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Breaking down the delay in tax refunds for millions of taxpayers

Erin Collins, National Taxpayer Advocate, joins Yahoo Finance to discuss the impacts of the pandemic on IRS operations and Biden administration’s additional funds for the IRS.

Video Transcript

[MUSIC PLAYING]

- Welcome back. Well, if you haven't got your tax refund yet, you are not alone. The IRS backlog has grown to 35 million returns. So we're joined now by Erin Collins, the IRS National Taxpayer Advocate. So Erin, let's just start with why there is a backlog in the first place. Does this have to do entirely because of the pandemic or is there something else here that's going on?

ERIN COLLINS: It's a combination of a little bit of different things. First of all, I think the challenge was last year because of COVID, we had over 11 million paper returns that still were not processed by year-end. So that 11 million carried into this filing season. On top of that, we had new legislation that Congress enacted at the end of December that was very favorable to taxpayers, but as a result, the IRS couldn't get their systems program enough that they could implement it through technology.

So that required manual review of a lot of those returns. So again, they were favorable changes. For example, for determining your earned income tax credit or your advanced child credit, you could elect to use your '19 income versus your '20 income, which could have increased your credit. But by doing so, the IRS was required to compare the returns from the prior year with your current return. And so that required a manual processing of those returns. That was very time-consuming to do that.

The IRS also has social distancing challenges. When you think about the IRS campuses and filing season, you know, there's a lot of people packed into one small space. So they had to social distance, which really impact-- excuse me, impacted how many taxpayers' returns could be worked by those employees.

We also had individuals who did not receive their first or second round of the stimulus checks. They had the opportunity to claim that on their 2020 return. And again, those require the IRS to manually review and compare the rebate credit amount against any prior stimulus payments going out. So again, that was another challenge for IRS employees.

And then every year you have situations with identity theft, challenges with taxpayer errors, and potential other postings that take place that cause the IRS to have to manually review. So if you look at all the paper returns, you look at all of the manual requirements, it was varying between 30 and 35 million a week in and week out. So it's been a very difficult year for taxpayers, practitioners, and for the IRS.

- For sure. So Erin, you know a lot of folks depend on those refunds to do things like pay their bills. Any-- any educated guess as to when they might expect to receive that refund?

ERIN COLLINS: Well, I guess the good news is the May 17 date has come and gone, which is your typical filing season. People have until October 15 to file their returns. But there'll be a little of a lull. The returns will not be coming in so fast, so hopefully that will give the IRS the opportunity to get caught up on all of those returns that are going through the manual processing.

I do not have a crystal ball. I would like to tell you that absolutely this summer. I'm not that optimistic. I do think a number of things are going to happen this summer. Either the IRS will send notices out, and if if a taxpayer receives those notices, please, respond as quick as possible, because if you don't, that is going to continue to delay your refund. So if the IRS reaches out and contacts you, please respond as quick as you can to get the information to the IRS.

- So Erin, frankly, what kind of resource-- recourse, excuse me, is really being given to those 35 million individuals or households? Do you have those returns delayed, as Alexis was just mentioning? So many Americans do rely on their refunds as part of their savings or to pay bills, and they've just been stuck in this limbo through no fault of their own. Exactly what can be done to help them? What kind of recourse is being given for them?

ERIN COLLINS: Yeah, I think the IRS is trying to put on as many resources as it can. The challenge is, this is an unprecedented year. If you compare to the prior two years pre-COVID-- so not last year, because again, I would say that's another COVID challenge. They usually had at the end of the filing season as many as 7 to 10 million of those returns requiring manual processing. This year we're looking at 30 to 35 million. So that's three times higher than prior years.

So it is a real challenge for IRS employees, but the real impact is to taxpayers. As you said, a lot of these folks, they are dependent on their refunds, and a lot of the individuals, it's the rebate credit potentially that's being held up or the earned income tax credit that's being held up while they verify the information. And that's a real challenge for taxpayers, is not knowing when they're going to get that refund, and basically in limbo or in this sort of what I call the black hole waiting to find out when they're going to receive the payment.

- I want to switch gears and talk a little bit about how the federal government is dealing with the-- the agency, the IRS. I know the Biden administration has proposed $80 billion to help the IRS crack down on tax avoidance. What do you make that amount of money? Is that going to do the job? And what else would you like to see the Biden administration do?

ERIN COLLINS: Yeah. I think when we talk about the funding, I think we always have to remember that compliance and service are just as important-- important as enforcement. So when we allocate the funds, when Congress allocates it through the apportion committee, we want to make sure that we get a fair amount of money that's going to taxpayer service, protecting taxpayer rights to encourage voluntary compliance. And we're all focused on the tax gap and the amount of money the IRS is not recovering.

But again, I think part of it is going to be key to taxpayer compliance, is if the taxpayers view it as a fair and just tax system. So again, the allocation of the money, I think, is almost as important.

Some of the things I would love to see Congress focus on and the money to be spent is funding for IT. IRS normally gets a budget every year. The challenge is-- and I think we've all been reading about this and hearing about it, is, their IT systems, specifically some of the language that's written, is COBOL, which is a very old language. It needs to be redone, overhauled.

But if you only get increments of one-year budget, it's very difficult for the IRS to make a major investment in their IT. So it really needs to have a multi-year commitment for both IT funding, and then as well on the funding for staffing. We need to get the IRS employees across the board up to the level of what I call the workforce of the future. Not only do we need to have the numbers increased, but we need to hire the right skill set. We need to hire people who are familiar with data analytics and other types of tools that can reduce the burden going forward on taxpayers with respect to audits and other things. So it really is not only hiring additional folks, but making sure we hire the right folks.

The third one, which I've been pushing internally within the IRS, is really prioritizing a taxpayer and practitioner online account. I think we've all discovered this last year, that the telephone service, the IRS is just inundated with calls. They didn't have enough people to answer the calls, it was extremely frustrating for taxpayers.

So I do think if they had an online account where they could access their information and have it be very robust. So for example, this past year a lot of people went to an IRS tool called Where's My Refund? On the Where's My Refund, if you didn't have a problem, it was a great tool. It told you they received your return, they told you when they processed it, and they told you the date of your refund.

The challenge was, for those individuals with a problem, the tool was silent. And you could go in every single day and they told you the same thing, it's being processed. It didn't tell you what was taking place or what you, if anything, had to do. So it was very frustrating for taxpayers not to have the key information they needed as to when they were going to get the refund or what, if anything, they had to do.

So those would be some of the things I'd like Congress and the Biden administration to focus on with respect to additional funds for the IRS.

- All right. Erin Collins, National Taxpayer Advocate, thanks so much for joining us.