Taxpayer advocate appeals IRS decision to delay scanning technology

National Taxpayer Advocate Erin Collins is protesting Internal Revenue Service officials’ decision to delay the implementation of scanning technology next tax season to deal with millions of paper tax returns.

Collins called on the IRS during tax season to implement scanning technology commonly used by many other government agencies and businesses of all kinds, such as 2-D bar codes, optical character recognition and machine-readable text. Last March, the IRS released a rare taxpayer advocate guide as it struggles to win over millions of unprocessed paper tax returns filed 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 funding for scanner technology has been left out of congressional appropriations bills for years.

Thassos Katopodis / Bloomberg

IRS Deputy Commissioners Douglas O’Donnell and Jeffrey Tribiano presented. RThe IRS is still testing different technologies, Collins said last month, but made no commitment on a timeline. However, in a blog post Thursday, Collins said she is appealing their decision, citing the urgent need for the scanner technology during the next application period.

“Due to the magnitude of this case and the unprecedented amount of paper returns, I have taken the unusual step of appealing to the Commissioner for reconsideration of the Deputy Commissioners’ decision,” Collins wrote. “Our taxpayers and employees deserve a 21st century tax administration that uses technology to streamline tax administration, especially by providing timely tax refunds. I believe IRS executives and employees wholeheartedly agree with this statement. As such, I am disappointed by the Deputy Commissioners. In response to my TAD .”

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’ve said before 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 2022 — has not implemented technology to machine-read paper-filled returns. As a result, employees must manually enter each digit on each paper return. Not only do hand-copied documents delay refunds, but data transcription errors in the past 22% of all paper-filed returns are filed annually, causing additional frustration for taxpayers and the IRS itself.

In the year In fiscal year 2017, the IRS asked Congress for $8.4 million to implement 2-D barcoding, but Congress did not provide the funds, so the IRS let the proposal lapse. However, she believes the IRS could have found the money elsewhere.

“It is not clear why the IRS, which at the time managed a budget of more than $11 billion, was unable to divert funding to cover the $8.4 million in spending,” Collins said. “If this was done, the technology would pay for itself many times over.”

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

“We have pursued and continue to pursue various options to achieve efficiencies in the preparation of 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 talking to some of our state partners to learn from their experiences. At the same time, we have implemented several pilot programs to test barcoding. Other technologies that could help us be more effective: Before we identify these options It is important to experiment completely and perhaps rely too much on any one.

One of the pilot programs being tested by the IRS involves so-called “V-coded” returns from taxpayers who prepare, print and mail the return to the IRS. However, the IRS’s experience to date has been mixed and it continues to work with providers to improve the likelihood of processing returns without errors.

Another trial program being tested includes a “lockbox scan service.” This pilot uses the Treasury Department’s Office of Fiscal Services to scan Form 940 and file it using the IRS’s modern eFile system. This pilot is showing better signs of success, and the IRS plans to begin scanning and e-filing Form 940s through the MeF system in August.

“The goal is to accelerate this pilot and begin scanning a larger portion of the forms during the 2023 filing season, depending on pilot test results and funding availability,” IRS officials wrote.

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

But IRS deputy commissioners said before the IRS could consider using 2-D barcodes from Form 1040, the agency needs to talk with the software industry about revising industry standards to adjust how their technology retrieves and processes data.

O’Donnell and Tribiano wrote to Collins: “Industry should agree to provide this code in printed forms that come with their software. We will soon begin the engagement, plan and report the results.”

Meanwhile, he noted that the IRS is introducing additional forms for electronic filing to further encourage e-filing.

“A multidisciplinary approach is necessary to address this paper stockpile [the] The IRS annually receives and seeks to improve the refund process for those who have received refunds, as well as those who owe no or no additional taxes, O’Donnell and Tribiano wrote, but added, “We will not implement any options until we are certain of this.” Delivering that option.”

That response fell short of what Collins had hoped the IRS would do, and she is appealing the decision.

“The response refrained from promising to use scanning technology to machine read V-coded returns, and flatly rejected the application of scanning technology to read handwritten returns,” she wrote. The response further states that no option will be exercised unless the IRS relies on the filing system. I fully agree that the IRS should choose an efficient and reliable delivery system, but TAD’s response does not provide details regarding its ongoing efforts. A timeline for implementing a submission system to process paper returns or wait for the 2022 percentage return scan. I applaud the IRS’s efforts with the ‘Lockbox Scanning Service Pilot’ and encourage it to move forward with scanning returns. But the pilot involved a comeback. The taxpayer is paying. Processing delays primarily affect taxpayers who pay their refunds, and I would like to see the IRS prioritize its efforts to process paper refunds.