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IRS faces 35 million unprocessed tax returns as backlog swells, watchdog says

Susan Walsh/Associated Press

The Internal Revenue Service closed the most recent filing season with more than 35 million unprocessed tax returns, as its backlog grew markedly amid a crush of challenges related to the pandemic and economic relief efforts, a government watchdog said Wednesday.

Erin Collins, the national taxpayer advocate, said in her report that about 17 million paper tax returns were still waiting to be processed and approximately 16 million additional returns were on hold because they required further review manually. Another 2.7 million amended tax returns have not been processed.

This backlog represents a fourfold increase from 2019 — the most recent year before the coronavirus pandemic — when the IRS closed its filing season with 7.4 million unprocessed returns, according to the report. These numbers reflect the IRS backlog as of May, and the agency may have made progress reducing it since then. The backlog amounted to 11 million at the end of the 2020 filing season, almost a third of the current number of unprocessed returns.

As a result of the backlog, millions of taxpayers have to wait much longer for their tax refunds. In the current filing season, 70 percent of individual income tax returns included refunds, with the average refund amounting to about $2,800. Refunds are also important for delivering tax credits to low-income Americans, while some other taxpayers need their returns to be processed to proceed with things like mortgage applications.

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The agency’s struggle comes as President Biden and Democrats in Congress prepare to give the IRS even more major responsibilities, including implementing a new paid family leave benefit, a clean energy tax-credit program, and new child care subsidies.

’'Processing delays matter greatly because most taxpayers overpay their tax during the year via wage withholding or quarterly payments and are entitled to receive refunds,’' Collins said in her report.

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IRS Commissioner Charles Rettig had told the Senate Finance Committee earlier this month that the agency had processed more than 137 million individual income returns and sent refunds totaling more than $281 billion. Rettig also said told lawmakers that the agency was ’'current as to all returns received by us during calendar year 2020.’'

The overwhelming majority of the 35 million unprocessed returns are for the 2020 filing season and were filed in 2021. An IRS spokesman did not immediately have additional comment.

The taxpayer advocate chronicled a ’'perfect storm’' of challenges facing the IRS as it struggles to recover from the pandemic and implement a wide array of changes related to Biden’s economic relief efforts.

Despite severe cuts over the last decade, the IRS was tasked with sending a third round of economic relief payments, changing rules around unemployment benefits, and following new guidelines for eligibility for other tax credits. Many of these changes were ordered in the middle of the filing season, compounding the challenge.

The IRS is now responsible for creating a new monthly child benefit that is unprecedented in the agency’s history. The pandemic also forced the shutdown of in-person centers where tax returns are processed. From 2010 to 2019, the IRS budget fell by about 20 percent, adjusting for inflation, while the number of full-time employees dropped by a similar amount.

Calls for help to the agency from taxpayers skyrocketed amid the challenges. The agency received an average of 45 million calls per year from 2018 to 2020. It received more than 167 million in 2021, a nearly 300 percent increase from 2018, with only 9 percent of calls answered by an IRS customer service representative.

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The responsiveness of one of the most important IRS services — the 1040 support line for individual income tax returns — fared even worse. That line received about 85 million calls, with only about 3 percent reaching a customer service representative, according to the taxpayer advocate.

Some former IRS officials said lawmakers should be alarmed. Mark Everson, commissioner under President George W. Bush, said the agency excelled at extraordinary pandemic-related measures but needed to ensure it is also living up to its basic obligations.

Everson also pointed to a leak to ProPublica with confidential taxpayer data that revealed that many of the wealthiest Americans pay little in taxes.

’'Coming on top of the breach of security and the failure to protect taxpayer information, this is more bad news for the IRS,’' Everson said. ’'The IRS is doing a great job getting relief to American taxpayers, but it needs to do its day job and concentrate on the basic blocking and tackling of running the tax system.’'

John Koskinen, who served as IRS commissioner in both the Obama and Trump administrations, faulted Congress for imposing far too many requirements on an agency without sufficient funding.

’'It’s a problem, but nobody should be surprised,” he said. “You can’t keep loading more things on an agency without enough people and expect things to go smoothly. The problem is not with IRS employees, who work very hard. It’s with Republicans in Congress, who have refused to provide adequate funding for 10 years.’’

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Republicans led the IRS budget cuts, but Biden has pushed to increase the agency’s funding by as much as $80 billion, in part to crack down on tax cheats. A bipartisan infrastructure deal reached with the White House includes as much as $40 billion in additional funding for the agency, although it is unclear when that may pass.