IRS Struggles to Resolve Amended Return Backlog

If you have filed an amended tax return with the IRS, don’t expect a quick response.

In the aftermath of the COVID-19 pandemic, the Internal Revenue Service (IRS) has made significant progress in processing paper original tax returns. However, the agency continues to grapple with a substantial backlog of unprocessed amended returns, as reported by National Taxpayer Advocate Erin Collins. In her NTA Objectives Report to Congress for Fiscal Year 2024, Collins sheds light on the persisting challenges faced by the IRS in tackling this issue.

Clearing the Original Return Backlog

According to Collins’ report, the IRS has made commendable headway in processing paper-filed original 1040s for individuals and various business returns. The number of unprocessed paper tax returns has reduced from 13.3 million to 2.6 million, greatly improving the efficiency of the refund process. Taxpayers calling the IRS also experienced shorter wait times, resulting in a vastly improved filing experience during the 2023 season.

The Amended Return Challenge

While progress has been made in handling original returns, the backlog of unprocessed amended paper tax returns remains a concern. As of April 22, 2023, there were still 3.4 million unprocessed amended returns, with only a marginal reduction of 200,000 compared to the previous year. The primary reason for the delay is that while amended individual returns are accepted electronically, they are processed manually. This manual processing creates delays in both data intake and refund issuance, since the IRS takes approximately seven months to process an amended return.

Business Challenges and Fraud Concerns

Processing amended returns with Employee Retention Credit (ERC) claims requires a good deal of scrutiny to rule out fraud. Collins notes that the IRS faces a dilemma in handling these claims swiftly to assist legitimate businesses while also ensuring thorough individual reviews to prevent fraudulent payments. The agency’s efforts to strike a balance between speed and accuracy have created processing bottlenecks, causing frustration for both businesses and the IRS.

Persistent Backlogs and Correspondence Cases

In addition to the amended return backlog, the report highlights the backlog of unprocessed taxpayer correspondence and accounts management cases. Although the backlog has reduced slightly, progress has been minimal. Collins points out that the Treasury Department’s prioritization of telephone service over paper processing is part of the challenge. This has particularly affected victims of identity theft, who face extended delays in receiving assistance. The average cycle time for Identity Theft Victim Assistance cases closed in April 2023 was 436 days, an increase of approximately three months compared to the previous year.

Additional Issues to Address

Collins emphasizes the need for the IRS to provide clear and timely guidance on two specific matters. First, the agency must address the federal tax treatment of special state tax refunds or payments in more than 20 states. Second, they need to clarify the Form 1099-K reporting requirements, ensuring taxpayers have comprehensive understanding and compliance.

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