Historic IRS Delays Impacting Taxpayers
By Jon Sharkey, Senior, Tax & Business Services
As the May 17, 2021, individual filing deadline has passed, more than 31 million Americans are still waiting for their tax returns to be processed. The 2020 tax returns aren’t the only year still in an IRS backlog. Millions of taxpayers are also waiting for their 2019 refunds.
According to IRS Commissioner Charles Rettig, approximately 335,000 tax returns from the 2019 tax year are yet to be processed. Many taxpayers that have already filed their 2020 tax returns still have not had their 2019 returns processed.
Reasons for IRS Delays
The IRS has blamed recent legislation for the processing delay, as a majority of the outstanding returns are due to three legislative issues:
1. Earned Income Tax Credit
In December 2020, a $900 billion stimulus package was passed, and a major provision of this legislation was that taxpayers could use the income amount from their 2019 returns if it would result in a larger Earned Income Tax Credit. The Earned Income Tax Credit is designed for low to moderate income workers and families. The credit subsidizes a percentage of earned income up to a threshold, where it is phased out as income increases. If taxpayers used their 2019 income amount to claim the Earned Income Credit on their 2020 return, the IRS has to manually verify the number.
2. Stimulus Checks
Over the past year, multiple bills have been passed to provide taxpayers with economic stimulus checks. If individuals did not receive the stimulus amount they were owed by the federal government, they were eligible to claim that amount on their 2020 tax returns. There are many instances where the amount of stimulus owed to a taxpayer did not match the amount claimed. In this situation, the return must be reviewed, causing further delays in receiving refunds.
3. IRS Staffing Shortages
Over the past decade, the IRS budget has significantly decreased, resulting in the service losing 22% of its workforce. The staffing shortage has coincided with an increase in complex partnership business structures. Examining returns for these entities has been extremely resource-intensive for the IRS due to the multiple layers of domestic and foreign activities entailed. The budget shortfall has also made it difficult for the IRS to modernize its technology. The IRS’s core tax processing system, which handles more than 150 million individual tax returns yearly, is written in programming languages dating back 50 years. This makes the core tax processing system one of the oldest among all federal agency systems.1
American Families Plan
On May 20, 2021, the Treasury released a report on the American Families Plan’s tax compliance agenda. The American Families Plan is a $1.8 billion proposal focused on increased federal spending in areas such as childcare, schooling, and healthcare. One of the highlights of the plan is doubling the size of the IRS, adding 87,000 workers over the next decade. The hiring would be funded by an $80 billion IRS budget increase, and much of this spending is proposed to modernize the agency’s computer systems and improve other taxpayer services. The main goal of the IRS plan is to increase government revenue by cracking down on tax evasion by high earners and large corporations. The plan also intends on increasing the efficiency and customer service of the IRS.
The IRS delays have caused headaches to many taxpayers. Hiring a Marcum tax professional for proper advice and tax filing can help alleviate these issues to provide for a smoother tax season.
- U.S. Department of the Treasury – The American Families Plan Tax Compliance Agenda May 2021.