IRS Quagmire May Be Showing Signs of Improvement

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When the COVID-19 pandemic hit in early 2020, the timing could not have been worse for the Internal Revenue Service and the public accounting profession. Government-mandated shutdowns took effect at the height of tax season, leaving accountants and tax preparers unable to get answers to their questions or resolve complex tax issues with the IRS. That year’s extension of the federal tax deadlines provided little relief amid a chaotic situation.

Lackluster service had been a reality with the IRS even before COVID-19, but the pandemic fanned that flame into an inferno. Like many government agencies, the IRS sent its employees home when the pandemic hit. The agency had neither the technological sophistication nor the cybersecurity measures in place to allow for remote work. The result was a disastrous tax season. Phone calls to the IRS often resulted in two hours or more of being on hold, only to have the call cut off before it was answered. Tax refunds often took months longer than they should have to be issued, and challenges to IRS denials of tax deductions and credits were denied with seemingly little to no review.

Taxpayers who have waited months, sometimes over a year, for resolution of their tax challenges may find some comfort in recent improvements in IRS service, brought about in part by an infusion of funding. Recent IRS survey data indicates that “overall satisfaction” with IRS Taxpayer Services improved significantly in 2023 over 2022 levels:

How Did We Get Here?

From 2011 to 2021, the IRS’s budget grew by a total of 9%, or less than 1% annually, at a time when the inflation rate averaged nearly 2% per year. During that time, the IRS lost thousands of experienced personnel and was surviving on outdated technology even as tax laws became more complex and the annual “tax gap” – the difference between taxes owed and taxes paid on time – grew by nearly 40%.

Accounting practitioners and the public at large have incurred a massive amount of additional time trying to correct IRS errors or get resolution. Billions of dollars in lost opportunity cost –  money that should have been refunded or deductions and credits that should have been allowed – have been tied up in backlog processing.

The reality is that the nation needs a well-equipped and fully staffed IRS to function in today’s digital technology environment and increasing tax non-compliance.

Inflation Reduction Act

The Inflation Reduction Act, enacted in 2022, provides the IRS with $80 billion in funding over the next 10 years. The IRS notes that $45.6 billion will be devoted to tax enforcement, $25.3 billion to operating expenses (including upgrades to the agency’s information technology and telecommunications systems), and $3.2 billion to improved taxpayer services (including pre-filing assistance).

Much has been made in political circles about the focus on enforcement, as the IRS has estimated the funding will support the hiring of 87,000 new enforcement agents. However, those positions will be added over 10 years, during which time approximately 50,000 current enforcement officers are expected to retire. So, the net increase will be 37,000 agents – again, spread over 10 years.

Though the increased funding was only put in place this year, coupled with our distancing from the Covid anomaly, it appears to be yielding fruit:

• In April 2023, the IRS had 2.6 million paper tax returns still unprocessed, compared with 13.3 million in April 2022.
• Also, in April 2023, the IRS answered 11 million phone calls from taxpayers and preparers seeking information or assistance, compared with 7.5 million calls the year before.
• Finally, in April 2023, the IRS had issued timely tax refunds to 90% of taxpayers who had filed returns and had refunds coming. The previous year, in April 2022, 10 million taxpayer refunds were still outstanding 10 months after returns were filed.

There are still challenges. The IRS has met headwinds in whittling down amended tax return inventory or responding to taxpayer correspondence. The percentage of phone calls from taxpayers and preparers that the IRS responds to still remains low at 35%.

Even with the additional funding from the Inflation Reduction Act, it appears it will take considerable time for the IRS to achieve reasonable service levels. But we may see a turning of the corner and a potential light at the end of the tunnel.

We’re Here to Help

If you have questions about an outstanding issue with the IRS, JLK Rosenberger can help. For additional information, call us at 972-931-6803, or click here to contact us. We look forward to speaking with you soon.