IRS backlog frustrates advisers, clients

A massive backlog of tax returns and taxpayer correspondence at the Internal Revenue Service, or IRS, is frustrating financial advisers and their clients.

“It’s been such a nightmare,” said Dan Herron, owners of Elemental Wealth Advisors.

The IRS has been bogged down dealing with paper returns, Erin Collins, the national taxpayer advocate, testified before the Senate Finance Committee on Feb. 17.

The IRS received about 169 million tax returns in 2021, 90% of which were electronically filed. Most were processed without delay, Collins said. But at the end of the 2020 filing season last May, the agency was holding 35.3 million tax returns for manual review.

In February, the IRS continued to retain 17.6 million tax returns and about 5.9 million pieces of taxpayer correspondence that required manual processing, Collins said in prepared testimony.

“In releasing my annual report to Congress, I said that paper is the IRS’s kryptonite and that the IRS is still buried in it,” Collins told lawmakers.

Herron, who’s also a CPA, said the 2020 tax season hasn’t ended even as a new one is underway. He has clients whose 2020 returns haven’t been processed, yet those returns affect their 2021 filing.

Calling the IRS doesn’t do much good because the agency essentially is not answering the phone. The IRS received 282 million calls during fiscal 2021 and answered 11% of them.

“It’s been really difficult to interface with the IRS,” said Joanne Burke, owner of Birch Street Financial Advisors. “I don’t even want to call. The call wait times have been ridiculous. In 30 years of practice, I’ve never experienced it like this.”

The IRS is backed up for a variety of reasons, including the heavy workload it took on during the pandemic to send relief checks to millions of Americans. IRS officials also have said that the agency is short-staffed and needs to upgrade its technology.

Both parties are upset with the processing delays. Sen. Ron Wyden, D-Ore. and chairman of the Senate Finance Committee, blamed Republicans for IRS budget cuts that have undermined customer service and enforcement.

Sen. Mike Crapo, R-Idaho, and ranking member of the committee said IRS funding has kept up with inflation over the years. He asserted that Democrats are trying to use the backlog to justify their goal of doubling the IRS budget to hire auditors to go after wealthy individuals who they think are tax cheats.

Despite the finger-pointing, Wyden said during the hearing that lawmakers will “do everything we can to [take] a bipartisan approach here.”

In the meantime, advisers and clients will have to bide their time waiting for returns to be processed.

“It’s going to take longer this year,” Herron said. “Just be patient.” 

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