal Revenue Service,” he said.