IRS rejects plan to speed up processing, despite massive paper backlog and delayed tax refunds

Despite drowning in a metaphorical flood, the Internal Revenue Service (IRS) is not heeding calls to build a metaphorical ark—and taxpayers are paying a literal price.

That’s according to Erin M. Collins, the National Taxpayer Advocate, who said in a memo on Tuesday that she was officially appealing a decision by the IRS to reject the timely implementation of simple scanning technology, which would have allowed the agency to “machine read” handwritten paper tax returns.

According to the most recent estimates, the IRS had a backlog of more than 17 million paper returns as of July—leaving processing centers overflowing with monstrous paper mountains that look almost comical from a distance—and each one of those returns has to be reviewed by a human being. The result is that many taxpayers who are owed refunds are left waiting for months on end with no clear communication for when they can expect their money.

As Fast Company reported in March, Collins had issued a directive to the IRS asking it to implement scanning technology that would automate the process, ideally by the start of the 2023 tax season, but if not, then by the start of the 2024 tax season at the latest. Such technology, known as optical character recognition, or OCR, has been around for decades and is already widely in use at state-level tax agencies, according to Collins.

However, the IRS said in a response last month that it was essentially revoking the directive, noting that, while it is testing a number of pilot programs, it did not yet have a system in place that it could simply just roll out. “We will not implement any single option until we are confident in the delivery of that option,” wrote deputy commissioners Jeffrey J. Tribiano and Douglas W. O’Donnell.

In other words, the agency agrees that scanning paper returns is urgently needed, but taxpayers shouldn’t hold their breath that this will happen by 2023 or even 2024.

Collins says that’s simply not good enough. “I fully agree the IRS should choose an efficient and reliable delivery system, but the IRS response did not provide specifics as to the IRS’s ongoing efforts, a timeline to apply a delivery system to process paper returns, or what percentage of 2022 returns it anticipates scanning,” she wrote in her appeal letter, adding that taxpayers “deserve a 21st century tax administration that utilizes technology to meet the needs of the taxpaying public, notably by delivering timely tax refunds.”

She went on to say that she expects an answer to her appeal by September 30. In it, she wants the IRS to explain either how it plans to implement the scanning technology, whether it has come up with a viable alternative, or whether it will simply decline taking action.

It’s unclear what will happen next. According to a follow-up blog post from Collins, her decision to appeal a decision by two IRS deputy commissioners is an “unusual step.” The Taxpayer Advocate Service is typically able to make recommendations to the IRS, but it has limited authority to mandate changes.

One thing does seem clear, though: The agency’s paper problem is not going away, and at its current pace, it may not even finish dealing with its existing backlog before the process starts all over again next year. “While we all hope the IRS can work through the backlog this year, I often say that hope is not a business plan,” Collins wrote.