National Taxpayer Advocate Erin M. Collins (Advocate) released the 2022 Annual Report to Congress (Report) on January 11, 2023. The report states what most of us already knew; tax professionals and taxpayers "experienced more misery in 2022" due to paper processing delays and poor customer service. Despite these challenges, she believes the agency is better prepared for the coming tax season.
Reducing the volume of unprocessed tax returns and correspondence and using a portion of the increased IRS funding provided by the Inflation Reduction Act to hire an additional 4,000 staff to help answer phones, process returns and handle additional paperwork. That being said, she believes real improvements in service are not likely to be seen until mid-2023, given the need to train and otherwise get the new hires "up to speed."
The Advocate's report assesses taxpayer service during 2022, identifies the ten most serious problems tax professionals and taxpayers are experiencing in their dealings with the IRS, and makes administrative and legislative recommendations to help address those problems.
Key taxpayer service challenges
Return processing and refund delays.
The report says the IRS failed to meet its responsibility to pay timely refunds to millions of taxpayers for the third year. About 13 million individual taxpayers filed paper returns. Because of paper processing delays, these taxpayers' refunds were generally delayed by six months or longer.
Millions of e-filed individual returns were "suspended" because they tripped IRS processing filters and required manual review by IRS employees before refunds could be released. Hundreds of thousands of business returns claiming the Employee Retention Tax Credit were delayed.
The number of returns suspended during processing is the only significant return category in which inventories increased. The IRS entered 2022 with an inventory of 4.2 million suspended returns. The inventory grew to 5.9 million suspended returns by mid-December.
Cases involving suspected identity theft account for about half the inventory of suspended returns. In mid-December, the IRS reported 2.9 million identity theft cases in its inventory. While some will turn out to be fraudulent claims, the IRS website, as of January 9, states:
"[D]ue to extenuating circumstances caused by the pandemic, our identity theft inventories have increased, and on average, it is taking about 360 days to resolve identity theft cases." The report calls a year-long delay "unacceptable" and urges the IRS to assign additional employees to process these cases.
Some light and the end of the tunnel for the 2023 filing season.
The Advocate believes the IRS will be starting the 2023 filing season in much better shape than the last two years. The IRS began 2022 with an unprocessed paper backlog of 4.7 million original individual returns (Forms 1040), 3.2 million original business returns, and 3.6 million amended returns (individual and business combined).
As of mid-December 2022, the IRS had reduced those backlogs to 1 million original individual returns, 1.5 million original business returns, and 1.5 million amended returns. By December 23, the IRS had further reduced its unprocessed paper backlog of original individual returns to about 400,000 and original business returns to about 1 million.
The report states that the significant reduction in the paper return inventory should enable the IRS to begin processing paper-filed tax year 2022 returns during the upcoming filing season. That contrasts with the previous two years, when the IRS was not able to process current-year returns until months after the filing season had ended.
Delays in processing taxpayer correspondence and other cases in accounts management.
The IRS sent millions of notices to taxpayers during 2022. These included 17 million math error notices, Automated Underreporter notices (where an amount reported on a tax return did not match the corresponding amount reported to the IRS on a Form 1099 or other information reporting document), notices requesting a taxpayer authenticate identity where IRS filters flagged a return as potentially fraudulent, correspondence examination notices, and some collection notices.
Notices often require written taxpayer responses. If the IRS did not process a taxpayer response, it may have taken adverse action against the taxpayer or not released the refund claimed on the tax return.
During fiscal year (FY) 2022, it took the IRS an average of 193 days to process taxpayer responses to proposed tax adjustments – about six months. That compares with 89 days in FY 2019, the most recent pre-pandemic year. The report also calls the delays in resolving these cases unacceptable.
Difficulty reaching the IRS on its toll-free telephone lines.
The IRS received 173 million calls during FY 2022. Only 22 million (13%, or roughly one out of eight calls) got through to an IRS employee.
Telephone service for tax professionals, the Practitioner Priority Service (PPS) telephone line was worse than the prior year and hit an all-time low. In FY 2022, IRS employees answered only 16% of PPS calls (fewer than one out of six), and the average hold time for those who got through was 25 minutes.