The IRS is wildly understaffed, and it could make for a hellish tax season

• The IRS has seen its budget and staffing shrink drastically over the past decade.
• That underfunding, combined with pandemic-era responsibilities, has led to a massive backlog.

Right now, the IRS is sitting on a mountain of paperwork.

That mound contains 6 million unprocessed returns as of mid-December — with some taxpayers still awaiting refunds after nine months, according to Erin Collins, the national taxpayer advocate.

"Paper is the IRS's Kryptonite, and the agency is still buried in it," Collins, the agency's top watchdog, said in a press release. All told, the IRS had 5 million pieces of correspondence backlogged as of mid-December, the release added.

It's a sign of the filing season to come, which Collins said she was "deeply concerned" about. While not everyone will see delays in receiving their refunds — the IRS has said online filers should get their refunds in under three weeks — the situation could prove dicey for filers with more complex taxes or who have to submit amended returns.

It's the result of decades of underfunding, according to experts, and its effects could be felt most strongly by the poorest Americans.

IRS underfunding could cause big problems for taxpayers

The IRS is grappling with the legacy of a decade of GOP-led budget cuts increasingly straining its workforce. Those problems are compounded by the swelling amount of responsibility that's been handed to the IRS during the pandemic.

"After adjusting for inflation, since 2010, the IRS's budget has been cut by 23%," Janet Holtzblatt, a senior fellow at the Tax Policy Center, told Insider. From 2010 to 2019, the number of full-time-equivalent staff fell by nearly 20%.

Holtzblatt said three factors were contributing to the "unusual step" the IRS took in being up front about this year's difficulties: deep budget cuts, the influence of the pandemic on the workforce, and additional responsibilities — like distributing stimulus checks and the now lapsed expanded child tax credit — that Congress gave the agency.

"You have in the IRS a faltering infrastructure, you've lost a good chunk of experienced staff, and you also have a technology that has become increasingly obsolete over time," Holtzblatt said.

That's caused a cascade of problems for taxpayers, some of whom are still struggling to get their refunds months or even years later.

"The burden's shifted to the taxpayers to track down their own refunds or reach out to their practitioners to get representatives to help them," Elyse Katz, a public accountant in Arizona, told Insider. "Just trying to even get through to the IRS is what's causing the biggest bottleneck."

Treasury officials said earlier this month that the IRS had been swamped with calls but it didn't have the capacity to answer all them. During the first six months of 2021, the agency had under 15,000 people to manage the over 240 million calls it got. That amounts to one person for every 16,000 calls the IRS received. An IRS spokesperson pointed Insider to its statement on providing assistance to taxpayers while being underfunded.

Before, "clients were able to easily call the IRS and get that resolved themselves," Katz said — but that's no longer the case.

Lawmakers on both sides of the aisle are growing increasingly concerned about the backlog. In a new letter signed by 216 Republicans and Democrats in both chambers, they urged the IRS to halt any penalties for people snarled up in the backlog.

Refunds, which could face delays, are an important source of cash for many families

In "normal" years — aka pre-pandemic years — tax refunds are a huge cash-flow event for families, according to Fiona Greig, a copresident of the JPMorgan Chase Institute.

"Prior to the pandemic, for 40% of families, this is the single largest cash infusion of the year," Greig told Insider. "It's the moment when their cash balances are at the high watermark for the year."

For low-income families, getting refunds tends to be an "expenditure story," Greig said. That includes spending on basic necessities.

Of course, the pandemic and the current economy have changed things a bit. Families have more cash on hand because of things like stimulus checks, enhanced unemployment, and spending cuts because of the pandemic. There are changes to the tax-credit structure, like the advance child tax credit, where half of the credit has already been distributed in monthly checks for many families.

There's also some potential for confusion this tax season. Americans who received unemployment insurance (UI) in 2020 weren't taxed on the first $10,200 they collected. But that's not the case this year. About 25 million people received UI benefits in 2021 and will be subject to income taxes, according to Andrew Stettner, a senior fellow and jobless-policy expert at the left-leaning Century Foundation.

Since some federal programs may not have given people an option to withhold taxes, that tax bill could come as a surprise.

"I think it's going to take the wind out of sails of people during tax time," Stettner said. Many UI recipients may have hoped for tax time to be a positive experience, with a cash boost from a refund. Instead, "it will become another significant expense that they'll have to figure out from their budget," Stettner added.

In pre-pandemic times, spending on healthcare services increased by 60% in the week after families got their refunds. That was even more true for lower-income families, according to Greig — and they were putting money toward deferred healthcare spending, which includes in-person healthcare.

"Why does that matter?" Greig said. "It matters because health problems don't age well, and the longer one defers getting the teeth cleaned or the checkup or the cancer screening or whatever it is, preventative or treatment services, it can have real health consequences."

Have you been waiting on a refund for months? Are you dealing with any surprises this tax season? Contact these reporters at jkaplan@insider.com and jzeballos@insider.com.