IRS reduces tax backlog, but still not below pre-pandemic level

The Internal Revenue Service was able to decrease the pile of unprocessed tax returns this tax season, but it's still not back where it was before the pandemic, according to two reports.

The reports, issued Monday by the Treasury Inspector General for Tax Administration, found the IRS making significant strides this tax season. In a report on the interim results of the 2023 filing season, TIGTA found the IRS made significant progress to reduce tax return inventories closer to pre-pandemic levels. More than 2 million individual tax returns and transactions remained in inventory as of the end of 2022, compared to more than 8.4 million as of the end of 2021. "This backlogged work will continue to have a significant impact on associated taxpayers," said the report.

IRS officials told TIGTA that for the first time since the pandemic began, individual tax return processing and related activities are returning to normal timeliness goals. The IRS cleared its carryover inventory of unprocessed individual tax returns received during 2022 by Feb. 4, 2023. However, the report noted that the IRS continues to have backlogs in its inventories of rejects, "unpostables" and amended returns. 

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In the other report, TIGTA found that additional actions are needed by the IRS to reduce its accounts management inventories below pre-pandemic levels. As of Dec. 31, 2022, the IRS reported that it had 6.2 million cases in its Accounts Management inventory and 445,000 cases in its Form 1040-X inventory of amended tax returns. The IRS set up surge teams last year to help deal with the backlogs as part of its Get Healthy initiative last year. TIGTA identified a number of contributing factors to the remaining backlogs. While the employees assigned to the accounts management function's surge team contributed to the additional closures of its inventory, there were fewer employees available than anticipated. In addition, the loss of employees from other IRS functions led to an estimated $2.6 billion in potential lost or delayed revenue, due to fewer examination and collection cases being worked. Furthermore, the Form 1040-X surge team's closure rates were less than half of the normal employees' closure rates. 

"Automating the processing of these amended returns would reduce the burden on taxpayers waiting for their amended returns to be processed, and the benefits far outweigh the associated costs," said the report. "For example, TIGTA estimated that the IRS would potentially save more than $322.2 million in yearly processing costs by automating the processing of Forms 1040-X. This is in addition to any interest saved."

TIGTA made 13 recommendations to the IRS in the report, including that management establish goals and a plan for all inventory types to reach pre-pandemic levels, and that they prioritize funding and implementation of automated processing of Forms 1040-X. The IRS agreed with 10 of the report's recommendations, but disagreed with three recommendations, including that management establish goals and a plan for all inventory types to reach pre-pandemic levels. 

"Our efforts have resulted in the closure of 23.9 million cases in fiscal year 2022, and 5.2 million cases in fiscal year 2023 through Dec. 31, 2022," wrote Kenneth Corbin, commissioner of the IRS's Wage and Investment Division, in response to the report. "During the 2023 filing season, our primary focus  is on providing service through our toll-free telephone lines; however, we continue to address the inventory levels as resources allow."

The other report on the interim filing season statistics also contains some statistics on the IRS's efforts to shorten the wait times on calls. As of March 4, 2023, taxpayers made a total of 17 million attempts to contact the IRS by calling the various customer service toll-free phone assistance lines. The IRS reported that 4.4 million calls were answered with automation, and telephone assistors answered 3.5 million calls and provided an 80.6% level of service with a five-minute average speed of answer. 

Tax prep companies like H&R Block have noticed improvements this year in IRS operations after the IRS received an extra infusion of funding from the Inflation Reduction Act. 

"The IRS had a rough couple of years trying to implement all of the stimulus relief and COVID credits," said H&R Block chief tax officer Kathy Pickering. "They really struggled, and that's because they were having to react so quickly on really aging technology systems and a very limited workforce. The money that they've gotten so far, the ability to hire assistors to answer the phones and get caught up on the backlogs have really contributed to seeing a much more normal stable tax season this year. We can see by looking back how important having stable funding is for the IRS to be able to deliver on their core mission. Incremental funding is going to be needed if they want them to be able to do incremental things. Otherwise, it's all going to come back to impacting their ability to deliver the base level of taxpayer service expectations, and we really don't want to see that happen."

However, tax professionals and taxpayers alike are still having trouble reaching the IRS over the phone, whether through the Practitioner Priority Service or the regular toll-free lines. 

"It's been a very mixed experience," said Pickering. "What we're seeing is that the way that the IRS reports their levels of service is a mixture of a number of factors. Was a taxpayer able to call the IRS and talk to a live person? That actual experience is certainly much lower than what the overall level of service is that the IRS is reporting, and we still see that there's a lot of room for improvement in handling the tax practitioner services. That;s where our frontline tax pros, when they need to call the IRS on behalf of a client, are meant to have a priority line, and they also have been experiencing long delays and frustrations and being able to get through. There's still a lot of room for improvement in the IRS's actual service levels. In the same breath, they did much better this year than they have in the past couple of years."