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IRS, stuck in backlog of tax returns, scraps plan to close major processing facility

Watchdog groups warned the tax collector that shuttering the Austin facility could have severe consequences for families that rely on tax refunds

A sign is displayed outside the Internal Revenue Service building May 4, 2021, in Washington. (Patrick Semansky/AP)
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The Internal Revenue Service on Thursday scrapped plans to close one of its three remaining tax processing centers amid a backlash over an unprecedented accumulation of unprocessed tax returns that threatens to derail the 2022 tax filing season.

IRS leaders announced plans in 2016 to close the Austin facility to cut costs at the long-underfunded agency and redirect resources to online tax-filing services.

Nearly 90 percent of tax filers submit their returns online, a number the agency is trying to boost to improve efficiency and accuracy. But that still leaves tens of millions of paper returns for the IRS to process at centers like Austin. And the agency has fallen behind: It has a backlog of 24 million tax returns, with some refunds held up for 10 months or more.

Eight in 10 filers received refunds in 2021, IRS data shows, and a delayed refund can have profound consequences: Millions of taxpayers rely on that money for basic living expenses, and delays can have an enduring impact on households that are strapped for cash or taxpayers who build their refunds into their financial plans.

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Critics of the IRS’s plans to wind down the Austin facility by 2024 — including the agency’s inspector general, the National Taxpayer Advocate Service and congressional Democrats — cautioned that slowing the agency’s operations could create significant financial hardship for millions of families.

It could also lead to slowdowns at the two remaining processing centers in Utah and Missouri, they warned. The agency had already shuttered another facility in Fresno, Calif., in September.

“To ensure there is sufficient capacity to best serve the nation’s taxpayers the IRS now believes having three [submission processing] sites is the best approach. As a result, the IRS decided to cancel the Austin consolidation when it completed its annual review in January of 2022,” the agency wrote in a memo to Congress, obtained by The Washington Post.

“While the decision to keep Austin open is based solely on the results of the revalidation analysis, it also aligns with feedback received during a recent audit conducted by the Treasury Inspector General Tax Administration as well as concerns expressed by the Taxpayer Advocates Office and the National Treasury Employees Union.”

Tax processing centers are massive buildings where civil servants open mail, manually log taxpayers’ data from handwritten returns, manage correspondence and handle more essential steps. But staffing and resources at those facilities have dwindled over time along with the IRS’s budget.

The agency’s annual funding from Congress has fallen 20 percent adjusted for inflation since 2010, according to the Congressional Budget Office, and it’s lost more than 22 percent of its workforce. Nearly 17,000 of its 78,000 employees are retirement eligible, and it projects 5,590 of them will retire in 2022.

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IRS hiring has not kept pace with separations for years, according to experts, and agency employees are often poached by the private sector to help clients navigate the country’s byzantine tax code. The IRS’s shrinking workforce along with obsolete equipment — old mail scanners cost the agency $56 million in 2021 because the agency could not tell whether envelopes it received contained checks — have contributed to the mounting backlogs.

“We applaud the IRS for finally recognizing that those employees in Austin are essential to the agency’s ability to dig out from the backlog of returns and correspondence, and that there is an ongoing need for the IRS to retain this capacity,” National Treasury Employees Union President Tony Reardon said in a statement. “This decision, although later than we would have liked, allows employees in Austin to stop worrying that their jobs were about to disappear, and instead focus on delivering a successful filing season, the third of the pandemic.”

The IRS’s two “most serious problems” heading into the 2022 tax season were its delays in processing returns and issuing refunds, and its lagging recruitment, hiring and training, according to National Taxpayer Advocate Erin M. Collins.

Congressional Democrats earlier Thursday had written to IRS Administrator Charles P. Rettig to ask him to reverse course on the Austin closure. Ten senators and 15 House members urged Rettig to at least postpone the closure until the tax collector could resolve its backlog and hiring issues.

“While we understand that these consolidation efforts are guided by the declining trend in the number of paper returns and a cost savings of $94 million, we believe that these efforts no longer make sense — especially given the extensive paper backlog and hiring challenges that have plagued the IRS for the last two filing seasons,” the lawmakers wrote.

The inspector general went further in a report released earlier in February, calling the projected savings “relatively insignificant” against the IRS’s $12 billion budget and “the additional burden that will be placed on taxpayers resulting from continued and new backlogs of work that will result from moving return processing.”

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Closing the Austin facility, according to the inspector general, would have seriously hindered the IRS’s ability to handle its paperwork and led to a significant drawdown in the agency’s workforce.

When the Fresno tax processing center closed, the agency lost 1,445 employees. At the Austin facility, the inspector general reported, the IRS had already lost hundreds of employees in key positions because the agency had delayed finalizing its plans. The workers left for other jobs.

“Keeping our IRS Center running means more tax returns will be processed in a timely manner with quicker rebates and Child Tax Credit payments,” said Rep. Lloyd Doggett (D-Tex.), whose district includes most of Austin, in a statement. “Austin workers gain job security while the agency gains the ability to recruit more Central Texas talent. I’m pleased that our request was approved to meet both the growing needs for taxpayer service and the need for job security for Austin workers.”