Tax Refund

Preliminary IRS data on the 2023 tax filing season illustrates that the agency has recovered from pandemic disruptions, with a calmer tax season thanks to improved telephone service and reduced backlogs in return processing and correspondence.

But the data show things aren’t entirely back to normal. Typically, the volume of total returns filed with the IRS grows by an average of 1 percent annually. Through April 28, the number of returns filed declined by 1.9 percent, largely due to the expiration of COVID-related tax breaks and a spate of natural disasters.

Taxpayers in 10 states affected by bad weather or wildfires—including between 16 million and 19 million in California alone—were granted extended filing deadlines. Many of them will join the roughly 19 million filers who usually request extensions until October, potentially swelling the number of late returns.

The other factor behind the decline in returns filed is that, without the new or enhanced tax credits available in 2020 and 2021, lower-income households have less reason to file. Many of the millions of taxpayers who filed simple returns for 2021-2022 to receive COVID-related economic aid but who otherwise had no filing obligation, returned to the sidelines this year. For other low-income filers, the cost to file may have eclipsed any refund they could expect.

Typically, over 75 percent of taxpayers receive a refund. This year, the percentage sank to 67 percent. Refund amounts fell 8 percent from $3,019 in 2022 to an average of $2,777, as six credits phased down or out and the $300 per person non-itemized charitable deduction expired.

Other takeaways from the filing season through April:

  • Customer Service Improves: Bolstered by the addition of 5,000 staff members, the IRS improved the volume and speed of answering queries and processing tax returns. The Treasury Department’s report card shows phone call wait times fell from 27 minutes in 2022 to 4 minutes; 87 percent of callers were able to access live assistance, compared to 15 percent in 2022. Other upgrades include more in-person help, the ability to respond to more notices online, scanning 80 times more returns than in 2022, and reducing the backlog of error-free 2022 individual tax returns.   
  • e-Filing Increases: The Taxpayer Advocate has described paper as the IRS’s Kryptonite. The number of e-filed individual returns grew to 96 percent as of April 28, but over 6 million returns were still filed on paper, and nearly 10 million paper returns were filed in all of 2022. Many paper returns, especially from business filers, are prepared with tax software, suggesting ripe targets for conversion to e-filing. The cost to process a paper-filed Form 1040 in 2020 was $15, 42 times more than the cost to process an e-filed return.
  • Assisted Filing Gains Share: Despite a slow multiyear slide in the share of returns filed by tax professionals (down from 62 percent in 2013 to 54 percent so far this year), the number of self-prepared (DIY) returns fell 2.2 percent from the same time in 2022, while assisted-return totals stayed flat. Reasons for the shift are unclear.
  • Half of DIY Returns Are Free: The IRS Free File program facilitated the filing of 2.7 million returns, compared to 3.3 million in 2022, while Tax Counseling for the Elderly (TCE) and Volunteer Income Tax Preparation (VITA) filed 2.5 million, up slightly from last year. Commercial return preparers say they added 27 million free returns. If so, 48 percent of DIY filers and 23 percent of all filers filed a free federal return, most outside the IRS’s Free File and VITA/TCE channels. Observers had wondered whether the withdrawal of H&R Block and Intuit from the Free File program would cause its collapse. It hasn’t. The current free-file program expires in October 2025.
  • State Tax Credits Grow: More states are piggybacking on federal tax credits. At least two dozen states are considering expanding their child or earned income tax credits. Thirty-one states, the District of Columbia, Guam, Puerto Rico, and some municipalities now have EITCs, and 13 states have child credits, 10 of them enacted since 2021.
  • IRS Direct File Pilot. On May 16, the IRS announced that Treasury had directed it to pilot a government-run tax filing portal with tax preparation software in 2024. The decision followed a feasibility study mandated by the Inflation Reduction Act. Advocates of an IRS-run program point to public interest and the fees and faults of commercial tax software developers, including Free File firms’ missteps. To succeed, the IRS will have to sustain its funding in the face of budget cuts and caps, as well as overcoming private industry’s head start and other advantages.

All in all, it was a smooth filing season with some noteworthy shifts in numbers and trends as the tax filing landscape continues to evolve, sometimes in surprising ways.

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