WASHINGTON — The IRS is beginning to see "a light at the end of the tunnel" of its customer service struggles, thanks to tens of billions of new money from the Democrats' climate and health law and the authority to hire more people, according to an independent watchdog within the agency.
The exterior of the Internal Revenue Service building is seen in 2013 in Washington. The IRS said it's beginning to see a "light at the end of the tunnel" of its customer service struggles.
But that upbeat assessment from the National Taxpayer Advocate is tempered by an early move by the new House Republican majority to rescind nearly $71 billion that Congress had provided the IRS, even though the bill approved Monday is unlikely to advance in the Democratic-run Senate.
In the report Wednesday to Congress from Erin M. Collins, who leads the office assigned to protect taxpayers' rights under the Taxpayer Bill of Rights, cited "more misery" for taxpayers last year and spoke of the challenges still ahead. "I am just not sure how much further we need to travel before we see sunlight," she said.
The report outlines how the 2022 tax filing season was a continuation of the yearslong struggle to process paper and electronic tax forms, answer taxpayer phone calls and distribute tax refunds in a timely manner.
The IRS was more successful in chipping away at its mountain of unprocessed returns. The agency began 2022 with a backlog of 4.7 million individual returns and 3.6 million amended returns. By mid-December 2022, the tax collector reduced that backlog to 1 million individual returns and 1.5 million amended returns.
"Taxpayers and tax professionals experienced more misery in 2022," the report said. "The good news is that since the close of the 2022 filing season, the IRS has made considerable progress in reducing the volume of unprocessed returns and correspondence."
One reason for the optimism is the infusion of billions from the Democratic-powered legislation signed into law this summer. It is meant to help rebuild an agency that hadn't seen additional funding in decades. House Republicans, however, want to rescind the money, saying it would bankroll an army of 87,000 auditors who will harass middle-class taxpayers rather than help them — claims that are generally alarmist and misleading.
Another boon to the agency is that IRS officials used direct hiring authority to add 4,000 customer service representatives in October who were trained in taxpayer rights and technical account management issues.
"We have been unable to provide the help that IRS employees want to give and that the nation's taxpayers deserve," then-Commissioner Chuck Rettig said at the time of the announcement, "but help is on the way for taxpayers."
Shortly after the new money was secured, Treasury Secretary Janet Yellen directed the IRS to develop a plan within six months outlining how the tax agency would overhaul its technology, customer service and hiring processes.
That report is due in the coming weeks.
Looking forward to the 2023 filing season, Collins' report said the IRS will be starting "in much better shape than the last two years."
12 ways you might be unintentionally committing tax fraud
Claiming an improper credit
Updated
Whether you’re filing your own taxes or having someone prepare your tax return for you, you are “legally responsible for what is on your tax return,” the IRS warns. Falsifying your income to claim tax credits you aren’t entitled to can lead to penalties and additional fees.
Underreporting income
Updated
You’re not fooling anyone if you understate your income to avoid paying taxes or to get a bigger return. The IRS receives third-party information about your income from employers and financial institutions using its Automated Underreporter (AUR) function. If there’s a difference between what you reported and what the AUR picks up, you will receive a CP2000 form and possibly have to pay your remaining taxes.
Claiming dependents improperly
Updated
According to the IRS, for a child to be a true dependent, they must be related to you, live in the same home as you for more than half the tax year, be of the correct age and not file a joint return with someone else.
Non-filing
Updated
Research from the IRS shows that in 2019, the nonfiling tax gap was estimated to be $39 billion. Non-filing of taxes is still considered tax fraud because you are withholding information from the IRS and failing to fulfill your legal duty to pay taxes.
Underpaying taxes
Updated
The September 2019 estimate for the underpayment tax gap was $50 billion. You may be able to avoid an underpayment penalty if you made less than $1,000 after withholding and tax credits and you paid at least 90% of your withholding or estimated tax for the current year or 100% of the tax shown on the return for the previous year.
Falsely claiming expenses
Updated
If you’ve incurred expenses associated with your work, you have every right to recoup them. But make sure you’re reporting and claiming expenses you actually had. Falsely inflating expenses and deductions was included on the IRS’s 2018 “Dirty Dozen” list of the worst tax schemes. The IRS estimates that close to 75% of tax filers overstate their expenses, which reduces their tax bill. The penalty for misreporting expenses can be up to 25% of the amount you owe.
Incorrectly reporting donations
Updated
Keeping improper records, misreporting a full donation when you received something of value (like tickets or merchandise) in exchange for your donation or giving to dubious charitable organizations are all ways you can find yourself unintentionally being dishonest about your taxes.
Not giving out 1099s
Updated
If you’re a business owner who uses independent contractors, they can still report their income, even if you don’t give a 1099. But as a business, if you fail to distribute 1099 forms, your penalties can be anywhere from $25 to $270 per form. If you intentionally disregard the form requirement, your penalty will be $550 per form with no maximum. Contractors who fail to report their 1099 income will receive a penalty of 20% of their underpayment.
Claiming a home office when you’re not self-employed
Updated
While many people complete some of their work from the comfort of their home, a home office deduction is only for people who make “regular and exclusive use” of their home as an office and their home is the “principal place” of their business.
Not overseeing accounting or other outside services
Updated
Unscrupulous accountants and other scam artists abound this time of year, and not doing your due diligence could leave you with a hefty penalty or worse since, no matter who prepares or helps you prepare your tax return, you are still responsible for it.
Creating a shell company or charity
Updated
Shell entities exist only on paper and can allow taxpayers to avoid reporting all of their money as personal, taxable income. Underreporting your income, however, is fraudulent, so if you’ve started an LLC or other company and are putting money into it, make sure it has legitimate business operations and that you are still reporting your income correctly.
Abusing tax shelters
Updated
While certain tax shelters like retirement accounts, investments and municipal bonds are perfectly legitimate ways to minimize your tax burden, abusing these shelters by redirecting money purely to avoid paying taxes is tax evasion and can subject you to penalties.
Fixing mistakes
Updated
If you find that you’ve made a mistake on your tax return that could subject you to a penalty, you can amend your return using a Form 1040-X, Amended U.S. Individual Income Tax Return. In some cases, if the IRS determines that it’s a clerical or mathematical error, they may correct it on their end without you having to do anything.
