Any bookkeeping, business or tax article contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor can it be used to avoid tax-related penalties. If desired, we would be pleased to perform the requisite research and provide you with a detailed written analysis. Such an engagement may be the subject of a separate engagement letter that would define the scope and limits of the desired consultation services.

2021 Highlights: Tax processing and refund delay

January 31, 2022

2021 Highlights: Tax processing and refund delay

Erin Collins, the National Taxpayer Advocate, sums up her assessment of the calendar year 2021 in this short sentence. In the Taxpayers’ Advocate’s Annual Report to Congress, the problems of last year were revealed and warnings were issued for this year’s tax season.

Let’s look at the 2021 highlights concerning tax processing and refund delays. The 2021 highlight on tax processing and refund delay might help us understand the situation facing the concerned agencies handling our 2021 tax processing and refund.

Tough Job

Collins says that the IRS faced a busy year in 2021, hence the tax processing and refund delay. The agency was recovering from the pandemic and at the same time had to carry out new laws meant to help combat the financial difficulties caused by that virus.

According to the IRS’s report, 478 million Economic Impact Payments were issued totaling more than $800 billion as the IRS processed and sent out Advance Child Tax Credit payments to more than 36 million families. Over $90 billion has been paid out so far. The report says that in 2021 the IRS lost 17% of its workforce while its workload increased by nearly 20%.

Backlogs

Despite a focus on the problems of 2021 highlights, Collins looks ahead to next year’s filing season. According to the report, “Paper is the IRS’s Kryptonite, and the agency is still buried in it.”

The Internal Revenue Service is still working hard to get its tax processing and refund backlog of 6 million unprocessed original individual Form 1040 returns, over 2 million unprocessed amended individual returns, and more than 2 million unprocessed Forms 941 and 941-X employer’s quarterly tax returns up to date.

In addition to all that, the IRS has another estimated 5 million pieces of taxpayer correspondence dating back to April and showing many taxpayers still waiting for refunds – nine months later. An evident proof of the tax processing and refund delay experienced by taxpayers.

E-filed returns are processed much more quickly than paper returns, minimizing refund delays, but the IRS found that millions of e-filed returns were suspended during processing because discrepancies were found between the amounts claimed on the returns and amounts on IRS records.

Delayed processing = Late refunds

When the IRS’s May 17, 2021 deadline for filing federal income tax returns dawned, more than 35 million returns were still on hand. About half of these were paper returns awaiting review by IRS staffers. The other half were e-filed returns that had been suspended during processing. Both instances caused large delays for taxpayers expecting refunds.

“Refund delay have a disproportionate impact on low-income taxpayers,” the report says. “Earned Income Tax Credit (EITC) benefits are worth up to $6,660, Child Tax Credit benefits worth up to $2,000 per qualifying child under the tax year 2020 rules, and RRCs are potentially worth several thousand dollars for families who did not receive some or all of their EIPs. Millions of taxpayers rely on the benefits from these programs to pay their basic living expenses, and when refunds are substantially delayed, the financial impact can range from mild inconvenience to severe financial hardship.”

Collins says that the number of returns requiring manual processing or an audit might increase in 2022. New legislation authorizing advances of the Earned Income Tax Credit could mean that even more discrepancies exist between what people report on their tax returns and the IRS records. Thsi legislation might be able to avoid tax processing and refund delay for 2022.

In addition, Congress has authorized monthly advance child tax credits. These payments can be claimed as a credit by taxpayers who don’t receive their Economic Impact Payments for one reason or another.

All these payments have to be reconciled when the recipients file their 2021 returns this tax season. Despite IRS efforts to head off problems, the risk of discrepancies – and math error notices generated by them – remains high.

Customer Service Shortfalls Top the List

While a number of problems were noted by the report to Congress, Collins found some had widespread effects on IRS operations:

The “Where’s My Refund?” tool isn’t exactly a fountain of information. The online tool won’t tell you about unprocessed returns and also won’t explain any status delays, reasons for delays, or what actions taxpayers should take.
The IRS answered 11% of 282 million calls. This pushed call volumes to triple from the previous year’s; with telephone support getting 282 million telephone calls. Not that they were all answered. Customer service representatives only were able to actually answer about 11 percent of those. “Among the lucky one in nine callers who were able to reach a CSR, the IRS reported that hold times averaged 23 minutes,” the report says. “Practitioners and taxpayers have reported that hold times were often much longer, and frustration and dissatisfaction was high throughout the year with the low level of phone service.”
The IRS mailed more than 6 million taxpayer notices during 2021. In many cases, a response was required by the receiving taxpayer and if the IRS automatic system didn’t process a response, the refund claimed on the return wasn’t released. If a taxpayer received a notice about an adjustment to their taxes, the automated system could take action against them if they didn’t respond within 30 days—a fact that many taxpayers were unaware of until it was too late.

Bottomline

The IRS may be known as one of the most cost-efficient agencies there is but they have their work cut out for them this tax filing season. To avoid any problems with your tax filing this year, it would be a great idea if you file your return with a tax professional. This way you can help reduce the paper returns that the IRS must process leading them to focus more of their manpower in processing tax returns filed online. As the report said, tax returns filed online get processed much faster, meaning you get to have your refunds faster.

Need a tax professional to help you? Get in touch with us today!