National Taxpayer Advocate Delivers Annual Report to Congress

January 14, 2022

National Taxpayer Advocate Erin M. Collins recently released her 2021 Annual Report to Congress. In the report, Collins says that the calendar year 2021 was "the most challenging year taxpayers and tax professionals have ever experienced." Tens of millions of taxpayers experienced delays in the processing of their returns, and with 77 percent of individual taxpayers receiving refunds, "processing delays translated directly into refund delays."

The report credits the IRS for performing well under difficult circumstances. Since the start of the pandemic, the IRS has implemented significant programs enacted by Congress. It has issued 478 million stimulus payments (referred to as Economic Impact Payments or EIPs) totaling $812 billion and has sent Advance Child Tax Credit (AdvCTC) payments totaling over $93 billion to over 36 million families.

The report says "[t]he imbalance between the IRS's workload and its resources has never been greater." Since fiscal year (FY) 2010, the IRS's workforce has shrunk by 17 percent, while its workload – as measured by the number of individual return filings – has increased by 19 percent. The report reiterates the National Taxpayer Advocate's longstanding recommendation that Congress provide the IRS with sufficient funding to serve taxpayers well.

While the report focuses primarily on the issues of 2021, Collins writes that she is also very concerned about the upcoming filing season due to the backlog of paper returns. As of late December, the IRS had backlogs of 6 million unprocessed original individual returns, 2.3 million unprocessed amended individual returns, more than 2 million unprocessed employer's quarterly tax returns and about 5 million pieces of taxpayer correspondence.

Although e-filed returns fared better than paper returns, the report says millions of e-filed returns were suspended during processing due to discrepancies between amounts claimed on the returns and amounts reflected on IRS records. The most common discrepancy involved Recovery Rebate Credit (RRC) claims by taxpayers who did not receive some or all of their stimulus payments as EIPs the prior year. These returns had to be manually reviewed, and the IRS issued more than 11 million math error notices to taxpayers over RRC discrepancies with IRS records. When a taxpayer disagreed with a math error notice and submitted a response, the taxpayer's response went into the IRS's paper processing backlog, further delaying the refund.

Collins is concerned that the number of returns suspended and requiring manual processing is likely to be high again in 2022. In March, Congress authorized two advance tax credits that may result in additional discrepancies between amounts claimed on tax returns and in IRS records. It authorized a third round of EIPs that may be claimed as RRCs by taxpayers who did not receive them, and it authorized monthly payments of the AdvCTC for the second half of 2021, both of which will have to be claimed and/or reconciled on 2021 individual tax returns. The IRS is attempting to minimize discrepancies by sending notices to taxpayers who received EIPs and AdvCTC showing how much they received, but millions of discrepancies remain likely.

At the postponed filing deadline of May 17, 2021, the IRS was holding 35.3 million tax returns for employee review that consisted of roughly half unprocessed paper returns and half tax returns suspended during processing, leading to refund delays for many of these taxpayers. The report expresses concern that refund delays have a disproportionate impact on low-income taxpayers.

The report states that processing delays led to a variety of customer service problems. One problem was that the "Where's My Refund?" tool often could not provide an answer to the taxpayer. Taxpayers attempted to check the status of their refunds on IRS.gov more than 632 million times last year, but "Where's My Refund?" does not provide information on unprocessed returns, and it does not explain any status delays, the reasons for delays, where returns stand in the processing pipeline, or what actions taxpayers need to take, if any.

The combination of processing delays and questions about new programs like the AdvCTC caused call volumes to almost triple from the prior year to a record 282 million telephone calls. Customer service representatives (CSRs) were only able to answer about 32 million, or 11 percent, of those calls.

Another issue was that the IRS took months to process taxpayer responses to its notices. The IRS sent tens of millions of notices to taxpayers during 2021. In many cases, taxpayer responses were required, and if the IRS did not process a response, its automated processes could take adverse action or not release the refund claimed on the tax return. The IRS received 6.2 million taxpayer responses to proposed adjustments and took an average of 199 days to process them – up from 74 days in FY 2019, the most recent pre-pandemic year.

By statute, the National Taxpayer Advocate is required to identify the 10 most serious problems encountered by taxpayers in their dealings with the IRS. This year's report details the following problems: processing and refund delays; challenges in employee recruitment, hiring and training; telephone and in-person taxpayer service; transparency and clarity; filing season delays; limitations of online taxpayer accounts; limitations in digital taxpayer communications, including e-mail; e-filing barriers; correspondence audits; and the impact of collection policies on low-income taxpayers. For each problem, the report includes an IRS response.

For more information, including the Taxpayer Advocate Service administrative recommendations to the IRS and legislative recommendations, visit the 2021 National Taxpayer Advocate Annual Report to Congress.