Stimulus check confusion and delayed tax refunds: IRS watchdog details failures

As the pandemic raged in 2020, the Internal Revenue Service stumbled, causing underpayment of economic reviews, delayed tax refunds and other missteps, according to a new surveillance report.
The impact was felt again in 2021 when another tax filing season begins and there may be more direct payments to taxpayers.
"In 2020, the COVID-19 pandemic affected almost every facet of our lives, and the US tax administration was no exception," wrote national taxpayers attorney Erin Collins in her 2020 annual report to Congress. "IRS staff who open and process tax returns and answer the toll-free phone lines had to follow social distancing and home ordering guidelines, which limited their ability to assist taxpayers."
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Last year got even more complicated when the IRS took on the task of running two rounds of stimulus checks "to expand their resources even further," Collins wrote of their assessment. Collins is part of the Taxpayer Advocate Service, an independent organization within the IRS that helps taxpayers and protects their rights.
The IRS did not immediately respond to Yahoo Money's requests for comments on the report.
The main Internal Revenue Service building appeared to be mostly empty on April 27, 2020 in the Federal Triangle section of Washington, DC. (Photo by Chip Somodevilla / Getty Images)
Underpayment of stimulus checks
Under CARES, around 160 million Americans received an incentive payment, but "Millions of Eligible Individuals did not receive some or all," the report said.
The IRS initially said it would not correct any errors in direct payments in 2020, but later in the year agreed to address some issues with stimulus testing, "mainly those that could be fixed by automation," the report said.
Read more: Do the following if you haven't received your stimulus check
Still, many cases remained unresolved, leaving eligible recipients to wait for full payments to be made before filing their 2021 tax returns. Individuals can also apply for the second Stimulus Check, which was issued on their December tax return, if they are eligible but haven't received one, haven't received the correct amount, or for other reasons.
"The IRS only created programming in September that allows individual accounts to be manually adjusted," wrote Collins. "Even then, only a limited number of problems could be fixed manually."
Tax refund failure
According to the TAS report, millions of taxpayers have experienced delays in getting their tax refunds this year due to arrears and fraud detection filters. (Photo: Getty Creative)
Millions of taxpayers have been experiencing delays in obtaining their tax refunds this year due to arrears and fraud detection filters, the report said. Arrears arose because "the IRS was unable to open and process the 16 million or so paper tax returns in a timely manner," the report said.
The IRS was backlog of over 7 million unprocessed individual tax returns as of December 31 and over 2.3 million unprocessed business returns as of November 24.
"The majority of these taxpayers were likely eligible for refunds, but had to wait many months longer than usual to receive them," Collins wrote.
Read More: 4 Reasons Why You Should Change Your Tax Withholding
All tax returns that claim refunds go through a series of IRS filters designed to detect fraudulent income or identity theft. According to the report, over half of the refunds frozen by these filters in the past few years have been found to be legitimate.
The IRS will typically notify taxpayers of a frozen refund in writing, which will further delay the process. Refunds took longer than 56 days for 1 in 4 returns marked for income verification. Nearly 1 in 5 people reported for identity verification took more than four months to send refunds.
General mishaps
The main Internal Revenue Service building appeared to be mostly empty on April 27, 2020 in the Federal Triangle section of Washington, DC. (Photo by Chip Somodevilla / Getty Images)
The IRS experienced other mishaps.
For example, the agency answered only 1 in 4 of the over 100 million taxpayer phone calls it received this year. Every fourth call was made to automated replies, and every third taxpayer hung up.
"Put another way, IRS employees have answered no more than 75 million phone calls from taxpayers seeking help with their tax obligations," Collins wrote.
Millions of taxpayers have also received late notices containing deadlines for reply or payment that have already passed. This happened because the IRS automatically printed the notices but was unable to send them at the time. Instead, they were provided with 1.8 million notices by the IRS telling taxpayers they had additional time to respond, creating "confusion and fear," Collins wrote.
According to the report, the IRS should have created a weekly "COVID-19 dashboard" to notify taxpayers of delays.
"Relatively limited information was released for much of the year," Collins wrote in the report, "and comments from IRS officials were often incomplete or misleading."
The challenges will continue until the 2021 filing season.
Some of the issues the IRS faced in 2020 are expected to continue through 2021, as a backlog of returns to be processed and continued social distancing policies at the IRS processing centers are slowing the process down.
In addition, a second round of stimulus checks was distributed in late December, and a potential third round could be sent out at the start of the tax filing season in 2021, meaning more people might struggle to get the full amount they're entitled to .
"The challenges posed by the COVID-19 pandemic will last until the 2021 filing season, and possibly months, and affect both the IRS and taxpayers," Collins wrote. "I expect the IRS has learned from the 2020 experience and will improve its performance in the months ahead."
The Yahoo Money sister site Cashay has a weekly newsletter.
Denitsa is a writer for Yahoo Finance and Cashay, a new personal finance website. Follow her on Twitter @denitsa_tsekova.
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Stock market highs, booming real estate, and millions of unemployed: A story of two Americas amid the coronavirus pandemic
House and Senate pass a $ 900 billion stimulus agreement
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