NTA Blog: Lifecycle of a Tax Return

The IRS has gotten quite good at processing returns and issuing refunds quickly, and most taxpayers during this filing season have experienced no problems. More than 90 percent of taxpayers file their returns electronically. These taxpayers often receive their refunds within three weeks, sometimes even under a week, and those who file paper returns generally receive their refunds within six weeks. The majority of taxpayers who don’t experience problems likely give little thought to how their return was processed.

But every filing season, millions of taxpayers have their refunds delayed and find themselves wondering, “What happened to my return, and when will I get my refund?”

As mentioned in a previous blog (NTA Blog: 2021 Filing Season Bumps in the Road: Part I), the number of delayed returns this year is significantly greater and the length of delays is longer than in past years. These delays can primarily be attributed to a culmination of circumstances such as pandemic-related issues, last-minute changes to the tax laws, and reduced staffing. Secondary aggravating factors include a reduction in the IRS’s budget over the years and outdated systems and technology. As of May 1, 2021, millions of returns remain backlogged in IRS functions, including:

• 8.8 million returns in IRS Error Resolution System (ERS);
• 15.8 million 2019 and 2020 paper returns; and
• 5.5 million returns with processing errors or suspected identity theft issues requiring responses from taxpayers.

This means the IRS is now holding over 30 million returns in total for manual processing, delaying millions of taxpayers from receiving their much-needed refunds during this difficult economic time.

Ever wonder what happens to your return after you place it in the mailbox or enter the submission button for your electronic return?

To give taxpayers a better understanding of the complexities of return processing and, more importantly, an understanding of what is holding up these returns or what may happen to them after being suspended, we offer a high-level discussion of a tax return’s journey.

Processing Station: First Level of Return Reviews Takes Place Even Before They Post to IRS Systems

Once a return is filed with the IRS and before it posts to IRS systems, it will go through a series of reviews to ensure the information on the return is correct. Many of these reviews are automated systemic processes while others, due to IRS’s outdated systems, are forced to remain manual including uploading paper filings. Assuming there are no issues identified, the return is processed, and if a refund is appropriate, it will be made either as a direct deposit if the taxpayer provided their bank routing information, issued as a check, or loaded onto a prepaid debit card. If payment is due, the IRS will send out a notice and demand requesting payment. The overwhelming majority of returns filed move through the system without a hitch. To date, the IRS has already processed 116 million returns and issued 85 million refunds. But this year, the IRS is dealing with an unprecedented number of returns requiring manual review slowing down issuance of refunds. The most common detours a return can take prior to being processed include:

• ERS;
• Rejected returns;
• Unpostable returns; and
• Suspected identity theft.

So, what does this mean?

Error Resolution System

As mentioned in part one of the “Bumps in the Road” blogs, ERS systemically identifies potential errors made on a taxpayer’s return and then requires an employee to manually review to address the identified error(s). During a typical filing season, ERS can quickly determine if an error was made and move the return through the process – but this filing season is anything but typical. Employees will review and either manually release the refund or confirm the error. If an error is confirmed, a notice will be sent to the taxpayer either requesting additional information or informing the taxpayer the error has been corrected through the IRS’s math error authority. (More on math error authority to follow in subsequent blog post.) However, reduced staffing combined with manually reviewing all returns where there is a discrepancy in the Recovery Rebate Credit (RRC), or where the taxpayer elected to use 2019 earnings for the purpose of claiming the Earned Income Tax Credit  or Additional Child Tax Credit, has resulted in the IRS suspending returns until they are able to work them.

There are three possible outcomes for returns being reviewed by ERS. The best possible outcome for taxpayers is that the information on the return is verified and the refund is released. The other two possibilities could potentially result in further delays and may require critical action on the part of the taxpayer. If the error is identified under IRC § 6213(g), the IRS, using its math error authority under IRC § 6213(b), can summarily assess math or clerical errors appearing on a return, which may reduce the amount of the refund issued or increase tax due. Any increase of the tax liability will be assessed without issuing a statutory notice of deficiency. If the taxpayer disagrees with this assessment, he or she must request an abatement within 60 days from when the notice was sent, thereby initiating normal deficiency procedures. Failure to request abatement during the 60-day time period will result in the tax remaining assessed and will bar the taxpayer from disputing the liability in the U.S. Tax Court, the only forum not requiring the taxpayer to pay the tax before litigation.

As of May 6, the IRS has sent about five million math error notices this year, including fiscal year 2020 and prior year returns. To date, more than four million returns contained RRC errors, including dependents listed on multiple returns, missing or invalid Social Security numbers or Individual Taxpayer Identification Numbers without a military indicator,  individuals who were deceased prior to the tax period, dependents exceeding the age limitation, or incorrectly computed RRC amounts. All of these returns will require manual processing and the issuance of math error notices. Unfortunately, taxpayers who receive these notices may not always have a clear understanding of how the IRS adjusted the return and what exactly they need to do to dispute it. As TAS has previously discussed, math error notices can be convoluted and confusing. You can read more about this in the National Taxpayer Advocate 2014 Annual Report to Congress and in Volume 3 of the National Taxpayer Advocate Fiscal Year 2020 Objectives Report to Congress, and stay tuned for a future blog post discussing math error notices and what practitioners and taxpayers need to do to protect their rights.

Rejected Returns

If the IRS does not have math error authority to automatically correct the error, it will send the return to its “Reject” function. Most commonly, these are returns where a schedule is missing or where the taxpayer has omitted Form 8962, Premium Tax Credit, and Form 1095-A, Health Insurance Marketplace Statement, both of which are necessary for reconciling the premium tax credit with the advance premium tax credit. Typically, in this case, the IRS will send the taxpayer Letter 12C, Individual Return Incomplete for Processing, giving him or her 20 days to supply the missing documentation. If the taxpayer doesn’t respond within that timeframe, the return will be adjusted, likely resulting in a reduced refund or increased liability.

Taxpayers should not ignore IRS correspondence. It may provide the answers about why the refund is delayed and what needs to be done to generate it.

Unpostable Returns

The next possible detour for a taxpayer’s return – and probably the least common – is if the return cannot be processed. These are usually paper returns that end up in the Unpostables Unit. Electronic returns in these situations are typically rejected up front with the “Reject” function. Unpostable tax returns are commonly caused by entity problems with the taxpayer’s  identification number, name, or both. For example, a recently married taxpayer signs her tax return using her new spouse’s last name. However, the return cannot post because the last name on her return does not match the name on file in the IRS and Social Security Administration (SSA) databases. The IRS will send the taxpayer a letter informing her of the problem and instructing her to contact SSA to update its records with her new name.

Suspected Identity Theft

Finally, taxpayers’ returns will be screened and possibly selected for suspected identity theft if IRS identity theft/fraud detection filters identify problems with the return that require further scrutiny. At this point, the return has been selected for review by the Taxpayer Protection Program (TPP), which will then send the taxpayer a letter asking him or her to authenticate his or her identity either over the phone, online, or by visiting a Taxpayer Assistance Center. From January 1, 2021, through May 6, 2021, the IRS has selected about 2.9 million returns into TPP, of which 1.2 million have been verified as non-identity theft, leaving 1.7 million suspected identity theft returns in inventory. Again, if a taxpayer receives correspondence from the IRS, he or she should review and respond as soon as possible to resolve the issue identified.

In a series of forthcoming blogs, I will delve into these individual processes, alerting taxpayers to possible stumbling blocks while also making recommendations about how these processes can be improved. In the meantime, the key takeaway is, if taxpayers receive one of these notices, they need to pay close attention to what information the IRS might be requesting, and the timeframes in which they must respond.

For a visual depiction of this IRS process, visit The Taxpayer Roadmap on the TAS website and select Tax Return Processing.

Conclusion and Recommendations

Taxpayers’ returns may avoid the long and scenic route through the IRS maze altogether, or they may be subjected to one or more of the reviews mentioned above. If the latter, taxpayers’ refunds will be delayed outside the normal processing times.

Taxpayers whose returns are subjected to one of these review processes will likely start to wonder: where’s my refund? The IRS works through these filed returns on a first in, first out basis and anticipates being done working through the backlog sometime this summer. In the meantime, taxpayers will not hear from the IRS until either information on the return is internally verified and the refund is released, or the IRS sends a letter requesting additional information to complete the processing of their return. While their return is lingering in tax purgatory, taxpayers are pretty much left in the dark and are checking their mailboxes, checking their bank information, still wondering what happened to their return, and asking when they will get their refund. Many taxpayers are utilizing the IRS’s Where’s My Refund tool and IRS2Go app, which only tell taxpayers their refunds are still being processed. But they are not being informed as to the reasons for the delays or when the refunds will be issued. The tool and the app are only updated when the return is ultimately processed. Taxpayers check the tool or app regularly, eagerly anticipating a message that their refund has been issued.

Further, it is unlikely that calling the IRS will yield additional information because through May 8, 2021, the IRS reported a level of service (LOS) on its Accounts Management telephone lines of 15 percent. Only seven percent of taxpayer calls reached a telephone assistor, and at the lowest point the IRS’s customer service representatives only answered about two percent of the roughly 70 million taxpayer calls to the IRS’s 1040 telephone lines, with the IRS reporting an official LOS of five percent. In other words, only about one out of every 50 calls has gotten through to a telephone assistor. And even if a taxpayer can reach the IRS, the assistor will likely not be able to determine why the return is sitting in suspense. This leaves taxpayers without answers and still frustrated in trying to determine what went wrong, the cause of the delay, and the timing of their expected refund.

The IRS has posted some general return processing information its IRS Operations During COVID-19 page but hasn’t included any specific numbers regarding these processes to provide more context, and the page does not contain specific information as to where the IRS is in working the backlog of returns (e.g., it has begun working returns filed in March 2021). TAS recommends the IRS consider adding specific numbers for each stage of the process that can be updated weekly with the received dates of those returns it is currently working. This will ensure taxpayers are aware the IRS is working through these returns and might provide them with some estimate when the IRS will issue their refunds. TAS also recommends that the IRS enhance its Where’s My Refund feature on IRS.gov and on the IRS2Go app to provide greater specificity to taxpayers as to the status of their refunds.

Next stops in the lifecycle of a return will include a discussion of pre- and post-assessment issues, including screening the return for possible fraud, examination of the return, assessment of the tax, and collection of the outstanding liability.