National Taxpayer Advocate Erin Collins has issued her 2023 Annual Report to Congress, finding that the IRS has made great strides in certain areas but continues to lag in others.
Taxpayer services have improved, Collins noted, writing in her introductory remarks, "Overall, the magnitude of successes exceeded the areas of weakness in 2023, and most metrics showed significant improvement from the depths of the pandemic. The two most important improvements were eliminating the backlog of paper-filed Forms 1040 and answering a much higher percentage of taxpayer telephone calls."
With regard to the processing of Forms 1040, Collins noted that the IRS had a backlog of about 17 million paper-filed 1040s at the close of the 2021 filing season, but had “virtually eliminated" that backlog of unprocessed original 1040s by the end of 2023.
And addressing improvements in phone service, Collins reported that, during fiscal year 2021, IRS employees answered just 11 percent of its calls, improving to 29 percent of its calls in fiscal year 2023, an increase of more than 150 percent. The agency also substantially reduced average wait times on its toll-free lines from 29 minutes in fiscal year 2022 to 13 minutes in fiscal year 2023. Collins attributed the improved performance to the IRS’s hiring more employees to answer the phones and to the volume of incoming calls dropping by two-thirds—but still faulted the IRS for having only 35 percent of callers reaching an IRS employee during the filing season and only 29 percent reaching an IRS employee during the full fiscal year.
"Taxpayers generally call the IRS when they are experiencing problems, so the drop in call volume last year was a good sign that overall taxpayers’ problems have declined,” she wrote.
Collins also highlighted taxpayer service challenges such as delays in processing amended taxpayer returns and taxpayer correspondence, assisting victims of identity theft and processing Employee Retention Credit (ERC) claims.
"When I released the National Taxpayer Advocate's 2020 report, I wrote that the IRS in most cases 'can effectively handle whatever it can automate,' and when I released our 2021 report, I wrote that, 'Paper is the IRS's kryptonite,'" Collins said. "Those observations continued to hold true in 2023."
While she lauded the agency’s success in eliminating the paper-filed 1040 backlog, she could not say the same for amended individual income tax returns (Forms 1040-X), and amended business tax returns and correspondence. At the end of calendar year 2019 (the most recent pre-pandemic year), the IRS’s backlog of unprocessed amended returns stood at 0.5 million, but increased almost fourfold to 1.9 million as of late October 2023. Taxpayer correspondence and related cases more than doubled over the same period, from 1.9 million to 4.3 million.
“Delays in processing amended returns and correspondence harm taxpayers because processing delays cause delays in issuing refunds,” Collins wrote.
Collins found that, at the end of fiscal year 2023, nearly half a million taxpayers with cases pending in the IRS’s Identity Theft Victims Assistance (IDTVA) unit were waiting an average of almost 19 months for the agency to resolve their identity theft problems.
“If it weren’t for the significant number of challenges affecting larger groups of taxpayers, this would be headline news, and it should be,” she wrote. “Many taxpayers depend on their tax refunds to meet their living expenses, particularly low-income taxpayers who receive Earned Income Tax Credit (EITC) benefits that [approached] $7,000 for tax year 2022.”
As of early December, the IRS had a backlog of approximately one million ERC claims, Collins wrote. (In September, the agency imposed a moratorium on the processing of all ERC claims in response to a proliferation of fraudulent claims).
Collins acknowledged the difficulty that the IRS faces in processing these claims; “If it pays claims quickly without adequate review, it could pay billions of dollars to nonqualifying persons,” she wrote. “If it takes the time to review claims carefully, eligible employers will experience significant delays in receiving the credit, and in extreme cases, employers who need the funds immediately could go out of business.”
Collins made administrative recommendations to address some of the most serious problems identified in her report. They included:
● Prioritizing the improvement of online accounts for individual taxpayers, business taxpayers and tax professionals to provide functionality comparable to that of private financial institutions;
● Improving the IRS’s ability to attract, hire and retain qualified employees;
● Ensuring that all IRS employees—particularly customer-facing employees—are well-trained;
● Upgrading the back end of the “Document Upload Tool” (DUT) to fully automate the processing of taxpayer correspondence;
● Enabling all taxpayers to e-file their federal tax returns; and
● Extending the eligibility for first-time penalty abatement to all international information return penalties.
In addition to these administrative recommendations, the national taxapyer advocate’s 2024 Purple Book proposes 66 legislative recommendations intended to strengthen taxpayer rights and improve tax administration.
To get the latest guidance on navigating clients’ tax issues, and to meet key IRS players and ask questions, attend the Foundation for Accounting Education’s NYSSCPA Meet The IRS Webcast on Jan. 25.