As Americans prepare to file their 2022 tax returns, the IRS remains mired in a backlog of millions of tax returns from previous seasons. The National Taxpayer Ombudsman issued a warning to legislators in its annual report to congress that the backlog creates “challenges for the 2023 tax filing season even before it begins and [continues] frustration and delays for taxpayers.”
Despite the expiration of pandemic-era relief, this year’s taxpayers will still have to deal with the backlog, wait times, and complexity of the underlying tax code.
Changes for the 2023 Tax Filing Season
Pandemic relief won’t be an issue on 2022 returns, but for many taxpayers, the absence of relief also means minor tax refunds than last year. For example, the following pandemic-era tax changes are no longer in effect:
- Recovery refunds available as tax credits on 2020 and 2021 tax returns are not available in tax year 2022.
- The Expanded Child Tax Credit (CTC) returns to its pre-2021 amount with a value of up to $2,000 per child, with an income requirement and a limited refund of $1,500.
- The Child and Dependent Care Tax Credit (CDCTC) returns from $8,000 in 2021 to $2,100 for tax year 2022.
- The above-the-line charitable deduction worth up to $600 for joint filers is not available for tax year 2022, but the itemized deduction for charitable contributions remains.
Taxpayers will also need to consider tax changes made under the Inflation Reduction Act (IRA) passed last summer, such as expanding tax credits for green energy. For this year’s tax season, the IRS estimates that the IRA “will require the creation or revision of 24 tax forms, as well as the creation or update of 29 tax form instructions and three publications. The IRS will also need to modify 20 information technology systems (for tax return processing and compliance activities) to ensure they can accommodate new and revised tax forms.”
In December, the IRS announced it is postponing implementation of the new Form 1099-K reporting requirements for this year’s tax season, which would have significantly increased the number of tax forms issued to independent contractors and informal economy workers. Instead, the reporting change will take effect for the 2024 tax filing season.
Remaining backlog, wait times, and underlying complexity of the tax code
A combination of long-standing operational deficiencies, a temporary closure due to the pandemic, and now-expired pandemic relief produced a perfect recipe for a backlog of documents. The IRS carried your back work through 2021, then through 2022, and now through 2023.
For taxpayers, the backlog means confusion and wait times, which can add up because the IRS doesn’t begin processing the paper returns it receives for a new tax year until it first processes all paper returns from the previous tax year.
Even when a taxpayer files electronically, they may find themselves stuck in a paper backlog if their electronically filed return contains an error. Unfortunately, errors were frequent last year as taxpayers tried to reconcile their Recovery Refund and CTC advance payments on their tax returns. As of November 2022, the IRS had sent out more than 17 million math error notices during the year due to taxpayers making errors reconciling their credits. Contributor responses to error notices were included in the paper backlog.
And if a taxpayer tried to call the IRS for assistance, they had little chance of receiving it: Only 13 percent of callers during tax year 2022 received live assistance, a small improvement from 11 percent in 2021.
Processing delays were the first of the 10 “most serious problems facing taxpayers,” according to the Taxpayer Advocate’s annual report. The complexity of the tax code was the second.
Estimates from last year indicate that an individual taxpayer spent 13 hours and $240 in out-of-pocket expenses to prepare and file an annual return. Our complex tax code encompasses some 9,834 code sections, with detailed subsections and a six-volume set of corresponding regulations, according to the National Taxpayer Advocate.
The complexity is not only a burden on taxpayers, it is also a burden on the IRS as it tries to collect revenue and administer social programs in a timely manner. While additional funding for IRS modernization and contracting may be part of the solution, there is no guarantee that the IRS will use the additional funds wisely.
For example, the annual report explains that “the IRS missed opportunities before and during the pandemic, including failing to expeditiously use the additional $1.5 billion of funds provided by the 2021 Bailout Act to hire additional employees and failing to implement technological solutions such as return scanning.” The Inspector General of the Treasury for Tax Administration has also recently highlighted similar challenges facing the IRS in deploying additional funds.
If legislators learn any fiscal policy lesson from the last three years, let it be the simplification of the tax code that is most important. Simplicity can encourage compliance, reduce costs for individuals and small businesses, ease administrative workloads, and increase transparency. In the meantime, taxpayers and the IRS can expect continued frustration and delays.
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