IRS backlog grows from documentation for tax adjustments

While the Internal Revenue Service has managed to reduce its backlog of unprocessed tax returns since the pandemic, one area where it’s losing ground is in processing all the documentation for tax adjustments.

The IRS often has to do a tax adjustment, for example, if it detects an error on a tax return during processing or if a taxpayer or tax preparer files an amended tax return.

When a tax adjustment is made on a business or individual taxpayer’s tax account, the IRS office that makes the adjustment needs to send all of the documentation supporting the adjustment to one of its tax processing centers, either in Austin, Texas; Kansas City, Missouri; or Ogden, Utah. Then when the adjustment is made, a Form 5147, Integrated Data Retrieval System Transactions Record, is printed at the tax processing center and paired with the source documents supporting the tax adjustment transaction. 

The IRS had more than 2.6 million source documents as of last November that needed to be associated with a corresponding Form 5147, which allows the IRS to identify and retrieve the source documentation for a tax adjustment from storage, according to a report Thursday from the Treasury Inspector General for Tax Administration. That backlog represents an increase of 241% in the inventory of such documents since May 2020.

TIGTA also found the IRS hasn’t formulated a comprehensive strategy outlining the actions it plans to take, the resources it needs, and the time frame to resolve this backlog. 

TIGTA also found significant inaccuracies in the reporting of these inventories.  For the week ending Oct. 27, 2023, the IRS inaccurately reported a closure of over 600,000 adjustment source documents at the Ogden Tax Processing Center, according to the report. After TIGTA brought this to the IRS’s attention, IRS management confirmed the report was inaccurate and admitted the true number of closures was around 96,000.  

In addition, the inventory reports were not being updated on a timely basis to accurately reflect transshipment closures on a weekly basis. Last September, the Ogden Tax Processing Center sent three shipments of adjustment source documentation totaling 341,773 to the Federal Records Center out of numerical order.  

The IRS’s contract with the National Archives and Records Administration requires processed adjustment source documents to be put in numerical order before they are sent to the Federal Records Center. Not only that, but the Kansas City Tax Processing Center included some items that didn’t even belong in the adjustment source documentation transshipments to the Ogden Tax Processing Center on four shipping pallets.

“Effective and efficient processing of adjustment source documentation is necessary to ensure that source documents supporting adjustments to taxpayers’ accounts can be timely located in the event they are requested by an IRS functional area or other government officials,” said the report. “If source documents cannot be located timely, taxpayers are burdened with the responsibility of providing tax documents that were previously sent to the IRS.”

The report recommended the IRS’s Wage and Investment Division take a comprehensive inventory of its adjustment source documents to update and correct current inventory records. Managers should also review the Miscellaneous Monitoring Report; finalize and execute a plan to rebalance the adjustment source documentation workload across the tax processing centers; develop a strategy to resolve the adjustment source documentation backlog; coordinate with the Federal Records Center to determine the steps that need to be taken to correct the adjustment source documents that have already been sent out of numerical order; ensure all adjustment case files sent to the Federal Records Center are in numerical order; and develop policies and procedures to ensure the accuracy of shipments between Tax Processing Centers. The IRS agreed with all the recommendations in this report. 

“The association of Form 5147 with source documents is a time-consuming activity and, as a residual effect of the pandemic conditions, we are continuing to process an unusually large inventory of documents,” wrote Kenneth Corbin, commissioner of the IRS’s Wage and Investment Division, in response to the report. 

He noted that the IRS eliminated its backlog of “original tax returns” to be processed in January 2023 and has since reassigned many employees from front-line processing to the Files Function. The IRS has also been leveraging the extra funding from the Inflation Reduction Act of 2022 to improve its technology, including a Document Upload Tool that enables taxpayers to respond to IRS notices that request more information by uploading the documents directly to the IRS’s systems instead of mailing in paper documents. 

The IRS reported separately Wednesday that the Document Upload Tool had reached a milestone of 1 million submissions from 265,000 taxpayers in the first six months of this year. The Document Upload Tool was originally introduced in 2021 in a limited format but was greatly expanded last year with funding from the Inflation Reduction Act.