National Taxpayer Advocate (NTA) Erin Collins formally directed the internal revenue service to take immediate actions towards implementing existing scanning technology to process income tax return submitted on paper.
Collins provided the directive, which is dated March 29, under her authority pursuant to a delegation order in the Internal Revenue Handbook to mandate administrative or procedural modifications by the IRS to improve its functional operation or grant relief to taxpayers to secure their rights or to provide them an important service.
In an NTA post on the Taxpayer Advocate Service website, Collins said the instruction was necessitated by repeated cautions that processing paper returns stays a weak point for the IRS. As she stated in her 2021 Yearly Report to Congress in January, “paper is the internal revenue service’s Kryptonite, and the IRS is buried in it.”
She cited recent updates on paper return processing that suggest the problem is not improving: As of March 18, the paper return backlog numbered nearly 15 million returns, Collins stated. Representing processing delays of 10 months or more, the backlog consists of 4.7 million original specific tax return, 2.6 million amended specific income tax returns, 4.9 million initial company income tax return, and 1.2 million changed company tax returns.
“Over the previous year, the IRS has actually not made development in reducing its stockpile,” Collins stated in the regulation, noting that since a year previously, unprocessed original individual returns numbered slightly fewer, 4.6 million.
If the internal revenue service is to satisfy its specified objective of removing its backlog by the end of 2022, it will need to embrace brand-new methods of processing paper returns, primarily by carrying out scanning innovation that itself is barely brand-new, Collins stated.
“If the internal revenue service had actually carried out scanning innovation, it is not likely the existing processing backlog would exist,” she said.
Additionally, the current process of transcribing the returns by hand by operators typing their contents into a computer is error-prone. About 22% of transcribed returns in 2015 contained information transcription errors, Collins stated.
2-D barcoding: Currently in minimal usage
One of 2 techniques Collins suggested, 2-D barcoding, is as time-honored and common as most retail checkout lines and the 17 state departments of profits that used it to process returns since 20 years ago. Simply as scanning a barcode on a retail item brings up all appropriate details to a sale, one put on a tax return by tax preparation software and printed out by the taxpayer for mailing can encode all information essential for the taxing authority to process the return.
The IRS has in truth executed 2-D barcoding for certain types, including Schedules K-1, which are issued to partners of collaborations and investors of S corporations, reporting their shares of the entities’ income, reductions, credits, and other tax products.
Yet the innovation’s potential for processing a whole return has actually been stymied by twenty years of dithering by the Service, Collins stated. In 2002, when then– Nationwide Taxpayer Advocate Nina Olson, mentioning the example of the 17 states, suggested 2-D barcoding to the internal revenue service, the internal revenue service demurred, stating it might weaken taxpayers’ shift to e-filing.
A year later on, nevertheless, the IRS began working with tax software application companies to implement 2-D barcoding for some tax return, such as Schedule K-1. The Service asked Congress in 2017 to offer it authority to require taxpayers submitting paper returns prepared with software to utilize a 2-D barcode, which Congress at first included in an early version of the Taxpayer First Act.
However prior to the Taxpayer First Act’s enactment in 2019 (as P.L. 116-25), “the internal revenue service had actually altered its position once again,” ostensibly to give it more flexibility to use other scanning innovation, and the provision was stricken from the expense’s enacted version at the internal revenue service’s request, Collins said.
A Program Supervisor Technical Assistance memo (PMTA 2022-002) in December 2021 recommended that the internal revenue service currently does not have authority to need tax software application designers to consist of barcodes, however the IRS can include one on its own income tax return and kinds. The Service also can ask for that the software application companies do so, Collins said. She directed that the internal revenue service immediately begin discussing this with the companies in time for the 2023 filing season and, if the companies decrease to do so, to ask Congress to mandate it.
OCR: A backup to barcodes
The other primary innovation used for scanning paper files is known as optical character acknowledgment (OCR), which analyzes the marks on a file and renders them into computer characters. While OCR has the advantage of also being able to check out handwriting, it doesn’t always do so properly, Collins said. However, some states utilize it in tandem with 2-D barcoding, such as when a barcode is smeared or otherwise unreadable, Collins said. She directed the internal revenue service to likewise develop a strategy to use OCR, likewise by the start of the 2023 filing season or, if not feasible already, the following season.
The regulation asks the IRS to react to it by May 13, 2022, and state whether it prepares to carry out the directed actions, plans to execute alternative actions that will attain the exact same objective, or decreases to take the directed actions. If the IRS suggests it will implement the directed actions, the instruction also asks the IRS to provide a comprehensive strategy by May 31 to execute the 2 technologies for the 2023 filing season.
The AICPA continues to advocate for much better IRS services; check out the web page explaining AICPA advocacy efforts to get more information.
— To discuss this post or to recommend a concept for another article, contact Paul Bonner at [email protected]!.?.!.