On Wednesday, the New York Times reported that “The Internal Revenue Service will kick off the approaching tax season with a backlog of at least 10 million unprocessed returns from last year,” including returns filed by “many taxpayers still waiting for refunds.” What accounts for that huge backlog? The Times summarizes the findings of a National Taxpayer Advocate report like this:

One big reason for the pileup, according to the report, is that the federal government charged the I.R.S. with administering various stimulus payments and other programs during the pandemic. That meant the agency, which has had its budget and work force shrink in recent years, had to reallocate a lot of resources to carry out those financial relief programs.

Later, the Times detailed the “various stimulus payments” the IRS has been charged with providing, which include “478 million payments worth $812 billion”; and the “other programs during the pandemic” include “$93 billion in advance payments for the expanded child tax credit to more than 36 million families.” Those latter payments were made in monthly installments for the first time in 2021 and turned the IRS into America’s number one welfare-paying agency. Small wonder the IRS has been distracted from its core mission of timely processing returns and paying refunds.

The National Taxpayer Advocate’s extensive report provides more details, which if anything are even more ominous about the mess ahead for taxpayers:

The problem involves the IRS’s core mission of timely processing returns and paying refunds, harming taxpayers:

“The IRS is in crisis and needs to apply resources to its core mission — processing these returns and paying the corresponding refunds. . . . [F]or many taxpayers, their unprocessed tax returns are impacting their ability to obtain a mortgage, refinance their house, or obtain student loans.” (Pages 37-38)

How bad was the problem last year?

“During 2021, tens of millions of taxpayers were forced to wait extraordinarily long periods of time for the IRS to process their tax returns, issue their refunds, and address their correspondence. More than 75 percent of individual income tax return filings resulted in refunds that millions of taxpayers rely on to pay their basic living expenses.” (Page 33)

The outlook for the coming tax season is “bleak” and “potentially worse” than last year:

“The outlook for the upcoming filing season is bleak.” (Pages 44–45)

“The unprecedented processing and refund delays taxpayers experienced in 2021 could be as bad, and potentially worse, in 2022 if taxpayers do not file electronically or do not properly reconcile their monthly AdvCTC payments or the third stimulus payment with their 2021 return.” (Page 33)

The administration’s vaccine mandate may worsen staffing shortages:

“In addition, it is anticipated that the COVID-19 vaccine mandate may cause additional staffing shortages at campus locations across the IRS.” (Page 38)

Some of the problem involves funding:

“To improve taxpayer service, Congress must provide the IRS with sufficient resources. . . . The IRS has been continuously asked to do more with less, and it has reached a point where providing basic services is no longer possible.” (Page 45)

But Congress made underlying problems worse, including by tasking the nation’s tax collector with paying unprecedented new benefits:

“During the last 18 months, Congress charged the IRS with administering several COVID-19 pandemic financial relief programs. . . . Each financial relief program consumed considerable IRS resources to administer. . . . To address these needs, the IRS had to reallocate resources from its core tax administration responsibilities.” (Page 1)

Those hurt most are low-income taxpayers who experience “severe financial hardship” from refund delays:

“Refund delays have a disproportionate impact on low-income taxpayers. (Earned Income Tax Credit (EITC) benefits are worth up to $6,660, Child Tax Credit benefits are worth up to $2,000 per qualifying child under tax year 2020 rules, and RRCs are potentially worth several thousand dollars for families who did not receive advance payments.) 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.” (Page 2)

None of this is new, with the IRS admitting last year that returns which previously took three weeks to process were taking up to four months. And as I recently noted, record child tax credit payments are pending in the coming tax season, payable to a record number of recipients, even without the passage of further legislation. As the National Taxpayer Advocate’s report suggests, those record payments are both contributing to current processing delays and will be caught up in them, too.

The post Prepare for more refund delays, taxpayers appeared first on American Enterprise Institute – AEI.