The National Taxpayer Advocate, Erin M. Collins, has released her 2020 Annual Report to Congress. The report takes a look at the last filing season, while providing suggestions for improvements to IRS taxpayer service.
"During 2020, the COVID-19 pandemic affected almost all facets of our lives, and U.S. tax administration was no exception," Collins said in releasing the report. "Taxpayers could not meet in person with their tax return preparers. IRS personnel who open and process tax returns and answer the toll-free telephone lines had to follow social distancing guidelines and stay-at-home orders, limiting their ability to assist taxpayers. And Congress assigned the IRS the task of issuing two rounds of stimulus payments, stretching its resources even further."
How did the IRS do during the 2020 filing season?
The report says in most cases, the IRS can “effectively handle whatever it can automate.” As a result, the report says most taxpayers were well-served.
As of Nov. 20, 2020, the IRS had taken in some 169 million individual income tax returns, including another 8.4 million that were filed only to claim stimulus payments, termed economic impact payments or EIPs.
About 90% of the returns were e-filed and not delayed by the pandemic. Similarly, the vast majority of EIPs were issued by direct deposit or automated mailing and were successfully transmitted in a timely fashion.
The report, however, is quick to add that a significant number of taxpayers - millions - did indeed suffer some major problems, including:
There were refund delays due to COVID or IRS processing filters
Because the IRS couldn’t fully staff its mail facilities during the pandemic, some taxpayers have waited six months or longer for the IRS to process their returns. On Dec. 31, the IRS website indicated there were still 7.1 million unprocessed individual returns and 2.3 million unprocessed business returns as of Nov. 24.
The IRS runs all returns claiming refunds through a series of filters to detect fraudulent income or identity-theft-based claims. In recent years the fraud detection filters have generated “false positive” rates greater than 50%, meaning most of the claims flagged by the filters are later found to be legitimate. For about 25% of the returns flagged for income verification, refunds took longer than 56 days. For about 18% of the returns flagged for identity verification, refunds took longer than 120 days.
Some late notices lacked complete information
During 2020, taxpayers were sent more than 20 million notices with dates that had already passed. In many cases, response or payment deadlines had also passed. This, the Taxpayer Advocate said, happened because on two occasions during the year, IRS computers automatically generated notices that the IRS didn’t have the capacity to mail at the time.
Rather than reprint the notices with the new dates, the IRS decided to include “inserts” with nearly 2 million notices, explaining that taxpayers would have additional time to respond. But the agency failed to include the inserts with other notices that should have contained them. This forced the IRS to issue supplemental letters to inform taxpayers of the extended dates. For affected taxpayers, this caused confusion and, in some cases, undue stress and concern. Among the late notices were collection notices and math error notices, where the failure to timely respond could mean loss of rights.
The Annual Report lays many of the shortcomings at the feet of lawmakers who have systematically cut the IRS budget over the years. In her preface to the report, Collins wrote: "If this year's Most Serious Problems are read in combination, one overriding theme emerges: To improve taxpayer service, the IRS needs more resources to hire employees and more resources to modernize its information technology (IT) systems."
Among the issues Collins named in her Most Serious list are:
- Insufficient employee hiring and retention
- Inadequate telephone and in-person taxpayer service
- Limited functionality of online taxpayer accounts
- Antiquated information technology
The Annual Report includes the National Taxpayer Advocate’s “Purple Book,” a list of 66 legislative recommendations. The biggest of these suggestions is a call to authorize the IRS to establish minimum standards for tax return preparers.
Most taxpayers hire tax return preparers to complete their returns, and visits to preparers by Government Accountability Office and Treasury Inspector General for Tax Administration auditors posing as taxpayers, as well as IRS compliance studies, have found preparers make significant errors that both harm taxpayers and reduce tax compliance.
Nearly 10 years ago, the IRS sought to implement minimum preparer standards, including requiring otherwise non-credentialed preparers to pass a basic competency test, but a federal court concluded the IRS could not do so without statutory authorization.
TAS recommends Congress provide that authorization.
Other recommendations from the Taxpayer Advocate include restructuring the Earned Income Tax Credit (EITC) to make it simpler for taxpayers and to reduce improper payments; clarifying that taxpayers can raise innocent spouse relief as a defense in collection proceedings and bankruptcy cases; and expanding the U.S. Tax Court’s jurisdiction to hear refund cases.
For more information on the full scope of recommendations, see the Annual Report to Congress.