The 2021 filing season has kicked off and some of you may be saying, "Wait! I'm still working on 202o returns!" So, how bad do you think this season will be?
Backlog of IRS Tax Returns
The last tax season was most likely the most miserable that you have ever survived, and you may still not be finished with it. According to Erin Collins, the head of the National Taxpayer Advocate who works as an independent watchdog for the IRS, "There is no way to sugarcoat the year 2021 in tax administration: From the perspective of tens of millions of taxpayers, it was horrendous. The IRS is in crisis and needs to apply resources to its core mission—processing returns and paying the corresponding refunds."
According to the National Taxpayer Advocate report released to Congress this month, here are some of the "lowlights" of the 2021 tax season.
- The IRS carried over approximately 11.7 million 2019 returns 2020 into 2021. In fact, it took until June of 2021 until the IRS processed nearly all of the 2019 returns.
- In 2021, the IRS received 17 million 1040 2020 paper returns. Those returns took up to eight months to process.
- The IRS closed the last filing year with 9.8 million individual returns active in its Error Resolution System.
- As of December 18, 2021, the IRS reported a backlog of 2.3 million forms 1040-X, Amended Individual Income Tax Return. Processing these forms are taking up to 20 weeks.
- The IRS reported more than 7 million business returns at the end of the filing season that required manual processing.
- As of December 15th, the IRS reported 2.8 million unprocessed forms 941 and approximately 427,000 Forms 941-X. The delay in processing the 941-X is further delaying the processing of forms 941.
Other major issues contributed to processing delays. For example, the IRS received 282 million taxpayer calls during 2021, but customer service representatives were only able to answer about 11% of those calls. In addition, processing times for the millions of notices sent to taxpayers, which typically run 45 days, ran as long as six months.
Recommendations to Congress to Improve Tax Return Processing
It would be easy to blame the IRS processing issues on COVID. According to the Taxpayer Advocate report, "There is no doubt the pandemic has had a big impact, but taxpayer services and technology at the IRS were inadequate long before the pandemic." In fact, in 2019, Congress passed the Taxpayer First Act which directed the IRS to reassess its business practices.
However, there has been a 19% increase in workload from FY 2010 to now and the inflation-adjusted appropriations for the IRS have decreased by nearly 20%. "This imbalance has left the IRS without enough resources to meet taxpayer needs, let alone to invest in additional personnel and technology."
The National Taxpayer Advocate 2022 Purple Book, which compiles legislative recommendations, provided 68 different recommendations to strengthen taxpayer rights and improve tax administration. Erin Collins, National Advocate, highlighted these ten specific recommendations in the Taxpayer Advocate Report. Of those, I find two recommendations to be particularly interesting.
1. Revamp the IRS Budget Structure and Provide Sufficient Funding to Improve the Taxpayer Experience and Modernize the IRS’s Information Technology Systems.
We all have our opinions of how (and if) we would like the U.S. tax structure to change. Whether the tax structure is changed or remains as is, the IRS does not have the capacity to process the volume of returns. Until the IRS structure is changed or a sufficient budget is allocated to the IRS, I believe that tax seasons will continue to be frustrating for taxpayers and tax preparers.
2. Authorize the IRS to Establish Minimum Competency Standards for Federal Tax Return Preparers.
According to the report, the IRS receives more than 160 million individual returns each year, and paid tax return preparers prepare most of them. The tax system is heavily dependent on the ability of tax preparers to be accurate.
In 2011, the IRS sought to implement minimum standards, including a basic competency test, but a U.S. Court of Appeals upheld a decision stating the IRS lacked the authority to impose preparer standards due to a lack of statutory authorization. However, Congress can (and is being asked to) authorize the IRS to institute minimum competency requirements.
These standards would protect the accounting, bookkeeping and tax preparation professionals who not only have studied to learn their profession but who also invest time and money in maintaining their skills.
What Will the 2021 Tax Filing Look Like?
My opinion, and take it for what it is worth, is that this season will again be a terrible slog. However, I am hopeful that the effects of COVID will lessen, causing less of an adverse effect on the IRS workforce. So, if the perfect tax season would rate a 10, I would rate last year as a 2/10. This season may be a 4/10.
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