You probably already know that this tax season is again a nightmare. Do you know why? Do you know the tips that will help you help your clients? What should congress be doing about the unprecedented issues facing taxpayers?
This article is part one in a three-part series giving more information about what you and your clients are facing with the IRS this tax season, tips to help your clients, and the unprecedented steps taxpayer advocates suggest the IRS and Congress adopt.
I first took a look at what is happening at the IRS about six weeks ago when Erin Collins, the current head of the National Taxpayer Advocate who works as an independent watchdog for the IRS, said "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."
This past week, Nina E. Olson, the IRS National Taxpayer Advocate from 2001 to 2019 and current Executive Director of the Center for Tax Payer Rights, appeared on a Forbes webinar - "The Mess at the IRS" - and provided more information that will be helpful for you and your clients. Olson also made specific and audacious recommendations for steps the IRS should take to clear this backlog.
Overview of the Current Situation at the IRS
The closest comparison for the current situation at the IRS was around 1985 when IRS staff were actually hiding returns in closets and throwing them away. Although there are no reports of hiding or disposing of returns or letters now, the current situation is worse than it was during that period.
Continuing Massive Processing Backlogs
As of a month ago, there were 24,000,000 back tax returns and letters in manual processing! These are returns and letters that need a human being to finish processing them.
The result? Taxpayers simply cannot find out the status of their returns.
Individuals visiting the "Where's my refund?" page are not getting accurate information. For many, the system simply returns "Accepted for processing." This status means that the return is in the IRS system, but has not cleared all filters and fraud detection; in other words, the return has not been posted due to a problem. Unfortunately, when a taxpayer tries to call the IRS for more information, the chances of actually connecting with an agent are only around 11%.
What causes this inability to identify what is happening with an individual return?
When a return is flagged by a filter or the fraud detection system, it is sent to the ERS, the Error Resolution System. The few lucky taxpayers who are able to connect with customer support are told that their return is in ERS (which may also be called "clerical"). However, that agent has no information as to why that return is in ERS. It could be due to possible identity theft, a math error, claiming a child deduction that is flagged as invalid, or quite a few other circumstances.
When a return is sent to ERS, it has to be assigned to an IRS agent for manual processing. Files waiting for assignment to an agent are held in ERS Suspense. Last year, those files waited for an average of 75 days to be assigned.
Once the error is determined, the IRS sends a letter to the taxpayer informing them of the issue and then the taxpayer sends information back to the IRS. That information mailed back to the IRS took an average of 199 days last year to be processed.
Simple Errors May Cause Major Processing Delays
Here is an example. A taxpayer files, but transposes two digits in the SSN for a dependent. The IRS software flags the SSN and name mismatch and the return is sent to ERS Suspense. The return will sit in suspense for an average of 75 days until an agent is assigned to process the return. During this time, the IRS website continues telling the taxpayer that their return has been accepted for processing - even though the IRS software has identified the problem.
In this specific case, the agent manually processing the return will disallow the dependent and adjust the return to remove the child tax credit, head of household, etc. as appropriate. The agent will send out a "math error" letter to the taxpayer notifying them of mismatch and adjusted return.
The taxpayer sends in proof of the dependent with the correct social security number listed. And that correspondence will then wait for an average of 199 days before it is processed. At this point, the taxpayer has been waiting approximately 9 months since filing their return.
Economic Impact Payments and Advance Child Tax Credit Payments
Last year, there was no programming in place to automatically adjust a return if a taxpayer reported a different amount of Economic Impact Payments received than what was shown in the IRS system. So last year, all mismatches on Economic Impact Payments were processed manually. This year, they have created programming to automatically adjust returns in these cases.
However, as of last week, it wasn't yet known if advance child tax credit payment errors are being processed manually or through computer programs.
Summary of the Issues Facing the IRS
The incredible backlogs at the IRS is a problem that has built over the decades with two major causes. First, the IRS has been chronically underfunded. Second, the IRS truly is managing two discrete missions - assessing income tax and delivering benefits, such as head of household benefits. COVID exacerbated these issues through staffing issues and taking on additional benefits distributions (economic impact payments and child tax credit advance payments).
What About Tips and Tricks for Accounting Professionals?
Make sure you are subscribed to The Woodard Report for ongoing information about the backlogs. And follow up with parts two and three of this series. In part two, we discuss the tips you can use to help your clients navigate the issues you and they both face. In part three, we will discuss the unprecedented steps taxpayer advocates suggest the IRS and Congress implement immediately to correct these issues.