After ‘horrendous’ year for cash-strapped IRS, taxpayers can expect more delayed refunds

WASHINGTON – With the 2022 tax season coming to an end Monday, U.S. taxpayers can expect more delays getting their refunds as the Internal Revenue Service contends with a massive backlog of filings, shortages of staff and funding and a computer system that’s half a century old.

Tax Day, normally April 15, falls on Monday this year because of the observance of Emancipation Day in Washington, D.C.

IRS Commissioner Charles Rettig promised lawmakers in March his agency will clear a backlog of more than 20 million unprocessed tax returns by the end of this year, but an internal watchdog has warned Congress that “the IRS is in crisis” and taxpayers could be in for more delays in 2022.

“This situation is untenable,” Sen. Mike Crapo, R-Idaho, and other GOP members of the Senate Finance Committee wrote to Rettig on Feb. 10. “When our constituents cannot get help from those tasked to administer our tax laws, it diminishes the integrity of our voluntary tax system.”

The IRS ended last year’s filing season with a backlog of more than 35 million returns that had to be processed by hand, according to an annual report to Congress by Taxpayer Advocate Erin Collins, who heads an internal watchdog office. Pandemic aid administered by the IRS made for unusually complicated returns, and when taxpayers called the agency for help last year, only 11% of the 282 million calls were answered.

“There is no way to sugarcoat the year 2021 in tax administration,” Collins wrote in the January report. “From the perspective of tens of millions of taxpayers, it was horrendous.”

The dysfunction matters not only because “taxes are the lifeblood of government,” as a Supreme Court justice famously wrote in 1935, but also because the IRS administers benefits in the form of tax credits that are especially vital for Americans who are struggling financially amid historic inflation and the ongoing pandemic. Families who received monthly payments of up to $300 per child in the second half of 2021, for instance, can’t get the other half of that Child Tax Credit until their tax returns are processed.

While no one in Congress denies the backlog is a problem, the parties disagree on what to do about it. In an April 7 hearing, Sen. Ron Wyden of Oregon, the top Democrat on the Finance Committee, pointed blame at the GOP for kneecapping the IRS since 2010. That’s when Republicans took control of Congress and imposed a hiring freeze at the IRS along with wide-ranging cuts to the federal budget.

“If you’re frustrated by poor customer service from the IRS, you’ve got years and years of Republican cuts to blame for gutting the agency’s ability to meet your expectations,” Wyden said.

Since 2010, the IRS has lost 17% of its workforce while its workload has risen by 19%, according to the Office of the Taxpayer Advocate. The agency’s budget, adjusted for inflation, fell by 20% between 2010 and 2020, according to the nonpartisan Congressional Budget Office.

Crapo, the top Republican on the Finance Committee, pushed back on Wyden’s assertion in the April 7 hearing, arguing the IRS has long failed to adopt technology and practices that could speed processing of tax documents.

“This is not a funding issue,” Crapo said. “Solutions to these challenges have existed for years, but to date have not been implemented.”

One problem, Crapo said, is that IRS workers still have to manually enter information from tax documents filed on paper because the agency has not implemented scanners that can read paper returns, a fact Collins called “crazy” in a March 30 blog post. While about 90% of tax returns are filed electronically, millions of Americans still submit paper returns and some IRS forms can only be submitted on paper.

Janet Holtzblatt, a senior fellow at the nonpartisan Tax Policy Center, said Crapo is right about the need for the IRS to modernize its technology, but that requires more funding. Congress boosted the IRS budget by about 5% through the government funding bill passed in March, but Holtzblatt said that isn’t enough to make up for decades of underinvestment in a badly outmoded computer system.

President Joe Biden and his allies in Congress have pushed for a massive infusion of funding to the IRS. The Build Back Better Act, a sprawling bill that died in December 2021 amid opposition from moderate Democrats, included roughly $80 billion for the IRS, with about half of that money to bolster tax enforcement and $32 billion for technology. It’s unclear how much of that funding may be included in a new, scaled-back spending bill Democrats hope to assemble this year.

Meanwhile, Sen. Rick Scott of Florida, who leads Senate Republicans’ campaign arm, has proposed cutting the IRS budget in half while simplifying the tax code as part of a sweeping GOP agenda that would also raise taxes on the lowest-income Americans.

Holtzblatt, who worked on tax policy at the Treasury Department for two decades, said simplifying the U.S. tax code is difficult for two reasons.

“One is that a lot of life is complicated,” she said, with different kinds of families and businesses subject to different taxes. “The other side of the coin is that we do a lot through the tax system.”

While many other countries provide benefits to their citizens through social service agencies, Holtzblatt said, the U.S. government relies on the IRS, through programs like the Earned Income Tax Credit that provides up to $6,700 for low-income families with children. When Congress approved economic stimulus payments as part of pandemic aid packages in 2020 and 2021, it relied on the IRS to distribute those funds.

The expanded Child Tax Credit, part of the $1.9 trillion pandemic relief bill congressional Democrats passed in March 2021, was also doled out to families in monthly installments of up to $300 per child between July and December 2021. Taxpayers with dependent children are eligible to receive the other six months’ payments in a lump sum through their tax refunds this year.

Holtzblatt said she’s concerned those payments, like other pandemic aid programs a year earlier, could result in more confusion and errors that add to delays. Taxpayers who mistakenly received the payments – which in most cases were based on the previous year’s tax filings – have to return that money to the government, while others may be eligible for higher payments.

In testimony to a House subcommittee Feb. 8, Collins, the Taxpayer Advocate, warned that if IRS systems detect any discrepancy or math error in a filing, “the taxpayer likely will end up waiting more than a year to receive a refund.”

The IRS recommends filing taxes electronically, and Holtzblatt said doing so should allow the IRS to process most tax returns quickly if they don’t contain errors, while returns filed on paper are likely to take months for processing.

Correction: The original version of this story confused tax returns with tax refunds. A tax return is a form submitted to the IRS, which may result in a refund.