Headaches and Backlogs Loom as Tax Filing Season Nears Again

Even so, the agency is still contending with piles of work from the messy 2020 tax year while facing new challenges, including the prospect of retroactive legislation and pandemic-era tax-law changes that will require extra attention from taxpayers.

“The IRS is going to start the filing season in a hole,” said Erin Collins, the national taxpayer advocate, who leads an independent group within the IRS.

In late December, the IRS said it was on schedule opening its mail and that it has processed returns it received before April 2021 that didn’t require special attention or contained errors.

But that means the agency, which struggled with flat budgets before the pandemic, still had 6.3 million unprocessed individual returns and 2.3 million amended tax returns to process as of Dec. 18. Those amended returns can take the IRS more than 20 weeks rather than the usual 16 weeks, the agency said. It has cut its tally of returns requiring special handling to 42,000 from 9.8 million in May.

Anything that requires human eyes or hands at the IRS—paper returns, telephone calls and correcting errors made on returns—still could be subject to significant delays.

“I don’t even call them any more,” said Richard Pon, a San Francisco accountant, who says it is better to mail letters and wait several months for a reply, rather than charge clients while he waits hours on hold to speak with an IRS employee.

As tax season starts, breaks created by Congress to help people cope with the pandemic’s disruptions will cause extra work. The advanced payments of the child tax credit received during 2021 must be reflected on tax returns, and people who were eligible for March’s $1,400 economic stimulus payment but didn’t receive it can claim it on their returns.

The IRS will send notices to taxpayers in late January, showing the government’s records of how much people received in stimulus and child-credit payments in 2021. Mismatches between those numbers and what is listed on tax returns can lead to processing delays as the IRS addresses discrepancies or errors. This process could be particularly challenging for households that added children or had significant income changes, said Kathy Pickering, chief tax officer at H&R Block Inc.’s Tax Institute.

“Accuracy has a value now,” said Mark Steber, chief tax information officer at Jackson Hewitt Tax Service Inc., which prepares about 2 million returns annually. “You’ll get your money. There’s no doubt of that. But it may take a few extra weeks or months.”

Filing electronically, using direct deposit and making sure child-credit and stimulus numbers match the IRS notices will help taxpayers avoid slowdowns, Ms. Collins said.

Employees at IRS paper processing centers are still working under pandemic restrictions, making electronic filing more important, said Douglas O’Donnell, the agency’s deputy commissioner for services and enforcement.

“The pandemic has created unique challenges for the IRS,” he said. “IRS employees continue working hard to prepare for the upcoming tax season as well as addressing outstanding tax returns.”

The IRS should take some of its new employees—even higher-skilled auditors—and redirect them to address choke points in tax filing, said Nina Olson, Ms. Collins’s predecessor, who retired in 2019.

“What they need is to serve the majority of the taxpayers who are trying to comply,” she said.

Ms. Collins said she is urging the IRS to provide more regular updates on its processing progress, so taxpayers who filed during a given week can know if the IRS has started on that batch of returns instead of calling.

And Congress may still change 2021 tax law retroactively. The Democrats’ stalled $2 trillion education, health and climate-change bill would increase the $10,000 cap on the state and local tax deduction to $80,000, starting with the 2021 tax returns that people are about to file.

The IRS hasn’t announced when it will begin accepting 2021 tax returns. Because of local holidays, the deadline for most people will be April 18 and April 19 in Maine and Massachusetts. The IRS delayed the deadline in 2020 to July 15 and in 2021 to May 17.

With changes to deadlines and laws, what once felt like a season now feels year-round and exhausting, said Henry Grzes, lead manager for tax practice and ethics at the AICPA, an accountants’ organization.

“We have to recognize that we’re in a world of unknowns on so many different levels,” he said. “You just have to roll with what you know and go forward on that basis.”

Tax preparers generally advise people to file as early as they can. Because most people get refunds, filing earlier lets them get money sooner. Filing a legitimate return can also help prevent an identity thief from filing first using the taxpayer’s information.

“If you get information to your tax preparer earlier in the year, they have more time to think about it and help you,” Mr. Pon said.

The potential expanded tax break for state and local taxes could give some people a reason to wait to file their returns.

Normally, Congress is reluctant to change a prior year’s tax law after tax filing has already started, given the administrative burden on taxpayers and the IRS. But in March 2021, Congress retroactively lowered income taxes on unemployment benefits received in 2020, and the IRS issued nearly 12 million refunds to people who had already filed and paid taxes on that income. The agency expects that work to continue into 2022.

The same thing could happen soon with the state and local tax deduction, where the IRS may start accepting 2021 returns before Congress makes a final decision on what the 2021 tax code is.

“On one hand, I think it’s great that Congress is trying to help many taxpayers,” Ms. Collins said. “The implementation of it is very painful.”

Write to Richard Rubin at richard.rubin@wsj.com