In more detail

The report highlights that taxpayer experience with tax administration vastly improved during the 2023 filing season even though the IRS continues to work through significant backlogs in processing amended tax returns and written taxpayer correspondence. The IRS caught up on processing paper-filed original individual and business income tax returns, refunds were generally issued quickly, and wait times for taxpayers calling the IRS were substantially reduced.

Review of the 2023 filing season

The NTA observed that the last several filing seasons were challenging. The IRS's processing of returns was backlogged, taxpayers waited months for their refunds, and taxpayers and their representatives struggled to communicate with the IRS, whether in person or over the phone.  

During the 2023 Filing Season, the IRS reallocated its resources to focus on answering key phone lines, processing original returns and issuing refunds on a timely basis. By reallocating its employees during the filing season to focus on these tasks, the IRS was able to substantially reduce the number of paper returns that awaited processing at the conclusion of the 2023 individual filing season, as compared to the number of unprocessed paper returns at the conclusion of the 2022 individual filing season. In addition, the IRS was able to significantly increase the number of telephone calls that it answered during the 2023 filing season, as compared to the 2022 filing season.

However, these improvements in taxpayer service during the 2023 filing season came at a cost ─ namely, that the IRS employees whose responsibilities were shifted to answering the phones and processing original, paper-filed returns were not able to work on other tasks, such as processing amended returns and responding to taxpayer correspondence. For business taxpayers, the delay in processing amended returns is largely attributable to Employee Retention Credit (ERC) claims. As readers may be aware, the ERC can be ─ and frequently is ─ claimed as a refund of taxes paid in a prior period. While many ERC claims are legitimate, the IRS is concerned that some claims are either aggressive or outright fraudulent. The IRS has included the promotion of fraudulent ERC claims on its "Dirty Dozen" list of tax transactions, which has resulted in a slower processing of all ERC claims.

The NTA observed that most of the challenges taxpayers experienced over the last few years were the result of the IRS's continued use of antiquated technology, as many key IRS systems are decades old. Further, the IRS's use of technology to automate the processing of paper-filed returns is minimal and taxpayers' ability to communicate with the IRS through secure and sophisticated on-line tools is severely limited. These technology constraints cause downstream processing issues, such as increasing the need for correspondence and for taxpayers to communicate with the IRS by telephone.

To address these ongoing issues, the NTA recommended that the IRS modernize its processing of tax returns (including increasing the number of paper returns that are electronically scanned), focus on suspended returns, and issue all pending refunds before the close of the year to eliminate backlogs before the start of the 2024 filing season. The NTA's recommendations are consistent with many of the projects identified in the IRS's Strategic Operating Plan, which include modernizing the IRS's technology and improving its functionality for taxpayers. See our client alert, IRS issues plan describing how it will spend USD 80 billion in IRA funding; details to come.

TAS objectives and goals for the future

The NTA presented her key goals and planned activities for the Fiscal Year 2024, which generally include goals related to the IRS's implementation of its budget, pursuing improvements related to the IRS Independent Office of Appeals ("Appeals"), and systemic issues that have challenged the IRS for many years.

The NTA's first Systemic Advocacy Objective relates to the IRS' implementation of its budget. Section 10301 of the Inflation Reduction Act of 2022 (IRA) provided the IRS with approximately USD 79 billion in additional funding over a 10-year period to modernize technology, improve taxpayer service, enhance enforcement, and cover operational costs. The majority of this funding was allocated to Enforcement and Operations Support. (Readers are likely aware that, as part of its agreement to increase the debt limit in June, Congress reduced the amount of funding available for enforcement, although the NTA did not discuss this funding reduction in her report.) Many observers expressed concern that insufficient resources were not allocated to Taxpayer Services. The NTA emphasized that TAS will continue to advocate for adequate funding for Taxpayer Services and other areas that will best allow the IRS to directly address customer service issues.

The NTA recognized that Appeals serves an important function within the IRS and is essential to the protection of taxpayer rights, while noting that case delays, inflexible policies, inexperienced Appeals Officers, and a perceived lack of independence between Appeals and the IRS more generally have hampered the appeals process. To address concerns about Appeals' independence and protection of taxpayer rights, another TAS Systemic Advocacy Objective will be to advocate for improvements to the appeals process over the next year, including encouraging Appeals to provide clear and concise explanations of its decisions to taxpayers.

In addition, the Report provided that TAS intends to work with the IRS to address systemic, non-technical tax issues that have plagued the agency for years, such as the challenges associated with processing tax returns that are filed on paper and workforce challenges, like recruiting, hiring, and promoting employees. The TAS’s efforts will include working with the IRS to modernize paper-processing procedures and implement scanning technology and digitization to reduce processing times and refund turnaround times. TAS will also recommend strategies to improve the efficiency of hiring actions and explore potential improvements to IRS employee retention strategies.

Other TAS goals include (1) improving transparency by encouraging the IRS to explain in detail how it uses the additional funding provided by the IRA (including reporting directly to Congress), (2) improving taxpayer access to digital tools, (3) working with the IRS to remove barriers to e-filing, and (4) evaluating how the IRS is protecting taxpayer confidentiality.

Takeaways

In her Objectives Report, the NTA acknowledged that the IRS has made substantial improvements in addressing some of the administrative backlogs and roadblocks that have frustrated taxpayers since the COVID-19 pandemic. Nevertheless, significant improvements are still needed to fully address the agency staffing and technology problems that continue to complicate taxpayers' ability to effectively comply with their tax obligations. Over the coming year, some of the issues that TAS will focus on include the IRS's implementation of the increased funding provided by the IRA, actions to ensure the independence of Appeals and its protection of taxpayers' rights, and systemic issues related to technology and hiring practices.