It’s no secret that the Internal Revenue Service faces historically high tax return processing backlogs, for both individual taxpayers and corporations. According to the Taxpayer Advocate Service (TAS) 2022 target report to Congress, in 2021 the IRS processed 136 million income tax returns, an impressive total. However, according to the same report, the IRS still has a backlog of over 35 million individual and corporate tax returns, noting, “But especially for low-income taxpayers and small businesses working on the fringes, delays in refunds can have significant financial consequences.” Trouble.”
The problem has been growing for a long time. The Treasury Department said in a statement dated Oct press release that the IRS’s budget has been cut by nearly 20 percent since 2010. The agency employs the same number of people as it did in 1970, even as the US population has increased by 60 percent. Census data shows that there were approximately 12 million businesses in the US in 1970 and more than 32 million today. Aside from chronic underfunding, the COVID-19 pandemic presented the agency with new challenges, including emergency relief programs for taxpayers.
It’s time Congress acted before an overwhelmed and underfunded IRS negatively impacts our nation’s small businesses, startups and entrepreneurs.
How bad is the problem?
my CPA company, Kruze Consulting, serves over 650 startups and yes, delays in processing tax returns often cause difficulties and headaches. For example, part of the CARES Act reduced certain tax obligations, including expanded net operating loss carryforwards. According to the US Office of Government Accountability (GAO), not only was the IRS unable to process refunds within its legal obligation of 90 days, but as of November 2021, the average time to process carryback refunds was over 165 days. In other words, support for small businesses comes with delays.
Another example is the Employee Retention Credit (ERC), which could be worth companies as much as $26,000 per employee. The IRS explained that as of March 9, 2022, 2.3 million employer tax returns (Forms 941 and 941-X) remained unprocessed, delaying ERC refunds. While our clients used to receive ERC funds in around a month, now there are delays of up to six months. The ERC and other tax credits are crucial for start-ups and small businesses that are not yet turning a profit or are operating on low margins.
In terms of service delays, at Kruze we’ve seen our call wait times triple and most queries go unanswered. We wait between 30 and 90 additional days to receive a certificate of US tax residency. Fax responses for proposed civil penalties are no longer appropriate and we are awaiting responses to letters. We are no longer receiving effective, accurate and timely notices from the IRS and this is having a real impact on startups and small businesses. Starting a startup or growing a small business is stressful enough, and the uncertainty of regulators is a lot to ask of our country’s entrepreneurs!
What measures are taken?
On March 10, the Ministry of Finance hung up new plans to fix the login backlog:
- The IRS created an 800-strong “surge team” in February to address the backlog.
- The IRS will aggressively fill 5,000 vacancies and add another 5,000 new positions throughout 2022.
- A second 700-strong “surge team” is being created to handle the high volume of paper tax returns.
- The IRS pays overtime to over 16,000 employees who process original returns, amended returns, and taxpayer correspondence.
- The IRS also hires contractors to help with administrative tasks.
These efforts will help address the immediate backlog problem, but remember there are over 32 million corporations and over 140 million individual taxpayers in the US. In February, Erin Collins, the National Taxpayer Advocate, stated testifies told the US Senate Treasury Committee that the IRS “started the 2022 filing season in a deep hole” and needs a longer-term solution with sustained, multi-year funding that strengthens both the IRS staff and its IT infrastructure.
We need more from Congress
As accountants, we all face these issues at our clients, but the numbers show that the issues are only going to increase. We know that IRS agents do their best in very difficult circumstances. It’s a vicious cycle for IRS agents, where the backlog leads to more calls and letters, leading to a greater number of inquiries and eventual employee burnout. Collins also testified that the IRS workforce has shrunk 17 percent since 2010 and that IRS employees answered less than a third of taxpayer calls in 2019. We currently advise our clients not to bother calling the IRS. Instead, we advise them to respond or inquire with a formal registered letter or fax every three months until the issue is resolved; and keep impeccable records of their request deadlines. It is time for Congress to act and provide long-term funding to support the IRS. If not, the problems we are already seeing will only get a lot worse.
Vanessa Kruze, CPA, is the CEO and Founder of Kruze Consulting.