IRS Backlog Has Grown To 35 Million Tax Returns; Hindering Refunds

A growing backlog of unprocessed tax returns now stands at 35 million, creating ongoing refund delays for millions of taxpayers, the National Taxpayer Advocate said in a recent report. That represents an increase in the IRS' backlog of unprocessed returns from May when it was holding 31 million returns.

Some taxpayers have recently told CBS MoneyWatch they have been waiting months for their refunds, and have been unable to learn when their tax return might be processed or when they can expect to receive their refund. As the typical refund stands at more than $2,800 per taxpayer, a delay could cause financial hardship, especially for the many households that rely on their refunds to pay bills.

The backlog at the IRS comes after a "perfect storm" that created "perhaps the most challenging filing season taxpayers, tax professionals and the IRS have ever experienced," wrote National Taxpayer Advocate Erin M. Collins in the Wednesday report. The pandemic caused the IRS to shut down some of its operations, while it was also given more responsibility from Congress through several new tax initiatives, such as the three rounds of stimulus checks that were distributed by the tax agency.

"The impact of the pandemic on IRS operations — and therefore on taxpayers — has been significant," Collins noted. "The IRS's historically high number of returns requiring manual review means that most individual taxpayers in this group and many business taxpayers will not receive timely refunds."

Some people may be able to weather the delay, Collins noted, but it could "impose significant financial hardships" on low-income taxpayers and small businesses without much wiggle room, she said.

The backlog of returns represents a fourfold increase from two years earlier, prior to the pandemic, the report noted. Unfortunately, taxpayers won't receive their returns until the IRS is able to manually process those 35 million returns that are awaiting review, she added. 

Why the delays?

The unprecedented backlog started in March 2020, when the pandemic caused the IRS to shut down its offices for health and safety reasons — during the middle of tax season for 2019 tax returns. Paper tax returns filed for the 2019 tax year were stored in trailers until IRS employees could get to them.

At the start of the tax season in 2021, the IRS was still working through those paper returns from the 2019 tax year. That meant it was already dealing with an existing backlog when it began accepting 2020 tax returns in February.

At the same time, the IRS is coping with tax changes passed into law by Congress this year. Many of these changes relate to pandemic-relief efforts, such as the Recovery Rebate Credit, which allows people to claim additional stimulus money if they received too little. But if taxpayers filled out this credit incorrectly, their forms are flagged for manual review by IRS staff, which has added to the backlog.

New provisions for the Earned Income Tax Credit and the Child Tax Credit are also causing snags in the system, since the government stimulus package signed into law in December came too late for the IRS to adjust its forms and computer systems.

The stimulus package's provisions allow taxpayers to claim the credits based on their 2019 income instead of their 2020 income if that would have been more favorable to them — but such "look backs" require IRS employees to verify 2019 incomes.

All of those issues, and more, have caused the "unprecedented number of returns requiring manual review, slowing the issuance of refunds," Collins noted.

Backlog requires manual processing

Manual processing of 35 million returns in the IRS' backlog requires an IRS employee to review or check each one before it can move to the next step, Collins noted.

The backlog includes:

1. 16.8 million paper tax returns that need to be processed
2. 15.8 million returns that were suspended for further review
3. 2.7 million amended returns that still need to be processed

Of the 15.8 million returns that need further review, more than 10 million were pulled because of an error, which could be as simple as an addition or subtraction mistake. Nevertheless, an IRS employee must manually review each of these returns to check the errors and address them, Collins noted.

But "large numbers" of returns flagged for errors relate to the tax credit "look back" issue, as well as discrepancies between the Recovery Rebate Credit claimed by the taxpayer and the IRS' own records. This could happen, for example, if a taxpayer didn't accurately recall the amount of stimulus money they received and put down the wrong number, Collins said.

Phone assistance not a "luxury"

With so many returns backed up at the IRS, it may be no surprise that the number of calls to the IRS and visits to its website jumped this year — with the number of calls jumping to four times what the agency received in 2020, Collins said.

At the peak of the filing season this year, the IRS was receiving about 1,500 calls a second, Collins added.

The IRS couldn't keep up with the demand, resulting in "historically poor service," her report stated.

For instance, the toll-free number for individual income tax services received 85 million calls, but only 3% of callers reached a customer service rep, she noted. Collins also singled out the "Where's my refund" tool on the IRS website as needing improvement, noting that in many cases the tool doesn't provide an estimate of when a taxpayer might get their refund or explanation for the holdup.

"From the taxpayer's perspective, the inability of the IRS to answer calls or provide answers causes frustration and undermines a fundamental taxpayer right — namely, the right to be informed," Collins said, adding that she urges Congress to increase funding for the IRS to improve its ability to answer and handle calls.

She added, "In my view, phone assistance is not merely an option or a luxury."

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