The IRS struggles mightily to balance two goals: It desperately wants to encourage taxpayers to file their tax returns electronically rather than on paper. And it must protect filers against identify theft and other forms of fraud.
The problem: The agency’s security processes are preventing millions of people from filing electronically and are slowing refunds. And they threaten to once again bury the agency under more paper at a time when it still is trying to process 1.7 million tax returns from 2019.
What is going wrong? The IRS is rejecting legitimately e-filed returns because they are failing its security verification system. Full disclosure: This happened to me. But after I mentioned it to former National Taxpayer Advocate Nina Olson on the April 15 episode of TPC’s webcast The Prescription, I heard from other taxpayers who faced the same problem this year.
There appear to be two issues that, combined, are leading to these needlessly rejected e-filed returns.
The AGI mismatch
It starts with the agency’s security protocols that require tax year 2020 taxpayers to report their 2019 adjusted gross income (AGI) before they can successfully e-file. This number, the agency hopes, will help it verify that filers are who they say they are.
The IRS says taxpayers are supposed to use the AGI they reported on their 2019 return. If they didn’t file in 2019, they should enter 0. The IRS often recalculates AGI when it reviews returns, but filers still should use the AGI they reported on their original 2019 return.
But what happens if the IRS’s record for the e-filers’ 2019 AGI does not match what appears on the return the taxpayer filed? Nothing good.
The IRS will reject the 2020 e-filed return. And that can force filers to mail a paper return. Bad for taxpayers, especially if they are expecting a refund. And bad for the IRS, which really doesn’t need to process any more paper.
The cell phone glitch
That’s where the second problem comes in.
In theory, filers can find the source of the problem by double checking their 2019 AGI against IRS records. They can do that by getting a transcript of their 2019 Form 1040 through the IRS website IRS.gov. But this requires them to pass a multiple identity verification test.
These requirements are intended to stop identity theft. But they have challenged legitimate filers for years. Filers must provide personal information such as their Social Security number and birthdate, postal mail and email addresses, and certain financial data such as a credit card number. And, crucially, they must provide the IRS with their cell phone number.
It is unclear where the IRS gets the mobile numbers of taxpayers. But one person familiar with the IRS system says the cell phone matching system may fail as often as half the time. Overall, the National Taxpayer Advocate reported that in 2020, the IRS could authenticate the identities of only about four of every 10 taxpayers who tried to use IRS.gov. to access their information.
If the IRS does not have an accurate record of your cell number, the only way to get a transcript is to request one by postal mail. The IRS promises you’ll get your return within 5-10 days. But the agency is so far behind processing paper that seems improbable. One person told me she has been waiting a month for a paper transcript. If that is typical and you make a request today, you’ll miss this year’s May 17 filing deadline. And, yes, that means you’ll have to file a paper return (or request an extension).
3.4 million rejected e-filers
Out of about 100 million e-filed individual returns sent by April 9, the IRS says it has rejected about 3.4 million because of the AGI mismatch. I asked Turbo Tax, the largest seller of do-it-yourself tax filing software, how many of its customers had their e-filed returns rejected this year, but a spokesperson would not say.
We do know that, according to IRS data, overall e-filing is down this year. As of April 9, it received about 1.2 million fewer e-filed returns than last season. However, last year’s numbers may be skewed because of the large number of people who e-filed to get their economic impact (stimulus) payments.
We really won’t know how bad the problem of rejected e-filed returns will be for at least another month, after last-minute filers crash head-on into either the AGI problem or the cell phone problem, or both. But we already know the IRS’s well-intentioned but poorly executed system of authenticating taxpayer identities is needlessly sending filers to the post office, which is the last place anyone wants them to be.