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IRS Reaches Milestone on Paper Return Backlog

On June 21, 2022, the IRS posted a news release announcing a new milestone reached regarding the processing of their massive paper return backlog. The milestone is related specifically to 2020 individual tax returns that were paper filed during 2021 which do not contain processing issues or require additional information from the taxpayer.

The IRS noted that the 1040s were to be fully processed by the end of the week. The 2020 business returns paper filed in 2021 with no issues are expected to be fully processed shortly after. The IRS sites the usual staffing limitation issues brought on by the pandemic and the larger-than-ever paper return and correspondence inventory at the beginning of 2022 as the reason for ongoing delays in processing.

The release would imply that the IRS still has a long way to go on 2021 paper filed return processing. Therefore, it is pertinent that 2021 returns are electronically filed with direct deposit selected whenever possible. E-filed returns with zero errors are generally processed within 21 days of filing. The IRS also encourages individual and corporate taxpayers to file their 2021 returns as soon as possible rather than waiting for the extended October 17th deadline to avoid potential delays.

National Taxpayer Advocate’s point of view

Although the IRS has accomplished what they consider a significant milestone, the National Taxpayer Advocate Erin M. Collins issued a report on June 22, 2022, showing that the IRS had lost considerable ground over the past year in attempts to catch up on the paper return backlog. The report cites that the IRS had a backlog of 21.3 million unprocessed paper tax returns at the end of May 2022, an increase of 1.3 million from May 2021. These delays impact taxpayer refunds on paper filed returns, of which receipt is generally delayed 6-10 months or more after filing.

Collins’ report also mentioned that the IRS processed an average of about 205,000 Forms 1040 per week during May. The IRS would need to process over 500,000 Forms 1040 per week to eliminate their backlog this year, i.e., doubling their efficiency.

The IRS processing time for written correspondence is an additional delay directly affecting taxpayers. From January through May 21, 2022, the IRS processed 5 million taxpayer responses to notices. Processing time for written correspondence was an average of 251 days, which is over eight months. Considering return processing delays and correspondence processing delays, taxpayers are likely waiting over a year to get issues resolved regarding tax refunds. Tax professionals also struggle to speak with the IRS by telephone to resolve client issues. In 2022, only about one in ten phone calls reach an IRS representative.

Going forward

The key takeaway from the IRS release and the National Taxpayer Advocate’s report is to e-file whenever possible. Otherwise, you can expect to wait a significant amount of time for paper returns and correspondence to be processed by the agency.

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