IRS backlog metrics ‘don’t translate’ into workforce efforts, commissioner says

The Electronic Tax Administration Advisory Committee, in its annual report to Congress, found the IRS experienced over 100 continuing resolutions since 2001, an...

The IRS needs more consistent funding from Congress to dig out from pandemic-era challenges, replenish its workforce and modernize its IT, an advisory panel told Congress.

The Electronic Tax Administration Advisory Committee (ETAAC), in its annual report to Congress, urges lawmakers to provide the agency with “flexible, sustainable, predictable, multi-year funding.”

The report found the IRS experienced over 100 continuing resolutions since 2001, and that funding uncertainty forces the agency to opt for “more expensive, less effective, short-term solutions.”

“They spend resources to keep outdated legacy systems running. They use temporary staff over permanent staff and typically suspend hiring during times of budget uncertainty,” the report states.

Congress gave the IRS a $12.6 billion budget as part of the fiscal 2022 omnibus spending deal that passed this March, the agency’s largest budget increase in decades.

But lawmakers have yet to act on the IRS’ request for multi-year funds that would allow it to make meaningful progress on a long-term IT modernization effort

Congress does, however, appear willing to incrementally increase the agency’s annual budget after decades of staff attrition and diminished spending power.

The House Appropriations Committee also advanced a fiscal 2023 spending bill last week that would give the IRS a $1 billion increase to its topline budget.

The committee, citing the IRS’ challenges with paper tax returns and historic backlogs since the start of the COVID-19 pandemic, also urges the IRS to modernize the electronic filing process for taxpayers.

IRS Commissioner Chuck Rettig, whose five-year term ends in November, told the committee the IRS workforce went to extraordinary lengths over the past two years to deliver $1.5 trillion in financial relief to the public through Economic Impact Payments (EIPs) and tax refunds.

“I think that history will be very polite to the Internal Revenue Service, and to everybody who’s helped the Internal Revenue Service during this period of time,” Rettig said Wednesday.

Rettig said the IRS’ shift into new lines of work, which made the agency more of a public benefits provider and not just a tax enforcement agency, went a long way to helping individuals who became unemployed, lost businesses or experienced food insecurity for the first time during the pandemic.

“It’s not like the EIPs got them out of the food bank line,” Rettig said, “But what it did is it showed these people that this country cared.”

While Rettig praised the agency’s work throughout the pandemic, he acknowledged some taxpayers are still waiting for their tax refunds.

The agency announced last week it finished processing the backlog of individual paper tax returns it received in 2021.

“When you’re in the middle of it, somebody who hasn’t yet got their refund, it’s hard for them to accept things went well,” Rettig said.

Response metrics ‘don’t translate’ to workforce’s dedication

The IRS has faced scrutiny over the past few years for a low response rate to taxpayer phone calls and a backlog of unprocessed tax returns, but Rettig said those metrics don’t reflect the hard work of IRS employees.

“I want you to know that the people at the IRS gave so much, so often, and I don’t want that lost in translation. Inventory amounts don’t translate into a lack of desire, dedication and the workarounds that had to occur with your help,” he said.

Rettig said the IRS workforce has been his “highest priority” as commissioner, and applauded employees for responding to a range of pandemic-era challenges.

“It’s no secret we’ve got some people that are doing 10 different jobs. We should have 12 people doing those 10 jobs, as in the private sector,” Rettig said.

The IRS plans to hire 10,000 additional employees and expects to make half of those hires this year.

ETAAC Chairwoman Courtney Kay-Decker, a former director of the Iowa Department of Revenue, said this year’s 31-page report takes a streamlined approach compared to previous years.

“We took a step back and said, in light of everything that’s happening in the world around us, let’s look at tax administration from a holistic sort of 30,000-foot approach, and figure out what it is that would mean most to the taxpayer experience,” Kay-Decker said.

The report, recognizing a historic mismatch between the budgets the IRS requests and what Congress approves, found that appropriate funding for IRS initiatives often comes down to four factors — collaboration, modern technology, prioritization of projects and a balance between machines and people.

ETAAC member Kimberly Pederzani, the compliance manager for the employee cloud business unit at Toast, said the IRS is focused on taxpayer service that tools with increased functionality over time, based on taxpayer needs.

“There has never been such a need for governmental turn-on-a-dime innovation as there has been during and following the facilitation of varying forms of relief stemming from the COVID 19 pandemic,” Pederzani said.

The IRS, in recent years, received more than 90% of all tax returns electronically, but the volume of paper tax returns received has led to complications and processing backlogs.

The report finds that at least half of paper tax returns were prepared using commercial software, and that challenges prevented taxpayers from filing their returns electronically.

Prior to the pandemic, about 5% of total returns filed went into error resolution. During the 2021 filing season, the rate of returns sent to the IRS Error Resolution System (ERS) was about 20% of returns filed.

That uptick in tax returns that needed to go through a manual review process created substantial delays in processing tax returns.

Tax returns filed during the tax season 2021 that required manual review often led to tax refund delays of 90 to 120 days, or even longer.

The committee found that congressional changes to the tax code in the middle of filing seasons contributed to an uptick in tax returns flagged as having errors. Pandemic aid programs also required some individuals to file a tax return who might not otherwise need to.

The IRS however, after the filing season of 2021, put together a program called “Fix ERS” to troubleshoot the volume of errors sent to error resolution.

The team developed an automation solution in April 2022 that significantly shortens the time needed to process tax returns that have errors in them.

The tool resolved about two-thirds of the returns coming through the ERS system, minimizing human intervention for those returns and bringing returns to the ERS queue back to the pre-pandemic levels of around 5%

Prior to the pandemic, an IRS agent could process about 100 returns per employee per day. With the new automation tool in place, an employee can process about 5,000 returns per day.

“A true strength of the IRS is making sure that the highest volume workflows are successful. This means prioritizing resources to ensure that forms with high volume can be filed,” said ETAAC member Jihan Jude, an attorney and counselor at law with the Davey Law Group.

Committee member Latryna Carlton, president of Committed Citizens of Waverly, Florida, said that while call volumes increased astronomically during the pandemic, the IRS has not been able to hire enough staff to keep up.

“The IRS folks who answer the phones are typically often the same people who open the mail and the other processing tests as well,” Carlton said, adding that in a typical year, 55% of a customer service representative’s time is spent on the phone.

Carlton said the IRS has deployed some tools, including chatbots, a callback service and secure document upload capabilities, that have improved the level of phone service for taxpayers.

ETAAC member Terri Steenblock, compliance director at the Federation of Tax Administrators, said the committee recommends restructuring the IRS’s funding to eliminate appropriation categories.

The report also recommends the IRS implement a pilot that allows the agency to retain a portion of defined amounts it collects for technology or staffing-related projects.

“We believe investing now in the future of the IRS is an important key to their long-term sustainability and success,” Steenblock said.

The report states that the IRS workforce and hiring challenges are significant, but warns that simply adding new hires “is an expensive, unsustainable, and largely ineffective way to solve what ails the IRS.”

“The IRS cannot meet taxpayers’ service expectations without a healthy balance between technology and human capital investments. By optimizing technology in the right places, the IRS can provide high-quality customer service through a leaner, more agile workforce,” the report states.

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