The Internal Revenue Service is making progress on its backlog of unprocessed tax returns, as it’s asked by the American Institute of CPAs to extend its recently announced penalty relief through the end of the year.

The IRS reported Monday it has reduced the number of unprocessed individual returns received this year 2022 to 8.7 million, as of Aug. 19, and it’s now opening mail within normal timeframes. In addition, it has caught up on the backlog of millions of unprocessed paper tax returns from last year and said all paper and electronic individual returns received prior to January 2022 have been processed if the return had no errors or did not require further review.

National Taxpayer Advocate Erin Collins reported to Congress in June that as of the end of May, the IRS had a backlog of 21.3 million unprocessed paper tax returns, an increase of 1.3 million over the same time last year, but the IRS said at the time those figures were out of date.

According to mid-August figures reported this week by the IRS, the 8.7 million unprocessed individual returns received in calendar year 2022 include both tax year 2021 returns and late-filed tax year 2020 and prior returns.

“Of these, 1.7 million returns require error correction or other special handling, and 7 million are paper returns waiting to be reviewed and processed,” said the agency. “This work does not typically require us to correspond with taxpayers but does require special handling by an IRS employee so, in these instances, it is taking the IRS more than 21 days to issue any related refund and in some cases this work could take more than 120 days.”

The IRS’S long-standing goal has been to deliver tax refunds within 21 days, but the pandemic and staffing shortages have forced the agency to delay many tax refunds. Another problem has been amended tax returns, in part a result of the many changes in tax laws and regulations in recent years as the IRS and Congress granted various forms of tax relief because of the CARES Act, the American Rescue Plan and other legislation. As of Aug. 20, 2022, the IRS reported it had 1.9 million unprocessed Forms 1040-X with amended tax returns. “We are processing these returns in the order received and are working hard to get through the inventory,” said the IRS. “The current timeframe can be more than 20 weeks instead of up to 16.”

Most recently, the IRS granted tax penalty relief to taxpayers who were affected by the pandemic and had trouble filing their tax returns in 2020 and 2021. Last week, the IRS announced its providing penalty relief to most individual and business taxpayers who filed their 2019 or 2020 returns late due to the pandemic, while refunding $1.2 billion in penalties to nearly 1.6 million taxpayers who filed late. The relief applies to forms in both the Form 1040 and 1120 series, as well as others listed in Notice 2022-36. To qualify for the relief, any eligible income tax return has to be filed on or before Sept. 30, 2022. The relief is supposed to be automatic, and the IRS said it would automatically send out the refunds by the end of September to eligible taxpayers. The IRS is also offering penalty relief to banks, employers and other businesses required to file various information returns, such as those in the 1099 series. To qualify for relief, eligible 2019 returns must have been filed by Aug. 1, 2020, and eligible 2020 returns must have been filed by Aug. 1, 2021.

However, those dates come at an inconvenient time of year for many taxpayers and preparers, the AICPA noted in a letter Thursday to the IRS and the Treasury Department. While it applauded the unprecedented waiver of the failure to file penalty and also praised the IRS for waiving the various international information reporting penalties, the AICPA pointed to the upcoming deadlines and business cycle of the tax profession and asked for the deadline of Sept. 30, 2022, provided in the notice be extended to Dec. 31, 2022. Setting a Sept. 30 deadline during a time when tax professionals are working to meet the Sept. 15 deadline for pass-throughs, Sept. 30 for trusts and Oct. 15 for individuals and corporations would be unreasonable and would create an “insurmountable burden for most practitioners and taxpayers,” according to the AICPA.

The Institute also noted the complex facts relating to international information reporting penalties and that many affected taxpayers may live abroad and contended the Sept. 30 deadline is unrealistic and wouldn’t prompt a critical mass of affected taxpayers to avail themselves of the relief relating to international information reporting.

“Extending the deadline will assist the practitioner community in maximizing the relief provided and bring more taxpayers into voluntary compliance. In turn, such voluntary compliance will save the IRS resources,” said the letter.

The AICPA has been urging the IRS in multiple letters since July 2020 to provide penalty relief to taxpayers who have experienced unprecedented challenges due to the pandemic and added that it’s pleased the IRS has listened and provided some late filing relief. But it’s now urging the IRS to go further and extend the notice’s penalty relief until Dec. 31, 2022.