Stimulus check confusion and delayed tax refunds: IRS watchdog details failures

Denitsa Tsekova
·Reporter
·5 min read

As the pandemic raged in 2020, the Internal Revenue Service stumbled, according to a new watchdog report, resulting in underpayment of stimulus checks, delayed tax refunds, and other missteps.

The ramifications could be felt again in 2021 as another tax-filing season gets underway and potentially more direct payments go out to taxpayers.

“During 2020, the COVID-19 pandemic affected almost all facets of our lives, and U.S. tax administration was no exception,” National Taxpayer Advocate Erin Collins wrote in her 2020 annual report to Congress. “IRS personnel who open and process tax returns and answer the toll-free telephone lines had to follow social distancing guidelines and stay-at-home orders, limiting their ability to assist taxpayers.”

The last year was further complicated by the IRS taking on the tasks of issuing two rounds of stimulus checks “stretching its resources even further,” Collins wrote about her assessment. Collins is part of the Taxpayer Advocate Service, an independent organization within the IRS that helps taxpayers and protects their rights.

The IRS didn’t immediately respond to Yahoo Money’s requests for comments on the report.

WASHINGTON, DC - APRIL 27: The Internal Revenue Service headquarters building appeared to be mostly empty April 27, 2020 in the Federal Triangle section of Washington, DC. The IRS called about 10,000 volunteer employees back to work Monday at 10 of its mission critical locations to work on taxpayer correspondence, handling tax documents, taking telephone calls and other actions related to the tax filing season. (Photo by Chip Somodevilla/Getty Images)
The Internal Revenue Service headquarters building appeared to be mostly empty April 27, 2020 in the Federal Triangle section of Washington, DC. (Photo by Chip Somodevilla/Getty Images)

Underpayments of stimulus checks

Under the CARES Act, around 160 million Americans received a stimulus payment but “millions of eligible individuals did not receive some or all” they were due, the report finds.

The IRS initially said it wouldn’t correct direct payment mistakes in 2020, but later in the year agreed to fix some stimulus check problems, “mostly those it could fix via automation,” the report found.

Read more: Here's what to do if you haven't gotten your stimulus check

Nevertheless, many cases remained unresolved, requiring eligible recipients to wait for their full payments until after they file their 2021 tax returns. People can also claim the second stimulus check that was issued in December on their tax return if they’re eligible, but didn’t receive one, didn’t get the correct amount, or for other reasons.

“The IRS did not create programming to allow manual adjustments of individual accounts until September,” Collins wrote, “and even then, only a limited number of issues could be manually corrected.”

Tax refund failures

1040 income tax form and w-2 wage statement with a federal Treasury refund check. Closeup with selective focusing.
Millions of taxpayers are experiencing delays in getting their tax refunds this year because of backlogs and fraud detection filters, the TAS report found. (Photo: Getty Creative)

Millions of taxpayers are experiencing delays in getting their tax refunds this year because of backlogs and fraud detection filters, the report found. Backlogs built up because the “IRS’s inability to timely open and process the roughly 16 million paper tax returns,” the report found.

The IRS had a backlog of over 7 million unprocessed individual tax returns as of December 31 and over 2.3 million unprocessed business returns as of November 24.

“The majority of these taxpayers likely were entitled to refunds, yet they had to wait many months longer than usual to receive them,” Collins wrote.

Read more: 4 reasons you should change your tax withholdings

All tax returns that claim refunds pass through a series of IRS filters meant to detect fraudulent income or identity theft. Over half of the refunds frozen by these filters have ultimately been determined to be legitimate in recent years, according to the report.

The IRS typically notifies taxpayers about a frozen refund via written communication, delaying the process even further. For 1 in 4 returns flagged for income verification, it took refunds longer than 56 days. For nearly 1 in 5 flagged for identity verification, it took refunds over four months to be sent.

General breakdowns

WASHINGTON, DC - APRIL 27: The Internal Revenue Service headquarters building appeared to be mostly empty April 27, 2020 in the Federal Triangle section of Washington, DC. The IRS called about 10,000 volunteer employees back to work Monday at 10 of its mission critical locations to work on taxpayer correspondence, handling tax documents, taking telephone calls and other actions related to the tax filing season. (Photo by Chip Somodevilla/Getty Images)
The Internal Revenue Service headquarters building appeared to be mostly empty April 27, 2020 in the Federal Triangle section of Washington, DC. (Photo by Chip Somodevilla/Getty Images)

The IRS experienced other breakdowns.

For instance, the agency answered only 1 in 4 of the over 100 million telephone calls from taxpayers it received this year. One in 4 calls were directed to automated responses, and 1 in 3 taxpayers hung up.

“Put differently, IRS employees did not answer more than 75 million telephone calls from taxpayers seeking help in complying with their tax obligations,” Collins wrote.

Millions of taxpayers also received late notices that included response or payment deadlines that had already passed. This happened because the IRS automatically printed the notices, but didn’t have the capacity to mail them at the time. Instead the IRS included them with 1.8 million notices telling taxpayers they have additional time to respond, which caused “confusion and anxiety,” Collins wrote.

The report said the IRS should have created a weekly ‘COVID-19 Dashboard’ to inform taxpayers about delays.

“For much of the year, relatively limited information was released,” Collins wrote in the report, “and comments made by IRS officials often were incomplete or misleading.”

Challenges ‘will continue through the 2021 filing season’

Some of the issues the IRS faced in 2020 are likely to continue into 2021 because of a backlog of returns to be processed and continued social distancing guidelines in the IRS’s processing centers that is slowing the process.

On top of that, a second round of stimulus checks began to be distributed in late December and a potential third one could be sent out in 2021 as tax-filing season starts, meaning more individuals may experience challenges getting the full amount they’re entitled to.

“The challenges created by the COVID-19 pandemic will continue through the 2021 filing season and possibly for months longer, affecting both the IRS and taxpayers,” Collins wrote. “I expect the IRS has learned from the 2020 experience and will improve on its performance in the coming months.”

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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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