Midyear Updates From the IRS: Slow but Consistent Progress

When an issue arises with a tax return filing, processing, or other concern, many will turn to the IRS to help with questions, address issues, and resolve outstanding situations. This has been a realistic expectation of the agency, but since the pandemic, it has all changed. The combination of staffing shortages, lack of modern technology, and previously existing backlogs, means it will be some time before the agency is operating normally. However, recent reports suggest the IRS has made notable progress in certain areas. In fact, the midyear National Taxpayer Advocate Report provides important insights into how IRS examiners are working to address these issues. To help clients, prospects, and others, Wilson Lewis has provided a summary of the key details below.

State of the IRS

The National Taxpayer Advocate, Erin Collins, released a midyear report to Congress in June highlighting the agency’s performance. Continuing delays in processing paper tax returns were the main discussion point. The report also identified the top taxpayer challenges in 2022, which include return processing delays, significant difficulty reaching the agency via phone, and correspondence delays.

Efforts to reduce the backlog will continue through the rest of 2022. Many IRS staff are working overtime and the agency has established groups of employees whose primary responsibilities are to process returns that haven’t been completed yet. Various hiring events occur throughout the year and at different locations across the country. Thousands of new workers are expected to be hired this year, and contractors will augment internal staff.

The taxpayer error resolution process has also been easier, which is helping to accelerate remediation efforts. New technology allows a single examiner to correct about triple the amount of tax returns per hour than last year. In 2021 there were 8.9 million tax returns in error resolution, but there are currently less than 360,000. Unprocessed returns have also been rerouted from offices that are maxed out to locations where additional capacity is available.

Midyear Update: June 2022

Because of the backlog, the IRS says it’s reviewing more than twice the amount of tax returns in at this point in 2022 than this time last year. The good news? Most of these returns are original, which means they take less time to process than amended returns.  

Individual Returns

Thanks to steps the IRS took to address the unusually large inventory of past returns, all originally filed Form 1040s received without errors should be completed. IRS employees continue to resolve individual tax returns from 2021 that contain processing errors or need extra information.

Most returns filed in 2022 have already been processed. One of the most common reasons for delays are errors in one of the COVID relief rebate amounts, like the Recovery Rebate Credit and the Child Tax Credit. If information related to those is missing, incorrect, or if there’s suspicion of fraud, it will take longer to process. In fact, resolution could take up to 90 to 120 days depending on circumstances.

What’s it all worth? To taxpayers, an estimated $298 billion in refunds.

Once the 1040s are done, the agency will move to complete 2021 filed business returns. The goal is to address all unprocessed inventory before the end of the year.

Unemployment Compensation Tax Exclusion Corrections

One of the longest delayed items has been the 2020 unemployment compensation tax exclusions. Due to how quickly tax laws were changing at the time, many unnecessarily paid taxes on unemployment compensation. The IRS will process corrections and issue refunds as appropriate. To date, more than $14.6 billion in unemployment compensation exclusion corrections have been issued.

Forms 941 and 941-X

Finally, there are still 3.7 million unprocessed Forms 941. Unprocessed Forms 941-X totaled around 215,000. Some can’t be processed until the related Form 941 is processed; usually, the disconnect is caused by the Employee Retention Tax Credit or another COVID tax incentive.

If the IRS Is Late Issuing a Refund

By law, if a taxpayer files on time and is due a refund, and the IRS fails to pay within 45 days of receiving the return, the taxpayer is owed interest. The clock starts ticking for taxpayers who filed electronically on of April 18, or Tax Day. For paper returns, it’s 45 days from when the return was due or when the IRS received the completed return, whichever is later.

Since the interest rate paid on past due refunds is tied to the Fed, taxpayers who have been waiting a long time will at least have a silver lining – a bigger return.  Starting July 1, 2022, the interest rate the IRS uses on delayed refunds will rise to five percent.

Returns are processed in the order in which they’re received, and if there are errors, the return will be kicked back for manual review. That’s why it’s so important to double- and triple-check that all information on a return is correct and accurate. Often, a simple error or math mistake can cause a return to become delayed by weeks when more careful attention could have prevented it.

Contact Us

Despite the fact the IRS has made some progress toward resolving backlogs and service issues, it appears that more work needs to be done. It appears that businesses will need to stay the course until the agency is able to address these returns. If you have questions about the information outlined above or need assistance with a tax or accounting issue, Wilson Lewis can help. For additional information call us at 770-476-1004 or click here to contact us. We look forward to speaking with you soon.