Backlog of income tax returns is growing, delaying refunds to millions

The IRS is falling behind in processing millions of income tax returns, potentially delaying refunds for many Americans.

According to the Taxpayer Advocate Service, an independent arm of the IRS focused on tax filers' rights, the agency is holding almost 31 million returns for manual processing just ahead of the May 17 tax-filing deadline. That backlog has grown by 2 million returns since mid-April, National Taxpayer Advocate Erin M. Collins told CBS MoneyWatch. 

"I was hoping it would go down, but I'm not that optimistic," she said of the logjam. "Taxpayers will continue to experience unusually long delays. I don't think anyone wants to hear that, but that is the case."

Collins had flagged the issue in an April 22 blog post, when the number of tax returns held up for manual processing had reached about 29 million. Some of those returns are paper tax filings from 2019, which the IRS got behind in processing due to the coronavirus pandemic last year. But much of the backlog also consists of 2020 tax returns, which are still flowing into the IRS.

Some of those newly filed tax returns are getting flagged by the IRS because of issues related to recent tax changes and federal stimulus checks, Collins said. One of those relates to the "Recovery Rebate Credit," the line on Form 1040 that allows people to adjust their stimulus payments if they didn't receive all the funds to which they were entitled. Some people are incorrectly filling out that line, typically by claiming the incorrect amount on the form. 

In such instances, the IRS flags the return for review — that requires an employee to check the return against the agency's record of stimulus payments. All that can add time to processing a tax return, which, in turn, means delays for taxpayers in getting their refunds. 

About 1 in 3 people who have claimed the Recovery Rebate Credit have had their returns flagged for review by an employee, according to a May 6 report from the Treasury Inspector General for Tax Administration. 

Collins expressed concern that the returns-processing backlog will continue to grow ahead of the May 17 filing deadline. So far, about 121 million tax returns have been filed out of the more than 160 million that are expected. The IRS has issued about 5 million fewer refunds so far this tax season compared with the same time last year, according to the agency's statistics. 

With more than 40 million taxpayers yet to file, it's likely a portion of those returns will end up flagged for review — leaving those taxpayers with an unknown wait for their refunds, rather than the usual three-week turnaround.

"My tax person said he was shocked if I wouldn't see my refund in 10 days, and it's been over two months," said Hillary Osborne, 41. She filed her 2020 tax return on February 27. So far, nothing. "I check 'Where's My Refund?,' and it says it's still being processed — I called the IRS after 21 days, and you can't get through to anyone."

Osborne, a single mother who works as a project administrator in Tennessee, said her refund should amount to more than $4,400, which will cover about four months of rent. She said her taxes are fairly simple, but she wondered if something about the stimulus checks have tied up her return. 

For now she remains in limbo, with Osborne telling CBS MoneyWatch she's been unable to reach anyone at the IRS. "I'm not happy," she said. "I depend on that money."

In limbo for a year

Some taxpayers are still in the dark due to tax returns filed last year, when the IRS shut down its offices as the pandemic took hold. Paper tax returns filed for the 2019 tax year were stored in trailers until IRS employees could get to them. As of March, the agency still had a backlog of 2.4 million paper returns from the 2019 tax year to process.

The IRS also must cope with the unprecedented health crisis with significantly fewer employees and less funding compared with a decade ago. The number of operations staff has fallen by almost a third since 2010, while overall funding has declined by more than 20%, according to the Center on Budget and Policy Priorities.

The IRS said the agency is now opening mail within "normal timeframes," and noted that it's making progress on processing tax returns that were filed last year. As of April 23, it had a backlog of 1.3 million individual returns filed before 2021 to finish processing, an IRS spokesman told CBS MoneyWatch in an emailed statement. 

One of those taxpayers is Eileen Mahoney, 63, an American who lives in London and who mailed her paper tax forms last year. She's still waiting for her tax return to be processed. Although Mahoney said she wasn't due a refund, she worries the issue is holding up her second and third stimulus checks — $600 and $1,400, respectively — which she has yet to receive.

"It is money I could well do with," Mahoney said, noting that she was laid off from her job as a paralegal before COVID-19 hit. The stimulus checks would allow her and her husband to fix up their home in London and list it for sale, achieving a dream of moving to Galway, Ireland. She's reached out to lawmakers and spent four hours and about $60 in overseas telephone charges to try to get through to the IRS, but hasn't been able to find out where her 2019 tax return is, or when it might be processed.

"The fact I might have to wait 12 to 18 months for it is driving me insane," Mahoney said. "This is not my fault — it's the IRS'."

Other taxpayers who spoke with CBS MoneyWatch about their return-processing delays also expressed frustration. Many have been unable to reach an IRS employees, an issue that's carried over from last year, when only one in four callers got through to an actual person. 

All expressed a desire to get two questions answered: Where is my tax return, and when will it be processed? Knowing some information — even if it's learning that their tax return wouldn't be processed for several months — is better than nothing, they said.

Collins of the Taxpayer Advocate Service agreed. "The IRS should do a better job of being more transparent even if it's bad news," she said. "Being in limbo is worse."

Avoiding manual review?

Taxpayers who have yet to file should heed the issues that millions of taxpayers are currently facing, tax experts say. For one, file electronically if possible, which is something the IRS is also urging taxpayers to do given their backlog of paper tax returns. 

If you have to file via paper — a requirement for people who live outside the U.S., as well as in some other cases — make sure to send it via certified mail with a required signature, said Lisa Greene-Lewis, a certified public accountant and TurboTax tax expert. Without that, you may not know whether the IRS received your return, she added. 

People who are filing for the Recovery Rebate Credit should also check their records to make sure they are accurately noting the amount they received, Greene-Lewis said. If you can't find the letters the IRS sent to confirm payment (forms 1444 and 1444-b), then check your bank and deposit records, she recommended. 

"One thing I would tell folks is if they haven't yet filed is to make sure: a) file electronically, b) please review for errors, and c) if you are doing the Rebate Recovery Credit, go back and look at bank deposits to make sure that Line 30 is consistent with IRS records," Collins said. "We are seeing people put in the wrong amount," and that will get a tax return flagged for review.

But some issues may be harder for taxpayers to control. Returns are getting flagged due to the Earned Income Tax Credit and the Child Tax Credit, partly because the government stimulus package signed into law in December came too late for the IRS to adjust its forms and computer systems. The stimulus package's provisions allows taxpayers to claim the credits based on their 2019 income instead of their 2020 income if that proves more favorable to them — but such "look backs" require IRS employees to verify 2019 incomes. 

"A human has to go back, pull the info, and verify it," Collins noted. 

The IRS has said the backlog will likely improve later this summer, she added, but until then taxpayers may need to brace themselves for longer waits.

"There is no guarantee the money is coming tomorrow," Collins said. "They should plan accordingly for continuing delays."