In her first report to Congress, National Taxpayer Advocate Erin Collins identified taxpayer challenges related to the COVID-19 pandemic, the Coronavirus Aid, Relief, and Economic Security (CARES) Act, P.L. 116-136, and the IRS's implementation of the Taxpayer First Act, P.L. 116-25.
Collins was sworn in on March 30, 2020, as the third national taxpayer advocate, in the midst of the COVID-19 pandemic. Prior to her appointment, she was managing director of KPMG's tax controversy practice for the Western region for 20 years, and before that she was an attorney in the IRS Office of Chief Counsel, where she worked for nearly 15 years.
The national taxpayer advocate's report released at mid-calendar year usually identifies the most serious problems encountered by taxpayers and typically assesses the recently completed filing season. Naturally, this year's midyear report focused on the effect of the COVID-19 pandemic, the impact it had on IRS service levels, and the impact the reduced services had on taxpayers. (See the National Taxpayer Advocate Objectives Report to Congress: Fiscal Year 2021, available at taxpayeradvocate.irs.gov.)Effect of COVID-19 on IRS operations mid-March to June 30, 2020
The report praises the IRS for acting quickly during the pandemic to postpone filing and other time-sensitive deadlines and to provide broad relief from compliance actions under its People First Initiative. The report also notes the IRS was given the task of disbursing economic impact payments during the pandemic, and despite the IRS's constraints, the Service did an impressive job. The payments authorized by the CARES Act were sent directly to most taxpayers to help defray the financial hardships created by the pandemic.
Taxpayers who filed a 2019 paper return with a refund due may be in for a long wait. The IRS had to suspend the processing of paper tax returns and, as of May 16, estimated it had a backlog of 4.7 million paper returns (id., p. 3). Although the IRS is reopening some of its core operations, it is not clear when it can fully reopen and log all the returns sitting in mail facilities.
Some taxpayers whose returns were mistakenly flagged by IRS processing filters are experiencing lengthy delays in receiving their refunds. Refund delays can have a significant financial impact on low-income taxpayers, as those refunds often constitute a significant percentage of their annual household income.
The report says that despite the IRS's efforts, taxpayers still faced significant challenges. Many taxpayers experienced a sudden change in their financial status and either desperately needed their tax refund to pay bills or suddenly could not pay their tax liabilities. At the same time, taxpayers could not contact the IRS in person or by phone for months, and their mailed correspondence and paper-filed returns sat unopened and unprocessed or were even returned in some instances. In addition, the IRS could not mail notices to taxpayers for months. When it resumed notice production, some backlogged notices included outdated information, requiring the IRS to include informational inserts in the envelopes (id., p. 10).
The report notes that the IRS must plan for the next significant emergency to avoid some of the challenges it faced during COVID-19. The IRS's arcane computer systems and infrastructure could not handle tax administration remotely, and it has not established across-the-board electronic communication procedures between the taxpayer and the IRS. Additionally, the report recommends that the IRS improve its infrastructure, hardware, and software to continue its mission-critical operations if another situation arises, so that taxpayers do not have to put their lives on hold while the IRS recovers from the effects of such a crisis (id., p. 11).
The report notes that between March 27, 2020, and Dec. 31, 2020, the IRS is accepting scanned or photographed images of signatures and digital signatures on certain documents related to tax assessment and collection. The report says:
[T]he IRS temporarily created an exception to its communication procedures. The National Taxpayer Advocate strongly recommends the IRS prioritize, evaluate, and determine the feasibility of extending the practice beyond 2020, and consider utilizing electronic communication procedures and exchange of digital documents after COVID-19 for all functions within the IRS. [id., pp. 27-28]
The report further recommends the IRS consider implementing additional procedures and increase the use of electronic exchange of documents and correspondence with taxpayers, institute the necessary improvements to its telephone systems allowing assistors to handle calls remotely, and continue to upgrade its computer systems to work in a secure remote environment (id., p. 11).Looking forward
The report makes the following recommendations for the IRS to be prepared for any future national emergency:
- Improve hardware and software to allow IRS employees to work and interact digitally between offices or remote locations;
- Prioritize the modernization of its technology and increase the use of digital communications and the electronic production of documents in a secure environment;
- Continue to provide taxpayer services on multiple channels but be prepared to continue operations if one or more service channels become inoperable; and
- Analyze all core functions to determine how to improve technology to make the duties more portable (id., p. 44).
The report notes the IRS Office of Chief Counsel acted quickly to issue guidance as the pandemic unfolded. The Families First Coronavirus Response Act, P.L. 116-127, enacted on March 18, 2020, and the CARES Act enacted on March 27, 2020, created many guidance projects requiring immediate attention. Much of this guidance was released as frequently asked questions (FAQs). The report acknowledges that FAQs do not rise to the level of "published guidance" and cannot be relied on by taxpayers to establish substantial authority for avoiding penalties. The Taxpayer Advocate Service (TAS) recommends that the IRS publicly state that it will follow the FAQs issued during the pandemic and also that the IRS publish a statement in the Federal Register that says:
- The IRS must number and provide effective dates for all FAQs, and the IRS will be prohibited from deleting previously issued guidance from its website, even if it has changed its position (instead indicating when an FAQ is obsolete, if applicable); and
- For penalty relief purposes, taxpayers can rely on an FAQ as authority for returns filed before an FAQ is made obsolete (id., p. 36).
The report notes that this will add permanence and prevent the IRS from changing an FAQ without leaving any evidence. For example, if the IRS issues an FAQ 10, it should provide the effective date of the FAQ and, if the IRS changes its position, add a new FAQ 10.1 with the new position and the new effective date. The report also recommends the IRS move obsolete FAQs to a taxpayer-accessible archive that can be used for historical purposes but would not be presented in a way that might confuse taxpayers as to which rule is applicable (id., p. 36).Implementation of the CARES Act
Economic impact payments
While the IRS issued approximately 160 million economic impact payments by early June, many individuals did not receive the full payment to which they are entitled or did not receive a payment at all, for various reasons. The IRS's position is that most of these individuals need to wait until they file their 2020 tax returns to claim the economic impact payment as a credit. The report recommends the IRS develop a solution to allow individuals to receive their full economic impact payment in 2020 rather than having to wait until 2021 when they file their 2020 income tax returns (id., p. 3).
The report also notes that the CARES Act does not specifically address whether a deceased taxpayer (e.g., someone who died in early 2020) is entitled to an economic impact payment or whether an individual who was incarcerated at the beginning of 2020 but subsequently released in the midst of the pandemic is entitled to an economic impact payment. The report notes that, during the last recession, stimulus payments sent to deceased taxpayers did not have to be returned and recommends that the IRS should not spend its resources pursuing enforcement against a decedent's estate or a family member. The TAS also recommends more specific guidance regarding a released prisoner's eligibility for an economic impact payment (id., pp. 56-57).
On May 19, 2020, the IRS began issuing debit cards preloaded with COVID-19 economic impact payments. The objective of issuing prepaid debit cards was to get the economic impact payments to taxpayers more quickly. Unfortunately, the IRS's outreach efforts to inform individuals that some economic impact payments would be issued as prepaid debit cards did not reach everyone, and some recipients destroyed or disposed of the cards fearing it was a scam. The report recommends that the IRS develop a more comprehensive outreach plan to educate and inform vulnerable individuals or those who have limited English proficiency that they may receive debit cards and how to activate and use them (id., pp. 51-52).
Employee retention credit
The employee retention credit is a complex refundable tax credit for employers. Some of the complexities include having to determine when a trade or business was fully or partially suspended by government order, an employer's number of full-time employees, what are qualified wages, if a business's post COVID-19 operations are comparable to its pre-COVID-19 operations, and the application of aggregation rules (id., pp. 59—60). The report advocates for the IRS to be as clear and transparent as possible regarding how and when employers should claim the employee retention credit (id., p. 46).Review of 2020 filing season
The midyear report typically includes an assessment of the filing season. Because of the postponed filing deadlines and the IRS's closure of most resources available to taxpayers, any assessment of the 2020 filing season would be incomplete. The report says the TAS plans to provide a more thorough analysis of the 2020 filing season in the future.
David Taylor, CPA, is a tax partner with BDO USA in Denver. For more information about this column, contact email@example.com.