IRS Struggles with Backlog of Tax Adjustment Documentation Processing

The Internal Revenue Service (IRS) is facing a significant challenge in processing all the documentation for tax adjustments, according to a recent report from the Treasury Inspector General for Tax Administration (TIGTA). While the IRS has made progress in reducing its backlog of unprocessed tax returns since the pandemic, the backlog of documentation for tax adjustments has increased by 241% since May 2020.

The IRS often has to make tax adjustments when errors are detected on tax returns during processing or when taxpayers file amended returns. However, the process of associating all the necessary documentation with a tax adjustment has become a bottleneck for the agency. As of last November, the IRS had over 2.6 million source documents that needed to be paired with a corresponding Form 5147, which allows the IRS to identify and retrieve the source documentation for a tax adjustment.

TIGTA also found significant inaccuracies in the reporting of these inventories, with the IRS inaccurately reporting closures of adjustment source documents and failing to update inventory reports in a timely manner. The report highlighted issues such as shipments of adjustment source documentation being sent out of numerical order and items being included in shipments that did not belong.

In response to the report, the IRS’s Wage and Investment Division agreed to take several actions to address the backlog of adjustment source documentation. These actions include taking a comprehensive inventory of adjustment source documents, rebalancing the workload across tax processing centers, developing a strategy to resolve the backlog, and ensuring the accuracy of shipments between centers.

Kenneth Corbin, commissioner of the IRS’s Wage and Investment Division, acknowledged the challenges posed by the backlog of documentation but noted that the agency has made progress in other areas. The IRS has eliminated its backlog of original tax returns and has reassigned employees to focus on processing documentation. Additionally, the agency has leveraged funding from the Inflation Reduction Act of 2022 to improve technology, including the Document Upload Tool, which allows taxpayers to upload documents directly to the IRS’s systems.

Overall, the IRS is working to address the backlog of adjustment source documentation and improve its processes to ensure timely and accurate processing of tax adjustments.