Taxpayer Advocacy Service report highlights top 10 issues facing taxpayers

A new report by the IRS Taxpayer Advocate says processing delays are the “Most Serious Problem”  faced by taxpayers during 2022.

From the report’s Executive Summary:

In 2020, the IRS quickly fell behind in processing paper-filed tax returns, resulting in tremendous backlogs of unprocessed paper. Even though the IRS tried to clear its paper backlogs through additional hiring, mandatory overtime for staff and “surge teams” of employees reassigned from other IRS business units, IRS processing delays, and paper backlogs continue to be a Most Serious Problem for taxpayers.

The full list of the top 10 problems encountered by taxpayers:

1. Processing delays
2. The complexity of the tax code.
3. IRS Hiring and Training
4. Telephone and In-person Service
5. Online access for taxpayers and tax professionals
6. E-file and Free File (“E-Filing Barriers and the Absence of a Free, Easy-to-Use Tax Software Option Cause Millions of Taxpayers to Continue to File Paper Tax Returns”).
7. IRS transparency
8. Return preparer oversight (Taxpayers Are Harmed by the Absence of Minimum Competency Standards for Return Preparers).
9. Appeals (“Staffing Challenges and Institutional Culture Remain Barriers to Quality Taxpayer Service Within the IRS Independent Office of Appeal”)
10. Overseas taxpayers (“Taxpayers Outside of the United States Face Significant Barriers to Meeting Their U.S. Tax Obligations”).

These are all important issues facing taxpayers.

In the 2022 Annual Report to Congress, National Taxpayer Advocate Erin Collins again raised familiar issues the IRS has faced since the COVID-19 pandemic, such as paper return processing delays, customer service deficiencies, and complicated tax benefits, but there is light at the end of the tunnel, she said.

“The bad news is that taxpayers and tax professionals experienced more misery in 2022,” the report, released January 11, read. “The good news is that since the close of the 2022 filing season, the IRS has made considerable progress in reducing the volume of unprocessed returns and correspondence.”

Law requires the national taxpayer advocate to submit a yearly report on the challenges the IRS faced in the previous year, how the agency performed in addressing those obstacles, and what it can improve on or do differently moving forward. Collins’ 10 most serious problems outlined in the latest edition largely reflect a lingering hangover from the pandemic at the administrative and operational levels.

The top matter, much like recent years, is the IRS’ lack of staff and antiquated technology that contributed to an inventory of about six million unprocessed paper tax returns. According to the report, at the end of the previous filing season, 29 million items still needed to be manually entered—an arduous task that can only ultimately be conquered through implementing barcode scanning of paper returns. 2-D scanning technology would expedite paper return processing, Collins argued as she has done so previously.

Poor customer service phone line response rates made the top 10 list again, as the IRS Enterprise lines were answered only 13% of the time in the fiscal year 2022, up just 2% from the previous year. In-person service at assistance centers also faltered. Collins stressed that the IRS should employ an all-hands-on-deck approach and assign “most or even all of its” customer service representatives (CSRs) to answer phones, though there may be opportunity costs.

“Although the IRS should accomplish both and deliver quality service, in the short term, CSRs must rotate between two key roles during the 2023 filing season to minimize processing delays, prevent a new backlog from developing, and provide the best possible service for taxpayers in the long term,” Collins recommended.

She also called attention to the complexity of the Tax Code. “U.S. tax laws are overly complex,” Collins wrote. As a result, they burden America’s taxpayers and negatively impact voluntary compliance. The current system of preparing and filing tax returns is too difficult because it is costly and time-consuming. This is especially true for taxpayers who access social programs through the IRS and for small business taxpayers.”

Per the report, the average individual taxpayer spends approximately 13 hours and $240 to file their return, and a typical small business spends 82 hours and $2,900. For simplicity’s sake and to lift the burden off lower- and middle-class families, Collins recommended that Congress streamline requirements for crucial tax benefits like the earned income tax credit or the additional child tax credit. This involves making definitions consistent throughout the Code, allowing separate worker and child credits, and setting estimated tax installment deadlines 15 days after the end of calendar quarters.

Other serious problems include hiring and training IRS staff; online account access for taxpayers and professionals; electronic filing errors; lack of agency transparency; oversight of paper return preparation; delays at the Independent Office of Appeals; and compliance limitations experienced by taxpayers overseas.

However, Collins is optimistic that things will begin to truly turn around this year.

“For the first time since the start of the pandemic, the IRS will begin 2023 in a better position than prior years to improve its performance for three reasons: (1) IRS has largely worked through its backlog of unprocessed tax returns, albeit it remains challenged with the high volume of suspended returns and correspondence; (2) Congress has provided the IRS with significant additional funding to increase its customer service staffing; and (3) with the benefit of Direct Hire Authority, the IRS recently hired 4,000 new customer service representatives and is seeking to hire 700 additional employees to provide in-person help at its Taxpayer Assistance Centers,” the report said.