Tax season wrapped a few days ago for most taxpayers. Now comes the waiting game.
When it comes to the IRS, waiting isn’t new. For years, we’ve complained about processing delays and gaps in response times on everything from petitions to correspondence.
But this year, it took on a completely different meaning.
On March 9, 2022, the Treasury Inspector General for Tax Administration released a report about the IRS’s 2021 filing season. As of the week ending Dec. 28, 2019, the IRS had 183,000 paper tax returns waiting to be processed. By the same time in 2020, the agency had 3,540,486 paper tax returns waiting to be processed—an increase of 1,835%. The numbers for amended returns were not any better.
The backlog only got bigger. In her report to Congress, the Taxpayer Advocate noted that the agency “was behind before the 2021 filing season had even started.”
Far Bigger Problems
But the snail-like pace of processing returns and returning correspondence that taxpayers and tax professionals have been subjected to over the past year is indicative of far bigger problems. It’s not just the pandemic. Or the shutdown before that. It’s a host of things. This week, Bloomberg Tax took a deep dive into the problems plaguing the Internal Revenue Service—you can read stories from the series and follow what’s to come here.
I’ve had a front-row seat, of sorts, on these problems over the past few years.
As a tax professional, I’ve sat on the phone waiting for the IRS to pick up (admit it, you, too, have found yourself occasionally humming along to the hold music). I’ve written numerous letters to the IRS asking for status updates. And I’ve laughed at correspondence advising that “more time” is needed to respond to a request that I made months prior.
As a tax columnist, not a day goes by that I don’t receive an email from a taxpayer who has been impacted by IRS delays.
Delayed Tax Refunds
You’re probably thinking that most of these emails focus on delayed tax refunds. That is true. Taxpayers have become increasingly frustrated by not only the length of time to get refunds, but also the related lack of information. It’s not unusual for me to get an email with some variation of “Will I ever hear from the IRS?” in the subject line. And I rarely have an answer that will help them—even a recommendation to check with the National Taxpayer Advocate may not result in action, since, absent financial hardship, they refer taxpayers back to the IRS.
But an overworked IRS doesn’t just mean late refunds. Many parts of our economy and government depend on proof of filed tax returns as means to get, well, lots of things done.
Mortgages
Take mortgages, for example. When you apply for a mortgage, you must validate your income. Lenders typically depend on IRS transcripts to do this—they match the income that the borrower has disclosed with what is reported to the IRS.
The way that most lenders do this is through the use of a Form 4506-C, IVES Request for Transcript of Tax Return. Form 4506-C, which replaced Form 4506-T, allows Income Verification Express Service, or IVES, participants to order tax transcripts with the taxpayer’s consent. The service is mainly automated and provides a relatively quick turnaround—assuming that the information is available. Lenders looking simply to verify income should be able to access Forms W-2 and Forms 1099. But lenders seeking to confirm that tax returns have been filed and taxes paid, or those verifying income not reported on informational forms, could run into a problem if those tax returns have not been processed.
That proved to be true during the pandemic, with taxpayers writing in to ask how to deal with tax validation issues at closings for real estate sales and refinances. Fortunately, many lenders have established workarounds, including asking for transcripts early as part of the pre-clearance process. But not having a tax transcript can still cause a delay at closing for some taxpayers—or worse, a loan rejection.
Pandemic Loans
Some of the saddest stories that taxpayers have shared with me involve difficulties keeping businesses open during the pandemic. Loan programs like the Paycheck Protection Program and the Economic Injury Disaster Loan (EIDL) were intended to keep the lights on, but many required confirmation of filed tax returns.
Even though the programs have largely ended, taxpayers still encounter related difficulties. Recently, a taxpayer wrote to me about her problems with IRS delays. She shared that during the pandemic, her business struggled, and she applied for an EIDL loan. After battling a bout of Covid, she applied for an increased amount.
Eventually, she found out that the SBA couldn’t process the increase because of a missing tax return. While she believed she had timely submitted all of her returns, she resubmitted the return that the SBA claimed was not on file. And then she waited.
Nearly eight months later, she was still waiting. She made phone calls and even visited the IRS offices in person. She also reached out to the Taxayer Advocate. No one had an answer.
Making matters worse, EIDL increase requests are subject to a 24-month window from the loan’s origination. The taxpayer watched the time tick away, and there was nothing more that she felt she could do. “Then what do I do?” she asked me.
Fortunately, this taxpayer had a happy resolution. With less than two months to go in her original window, the IRS finally processed her tax returns.
Student Loans
Student loans have also been impacted, something I know firsthand. Like many others, my family was required to submit Free Application for Federal Student Aid, or FAFSA, documentation to almost every college that our child applied to—even in cases where it was clear that we would be paying out of pocket. And even though our CPA e-filed our 2020 return timely, albeit on extension, our return wasn’t processed by most college application due dates. While some schools allowed us to input our tax return information manually, others considered the application “incomplete” without confirmation from the IRS that our tax return had not only been received, but also was processed.
In one case, a school that allowed us to manually input our information did not distinguish between Covid-related retirement distributions and “normal” distributions. When the pandemic began, the law firm was largely closed and my husband was partially furloughed, so we made a Covid-related retirement account withdrawal. We eventually replaced the money, but the distribution was coded on the college form as though we had extra spending money. It would be months later before we could make the adjustment.
Divorce and Family Law
IRS delays aren’t just causing financial problems. Many of my colleagues who practice family law have reached out to me about resolving divorce proceedings in the current climate. Typically, as part of a settlement or judgment, divorced or divorcing parties submit financial records—like official IRS transcripts—as verification. In fact, I always urge my colleagues to review tax records before finalizing a divorce settlement or judgment since it can be more challenging to resolve tax matters afterward.
But remember those processing delays? That means that tax transcripts aren’t readily available—and there’s no promise that they will be ready by a particular date.
I’ve heard from multiple taxpayers where this has caused significant stress. In one case, a taxpayer had been legally separated from his former spouse for years when she decided to make things final. As part of the process, the taxpayer was ordered to prove that he was compliant with his federal tax obligations. There were a few problems, notably that the taxpayer had actually not been compliant before the matter went to court. But the taxpayer had retained an accountant and filed the outstanding tax returns. And then, like other taxpayers, he waited.
At some point, the court grew weary of waiting. But short of a contempt order, there were not many remedies available. Should the taxpayer have filed earlier? Of course. But once he was compliant, was it his fault that he couldn’t produce the required records for months? Of course not.
I’ve heard from many taxpayers and family lawyers with similar issues. It’s impossible to prove compliance when all you have is a confirmation of filing. And when it comes to divorce, taking the word of someone with whom you’ve had constant conflict isn’t always the best plan.
Taxpayers Aren’t Numbers
I could tell you more stories. Chances are that you have a few of your own.
The reality is that these delays are not just a bunch of numbers. Each one represents a real person. And those taxpayers may be encountering financial hardships from not receiving a timely refund. They may be putting life plans—like moving or rebuilding a business—on hold while they wade through red tape. And they may be worried more with every passing day about what comes next.
For years, we’ve accepted the premise that the IRS can act as a reasonable confirmation stamp for government, financial, and legal transactions. But as taxpayer lives are increasingly disrupted, maybe it’s time to rethink that reliance.
This is a weekly column from Kelly Phillips Erb, the Taxgirl. Erb offers commentary on the latest in tax news, tax law, and tax policy. Look for Erb’s column every week from Bloomberg Tax and follow her on Twitter at @taxgirl.