TIGTA: IRS inefficiencies worsened the backlog of cases

An audit by the Treasury Inspector General for Tax Administration (TIGTA) found that while pandemic and law changes were to blame for the IRS’ failure to meet timeframe standards for most taxpayer cases last year, inefficiencies in staffing, equipment, and procedures also played a role.

“Program and organisational changes are needed to address the continued inadequacy of tax account assistance provided to taxpayers” (Rep. No. 2022-46-027) is the focus of the report, which looks at the IRS’s accounts management operation. After completing the audit period from April to November 2021, 56.8% of the 7.8 million cases in Accounts Management were overaged, meaning they had passed the 45-day processing period from receipt after which interest is generally paid to the taxpayer on any refund or credit due.

TIGTA found that the vast majority of Accounts Management’s employees were juggling their work with answering toll-free phone calls.

There is a 53-day delay in processing returns because much of Accounts Management’s mail is received at IRS centres that also process returns. TIGTA found this to be one of the reasons for the backlog in processing returns for Accounts Management. As a result, return processing centres would be able to complete their primary duties more quickly. TIGTA reported on Nov. 20, 2021, that more than 14.6 million tax returns were awaiting processing.

Carrybacks and amended return

The types and ages of cases that Accounts Management had on hand as of October 30th, 2021 are listed in an appendix to the report. Modified returns and forms for a carryback claim, such as those resulting from a net operating loss, were the most common, both in terms of volume and as a percentage of the total. TIGTA discovered that more than two million of these nearly 2.3 million items were out-of-date. Taxpayers’ responses to IRS correspondence came next in terms of volume, followed by general correspondence from them. 45.6 percent of the 1.9 million items were overaged.

TIGTA noted that many of the amended returns were filed in order to take advantage of new tax relief provisions inspired by the pandemic, such as carryback claims. In order to provide an employment tax credit to businesses that have seen a 50% decrease in gross receipts from the same quarter in calendar 2019 or that have completely or partially suspended operations as a result of orders from a government authority, the Coronavirus Aid, Relief and Economic Security Act, P.L. 116-136, was passed. There have been a large number of amended Form 941-X, Adjusted Employer’s Quarterly Federal Tax Return or Claim for Refund, returns filed by businesses as a result of the Consolidated Appropriations Act of 2021, P.L. 116-260.

Some affected taxpayers had to file Form 1040-X, Amended U.S. Individual Income Tax Return, to claim a tax credit that they became eligible for as a result of the unemployment compensation that was excluded from their modified adjusted gross incomes under $150,000 by the American Rescue Plan Act, P.L. 117-2, which was largely handled by the IRS without those taxpayers having to file an amended return.

Among Accounts Management’s tardiest tasks, TIGTA found was the processing of these amended returns (including some unrelated to the special provisions). As of November 27, 2021, it had 708,251 Forms 1040-X that was 79% overdue, and 411,610 Forms 941-X that were 91% overdue as of November 30, 2021. As of Aug. 26, 2021, the interest paid on the two forms totaled $166.4 million.

According to TIGTA, “given the number of returns remaining, we expect the IRS to pay significantly more interest on Forms 1040-X and 941-X claims.”

According to TIGTA’s recommendation, the IRS should devote sufficient staff to answering the phone and working the Accounts Management caseload. TIGTA estimated that Accounts Management could have cleared its entire inventory by the beginning of October last year if it had separated those duties as of March 2021.

Problems with technology

TIGTA found that insufficient equipment also hampered timely processing. For example, the IRS is unable to directly import a faxed document from a taxpayer into its computer systems, but must instead print it out and scan it (it also generally scans all paper correspondence received). Taxpayers should be able to send and receive faxes electronically, according to TIGTA’s recommendation, but as of early this year, the technology had not been implemented, according to TIGTA.

TIGTA also found that scanners were not always deployed correctly and lacked adequate processing power.

Taxpayers should be able to send documents to the IRS electronically, including by uploading them directly to the IRS’s campus support sites for Accounts Management, which TIGTA recommended the IRS do.

‘This could provide taxpayers with an immediate confirmation that the IRS has received their documents and reduce the time it takes for the correspondence to reach Accounts Management,’ TIGTA stated.

Electronic taxpayer communications have been used in pilot programmes, according to the IRS, which agreed with this recommendation.

Taxpayer Experience Strategy is being implemented for IRS enforcement functions first, and there is no planned date for implementation within Accounts Management as of December 13, 2021,” according to TIGTA.

Changes in oversight and recordkeeping, such as ensuring the IRS is aware of how much of its accounts management inventory is held at each of its sites, were also recommended.

Visit the AICPA’s website to learn more about the AICPA’s efforts to improve IRS services.

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