Unopened tax refund requests

The IRS is drowning in unopened tax refund requests amid pandemic

While some IRS employees are telecommuting, it’s not enough to fill the breach.

By AARON LORENZO

The IRS is piling unopened business tax refund requests into storage trailers and advising companies to file by fax instead. It’s stopped answering phone calls on taxpayer assistance lines. And it’s not processing millions of paper tax returns filed by individual Americans.

The coronavirus pandemic has nearly crippled the tax collection agency, which relies on antiquated technology and still does a lot of business on paper, just as it is most needed to help pump money into the ailing economy.

All of the agency’s processing and taxpayer assistance centers have been shuttered to shield its workforce from exposure to the virus. With the normal tax filing deadline delayed until July 15, the IRS has turned most of its attention to implementing a key part of the federal government’s most recent economic rescue plan — sending out stimulus payments of up to $1,200 for individuals and $2,400 for couples, plus $500 for children under 17.

As a result, millions of individual taxpayers and businesses could face lengthy delays before they receive refunds they desperately need as the coronavirus halts their incomes. Taxpayers disputing how much they owe or waiting to see if they qualify for tax credits also could have to wait indefinitely.

“Clearly, most day-to-day operations at the IRS have stood down, that’s the blunt reality,” said a former commissioner, Mark Everson, who ran the agency from 2003 until 2007.

The delays in handling paper correspondence are coming as the agency grapples with getting out the stimulus payments. The process kicked off this week with direct deposits to tens of millions of Americans, and almost immediately hit some bumps.

Many taxpayers took to Twitter to vent about not being able to navigate or access an online IRS payment tracking tool, or having their payments misrouted to their tax preparers. Spokespeople for two of the biggest tax software companies, TurboTax maker Intuit and H&R Block, said their systems weren’t at fault.

“We share our clients’ frustration that many of them have not yet received these much-needed payments due to IRS decisions, and we are actively working with the IRS to get stimulus payments sent directly to client accounts,” H&R Block’s spokesperson said.

The IRS will face another big test next week, when paper checks for the stimulus payments are supposed to start going out to people who don’t have direct deposit information on file with the agency.

Meanwhile, tax returns for the 2019 tax year, along with refunds, are still being processed, at least the ones that are filed electronically, as the vast majority are these days. But many other, more routine things are falling through the cracks, tax preparers and others who deal with the agency say.

It’s an unprecedented challenge for a federal agency that arguably affects more Americans than any other, exacerbated by a decade of budget cuts by Congress and a workforce that has shrunk by roughly 22 percent since 2011.

The myriad closures will inevitably inconvenience taxpayers and professionals who represent them, said another former commissioner, John Koskinen. But he added that agency managers have an obligation to give employees a safe working environment.

Still, Koskinen didn’t play down some of the consequences, such as the halt in processing paper returns. Even though only about 10 percent of individual taxpayers mail returns instead of electronically filing them, that amounts to 15 million to 16 million people, many of whom will have to wait for refunds just as they, and the economy, need them most.

“This is a significant issue that I’m sure the IRS would have avoided if that were possible,” said Koskinen, the agency’s head from 2013 until 2017.

The threat the coronavirus posed to the IRS first became apparent in March, when Treasury Secretary Steven Mnuchin extended the tax filing deadline by three months, to July 15. After that, other things started falling one by one, from the suspension of in-person taxpayer assistance to the closure of its last service center a little more than a week ago.

Swiftly issuing stimulus payments is the agency’s top priority right now. Tax filing season has become secondary, though still a focus, given that most Americans need to have filed tax returns this year or last year to get their stimulus payments.

IRS and Treasury officials have also urged people to continue filing electronically so they can get their refunds.

The agency had received 97.4 million tax returns and processed 92.5 million through April 3, down 6 percent and 8 percent, respectively, from the same period last year. It had paid out $213 billion in refunds, down from $221 million at this time last year.

“In terms of what the IRS has been able to do, so far so good,” Everson said.

Still, there are disruptions large and small across the agency, particularly because it still relies on paper for many of its functions.

For instance, the closure of its last service center — the sprawling campus in Ogden, Utah, that mostly handles business taxes — threw up an obstacle to getting quick refunds to cash-strapped businesses, another element of the economic rescue package. Forms required for those refunds are paper-only.

Sunita Lough, the agency’s deputy commissioner for services and enforcement, said on a webcast Monday that all paper correspondence was being stored in trailers. The agency has decided to start taking the business relief forms via fax, Lough said, with two new fax numbers available starting Friday.

The storage situation bewildered Nina Olson, who retired last year after 18 years as National Taxpayer Advocate.

“What kind of government in the 21st century, in a first world country, says that?” Olson said in an interview. “That’s extraordinary to me.”

The IRS has been trying to steer more taxpayers to online resources. But Olson said the IRS website is a difficult or impossible resource for the 41 million Americans without broadband internet access. And 14 million have no home internet connection at all.

Audits and tax disputes are other areas where the IRS usually relies on paperwork. Stalled examinations of claims for the earned income tax credit, which aids low-income working families, could be holding up recipients' refunds, said Janet Holtzblatt, a former Treasury official who is now a senior fellow at the Tax Policy Center.

Olson cited another example that could be costing individuals and businesses money — disputes over misreported wages. More than seven out of 10 mismatches between wages and taxes last year were false positives, she said, which means people due refunds this year are on hold because the verification system is shuttered and their cases aren’t getting decided.

“They’re sitting in a black hole, and it could be way more than $1,200 apiece,” Olson said. “That’s a huge amount of money backlogged in that system.”

Lough said the IRS is also resorting to fax and email when dealing with some audits.

Everson said he assumes IRS officials are already planning how to prioritize restarting operations.

Koskinen said the effects of the coronavirus-related shutdowns could persist long after the agency returns to more normal operations.

Audits and regulatory work will continue to face delays, he said. And there could be a cascading effect on next year’s filing season, since preparatory work typically begins in the summer and testing rolls into the fall.

“Delays in any of that increase the risk of problems in the next filing season,” Koskinen said.