Tax Filing: 2021 Performance Underscores Need for IRS to Address Persistent Challenges
IRS faced an unprecedented workload during the 2021 filing season. It began with a backlog of 8 million returns from the prior year. IRS reduced the backlog, but still had millions of new 2021 returns to process by year's end. Taxpayers faced refund delays due to an unprecedented volume of returns requiring manual review—most with similar tax credit errors.
During the 2021 filing season, taxpayers also struggled to get help from IRS as:
- Telephone demand skyrocketed
- Online refund information was scant
- Correspondence nearly tripled
- In-person service declined
We recommended that IRS address these issues.
What GAO Found
The Internal Revenue Service (IRS) experienced multiple challenges during the 2021 filing season as it struggled to respond to an unprecedented workload that included delivering COVID-19 relief. IRS began the filing season with a backlog of 8 million individual and business returns from the prior year that it processed alongside incoming returns. IRS reduced the backlog of prior year returns, but as of late December 2021, had about 10.5 million returns to process from 2021. Further, IRS suspended and reviewed 35 million returns with errors primarily due to new or modified tax credits. As a result, millions of taxpayers experienced long delays in receiving refunds. GAO found that some categories of errors occur each year; however, IRS does not assess the underlying causes of taxpayer errors on returns. Doing so could help reduce future errors, refund delays, and strains on IRS resources.
IRS has paid nearly $14 billion in refund interest in the last 7 fiscal years, with $3.3 billion paid in fiscal year 2021. Using IRS data, GAO identified some characteristics of refund interest payments, such as amended returns. However, IRS does not identify, monitor, and mitigate issues contributing to refund interest payments. Accordingly, IRS is missing an opportunity to reduce costs.
Challenges with IRS Customer Service during the 2021 Filing Season
IRS answered more phone calls than in prior years, but taxpayers had a difficult time reaching IRS due to high call volumes. IRS urged taxpayers to access its “Where's My Refund” online tool to get refund status information; yet this tool provides limited information on refund status and delays. IRS does not have plans to modernize “Where's My Refund,” although this could help IRS better serve taxpayers, lower call volume, and reduce costs. IRS's correspondence inventory was 5.9 million by the end of the filing season, and grew to more than 8 million by the start of 2022. IRS does not have a plan or estimates for reducing this backlog; doing so could help reduce demands on IRS. Finally, in-person service has significantly declined since 2015 and IRS has not fully considered alternatives for its current in-person service model. IRS's plans to improve the taxpayer experience—such as by expanding virtual services—may further contribute to the decline in in-person visits.
Why GAO Did This Study
During the annual tax filing season, generally from January to mid-April, IRS processes more than 150 million individual and business tax returns and provides telephone, correspondence, online, and in-person services to tens of millions of taxpayers. To accommodate new legislation and provide additional relief to taxpayers, IRS postponed the 2021 individual filing and payment deadline by 1 month to May 17, 2021.
GAO was asked to review IRS's performance during the 2021 filing season. This report assesses IRS's performance during the 2021 filing season on (1) processing individual and business income tax returns and (2) providing customer service to taxpayers.
GAO analyzed IRS documents and data on filing season performance, refund interest payments, hiring, and employee overtime. GAO also interviewed cognizant officials.
GAO is making six recommendations, including that IRS assess reasons for tax return errors and refund interest payments and take action to reduce them; modernize its “Where's My Refund” application; address its backlog of correspondence; and assess its in-person service model. IRS agreed with four recommendations and disagreed with two. IRS said its process for analyzing errors is robust and that the amount of interest paid is not a meaningful business measure. GAO believes that these recommendations remain warranted.
Recommendations for Executive Action
|Internal Revenue Service||The Commissioner of Internal Revenue should develop a process to identify and analyze the underlying causes for taxpayer errors on returns and address them, as appropriate and feasible, with input from internal and external stakeholders. (Recommendation 1)||
IRS disagreed with this recommendation. In October 2022, IRS said it has a robust process for identifying taxpayer errors on returns, identifying probable causes, and proactively disseminating information through public and professional channels to prevent their continued occurrence. As we discussed in our report, for errors that occur frequently each year, such as those related to refundable credits, IRS said it did not have a process to identify and analyze their underlying causes. However, in October 2022, IRS said that it maintains a research program that addresses questions of taxpayer behavior and challenges they face in accurately complying with tax provisions, particularly refundable credits for individuals. IRS did not indicate how it uses these results to reduce taxpayer errors, particularly for recurring errors on the Earned Income Tax Credit and the Child Tax Credit that we highlighted in our report. If IRS uses results from the research program it maintains to identify and analyze underlying causes for frequently occurring taxpayer errors, and to address those errors, it could satisfy our recommendation.
|Internal Revenue Service||The Commissioner of Internal Revenue should direct responsible IRS business units to regularly identify, monitor, and report on the primary reasons for individual and business-related refund interest payments and associated dollar amounts, and report this information, as appropriate, to IRS leadership, Treasury, and Congress. (Recommendation 2)||
IRS disagreed with tracking and reporting why it pays interest. In October 2022, IRS re-iterated that interest is prescribed by statute, and it does not consider interest paid a reliable or meaningful business measure. GAO maintains that interest payments are an expense to the U.S. government, and monitoring them could help IRS and Congress know how, if at all, the expense could be reduced.
|Internal Revenue Service||The Commissioner of Internal Revenue should take steps to reduce the amount of refund interest paid for those cases within IRS's control. (Recommendation 3)||
IRS agreed to look for ways to reduce refund interest payments related to the return backlog. In October 2022, IRS stated that it continues to implement its "Get Healthy Plan" to reduce the backlog of work. As part of this plan, IRS hired additional staff, redirected existing resources, and utilized automation to return its inventory to manageable levels and restore its ability to timely process returns and correspondence. These actions, according to IRS, will help reduce refund interest payments. We support IRS's efforts to fully address its pandemic-related backlog and process returns and correspondence in a timely manner. However, this alone will likely not reverse the annual growth of refund interest payments. As we noted in our report, refund interest payments have gradually increased since fiscal year 2015, several years prior to the pandemic. Further, as we reported, and IRS confirmed in its response, refund interest payments can be due to both retroactive legislative benefits and delays in IRS processing times. Without identifying, monitoring, and reporting on the primary reasons for refund interest payments, and associated dollar amounts (recommendation 2), IRS is not in a position to ensure that any steps it takes in response to recommendation 3 directly affect any reduction in refund interest payments.
|Internal Revenue Service||
Priority Rec.The Commissioner of Internal Revenue should work with Treasury to develop and implement a modernization plan for "Where's My Refund" that fully addresses taxpayer needs and requirements. (Recommendation 4)
IRS agreed with this recommendation and began taking action to address it. In October 2022, IRS said it had added some functionality to "Where's My Refund" to allow taxpayers to view the refund status for the last three tax years. IRS also stated that it is evaluating options for further improvements that may be possible through funding provided under the Inflation Reduction Act of 2022. Finally, IRS stated that it is conducting research to gather insights on user needs and expectations regarding obtaining refund information online. IRS expects to use this information in evaluating future enhancements to "Where's My Refund." This indicates that IRS is in the early stages of gathering user requirements for "Where's My Refund," an initial step for an information technology modernization effort. To fully implement this recommendation, IRS needs a plan to address technical limitations with the current application or develop a new application to better serve taxpayers in the future. Without clear leadership direction and a plan and timeline for modernizing "Where's My Refund," IRS will not be positioned to better serve taxpayers in the future. Further, it will be difficult for IRS to reduce the burden of additional workload on IRS staff and associated costs when taxpayers call or write IRS when they cannot get the information they need through "Where's My Refund."
|Internal Revenue Service||
Priority Rec.The Commissioner of Internal Revenue should estimate time frames for resolving IRS's correspondence backlog, monitor and update these estimates periodically, and communicate this information to taxpayers and stakeholders. (Recommendation 5)
IRS agreed with the recommendation, and officials said IRS would continue with its efforts to manage its correspondence inventory and return it to normal levels. IRS committed to reducing its taxpayer adjustments correspondence inventory to about 1 million by the end of 2022, and assigned additional customer service representatives to process correspondence during the year. However, IRS has not established goals to resolve other areas of its correspondence inventory. In October 2022, IRS stated that it continues to update its "Status of Operations" webpage to provide taxpayers and other stakeholders pertinent information regarding processing time frames. However, this webpage provides limited information on processing time frames. For example, before the 2022 filing season started, IRS reported on its website that it had about 2.3 million unprocessed individual amended returns in its correspondence inventory, and that its current time frame for processing amended returns can be more than 20 weeks. As of late September 2022, IRS had updated the volume of amended returns in process and that the processing time frame remained at more than 20 weeks. Further, during the same time period, IRS provided limited information on the status of processing other types of correspondence, such as responses to letters and notices. IRS needs to clearly communicate estimated timeframes for resolving correspondence so taxpayers know when to reasonably expect a response or refund. Without clear, timely information on IRS's processing timeframes for addressing taxpayer correspondence, taxpayers will continue to call, write, or visit IRS in person to try to obtain this information, and IRS will continue to struggle to meet demands for taxpayer customer service and in processing returns.
|Internal Revenue Service||The Commissioner of Internal Revenue and appropriate IRS stakeholders should develop and communicate a plan for providing in-person taxpayer services relative to IRS's plans for expanded virtual customer service options, and costs and benefits. (Recommendation 6)||
IRS agreed with this recommendation. In October 2022, IRS stated that it will develop and communicate a plan, while considering costs and benefits, to consider the expansion of in-person service in concert with virtual customer service options. IRS expects to complete this plan by February 2023. IRS also stated that it developed a Taxpayer Assistance Hiring and Expansion Strategy to identify underserved areas of the country and to expand the Taxpayer Assistance Center footprint. IRS plans to increase its presence in rural and underserved areas with a Community Assistance Visits program in fiscal year 2023. Developing and communicating a plan for how IRS intends to provide in-person service to taxpayers will help IRS allocate its resources among its multiple taxpayer service channels and ensure that it is meeting taxpayer needs.