“What a distinction a yr makes!” That is how Nationwide Taxpayer Advocate (NTA) Erin M. Collins kicked off the preface to her midyear report back to Congress.

That distinction, Collins reported, was constructive. She famous, “In submitting this report, I am lastly capable of ship some excellent news: The taxpayer expertise vastly improved in the course of the 2023 submitting season.”

Particularly, Collins famous that the IRS caught up in processing paper-filed authentic Kinds 1040 for people and numerous enterprise returns, refunds had been usually issued rapidly, and taxpayers calling the IRS had been more likely to get via with considerably shorter wait instances.

Collins additionally reported some challenges, together with delays in processing amended tax returns and taxpayer correspondence. These capabilities are intertwined—customer support representatives (CSRs) within the IRS’s Accounts Administration (AM) operate carry out two roles: answering phone calls and processing taxpayer correspondence and instances, together with amended returns. CSRs cannot do each concurrently, which signifies that once they had been on telephone obligation, they weren’t processing amended returns or taxpayer correspondence—and vice versa.

Degree of Service

The Treasury Division directed the IRS to attain at the least an 85% “Degree of Service” (LOS) in answering phone calls this submitting season. They did that.

A bit of context is warranted: the LOS measure excludes 73% of the taxpayer calls the IRS acquired. That computation solely contains calls directed to its AM phone traces, excluding 7.2 million calls directed to compliance and different phone traces, 8.5 million calls wherein taxpayers hung up earlier than being positioned right into a calling queue, and about 6.9 million calls routed to obtain automated responses. The LOS measure displays that phone assistors answered 7.7 million out of 9.3 million taxpayer calls routed to them, not 11 million out of the 31.9 million calls the IRS acquired. Nonetheless, evaluating apples to apples, LOS is up.

Assigning representatives to telephone traces means they can’t carry out different duties—even when telephones aren’t ringing. That signifies that in the course of the time they had been assigned to reply the telephones, they had been neither helping taxpayers on the telephone nor processing amended tax returns and taxpayer correspondence. So whereas the LOS charges had been terrific, they resulted in additional delays in processing paper correspondence.

This is how that interprets into numbers. From December 2022 via the submitting season, the stock of amended tax returns greater than doubled from 1.5 million to three.4 million, and the stock of taxpayer responses to IRS notices and different AM instances awaiting processing elevated from 4.9 million to five.0 million.

Collins stories that processing delays primarily contain paper-filed tax returns. Through the pandemic, greater than 90% of taxpayers e-filed their returns, and the IRS largely processed these e-filed returns with out errors and issued refunds well timed.

However since most taxpayers are e-filing, which means just some returns aren’t getting processed, proper? Not precisely. The IRS acquired 17 million paper-filed Kinds 1040 in 2021, 14 million paper-filed Kinds 1040 in 2022, and as of April 21, 2023, over 5 million paper-filed Kinds 1040 in 2023. However the IRS is not but scanning machine-read paper-filed returns, which signifies that IRS staff should nonetheless manually enter information from paper-filed returns into IRS methods.

The IRS is hopeful that may change. In accordance with the NTA, the IRS is working pilot applications to check automating the processing of paper-filed tax returns. And there is an formidable timeline: the IRS goals to develop the potential to scan all paper-filed Kinds 1040 by the 2024 submitting season.

Amended Returns

Additionally inflicting a delay? Amended returns. Though the IRS accepts amended particular person revenue tax returns (1040-X) electronically, it nonetheless depends on guide processing for these returns. This creates delays in each information consumption and issuing refunds. As of the tip of the submitting season, the IRS was taking about seven months to course of amended returns.

Worker Retention Credit score (ERC)

On the enterprise facet, a big portion of the delay in processing amended returns is attributable to ERC claims. Whereas most ERC claims are reputable, a big proportion are “alongside the spectrum of very aggressive to fraudulent.” Because of this, ERC promoter claims involving the ERC are on essentially the most current IRS “Soiled Dozen” listing of tax scams.

Presently, the ERC is claimed on Kind 941-X, which is an amended payroll tax return. Corresponding Kinds 941 should be processed earlier than Kinds 941-X will be processed. And on account of fraud issues, the processing of those claims has been comparatively gradual—particularly since processing is simply occurring at facilities the place staff are skilled on Covid-related returns.

Taxpayer Correspondence and AM Instances

AM staff additionally course of taxpayer responses to IRS notices and different taxpayer requests, like purposes for Employer Identification Numbers (EINs), id theft sufferer help instances, and tax return preparer authorizations. Since phone service has been a precedence, the IRS has not made a lot progress in decreasing its paper AM inventories over the previous yr—the stock is simply 6% decrease than on the similar time final yr. In April, it took the IRS 130 days to course of its changes instances—higher than the 214 days it took final yr however properly above the IRS’s customary processing time of 45 days.

Victims of id theft have skilled notably lengthy delays. The common cycle time for id theft sufferer help instances closed in April 2023 was 436 days, or almost 15 months—three months longer than the 362-days to shut in April 2022.

Expertise

What is the frequent theme in taxpayer challenges? Outdated tech. This is the place Collins makes use of a whole lot of ifs:

• If the IRS had been utilizing expertise to automate the processing of paper-filed tax returns earlier than the pandemic, processing delays and consequent refund delays would have been minimal.
• If the IRS had deployed subtle chatbots and higher communications instruments, far fewer taxpayers would have wanted to name the IRS, making it simpler for many who wanted private help to succeed in an worker.
• If all taxpayers had broadly purposeful on-line accounts, they might have obtained transcripts and most crucial data on-line with out the necessity to name.
• If taxpayers might have downloaded notices and responded on-line, staff who weren’t permitted to return into the workplace on account of COVID-19-related social distancing restrictions might have processed the responses from their telework places.

Inflation Discount Act (IRA)

Collins additional factors out that final August, Congress tried to repair a few of these issues by giving the IRS about $79 billion over the following ten years as a part of the Inflation Discount Act of 2022. Whereas Congress allotted a lot of the funds ($45.6 billion) to enforcement, it additionally supplied $3.2 billion for taxpayer companies, $4.8 billion for enterprise methods modernization, and $25.3 billion for operations help. Most operations help {dollars} help taxpayer companies and data expertise (IT) modernization. (A few of that funding took a success after the debt ceiling settlement.)

Will these {dollars} make a distinction? Collins appears to assume so. She notes that the IRS has already used almost $1 billion of the IRA funding to rent extra staff to course of returns, reply calls, and course of taxpayer correspondence. She writes, “The sturdy enchancment in taxpayer companies this submitting season is generally on account of this elevated staffing.”

To make substantial enhancements over the long run, Collins says the IRS should focus like a laser beam on IT. That features:

• Giving taxpayers sturdy on-line accounts akin to accounts supplied by banks and different monetary establishments;
• Making it doable for all taxpayers to e-file tax returns;
• Limiting the variety of rejected e-filed returns;
• Offering sooner reduction for victims of id theft;
• Making it doable for taxpayers to obtain and submit responses to data requests electronically in all interactions with the company;
• Digitizing all paper returns and correspondence upon receipt;
• Changing discrete case administration methods with an built-in, agency-wide system; and
• Finishing the modernization of the IRS Particular person Grasp File and Enterprise Grasp File (repository for official taxpayer information, initially deployed within the Sixties).

The IRS has launched an in depth Strategic Working Plan (SOP) which explains the way it hopes to spend the IRA funding. Collins believes the SOP may very well be a sport changer for taxpayers and tax administration, however warns, “My principal concern is with the massive variety of formidable objectives and initiatives described within the SOP.”

Collins writes that the IRS’s management might want to set priorities and supply focus to make sure essentially the most essential initiatives are accomplished. She additionally says the company ought to solely tackles initiatives as it will possibly moderately deal with.

TAS Aims

As required by legislation, the report additionally identifies TAS’s key targets for the upcoming fiscal yr. The report describes 17 systemic advocacy targets (what the TAS will advocate for with the IRS to enhance tax administration on behalf of taxpayers and to deal with systemic points inflicting taxpayer burden, hurt, or unfavorable affect on taxpayer rights), 4 case advocacy and different enterprise targets (actions TAS will pursue to advance advocacy efforts for particular person taxpayers via their casework) and 5 analysis targets (understanding how IRS procedures have an effect on taxpayers and the way taxpayers react to IRS actions).

Listed below are a number of highlights:

• Shield taxpayer rights. The SOP proposes compliance initiatives to rapidly resolve taxpayer points and enhance tax compliance, notably amongst high-income taxpayers, giant companies and pass-through entities. TAS will consider the IRS’s implementation of the IRA SOP to maximise safety of taxpayer rights.
• Enhance correspondence audit processes. The IRS conducts most of its audits by correspondence—not in-person. Taxpayers might have problem understanding the notices, gathering and offering documentation, and responding inside deadlines. Excessive no-response, unagreed, and correspondence audit default charges are notably regarding for the TAS as a result of a excessive proportion of the taxpayers subjected to correspondence audits have complete constructive incomes under $50,000. TAS will work with the IRS to enhance taxpayer correspondence audit participation and settlement and default charges.
• Shield taxpayer privateness. Tax return preparers, together with tax return preparation software program suppliers, can’t use or disclose tax return data to 3rd events with out taxpayer consent. There are issues as as to if tax return preparation software program suppliers shared tax return data with third events with out specific taxpayer consent. TAS plans to guage how the IRS is defending taxpayers’ proper to confidentiality and stopping illegal makes use of and disclosures of their tax return data.
• Implement systemic first-time penalty abatement however enable substitution of affordable trigger. The IRS permits a first-time abatement of penalties for failure to file, failure to pay and failure to deposit required tax if a taxpayer is in any other case compliant and has not used the abatement program throughout the prior three years. Nonetheless, FTA is mostly supplied provided that a taxpayer requests it. In 2021, the IRS granted reduction to about 200,000 taxpayers, however there have been about 4.3 million eligible taxpayers who didn’t obtain it. The overwhelming majority of taxpayers have no idea the IRS is prepared to abate these penalties—and a systemic FTA would have granted them reduction. The IRS additionally grants FTA earlier than affordable trigger penalty reduction—the TAS additionally believes taxpayers who qualify for affordable trigger penalty reduction shouldn’t be compelled to first use the FTA waiver. TAS will collaborate with IRS stakeholders to implement systemic FTA at the side of recharacterized affordable trigger reduction.

Different targets embody decreasing burdens on taxpayers making use of for an Particular person Taxpayer Identification Quantity (ITIN), bettering IRS hiring, recruitment and coaching methods and decreasing compliance boundaries for abroad taxpayers.

General, Collins provides up a hopeful be aware, “With satisfactory funding, management prioritization, and acceptable oversight from Congress, I imagine the IRS will make appreciable progress within the subsequent three to 5 years in serving to taxpayers adjust to their tax obligations as painlessly as doable.”

About The Report

The report is certainly one of two that the NTA delivers to Congress every year—one in January and one other in June. The NTA leads the Taxpayer Advocate Service (TAS), and delivers the stories to the Senate Finance Committee and the Home Methods and Means Committee. Since TAS is an impartial group throughout the IRS, there isn’t a prior overview or remark from the IRS Commissioner, the IRS Oversight Board, the Treasury Secretary or another Treasury officer or worker or the Workplace of Administration and Price range.