IRS Backlog Grows to 35 Million Tax Returns

By Yuval Rosenberg

Where’s Your Refund? IRS Backlog Grows to 35 Million Tax
Returns: Report

The Internal Revenue Service ended this year’s tax filing season
with a backlog of more than 35 million unprocessed returns, a
four-fold increase over 2019, National Taxpayer Advocate Erin
Collins said in a report to Congress Wednesday.

The 2021 tax season “was perhaps the most challenging filing
season taxpayers, tax professionals, and the IRS have ever
experienced,” Collins says in her report. The agency faced a
“perfect storm” of challenges stemming from the Covid-19 pandemic
and the relief efforts it was tasked with by Congress, including
sending out three rounds of “stimulus checks,” or a total of about
475 million payments worth $807 billion. The agency also processed
136 million individual income tax returns and issued 96 million
refunds totaling $270 billion.

“The IRS and its employees IRS and its employees deserve
tremendous credit for what they have accomplished under very
difficult circumstances,” Collins says in her report, “but there is
always room for improvement.”

Breaking down the numbers: The unprecedented backlog of
unprocessed filings includes nearly 17 million paper returns
waiting to be processed, almost 16 million returns that require
further review and another 2.7 million amended returns that have
not been processed. The numbers are as of the end of filing season
in May, and the IRS may have cut into its backlog since then.

Still, the number of returns awaiting processing has grown
tremendously from 7.4 million in 2019 and 10.7 million in 2020,
meaning that millions more filers likely have had to wait for their
tax refunds. This filing season, 70% of income tax returns called
for refunds, with an average refund of $2,827, according to the
report.

Playing catch-up: Collins notes that new filings will
slow dramatically now that tax season has ended and that IRS as of
earlier this month had finished processing all Form 1040 returns
from 2019 — yes, 2019 — leaving 800,000 business returns from 2019
to be manually processed.

That may be small consolation to taxpayers frustrated by their
lack of a refund or by what the report calls a “historically low
level of IRS telephone service.” The agency received more calls
this tax season than ever before — more than 167 million, compared
to an average of about 46 million for the prior three years. Only
9% of those calls were answered by a customer service
representative, down from more than 20% the year before and 32% in
2018. Only about 3% of the more than 85 million calls to the Form
1040 support line were answered by a customer service agent.

“We can understand and articulate the challenges the IRS faced
over the past year, but for individuals and businesses that waited
nine months, 12 months, or longer to receive their refunds, the
reality of the long delays was incomprehensible and in many cases,
financially distressing,” the report says. “Taxpayers cannot
experience similar challenges in future filing seasons. We cannot
allow the agency to face the staffing and technology limitations it
has experienced this past year. Americans deserve better.”

Changes ahead: The report comes as President Joe Biden
and Democratic lawmakers look to task the IRS with even more
responsibilities, including sending out monthly Child Tax Credit
payments and ramping up enforcement efforts to curtail tax
avoidance by the wealthy and corporations.

Biden has proposed boosting the IRS budget by $80 billion over
10 years, with much of the money going toward stepped-up
enforcement, and his bipartisan infrastructure deal with senators
calls for as much as
$40 billion in additional funding for the agency.
While those funding increases haven’t been enacted, House
Appropriations Committee Democrats last week
proposed a $1.7 billion increase in the IRS budget
for 2022. IRS funding fell by 20% in inflation-adjusted terms from
2010 to 2019 and its staff shrank by 22% from its 2010 peak to
2018, according to a report
last year by the Congressional Budget Office.

Some former IRS officials said the latest Taxpayer Advocate
report should serve as a wake-up call to lawmakers, coming as it
does on the heels of a leak of taxpayer data to ProPublica. “Coming
on top of the breach of security and the failure to protect
taxpayer information, this is more bad news for the IRS," Mark
Everson, a former IRS commissioner under President George W. Bush,
told
The Washington Post. "The IRS is doing a great job
getting relief to American taxpayers, but it needs to do its day
job and concentrate on the basic blocking and tackling of running
the tax system.”

John Koskinen, IRS commissioner under Presidents Obama and
Trump, told the Post that the new numbers reinforce the need for
additional IRS funding. “It’s a problem, but nobody should be
surprised. You can’t keep loading more things on an agency without
enough people and expect things to go smoothly,” he said. “The
problem is not with IRS employees who work very hard. It’s with
Republicans in Congress who have refused to provide adequate
funding for 10 years.”

Bipartisan Infrastructure Plan Would Reduce the
National Debt and Increase Growth: Analysis

The bipartisan infrastructure plan backed by President Biden
would modestly increase domestic output and reduce the national
debt over the next several decades, according to an analysis from
the Penn Wharton Budget Model.

The plan’s $579 billion in new spending over the next five years
on things like improving roads, bridges and rail would make private
capital more efficient, Wharton economist Jon Huntley told CNBC
Wednesday, boosting overall economic growth and thereby boosting
tax revenues. The plan also includes more funding for the IRS,
empowering the agency to collect more of what is owed, helping to
reduce the debt.

“Over time, as the new spending declines, IRS enforcement
continues, and revenue grows from higher output, the government
debt declines relative to baseline by 0.4 percent and 0.9 percent
in 2040 and 2050 respectively,” the Wharton researchers
wrote.

4 Ways the Battle Over Infrastructure Could
Play Out

There are a lot of moving parts as Congress attempts to write
and pass a massive infrastructure package. With tensions running
high in Washington, there’s a good chance that things may not turn
out exactly as planned. Cowen Research’s Chris Krueger laid out a
set of potential paths the infrastructure effort could take over
the next few months, providing a useful sense of both how unsettled
the situation is and where we could end up in the fall.

Krueger identified four possible outcomes, in decreasing order
of likelihood:

1. Two bills, with some tweaks: Critics are already
complaining that the $973 billion infrastructure package agreed to
by President Biden and a bipartisan group of senators doesn’t
really pay for itself — as
we noted Tuesday, Howard Gleckman of the Tax
Policy Center says the financing proposals are little more than
“pixie dust.” Krueger thinks the simple fix for that is to merge
the infrastructure plan with the highway bill, a five-year, $715
billion spending package that House Democrats plan to vote on this
week. Combining the two, which cover many of the same areas, makes
sense, and could result in an infrastructure bill worth about $700
billion.

Whatever form the bipartisan infrastructure bill takes,
Democrats are going to push for a second bill, passed on a partisan
basis via reconciliation, to provide more spending on their social
welfare and green energy priorities. Krueger pegs the size of the
package at somewhere between $2.5 trillion and $3.5 trillion, with
roughly half of it paid for.

2. One big reconciliation bill: If the bipartisan effort
fails, Democrats will attempt to pass a single bill via the
reconciliation process to fund their infrastructure plans, with the
term broadly defined to include things like child care and climate
change resiliency. In the absence of a companion bipartisan bill,
the reconciliation bill will sweep everything into one package,
with a price tag between $3.5 trillion and $4 trillion — basically
the same overall as the first scenario, except for the political
optics around bipartisanship.

3. Bipartisan bill only: In this scenario, the roughly
$700 billion bipartisan infrastructure bill (or perhaps an expanded
highway bill) gets to President Biden’s desk, but the
reconciliation fails for some reason. Biden signs it, preferring to
get something rather than nothing.

4. Goose egg: Republicans and Democrats can’t agree on a
final spending package, and the latter then fail to come together
to pass legislation on their own. Krueger says this is unlikely,
but that “doesn't mean it is impossible.”

The base case for Kreuger is a package in one form or another
authorizing between $3 trillion and $4 trillion in spending on
infrastructure, which will likely include hard (roads and bridges),
soft (human welfare) and green (clean energy) components.

Kruger adds an interesting historical note that could come into
play: “Do not forget: per public comments, this is Speaker Pelosi's
final term as Speaker. This bill is her swan song.”

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