As if businesses weren’t dealing with enough right now with high inflation, worker shortages, and clogged supply chains, the woes at the IRS are making it harder for them to get their tax refunds.
Delayed refunds hurt cash flow and make it harder for businesses to keep the doors open, pay employees and vendors, and invest in the future. It is critical that Republicans and Democrats in Washington focus on improving the IRS’s performance and meeting the needs of all taxpayers, including America’s small businesses.
It’s no secret that the IRS is struggling to process tax returns in a timely manner. According to its own data, at the end of 2021, the IRS still had more than 6 million unprocessed 2020 tax returns. Those are now two years behind schedule. In all, according to the Government Accountability Office, the IRS ended last year with about 10.5 million returns to process and about 16 million total outstanding returns.
Business returns are a large part of the backlog. According to the Taxpayer Advocate Service, more than 2 million employers’ quarterly tax returns (Forms 941 and 941-X) remained unprocessed. A good number of those small businesses are entitled to refunds from these returns because of programs created by Congress during the Trump administration to help small businesses weather the COVID pandemic.
As the TAS made clear to Congress, “Some taxpayers need the refunds to meet payroll or otherwise maintain operations.” Lots of these are small businesses that need access to as much liquidity as possible right now to remain solvent. For some small businesses, assistance delayed is effectively assistance denied.
It’s not just their cash back. Small business owners trying to navigate the dozens of tax changes made during the pandemic intended to help them survive while their businesses were closed or severely constrained need better service. Many of them are twisting in limbo waiting for replies from the IRS about how to handle problems that arose because of the flurry of changes to the tax laws at the outset of COVID.
Stephanie Sims, a small business owner based in Arizona, is still waiting on her 2020 refund. Her business, Finance-Ability, is among the 51.1% of America’s 32.5 million small businesses that are S-corporations, which file taxes on their business’s income by using IRS Form 1040. According to the TAS, only 3% to 11% of the 85 million callers seeking help with Form 1040 actually reached a representative. That is inexcusable.
The IRS isn’t fully to blame here — it has the daunting job of administering a Byzantine and ever-changing tax system created by Congress. For a number of years, Congress underfunded the agency. At the same time, with the resources provided, tax enforcement has often been prioritized over fixing these customer service problems.
The IRS has also failed to enter the digital age. It continues to process around 24 million paper tax returns and correspondence by hand, literally moving paper around on carts. Many of the computer and data systems the IRS does have can’t communicate with each other.
Businesses, especially small ones, have been pummeled the last few years by COVID and its fallout. At this time especially, the government should not pile on extra burdens that make it harder for these vital engines of growth and job creation to operate. The IRS needs to get its act together and get outstanding returns processed and money back to those entitled to refunds.
Congress should be paying close attention to the IRS’s progress because the public will hold them accountable too if the agency continues to come up short of fulfilling its basic functions and the economy, job creation, and wage growth suffer as a result.
Curtis Dubay is senior economist for the U.S. Chamber of Commerce, where Tom Sullivan is vice president of small business policy.
