(CBS New York) — The Internal Revenue Service (IRS) has had a busy year. A June 30 report from National Taxpayer Advocate Erin Collins says the agency has completed 136 million tax returns, distributed two more rounds of stimulus checks, revised rules for unemployment insurance, and prepared for the launch of advance Child Tax Credit payments (which have since started). The IRS accomplished all of this during what is hopefully the last part of a pandemic, which followed a decade of staffing and funding cuts. But their efforts to weather what Collins described as a “perfect storm” fell a little short. The report pointed out that over 35 million tax returns (roughly two-thirds of which are refunds) remained unprocessed or in some stage of processing. The agency has certainly decreased that number in the last month. But millions of tax refunds are still pending.

“The IRS and its employees deserve tremendous credit for what they have accomplished under very difficult circumstances, but there is always room for improvement.” Collins wrote in her report.

“This year, the IRS is dealing with an unprecedented number of returns requiring manual review, slowing the issuance of refunds,” Collins continued. “These processing backlogs matter greatly because most taxpayers overpay their tax during the year by way of wage withholding or estimated tax payments and are entitled to receive refunds when they file their returns. Moreover, the government uses the tax system to distribute other financial benefits.”

The 35 million pending returns at the time of the report account for 20 percent of the total returns submitted. And with the May 17 federal tax deadline well in the past are the time of the report, the IRS was well beyond its goal of processing returns in 21 days. A variety of reasons account for the ongoing delay.

Starting From Behind

Many of the factors that contribute to the backlog are largely beyond the IRS’s control. The agency came into the most recent tax season with millions of pending tax returns from 2019 and before. As with most office workers, many IRS employees had to do their jobs from home for much of the pandemic. Paper returns, which sat in trailers awaiting processing, were inaccessible. Only when workers returned to the office could they tackle these.

Pandemic-related changes to the tax code were also passed just weeks before tax season. The Consolidated Appropriations Act, 2021, which included the $900 billion second stimulus package, contains a “lookback rule.” That lets filers who qualify for the Earned Income Tax Credit (EITC) or the Additional Child Tax Credit (ACTC) use their 2019 income to figure out the right amount on their 2020 return. The IRS didn’t have enough time to change forms and adjust computer systems. As a result, millions of forms have to be processed manually through their Error Resolution System.

Discrepancies with the Rebate Recovery Credit were also set aside for manual processing. This is the credit people can claim if they received less than they were eligible for in their first or second stimulus check. At one point, the Treasury Inspector General for Tax Administration reported that about one-third of those who had claimed the Rebate Recovery Credit had their forms flagged for review.

More Reasons For The Backlog

Since the start of 2021, the IRS has issued the second and third economic impact payments, better known as stimulus checks. The second, for up to $600, started going out at the end of December 2020, as part of the Coronavirus Response and Relief Supplemental Appropriations Act. The third, for up to $1,400, started going out in the middle of March, as part of the American Rescue Plan Act. The IRS began accepting tax returns on February 12. So the latest check was processed during tax season, its busiest time of the year.

Another key component of the American Rescue Plan is the updated Child Tax Credit. Starting July 15, the IRS is paying $3,600 per child to parents of children up to age five. Half is coming as six monthly payments, and half as a 2021 tax credit. That comes out to $300 per month and another $1,800 at tax time. The total amount changes to $3,000 per child for parents of six to 17 year olds, or $250 per month and $1,500 at tax time. The IRS also stood up this new program of monthly Child Tax Credit payments during tax season. While the agency has now sent out three stimulus checks, it has no experience sending out millions of periodic payments. Resources dedicated to setting up this program are resources not dedicated to its core mission, which is to “provide America’s taxpayers top quality service by helping them understand and meet their tax responsibilities and enforce the law with integrity and fairness to all.”

Poor Service

Americans have not received that “top quality service” this year. The lesser level of service started online and extended to in-person interactions over the telephone.

With delays across the country, people looked to the IRS’s Where’s My Refund tool to find information on their pending refunds. (For the 2021 filing season, the IRS processed 96 million refunds worth a total of $270 billion.) The tool can tell a taxpayer that their filing was received, approved, or sent. It does not provide any specifics about what’s holding up the refund, what additional information might be needed for processing, or when it might be issued. That lack of transparency inevitably pushes people to call on the telephone.

Taxpayers seeking information and guidance turned to the agency’s toll-free phone lines. And the number of people inquiring was staggering. The IRS received 167 million calls during the 2021 tax season, almost quadruple the number it received during the 2018 tax season. At peak times,1,500 calls came in per second. Unsurprisingly, the level of service dropped dramatically. Only nine percent of callers seeking tax help reached someone who could provide it. Calls to the 1040 support line specifically reached a live person only three percent of the time

Overworked And Underfunded

Collins’s report also cites limited resources and technology issues as reasons for delays in processing tax returns. The agency operated under many of the same limitations that have affected office workers the world over during the pandemic. That included remote work, which can lower efficiency. The IRS is also understaffed and underfunded. Congress has continually reduced the agency’s budget over the last decade, with funding and total employment both down by about 20 percent.

An IRS watchdog informed Congress that budget cuts limit the agency’s ability to keep up with technology and collect taxes. The agency has long relied on an old programming language called COBOL. That isn’t necessarily a problem, unless the code isn’t kept up to date. And the IRS hasn’t kept it up to date. So when stimulus checks or changes to the tax code come along, the agency has to find and pay programmers to fix things. The IRS initiated a modernization effort in 2019, but it relied on future funding. That funding hasn’t materialized yet. As a possible  example of the effects, “42 percent of the printers and copiers of IRS Submission Processing functions were unusable or broken,” as per the report. President Biden is also looking to increase the agency’s funding by $80 billion over the next decade. The budget would grow at a rate of 10 percent per year, and the workforce at a rate of 15 percent per year.

Beginning the tax season at a disadvantage contributed to the 35 million-return backlog. Tasking the IRS with stimulus checks and the updated Child Tax Credit at the same time drew resources away from processing tax returns. And a history of understaffing and underfunding set them up for failure. All of this put a strain on Americans who were counting on timely refunds. That strain continues.

“The IRS’s historically high number of returns requiring manual review means that most individual taxpayers in this group and many business taxpayers will not receive timely refunds and will have to wait until the IRS eventually processes their returns,” wrote Collins. “For taxpayers who can afford to wait, the best advice is to be patient and give the IRS time to work through its processing backlog. But particularly for low-income taxpayers and small businesses operating on the margin, refund delays can impose significant financial hardships.”

First published Friday, July 2, 2021 at 3:39 p.m. ET.