Millions of tax refunds may be delayed as IRS backlog swells, report finds

·Reporter
·3 min read

The Internal Revenue Service's backlog of tax returns more than tripled over last year, according to a new report, as it stretched to enact last-minute tax legislation and provide much-needed stimulus payments earlier this year.

The delay could affect many Americans still waiting on tax refunds.

“The 2021 filing season was the quintessential definition of a perfect storm,” National Taxpayer Advocate Erin Collins wrote in her mid-year report to Congress. “This filing season has been challenging for tens of millions of taxpayers and anything but normal for the IRS and its employees.”

At the end of the 2021 tax filing season, the agency held 35.3 million individual and business tax returns for manual processing, a 230% increase from last year when 10.7 million returns were backlogged. The volume is also up 377% from the 2019 filing season.

Internal Revenue Service sign with a traffic signal in the foreground indicating a red light.
Photo: Getty Creative

More than 14 million individual tax returns require further review, including those claiming stimulus payments, the Earned Income Tax Credit (EITC), or the Child Tax Credit (CTC) — two credits that predominantly help lower income Americans.

On some returns, there was an inconsistency between the stimulus payment the taxpayer received and the amount claimed on their return. On others, the taxpayer used the new 2019 “look back” rule to calculate their EITC or CTC, and the IRS must verify that calculation.

Read more: Top 10 tax mistakes — and how to avoid them

“For taxpayers who can afford to wait, the best advice is to be patient and give the IRS time to work through its processing backlog,” Collins wrote. “But particularly for low-income taxpayers and small businesses operating on the margin, refund delays can impose significant financial hardships.”

When asked about the findings of the report the agency said that the numbers in the report "do not reflect the current situation at the IRS."

"The 35 million returns noted by the NTA include 15.2 million individual and business tax returns that are already in some stage of the normal processing stream and not part of the backlog," the agency said in a statement to Yahoo Money.

'So few callers can get through to a telephone assistor'

The agency also received a record high volume of calls in 2021 — three times more than than the 2020 season — and responded to a record-low fraction. Of the 167 million calls the IRS received by the end of the 2021 filing season, only 9% reached a telephone assistor.

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“When so few callers can get through to a telephone assistor, problems remain unsolved and taxpayer frustration mounts,” Collins wrote.

A confluence of factors are to blame, Collins wrote. Pandemic legislation brought one-time tax changes in the middle of tax season, while IRS employees worked in suboptimal conditions from home. Additionally, the agency oversaw the distribution of 163 million stimulus payments starting in March.

The agency also faces long-term staffing challenges. Between 2010 and 2018, the IRS lost over 21,000 employees and its budget was slashed by 20% when taking inflation into account. While the agency staff and budget increased slightly in 2020, they are still significantly below 2010 levels.

"Our ability to answer phone calls reflects the amount of staffing available," the IRS said. "Pending budget proposals would help the agency’s ability to assist more taxpayers, including on the phones."

President Joe Biden is calling for $1.2 billion in additional funding for the Internal Revenue Service in his 2022 budget request — a 10% increase over 2021 — as well as further funding as part of his infrastructure plan.

“The pandemic exposed weaknesses and vulnerabilities that must be strengthened,” Collins wrote. “It led to a renewed awareness of the impact of cuts to the IRS’s budget over the past decade and the IRS’s need for additional funding.”

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Denitsa is a writer for Yahoo Finance and Cashay, a new personal finance website. Follow her on Twitter @denitsa_tsekova

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