Taxpayer advocate appeals IRS decision to delay scanning tech

National Taxpayer Advocate Erin Collins is protesting a decision by Internal Revenue Service officials to postpone implementation of scanning technology by next tax season to deal with a backlog of millions of paper tax returns.

Collins called on the IRS during tax season to implement the kind of commonly used scanning technology already in use by many other government agencies and businesses of all kinds, such as 2-D bar coding, optical character recognition and machine-readable text. She issued a rare Taxpayer Advocate Directive last March as the IRS struggled to overcome a backlog of millions of unprocessed paper tax returns from last year and this year (see story).

Lawmakers in Congress echoed her concerns during oversight hearings with IRS commissioner Chuck Rettig, who reminded them that the funding for scanner technology had been left out of congressional appropriations bills for years.

National Taxpayer Advocate Erin Collins testifying before a congressional committee in October 2020.

Tasos Katopodis/Bloomberg

IRS deputy commissioners Douglas O’Donnell and Jeffrey Tribiano issued a response last month to Collins’s directive, saying the IRS is still pilot testing various technologies, but without making any commitment on timing. However, in a blog post Thursday, Collins said she is appealing their decision, citing the urgent need for the scanner technology to be in place by next filing season.

“Due to the magnitude of this issue and the unprecedented backlog of paper returns, I took the unusual step of appealing the deputy commissioners’ decision to the commissioner for reconsideration,” Collins wrote. “Our taxpayers and employees deserve a 21st century tax administration that utilizes technology to streamline tax administration, most notably by delivering timely tax refunds. I believe IRS executives and employees wholeheartedly agree with this statement. As such, I was disappointed in the deputy commissioners’ response to my TAD.”

She noted that since the start of the COVID-19 pandemic, tens of millions of taxpayers have experienced significant delays in receiving their tax refunds, with some waiting 10 months or more.

“I have previously said that paper is the IRS’s Kryptonite and the IRS is buried in it,” Collins wrote. “Paper returns remain the IRS’s Achilles heel because the IRS still – in the year 2022 – has not implemented technology to machine read paper-filed returns. As a result, employees must manually keystroke into IRS systems each digit on every paper return. Not only does manual data transcription delay refunds, but data transcription errors were made on 22% of paper-filed returns processed last year, which causes rework and additional frustration for taxpayers and the IRS itself.”

She acknowledged that in fiscal year 2017, the IRS requested Congress to appropriate $8.4 million so it could implement 2-D barcoding, but Congress didn’t appropriate the funding, so the IRS let the proposal drop. However, she believes the IRS could have found the funding elsewhere.

“It is not clear why the IRS, managing a budget that at that time exceeded $11 billion, could not reallocate funding to cover the $8.4 million implementation cost,” said Collins. Had it done so, the technology would have paid for itself many times over.”

In their response to Collins’ directive, the IRS deputy commissioners discussed their progress in testing out the scanner technology.

“Therefore, we have pursued and continue to pursue a variety of options to gain efficiencies in processing paper filed returns,” O’Donnell and Tribiano wrote. “One such technology is 2-D barcoding. Several states have adopted 2-D barcoding, and we are in discussions with some of our state partners to learn from their experiences. At the same time, we have implemented several pilot programs to test barcoding and other technologies that may help us become more efficient. It is important to fully test these options before singling out, and perhaps becoming overly reliant, on any one of them.”

One of the pilot programs being tested by the IRS involves so-called “V-coded” returns that come from taxpayers who use software to prepare a return, print the return and mail it to the IRS. However, the IRS’s experience to date has been mixed and it’s continuing to work with vendors to improve the likelihood of being able to process the returns without errors.

Another pilot program being tested involves a “lockbox scanning service.” This pilot uses the Treasury Department’s Bureau of the Fiscal Service to scan Forms 940 and submit them using the IRS’s Modernized eFile system. This pilot is showing better signs of success, and the IRS plans to begin scanning and e-filing a portion of paper Forms 940 through the MeF system in August. “The goal is to accelerate this pilot and scan a larger portion of forms in filing season 2023, depending on pilot testing results and funding availability,” the IRS officials wrote.

Another pilot program involves the 2-D barcodes that Collins has urged the IRS to implement. In this pilot, the IRS is receiving data from Forms 8918 and Forms 8886. Last December, the IRS released Form 8918 with 2-D barcodes and intends to issue Form 8886 with 2-D barcodes this coming August.

However, the IRS officials noted that before the IRS can consider using 2-D barcodes from Form 1040, the agency will need to talk with the software industry about revising industry standards to align with how it brings in and processes data.

“The industry would have to agree to provide this code in printed forms prepared with their software,” O’Donnell and Tribiano wrote. “We will start that engagement soon, develop a plan and report back to you with the results.”

In the meantime, they noted the IRS is making more forms available for electronic filing to encourage greater adoption of e-filing.

“A multi-faceted approach is necessary to address the paper inventory that [the] IRS receives yearly and to improve return processing for those due refunds as well as those who owe nothing or owe additional tax,” O’Donnell and Tribiano wrote. However, they added, “We will not implement any single option until we are confident in the delivery of that option.”

That response fell short of what Collins has been urging the IRS to do, and she is appealing the decision.

“Notably, however, the response declined to make a commitment to implement scanning technology to machine read V-coded returns, and it expressly rejected implementing scanning technology to machine read handwritten returns,” she wrote. “The response further stated the IRS would not implement any single option until it is confident in the delivery system. I fully agree the IRS should choose an efficient and reliable delivery system, but the TAD response does not provide specifics regarding its ongoing efforts, a timeline to apply a delivery system to process paper returns, or the percentage of 2022 returns it anticipates scanning. I appreciate the IRS’s efforts with the ‘Lockbox Scanning Service Pilot’ and encourage moving forward with scanning returns. But that pilot involves returns with which the taxpayer is making a payment. Processing delays primarily harm taxpayers who are due refunds, and I would like to see the IRS prioritize its efforts to paper-filed refund returns.”

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