IRS faces steep climb in clearing old tax returns

Former IRS officials and experts are casting serious doubt on the agency’s ability to clear by the end of this year tens of millions of unprocessed tax returns delayed by the pandemic. 

IRS Commissioner Charles Rettig vowed to Congress last week that the agency would “absolutely” clear the backlog by the end of 2022, but operational demands that confounded the agency last year show no signs of letting up, raising questions about meeting the deadline.

“The commissioner said that he commits [the IRS is] going to get through all of the returns by December of 2022, and I would love to see that, but I will be circumspect in thinking that that’s actually going to happen,” Nina E. Olson, who served as the national taxpayer advocate in the Treasury Department from 2001 to 2019 and is now the executive director of the nonprofit Center for Taxpayer Rights, said in an interview.

“What will happen to taxpayers — and this will put pressure on preparers — is that their returns are going to be held up. They will be stopped by any number of things that happen in the IRS return processing system,” she continued. “There are all sorts of ways the return can go wrong, even after it’s filed, and especially now.”

The root cause of the backlog, analysts say, is the administrative workload the IRS has had to take on, in addition to being a tax collector, to distribute economic stimulus payments in response to the pandemic.

Total stimulus administered by the IRS, which consisted mostly of checks and direct deposits known as economic impact payments, was considerably higher in 2021 than in 2020.

For this filing season, the IRS doled out more than 175 million third-round stimulus checks and direct deposits totaling around $400 billion as part of the American Rescue Plan Act. A portion of the second-round stimulus checks, which delivered more than $142 billion through 147 million individual payments, went out in 2021 as well.

This is compared to 160 million first-round payments totaling $273 billion handed out as a result of the 2020 CARES Act during the period covered by last year’s filing season.

On top of the payments, this year’s workload also included delivering 200 million installments of the child tax credit, a program designed to save parents $1,000 on their taxes for each child. Analysts describe the credit as more complicated to administer than the one-shot stimulus payments due to common mistakes about who can claim a child as a dependent. 

“It would make sense to stop using the tax system as a benefit administration tool, given that the IRS is already stretched with its baseline responsibilities,” Alex Muresianu, an analyst with the Tax Foundation, a Washington think tank, said in an interview.

In a normal year, about a million returns go unprocessed and requests go unanswered. This year, the number is more than 20 times as high. 

“Each financial relief program means that [the IRS] has to reallocate resources from their core responsibilities. They did get a little bit of a bump in funding, but when you consider the scale of these programs, it doesn’t match up,” Muresianu continued.

The IRS budget for 2022 of $12.6 billion in the omnibus spending package passed earlier this month was a 6 percent increase from the previous year. One of the largest segments of the increase was $225 million for services for taxpayers, a 9 percent annual jump meant to help tackle processing delays.

Part of that allotment will fund an agency initiative to hire an additional 10,000 employees by the end of next year, with 5,000 of those to begin work in the next few months, the agency announced earlier this month. The IRS also repurposed an additional 900 employees to work specifically on the tax return backlog. 

Despite the added personnel, IRS watchers think staffing concerns will continue to drag on this year’s inventory.

“They won’t get 5,000 people on board before the filing season is over,” Janet Holtzblatt, a senior fellow at the Urban-Brookings Tax Policy Center, a Washington think tank, said in an interview. “You have to find people, you have to bring them on board, and then you have to train them.”

The additional credits and stimulus handed out by the IRS this year aren’t the only reason for the backlog, Holtzblatt said, pointing to some perennial criticisms of the agency.

“You also have to blame it on the paper filing and the IRS technology that hasn’t caught up,” she said. “You could have new technology that would allow the IRS to scan the paper returns when they come in. But they don’t. Their technology is way behind.”

“The speed at which they got all of the [stimulus checks] out there was unprecedented,” Holtzblatt added. “But it came at a cost.”