WASHINGTON — The Internal Revenue Service will begin the 2023 tax season bogged down in 10 million unprocessed tax returns from prior years and struggling to answer taxpayer phone calls, putting the embattled tax agency in a fraught position as Republicans try to gut its funding.
The tax collector’s struggles were outlined on Wednesday in the National Taxpayer Advocate’s annual report to Congress, which detailed how years of cuts to the I.R.S.’s budget has crippled its capacity to enforce the tax code and serve taxpayers.
The watchdog report offered optimism that the $80 billion in additional funding that was allocated from the so-called Inflation Reduction Act last year meant that improvements lay ahead.
“We have begun to see light at the end of the tunnel,” Erin M. Collins, the taxpayer advocate, wrote in the report. “I am just not sure how much further we need to travel before we see sunlight.”
Yet Republicans, who assumed control of the House, voted to rescind much of the $80 billion that Democrats approved last year. The proposal, which has little chance of being enacted, would add $114 billion to the deficit, according to the Congressional Budget Office.
That is just the beginning. House Republicans are expected to soon vote on the Fair Tax Act, which would abolish the I.R.S. entirely.
The Biden administration’s overhaul of the I.R.S. is central to its plan to narrow the $7 trillion tax gap — payments that individuals and businesses owe but that are expected to go uncollected over the next decade. Republicans have seized on plans to hire 87,000 new employees to conduct more audits and expand customer service and accused President Biden of creating a “shadow army” to target conservatives.
It remains highly uncertain how fast the planned agency overhaul will give the I.R.S. the tools to prioritize audits of wealthy taxpayers and big corporations over middle class taxpayers and small businesses that are unable to mount legal resistance. The agency is expected to deliver a plan to Treasury Secretary Janet L. Yellen by next month laying out the new initiatives and timelines for its modernization plan.
The taxpayer advocate report noted that as of mid-December, the I.R.S. had made substantial progress in reducing its backlog of unprocessed tax returns in the last year, when it was working through more than 20 million filings. Total unprocessed tax returns were down to about 10 million. However, refunds for taxpayers who did not file electronically were delayed by more than six months.
Telephone calls to the I.R.S. seeking customer service are still going largely unanswered. In 2022, only 13 percent of 173 million calls reached an I.R.S. representative. That was up from 11 percent in 2021, but average hold times increased to 29 minutes from 23 minutes.
The Treasury Department said that the troubles at the I.R.S. were the result of years of underfunding and that the lack of investment had led to a loss of talent at the agency. As a result, the I.R.S. audits nearly 80 percent fewer millionaires than it did 10 years ago. Treasury said that families that had questions about their refunds or tax credits were suffering through delays.
The I.R.S. has met its goal of hiring 5,000 additional customer service workers for the upcoming tax season using funds from the Inflation Reduction Act. However, the Treasury Department said that the report released on Wednesday underscored the need for resources.
“The National Taxpayer Advocate’s report reiterates the urgent need for resources provided by the Inflation Reduction Act to deliver the service taxpayers deserve this filing season and in years to come,” Ashley Schapitl, a Treasury Department spokeswoman said. “House Republican efforts to rescind these resources would preserve the status quo, and deny honest taxpayers timely assistance, refunds, and benefits.”
The report included several recommendations for improving the I.R.S., including upgrades to its website, clearer communication about processing delays and a streamlined hiring process to more efficiently bring on and train new staff.
The Biden administration said this week that it would veto any legislation that makes it easier for the wealthiest Americans or the largest corporations to evade taxes.
Mark W. Everson, who served as I.R.S. commissioner from 2003 to 2007, said that the political attention on the agency was unfortunate for taxpayers.
“The point here is that you need adequate services, you need a competent I.R.S.,” said Mr. Everson, who is now a vice chairman at the business consulting firm Alliantgroup.