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The real reason the IRS is behind in processing tax returns

Processing paper returns by hand ‘doesn’t just seem crazy. It is crazy,’ says the national taxpayer advocate

Erin M. Collins, the national taxpayer advocate, in 2020. (Toni L. Sandys/The Washington Post)

Here, at last, is the real reason your tax return is delayed: It’s not the pandemic. It’s that the IRS handles too much paper and has failed to adopt scanning technology that could have significantly reduced the current backlog of returns.

The way the agency processes paper is “archaic” and was a problem that was fixable long before the coronavirus shut things down, National Taxpayer Advocate Erin M. Collins wrote in her latest blog about the 2022 tax season.

Last year, the IRS received nearly 17 million paper 1040 forms, more than 4 million individual amended returns and millions of paper business returns, according to Collins.

I’m still trying to wrap my head around it: Employees transcribe all of those millions of paper tax returns manually.

This means keystroking each digit and each letter on the return. For moderately complex or longer returns with forms and schedules, the number of digits can exceed 1,000.

“In the year 2022, this doesn’t just seem crazy. It is crazy,” Collins wrote.

As of March 18, the paper return backlog — original individual and business returns as well as amended returns (1040-X forms) — was nearly 15 million.

And since most taxpayers get money back, the processing delays have resulted in delayed refunds. Since the start of the pandemic, some taxpayers expecting refunds have experienced delays topping 10 months.

“Paper is the IRS’s Kryptonite, and the IRS is buried in it,” Collins said when she released her annual report to Congress in January.

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It doesn’t have to be that way, say Collins and her predecessor, Nina E. Olson. They point out that over the past two decades, many state tax agencies have begun using scanning technology to automate the processing of paper tax returns.

But the IRS, like a squirrel trying to cross a busy street, has been indecisive about introducing technology that could free up personnel for other things, such as correcting returns that have mistakes, corresponding with taxpayers or answering the phones.

“The IRS has considered, rejected, proposed, reconsidered, partially implemented, and deferred the question of whether to implement scanning technology,” Collins wrote.

When criticized for the backlog, IRS officials have responded with legitimate grievances.

Yes, the agency has been hobbled by pandemic-related shutdowns. Yes, Republicans in Congress have repeatedly blocked necessary funding to expand the agency’s workforce and update its old technology — using the IRS like a soccer ball being kicked around to make a political point.

But the scanning technology could have — and should have — been put into place to mitigate the current backlog crisis.

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Collins has issued a directive asking the agency to work with tax companies to implement scanning technology.

“The IRS has been reviewing bar coding and other viable options with our tax industry partners, who are critical to our tax return processing efforts,” the agency said in a statement.

This is not the first time the IRS has been scolded for failing to think progressively.

Olson said she had conversations with IRS leadership about using 2D bar code scanning back in 2004, when she was national taxpayer advocate. At the time, the agency did have this technology and was using it to scan some IRS forms.

So why not introduce it on a wider scale?

The agency said that it didn’t want to confuse taxpayers and divert them from e-filing, Olson said.

“That thudding sound is my head hitting the desk, both back then and now,” Olson said in an interview.

Olson, now executive director of the Center for Taxpayer Rights, has a blog series — “How Did We Get Here?” — in which she writes about failures at the IRS, including the missed opportunity of scanning technology.

There are two types of scanning technology the agency could use — 2D bar-coding like you see on products you buy at the supermarket, and optical character recognition (OCR). There are, of course, kinks that would need to be worked out. With OCR, certain digits can be scanned incorrectly. A “1” might be mistaken for a “7.” But a lot of mistakes also happen when humans are typing in the data.

Last year, IRS employees made transcription errors on about 22 percent of paper returns, Collins said.

Having employees transcribe returns is an incredible misuse of their time. They could instead be put on the phone lines to help weary taxpayers.

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Olson said that with 2D bar-coding, upon receiving a paper return, the agency could convert the information into digital form and allow the return to be treated the same as an electronically filed return.

I can sympathize with the IRS’s employees. They have faced a monumental task over the past two years because of the pandemic, including issuing millions of stimulus payments.

But come on. Where’s the visionary leadership to push for the scanning technology that could have mitigated the situation the agency finds itself in right now?

“There are lots of problems that the IRS has that are not easily solvable,” Olson said. “But really, this is so solvable, and it was solvable back in 2004.”

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Collins says in her post that it’s been 20 years since more than one-third of states adopted 2D bar-coding, 18 years since Olson recommended it for 1040 forms and eight years since the Treasury Department requested that Congress provide the IRS with the authority to mandate 2D bar-coding.

“The pandemic didn’t stop people from thinking intelligently and prospectively,” Olson said

I agree with Collins and Olson. The time is now, before the 2023 tax season starts, for the IRS to show some common sense and get this done.

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