National Taxpayer Advocate Report

The Taxpayer Advocate Service (TAS) released its annual report in January 2023. It provides a detailed analysis of the significant progress the agency has made in reducing the backlog of returns and the top problems as well. This includes challenges with processing delays, agency hiring and training, transparency, and a troubled appeals process. TAS is a nonpartisan, independent organization within the IRS that advocates for and supports taxpayers. Its 2023 report contains summaries of the most important issues in the fiscal year 2022 and recommendations for changes to improve the taxpayer experience. To help clients, prospects, and others, Wilson Lewis has provided a summary of the key details below.

Report Highlights

In a bit of good news for the start of tax season, the IRS is down to less than four million unprocessed returns. That includes around 400,000 individuals, one million businesses, and 1.5 million amended returns. A year ago, the agency still had a backlog of around 11.5 million returns. For taxpayers who still file by paper – approximately 13 million Americans – this means their returns can get processed during tax season. During 2022, the substantial backlog meant that paper returns didn’t get processed for several months.

Currently, the number of suspended returns has increased mostly due to suspected identity theft. Taxpayers whose returns are suspended due to suspected identity theft currently need to wait about a year before the returns are resolved.

Despite that hiccup, the outlook for 2023 is much more promising. More funding has already allowed the IRS to hire more than 4,000 new customer service representatives. More than 700 new employees will staff nationwide Taxpayer Assistance Centers. And the time it takes to hire an onboard new staff has been cut in half. Taxpayers won’t see immediate benefits though, as new staff will need additional training time. As the report noted, “If the IRS assigns more employees to answer the phones, correspondence processing will be slower. If the IRS assigns more employees to process correspondence, phone service will decline.”

Ongoing IRS Issues

Reaching the IRS is still a problem for most taxpayers, the report indicated. Of 173 million calls in 2022, only 13 percent talked to an IRS employee. The average wait time was 29 minutes. Tax professionals didn’t fare much better in their attempts to reach the IRS by phone.

Return and refund processing delays continue to be a major challenge for taxpayers, according to the report. Of those who filed returns by paper, many of the refunds were delayed by at least six months. Additionally, several hundred thousand business returns with refunds for the employee retention tax credit were also delayed.

The IRS also still struggles to correctly process taxpayer notices. In 2022, it sent millions of notices related to math errors on a tax return, reporting errors, authentication, correspondence examinations, and collections. However, if the IRS didn’t process a taxpayer response, the return was either further delayed or the taxpayer got penalized. Even processing responses took an average of about six months.

According to the report, the top ten most serious issues prohibiting a more positive taxpayer experience are:

1. Processing delays
   1. 29 million returns had still not been processed at the end of tax season, and about two-thirds were due refunds. Some refunds took ten months or longer to issue.
2. Tax code complexity
   1. More than one-third of taxpayers feel that the IRS does not help them to understand their tax obligations. When taxpayers understand the tax code, compliance tends to also improve.
3. IRS hiring and training
   1. Current employees can barely keep up with ongoing demands, and without adequate staffing and training, taxpayers don’t trust the IRS.
4. Phone and in-person service
   1. Compliance and service are both undermined when taxpayers can’t reach the IRS with questions or problems.
5. Online access for taxpayers and tax professionals
   1. Most taxpayers and tax professionals want an easy-to-use online system, but such a system doesn’t yet exist.
6. E-file and free file
   1. E-filing is known to be easier, quicker, and less burdensome for everyone. But if a taxpayer can’t e-file either due to choice or because the e-file system can’t support certain attachments, the resulting paper returns bog down the system and cause delays.
7. IRS transparency
   1. When the IRS struggles to answer phone calls or deliver in-person service and the website is difficult or complicated to navigate, compliance and customer service suffer.
8. Return preparer oversight
   1. More than half of tax returns are prepared by a tax professional, but unless they’re a CPA or enrolled agent, the professionals aren’t subject to any competency requirements.
9. Appeals
   1. Appeals cases often result in long delays; many taxpayers feel that too many resources are devoted to enforcement and not customer service.
10. Overseas taxpayers
    1. Overseas taxpayers can’t access the IRS as easily and need better, more accessible resources online.

There are many opportunities to turn these challenges into solutions, the report noted. Initiatives to improve the taxpayer experience include hiring and training more employees, creating online taxpayer accounts, enabling online document uploads, improving the readability of tax transcripts, and giving all taxpayers the option to e-file their returns. Specifically, there are many taxpayers who would prefer to e-file but can’t because the IRS can’t process certain attachments or documents.

Other Legislative Recommendations to Improve the Taxpayer Experience

At the same time as the Taxpayer Advocate released its annual report, it also published a list of 65 recommendations for Congress to use in improving the overall experience. In the past, Congress has enacted about 50 legislative recommendations, though it’s unclear whether the TAS was the driving force behind the recommendation or other stakeholders.

Among the more notable recommendations, this year are:

• Allow qualified taxpayers to claim a refund if they otherwise would have been entitled to it but missed the lookback period in 2020 or 2021 due to postponed return deadlines.
• Establish minimum competency standards for tax preparers.
• Expand the Tax Court’s jurisdiction to include cases regarding refunds and assessed penalties.
• Restructure the earned income tax credit.
• Strengthen the Low-Income Taxpayer Clinic Program.
• Update the substantiation requirement for written receipt of a charitable donation.
• Clarify supervisory approval before assessing taxpayer penalties.
• Require math error notices to include specific reasons for the adjustment.
• Give taxpayers the right to request an independent review of certain collection processes.
• Require that a notice of deficiency is first issued before an assessable penalty.

Contact Us

While it seems, the IRS is making headway in resolving many of the identified challenges, it does appear there is still a way to go. The funding set aside in the Inflation Reduction Act should help to resolve these issues. 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 770-476-1004 or click here to contact us. We look forward to speaking with you soon.