IRS braces for the unthinkable: A normal tax season

The Internal Revenue Service’s massive—and controversial—funding boost has begun to reach the front lines of tax season, and it’s vaulted the agency from more than a decade of disarray, tax experts say, to a once-unimaginable position: a functioning tax service.

The IRS is answering 90 percent of its phone calls, has squashed its backlog of overdue returns, introduced new online taxpayer tools to keep pace with private software companies and processed 99.7 percent of returns filed this tax season, according to agency reports.

“An appropriately funded IRS, given its skill set and people, can make a filing season work,” said Timur Taluy, CEO of FileYourTaxes.com and a member of an IRS consulting panel of tax industry experts.

The IRS has tapped nearly $1 billion from the Inflation Reduction Act, one of President Biden’s chief legislative victories, to fund those initiatives, according to Treasury Department data obtained by The Washington Post.

The law allocated the IRS $80 billion over 10 years to stiffen tax enforcement on high-income earners and major corporations and improve the agency’s customer service and technology systems. Republicans criticized the proposal by saying it would “supersize” the IRS, and some falsely claimed it would lead armed government agents to harass taxpayers, prompting threats against agency employees.

So far, the IRS has hired more than 5,000 employees, mostly to answer taxpayer-assistance phone lines and staff walk-in tax clinics, agency officials said. Last month, it posted job openings for 5,300 more workers.

The law requires IRS leaders to gain approval from Treasury Secretary Janet L. Yellen before spending most of the new funding, but it can use limited resources to prepare for the 2023 filing season.

The IRS so far has used $847.6 million of the new funds—just more than 1 percent of the total—according to Treasury Department data. Roughly half of that money, $426 million, has gone toward taxpayer services.

Another $315.4 million has been spent on operations support, training new employees and preparing software systems for changes in tax laws.

The agency also spent $99.6 million on modernizing outdated business systems, a long-term goal of generations of agency officials, and $6.6 million on tax enforcement.

The influx of funding could have major effects for taxpayers this year. The IRS, tax professionals told The Post, is on track for a “normal” tax season—one in which the agency will be able to keep up with phone calls and written correspondence, and disburse refunds in a timely manner—for the first time in years. And agency leaders are trying to show that the new investments are paying off.

“I think they understand a disastrous filing season would be catastrophic,” said Mark Mazur, the Biden administration’s former assistant treasury secretary for tax policy. “That would basically mean, ‘We gave you money—you did such a bad job spending it, we’re taking it back.'”

The IRS is using some money now to improve services immediately for this year, Deputy Treasury Secretary Wally Adeyemo said. But Biden administration and IRS officials are drafting a plan to spend the rest of the funding over the next decade.

“Many of the improvements that we’re going to make in terms of service are going to come through investments and technology that will take a long time,” Adeyemo said in an interview.

Yellen has instructed the agency not to use any of the money to increase audits of taxpayers earning less than $400,000 per year. During a hearing last month, Daniel Werfel, Biden’s nominee for IRS commissioner, said he would abide by that order and prioritize taxpayer service.

“The IRS has been told what it needs to do to improve for years, but it hasn’t gotten the resources to do it,” Adeyemo said. “So now that it does have the money, we are in a pretty good place of knowing where it needs to go to be a 21st-century tax service.”

The IRS has made significant progress on its backlog of paper tax returns, and entered the year with a “healthy” level of paper to process, Taluy said.

At the end of February, the agency reported it had 2 million unprocessed individual returns from the 2022 and 2021 tax years that needed to be reviewed or corrected. At the same point in 2022, it had a backlog of nearly 24 million returns.

To sort through the backlog, the IRS last year moved employees from roles answering the phones to other departments that processed paperwork.

Now that the quantity of unresolved returns is more manageable, IRS officials have shifted many of those employees back to the phones while training new hires to handle paper files, a complex, weeks-long process.

The agency still doesn’t have much flexibility, some experts said.

“We’re concerned that we could be one step away —one big problem away—from needing additional customer service [employees] having to process more correspondence, which would then build up that backlog,” said Ed Karl, vice president of taxation at the American Institute of CPAs.

But there’s a noticeable difference in how the agency is functioning now, Karl and Taluy said. At the end of February 2021, the IRS had processed 86 percent of returns submitted, and 93.2 percent in 2022, according to IRS weekly data reports. This year, the agency is up to 99.7 percent of returns processed.

“That means returns are coming in more accurately,” Taluy said. “The IRS systems are able to process them more quickly. That’s a real benefit to taxpayers.”

The IRS has also introduced new online tax-filing tools, a major step for an agency whose technology has for decades lagged behind even the most basic capabilities of private-sector tax software firms.

In January, the IRS debuted a program that allows businesses to file information reports for independent contractors through a secure portal on the IRS website.

In February, it updated software to let individuals filing amended returns receive refunds via direct deposit rather than a paper check, and released a product to allow taxpayers to respond to mailed notices by uploading documents to the IRS website.

“This is exactly the direction they need to go in,” said Nina Olson, executive director of the Center for Taxpayer Rights and the former national taxpayer advocate. “They need to look at what makes it easier for taxpayers to respond to their notices, get it into a digital format, get it into the hands of an IRS employee quickly. I just think this is an important first step, and they’ll continue to build on that.”