Small business owners and the IRS backlog: How delays might affect your business

Even as the government takes steps to mitigate the backlog and alleviate delays, millions of Americans will still be left waiting. Luckily, small business owners can avoid these delays in the future by relying on methods that can expedite processing times.

It’s no secret the Internal Revenue Service began the 2022 filing season on its heels. Just weeks before the deadline to file 2021 tax returns, the agency still had tens of millions of 2020 returns for individual taxpayers and businesses waiting to be processed. The backlog was created by significant budget cuts, understaffing, and pandemic-related closures and complications.

More than two million employer tax returns from the previous filing season delayed Employee Retention Credit funds. The ERC was supposed to serve as a tax relief so businesses could keep their employees amidst the economic uncertainties. Still, with the delay, small business owners who had hired employees are forced to take extra money out of pocket, which could significantly affect their business. 

Without much hope for relief, unprocessed returns only continued to pile up, and the numbers showed little progress. In fact, in May of 2021, 20 million returns awaited processing. By May 31st of 2021, 21.3 million unprocessed paper returns had taken their place. 

Fortunately, small business owners can avoid this backlog and make preparations to streamline their next tax season. While the Inflation Reduction Act may eventually help move the mountain of paper returns and optimize processes through additional IRS funding, this will not give immediate relief. With that said, small business owners can still avoid delays by being proactive ahead of the next filing season.

Early optimism and a challenging reality

In a testimony before the House Ways and Means Committee back in March 2022, Commissioner Charles Rettig stated that he expected the backlog to “absolutely resolve before December.” By all accounts, Rettig felt confident that the IRS would be healthy by the end of 2022 and would enter the 2023 filing season with average return inventories.

This optimism was based on a plan to hire 10,000 additional workers to process the waiting returns. Still, Ken Corbin, the agency’s chief taxpayer experience officer, reported that hiring hadn’t been completed in May. 

By June, the IRS was still facing difficult numbers. Though the agency had completed about 4.5 million of the more than 4.7 million individual paper returns from 2021, more than 21 million pending returns remained. This has led to refund delays exceeding six months, with some taxpayers waiting ten months or more. 

A plan of action

In August, Congress passed the Inflation Reduction Act, which allocated funding for the IRS. The agency will receive $80 billion over the next ten years, with $3.2 billion for taxpayer services and $4.8 billion for technical upgrades. This is excellent news for an agency struggling under the weight of a significant backlog and facing further obstacles due to understaffing. 

However, in a press release, Commissioner Charles Rettig attempted to put this influx of funding into context. He spoke highly of the opportunity the funding would provide to his agency but quickly called attention to the time required to make any change. Improvements, upgrades, and innovations would not be possible overnight.

In the end, while the funding is a much-needed liferaft for the struggling IRS, it may not provide much immediate relief against the recent typhoon of unprocessed returns. While the pile has decreased to 8.7 million unprocessed returns as of mid-August, it’s unclear if the agency will be able to start the 2023 filing season without a backlog. 

There is a lot of speculation about how the IRS can and should handle the backlog and the new funding. Such advice includes reassigning employees to prioritize clearing the backlog, streamlining phone technology, and optimizing processes frequently used by taxpayers and tax professionals. 

Erin Collins of the National Taxpayer Advocate outlined many urgent priorities for the IRS. These objectives, much like the directive from Treasury Secretary Janet Yellen, could urge the creation of a roadmap for the agency.

The best way to dodge delays

The bottom line is that small business owners need to be proactive. Waiting for the IRS to clear the backlog and create a seamless process without flaws could mean waiting a very long time. 

It’s also important to remember that the returns that are currently bogged down are largely paper returns. If small business owners can file electronically, then this is the way to go. However, filing online doesn’t completely eliminate the possibility of delays. Tax returns that the system flags with potential errors or marked as needing hand reviews could require more processing time. 

E-filing reduces the chances of a delay significantly, especially in a system that’s currently bogged down with paper filings. However, e-filing isn’t always possible. Entrepreneurs and business owners who need to file a paper return should file early and brace for delays. 

An early and accurate return can reduce the chances of a delay, but if a backlog still exists at the beginning of the 2023 filing season, a timely process might not be possible.

What small business owners should do moving forward

The best thing any small business owner can do is take charge of their taxes and make plans for the next tax season. It’s easy to procrastinate on business taxes, but starting early and sticking to a routine can help make a daunting task seem more manageable. 

Since taxes are a year-round endeavor for small businesses, with quarterly estimated payments, annual business applications, and yearly tax filings, being proactive is critical 

Accurate accounting also benefits small business owners by keeping more money in their own accounts and less tied up waiting for an IRS refund. Budgeting and planning for tax payments mean fewer surprise bills, allowing businesses to file earlier and hopefully avoid potential delays.

Even without the backlog at the IRS, taxes can be cumbersome. Tasks like payments, filings, and other applications can pile up and become overwhelming. Creating a plan early to manage deadlines and maintain a budget can make taxes more straightforward, even in uncertain times.