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TIGTA Cites Multiple Failures in IRS Business Return Processing

Posted on Sep. 8, 2021

Pandemic-induced IRS labor shortages, IT failures, and communications breakdowns exacerbated a multimillion-piece rolling mail backlog of business tax returns through 2020, the tax agency’s inspector general said.

The IRS’s backlog of unprocessed business tax returns exploded 3,320 percent, to almost 7.98 million by the end of calendar year 2020, compared with 239,285 backlogged returns in 2019, according to a Treasury Inspector General for Tax Administration’s postmortem released September 7 on the agency’s COVID-19 business tax operations.

“Thanks to the hard work of IRS employees, we continue to make progress in this area,” IRS spokesperson Dean Patterson told Tax Notes September 7. By July of this year, the inventory of unprocessed business tax returns had dropped to 291,000 from 5.5 million in February, he said.

In its response to the TIGTA audit, the IRS claimed it had hired about 3,500 new processing personnel, 63 percent of its goal of 5,473 new hires. TIGTA reported the tax agency had hired just 53 percent (2,883) of that goal as of April, leaving 2,590 IRS processing positions open.

Computer programming errors also contributed to bigger IRS inventories during the pandemic, TIGTA reported. The IRS blamed computer systems no longer able to process them for its decision to destroy some 30 million information return documents in March. The IRS also placed on hold some 5 million prior-year Affordable Care Act information returns because of the agency’s closure of tax processing centers during the pandemic.

‘Error’ Notices

The underlying cause of the business correspondence backlogs — unprocessed returns, error resolutions, rejections, etc. — was the IRS’s decision to close its tax processing centers in March 2020.

After the IRS extended the 2020 and 2021 tax return filing dates, and after Congress passed multiple new tax laws, the IRS was still stuck with a business information return filing schedule that stretched further across the calendar than many individual April 15 filers realize.

In response, from mid-October to mid-December 2020, the IRS transshipped more than 2 million pieces of unopened mail from closed tax processing centers to secure IRS “lockbox” sites at federally insured banks, TIGTA said. But IRS management said there weren’t enough lockboxes for all the payments made at field offices.

TIGTA found the IRS issued more than 2.5 million failure-to-pay penalties from April 1, 2020, through December 31, 2020, and another 577,835 failure-to-file penalties. The IRS blamed the mail backlog for erroneous notices when extensions to file or make a payment weren’t received with a statutory deadline.

TIGTA made two recommendations about helping clear the business tax return backlog, and the IRS agreed with both.

The IRS completed a review of 1,295 taxpayer accounts with potentially incorrect estimated tax and corrected them.

The IRS also agreed to explore potential new payment channels from its tax processing center field office employees to its lockboxes. However, it determined those direct payments weren’t feasible because the bank lockbox sites don’t have access to IRS internal research and accountability systems.

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