While the pandemic and legislative changes were primarily responsible for the IRS’ inability to meet timeliness standards for the majority of taxpayer cases last year, inefficiencies in personnel, equipment and procedures also contributed to the delay, the Treasury Inspector General for Tax Administration (TIGTA) said in an audit report.
The report, titled Program and organizational changes are needed to address the ongoing inadequate tax accounts assistance provided to taxpayers (Rep’t No. 2022-46-027), focuses on the account management operation of the IRS, which is responsible for processing taxpayer returns and correspondence. At the end of the April-November 2021 audit period, the IRS had 7.8 million cases in account management, of which 56.8% were overdue, meaning they had exceeded the period. 45-day processing period from receipt, after which, for a return, interest is generally payable to the taxpayer on any refund or credit due.
Systemic issues in account management, TIGTA said, included the fact that the majority of its staff split their time between working on cases and answering toll-free phone calls.
Another factor in the backlog was that much of the mail from account management is received by IRS centers where returns are also processed, which lengthens the time it takes for it to finally be scanned into a computer system 53 days longer than if it had gone to one of Accounts Management’s campus support sites, TIGTA said. Redirecting mail accordingly would also free up returns processing centers to perform their primary function more quickly. More than 14.6 million returns were pending processing on November 20, 2021, TIGTA reported.
Amended returns and carryback requests
In an appendix, the report details the types and ages of cases that account management held as of October 30, 2021. The largest type, both in volume and percentage overage, were amended statements and forms related to a deferral claim, such as those resulting from a net operating loss. Of those nearly 2.3 million items, 73.7% were outdated, TIGTA found. After that, in volume was general taxpayer correspondence, including responses to notices and letters from the IRS. Of these 1.9 million items, 45.6% were outdated.
Many amended returns have been filed to take advantage of new pandemic-inspired taxpayer relief legislation, TIGTA noted, including deferral requests. The Employee Retention Credit, for example, was created by the Coronavirus Aid, Relief, and Economic Security Act, PL 116-136, to provide an employment tax credit to employers carrying on a trade or business that experienced a 50% drop in gross receipts. for a quarter in 2020 compared to the same quarter of the calendar year 2019 or which has totally or partially suspended its operations due to orders from a governmental authority. Because the Consolidated Appropriations Act of 2021, PL 116-260, retroactively changed the 50% drop in gross receipts to 20%, many employers filed one or more amended statements, Form 941-X, Adjusted Employer Quarterly Federal Income Tax Return or Claim for Refund.
And while a retroactive measure of the American Rescue Plan Act, PL 117-2, which excluded up to $10,200 of unemployment benefits from the income of taxpayers whose adjusted gross income was less than $150,000 was largely handled by the IRS without these taxpayers having to file an Amended Return Request, some affected taxpayers had to complete Form 1040-X, Amended U.S. Personal Income Tax Returnto claim a tax credit they became eligible for as a result of the unemployment exclusion, TIGTA noted.
Processing these amended returns (including some unrelated to the special provisions) was one of the later tasks of account management, TIGTA found. Its inventory contained 708,251 Form 1040-Xs, 79% of which were expired as of November 27, 2021, and 411,610 Form 941-Xs, of which 91% were expired as of November 30, 2021. Interest paid on the two forms combined totaled $166.4 million. dollars as of August 26, 2021.
“We expect the IRS to pay significantly more interest on Forms 1040-X and 941-X given the number of returns remaining to be processed,” TIGTA said.
TIGTA recommended that the IRS dedicate adequate staff to separate the duties of answering telephones or handling account management workload, which the IRS agreed to. Separating these duties from March 2021 could have allowed account management to liquidate its entire inventory by early October last year, TIGTA estimated.
Inadequate equipment also hampered timely processing, TIGTA found. For example, the IRS is generally unable to directly import a taxpayer’s faxed document into its computer systems but must print and scan it (it also generally scans all paper correspondence received). IRS officials, in response to TIGTA’s recommendation, asked the Service’s information technology office last October to implement an electronic connection for faxes, but in early January of this year, the technology had not been implemented, TIGTA reported.
Scanners were not always deployed efficiently and generally lacked sufficient processing capacity, TIGTA reported.
In addition to recommending that taxpayer correspondence be received at the Account Management Campus Support Sites, TIGTA recommended that the IRS develop and implement means for taxpayers to correspond with the IRS electronically. , in particular by directly uploading documents.
“This could provide taxpayers with instant confirmation that the IRS has received their documents and reduce the time it takes for correspondence to reach account management,” TIGTA said.
The IRS accepted this recommendation and noted that it had used electronic taxpayer communications in pilot programs.
TIGTA noted, however, that while the IRS plans to expand these capabilities as part of its taxpayer experience strategy, this initiative “is being implemented for enforcement functions first.” IRS, and as of December 13, 2021, there is no expected date for implementation in accounts management.”
Other recommendations focused on monitoring and record keeping, including changes needed so the IRS knows accurately how much of its account management inventory is held at each of its locations, due to inconsistencies in how each site prepares its inventory report.
The AICPA continues to advocate for better IRS services; visit the webpage describing AICPA’s advocacy efforts to learn more.
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