Backlog of Delayed Tax Returns May Force IRS to Pay Billions in Interest to Past-Due Applicants

The US Internal Revenue Service (IRS) faces a significant lack of staff and underfunding after the agency’s budget has decreased by 23% from 2010.

The IRS has piled up millions of tax return applications that could be overdue, forcing the Treasury to pay extra for the delay.

The agency has 45 days to process an application, and delays entail interest payments. Starting from April 1, the interest rate for individual filers, which is tied to the Federal Reserve's benchmark rate, was raised from 3% to 4%.

According to the Wall Street Journal, all this may lead to a substantial budget crunch, as the IRS has a backlog of 9.6 million unprocessed returns.

A recent report from the Government Accountability Office showed that the IRS has returned nearly $14 million in interest over the past fiscal years. The fourth part, around $3 million, was paid in 2021 due to technical problems caused by the pandemic.

The agency hasn’t specified which part of the unprocessed declarations had missed the 45-day delay, but many weren't received until 2022. In 2021, taxpayers waited as long as nine months for refunds.

An additional reason that led to the delays, is the extension of the application period introduced during the pandemic in 2020 and 2021. As the refund deadline was tied to the original Tax Day, the IRS has even less time to process a return before the deadline.

Additional staff recruiting had been planned in US President Joe Biden’s $1.75 trillion Build Back Better bill, which included $80 billion in spending for the IRS. It projected the recruitment of 89,000 additional IRS agents, which would result in 1.2 million additional audits each year.