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Refunds and stimulus payments are still piled up at the IRS, and this year may be just as bad, new report says

WASHINGTON - The coronavirus pandemic has magnified critical weaknesses at the Internal Revenue Service as many taxpayers face economic hardship, with old technology and short staffing still delaying millions of tax returns and stimulus checks, a new report finds.

The tax agency blasted out most of the more than 160 million stimulus payments Congress mandated starting last March and managed to process roughly that many tax returns to electronic filers last year - even as the virus sidelined much of its workforce, the National Taxpayer Advocate’s annual assessment released Wednesday said.

But while the IRS in most cases “can effectively handle whatever it can automate,” it does not automate a lot. And its heavy reliance on paper, outdated methods of communicating with taxpayers and information technology systems that date to the 1960s resulted in delayed refunds for paper filers and missing or inaccurate stimulus payments, auditors found.

The overwhelmed agency, challenged now by a new tax season and another round of stimulus payments, failed to set up procedures to resolve many of these issues. As of late last year, 7.1 million individual returns and 2.3 million business returns were still unprocessed, the report said.

Among the most acute customer service lapses in 2020: Employees answered just one in four of more than 100 million calls to the IRS’s toll-free telephone lines, leaving the rest unanswered or directed for automated responses, the report found. And for months, taxpayers who wanted to consult an agent in person could not, since in-person assistance offices were closed.

“While the IRS took some steps to keep the public informed about COVID-19-related delays, particularly later in the year, taxpayers often did not understand what was happening with their tax returns, refunds, balances, or [stimulus payments],” Taxpayer Advocate Erin M. Collins wrote in her first annual report to Congress.

“For much of the year, relatively limited information was released, and comments made by IRS officials often were incomplete or misleading,” Collins wrote. She predicted that the challenges created by the pandemic would continue through the 2021 filing season “and possibly for months longer.”

The Taxpayer Advocate Service is an independent organization within the IRS that advocates for taxpayers.

Collins’s 278-page report offers a detailed description of how one federal agency, already weakened by a decade of funding cuts by Congress, has navigated through a pandemic that continues to shut down and slow many of its functions. Paper tax returns and correspondence from taxpayers sat unopened in trailers in U.S. Postal Service parking lots for months while IRS offices were closed, an arresting image of an antiquated government function the virus had hobbled.

While thousands of IRS employees have been able to work remotely since last spring, large swaths of the agency’s customer service workforce has not. That’s because it had not switched phone operators and others employees to technology platforms that allow them to answer phones from home and send secure emails to taxpayers.

Agency spokeswoman Jodie Reynolds said in a statement that the IRS “remains committed to continue to do as much as it can, subject to budget constraints, to provide meaningful services to all taxpayers, whether in-person, on the phone or online.”

She said that in the past year the agency “simultaneously executed a highly successful filing season while taking on significant new responsibilities to deliver hundreds of millions of [stimulus] payments.” She acknowledged the weakness cited in the report and said the IRS sent a plan to Congress this week to “reimagine the taxpayer experience, enhance employee training and restructure the organization to increase collaboration and innovation.”

Sen. Ron Wyden, D-Ore., the incoming chairman of the Senate Finance Committee, said in a statement that the IRS needs “rebuilding” after a “decade of Republican budget cuts” so it can crack down on wealthy tax cheats. “I appreciate the Taxpayer Advocate’s focus on the need to restore critical funding and staffing...,” he wrote.

On Tuesday, in guidelines to the public for the upcoming tax season, the agency said it anticipates “heavy call volume on its telephone assistance lines to continue into the filing season,” and urged taxpayers to file returns electronically, sign up for direct deposit and provide up-to-date banking information for their refund.

About 16 million taxpayers file paper tax returns, and most receive refunds that in recent years have averaged $3,000, the report says. But because the IRS could not fully staff its mail facilities, some taxpayers have waited six months or longer for their refunds.

With overburdened phone lines and an online portal many customers had trouble navigating, they were left in the dark about their payments as the pandemic dragged on. When taxpayers did reach an agent by phone, the agent had no access to their individual account.

In another communication problem, the IRS generated more than 20 million notices of various kinds that it wasn’t able to mail promptly. Rather than reprinting them later, the agency sent the initial printed notices with old dates to taxpayers - often with response deadlines that had passed. This caused significant concern for those who may have believed they missed critical deadlines, the report concluded.

Some of these issues stem from long-standing problems that include a roughly 20 percent inflation-adjusted cut to the IRS budget in the last decade. The workforce shrank by about the same fraction, leaving the agency with an estimated 26 percent of its employees eligible to retire this fiscal year.

The result is antiquated technology and inadequate staffing levels to meet the mission, the report said.

The IRS has estimated it needs $2.3 billion to $2.7 billion in additional funding over the next six years to upgrade to a modern computer system. But it ended 2020 with $223 million in the account for such projects, “a drop in the bucket compared to the IRS’s IT funding needs,” auditors wrote.

The report predicts that some of these problems will likely continue this year because of a cascading effect. Taxpayers have 2019 tax returns and refunds still outstanding. Paper returns will continue to proceed more slowly than usual due to covid-19 social distancing guidelines in processing centers.

And with Congress just authorizing another round of stimulus payments - and possibly more after President-elect Joe Biden takes office - the challenges are likely to continue, the audit said.

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