The Internal Revenue Service failed to process around 8.3 million paper returns by the end of 2020 and had to carry them over to the 2021 filing season, the agency's watchdog said in the report, dated Thursday. The interim report on this year's filing season detailed complications posed by the coronavirus pandemic and changes made to federal tax law in the past year.
The IRS' failure to process returns before the end of 2020 can lead to issues for taxpayers, including automatic rejections of returns they electronically file in 2021, according to the report.
"The backlog of returns, correspondence and other types of work resulting from the pandemic has and will continue to have a significant impact on the associated taxpayers," TIGTA said in the report.
The IRS has also had a difficult time trying to fill some of its positions — some of which are temporary and have unideal hours — and had around 4,400 positions unfilled in its submission processing workforce as of March 5, according to the report. TIGTA also said that many IRS sites don't have enough functioning printers and copy machines, which has complicated its efforts to complete taxpayer records requests, according to the report.
The IRS closed some of its processing centers during the pandemic to prevent the spread of the coronavirus, which affected its ability to go through mail and lead to a backlog of correspondence and returns, the report said.
The IRS was also tasked with carrying out some of the major provisions of several relief laws, including direct payments for individuals below certain income thresholds. The Coronavirus Aid, Relief and Economic Security Act of 2020 authorized $1,200 economic impact payments for individuals and $2,400 for couples, plus additional funds for qualifying children. The Consolidated Appropriations Act of 2021, signed by former President Donald Trump in December 2020, authorized another round of payments of $600 for individuals and made some changes to the earned income tax credit and child tax credit, or EITC and CTC.
The American Rescue Plan Act , signed by President Joe Biden a few weeks into the tax filing season in March, authorized $1,400 direct payments for individuals, expanded the EITC and CTC and allowed people who received unemployment benefits in 2020 to exclude up to $10,200 from their taxable income.
Around 7.3 million people who were potentially eligible for the unemployment income exclusion, reporting more than $87 billion in unemployment benefits, had already filed their returns by the time the American Rescue Plan authorized this exclusion, according to the TIGTA report. The IRS advised people to not refile their tax returns to report this exclusion unless their reduced income entitles them to tax credits to which they weren't previously entitled.
While the IRS was working to execute these changes to federal tax law, the closures of agency worksites and other responses to the pandemic led to a backlog of tax returns and other filings that couldn't be processed by the end of the year, according to the report. The IRS has split its workforce so some tax examiners can focus solely on the 8.3 million returns filed in the 2020 calendar year that still need processing while others can work on returns filed in the 2021 filing season, TIGTA said.
The 2021 filing season started two weeks later than last year so the IRS could make changes to its programming to distribute the second round of economic impact payments authorized in December. The agency received around 18% fewer returns as of March 5, 2021, compared with a similar period last year, partly because of the abbreviated filing period, according to the report. The IRS extended tax deadlines for individuals to May 17.
The TIGTA report also highlighted a shortage of working printers and copy machines at IRS sites, most of which cannot be used because they ran out of ink or the waste containers are full. Around 42% of the devices used by the submission processing function of the IRS cannot be used, according to the report. A lack of working printers and copy machines has had a serious impact on making copies of tax returns requested by taxpayers, TIGTA said.
The report also found that around 7.6 million of 46.3 million phone calls to the agency's toll-free telephone assistance lines were answered by an automated system, while around 4.4 million calls were answered by phone assistants.
While the inspector general report didn't provide any recommendations that the agency could respond to, it included responses by IRS management to several issues raised in the report. For instance, the IRS said it was looking to hire more people to answer taxpayer phone calls, while management is working with its information technology team to resolve issues with printers and copy machines, according to the report.
The IRS is also working to mitigate tax return and refund processing issues caused by its hiring shortages, according to the report. Those mitigation efforts include allowing employees to take overtime, transferring returns to other processing centers and rotating employees, according to the report.
The IRS is also working to hire more people to answer toll-free phone calls and is trying to increase its staffing at taxpayer assistance centers, which provide tax filing services to the public, TIGTA said.
An IRS spokesperson told Law360 on Friday that the agency had no other comments.
--Additional reporting by Amy Lee Rosen, Joshua Rosenberg and Christopher Cole. Editing by Tim Ruel.
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