Erin M. Collins, the nation’s new National Taxpayer Advocate, has issued her first report to Congress, which details the series of challenges—some met, some unmet—faced by the IRS this year. The challenges ranged from the COVID-19 pandemic and the subsequent aid and relief programs, to implementation of the Taxpayer First Act.
Collins prefaced the report with an admission that her tenure got off to a rocky start.
"On March 30, 2020, I had the honor and privilege of being sworn in as the third National Taxpayer Advocate," Collins wrote. "Starting in the midst of a pandemic and witnessing IRS offices closing one by one was not the way I envisioned my role when I accepted the position, . . . but there also has been a silver lining in this experience: As I have participated in conference calls with members of my leadership team, TAS employees, and the IRS's COVID-19 response team, I have been extraordinarily impressed by their commitment and focus on the health and safety of all employees during this pandemic, while still doing as much as possible to assist taxpayers.”
Collins also praised her predecessor, Nina Olson, who served from 2001-2019, and the very first National Taxpayer Advocate, Val Oveson, who served from 1998-2000. "Over the past 20 years, TAS has successfully assisted more than 4.5 million taxpayers by helping them resolve their tax problems and protecting their rights, and it has made hundreds of administrative recommendations adopted by the IRS and some 45 legislative recommendations enacted by Congress," Collins wrote.
The Taxpayer Advocate says 2020 is a year fraught with challenges.
In the report, Collins praises the IRS for quick action during the developing COVID-19 pandemic, postponing more than 300 filing, payment, and other time-sensitive deadlines. The IRS also provided relief from compliance actions under its “People First Initiative” and distributed some 160 million Economic Impact payments (EIPs). Collins says these are balanced against some areas where the IRS didn’t so so well:
- Taxpayers who filed a 2019 paper return and are entitled to refunds may be in for a long wait. The IRS had to suspend the processing of paper tax returns, and as of May 16, it estimated it had a backlog of 4.7 million paper returns. Although the IRS is reopening some of its core operations, it is not clear when it can open and process 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. All tax returns claiming refunds are passed through filters designed to detect identity theft and other types of refund fraud. As TAS has documented, some of these filters produce "false positive rates" of more than 50 percent (meaning that more than half the taxpayers whose returns are stopped by certain filters are entitled to the refunds they claimed). Affected taxpayers are often asked to mail in documentation to substantiate their claims, but the IRS has not opened or processed many of their responses, delaying their refunds.
- Taxpayers who have needed help from the IRS have had difficulty obtaining it. The IRS shut down its Accounts Management telephone lines, so taxpayers could not reach a live assistor by telephone. The IRS shut down its Taxpayer Assistance Centers, making it impossible for taxpayers to obtain in-person assistance. The IRS also shut down its mail facilities, so it was unable to log or process taxpayer responses to compliance notices.
- IRS systems prepared over 20 million notices during the pandemic that could not be mailed due to closure of notice production centers between April 8 and May 31. The IRS is mailing these notices now. However, some collection notices bear old dates and include response deadlines that often have passed. The IRS plans to include "inserts" with these notices explaining that response deadlines have been postponed, but the report expresses concern that receiving compliance notices with response deadlines that have passed will be confusing and concerning to many taxpayers who may not read the inserts.
What were the CARES Act challenges faced by taxpayers?
The report says the IRS generally did a good job in implementing the CARES Act, but here too, challenges remain:
- Individuals who did not receive some or all of their Eonomic Impact Payments may have to wait until next year to receive them. To date, the IRS has taken the position that most taxpayers who did not receive their full payments must wait until they file their 2020 income tax returns to claim the amounts as credits against their 2020 tax liabilities, even though there is no legal constraint on the IRS's ability to issue additional EIP amounts as advance refunds during 2020.
- Employers are struggling to determine whether they qualify for the Employee Retention Credit (ERC) and in what amounts. The ERC is a complex, refundable tax credit that requires employers to determine when a trade or business was fully or partially suspended by government order; the employer's number of full-time employees; what constitutes qualified wages; whether a business's operations post-COVID-19 are comparable to its pre-COVID-19 operations; and the application of aggregation rules. Despite IRS efforts to issue guidance, additional clarification is needed.
- Businesses are facing challenges when seeking to utilize the CARES Act provision that authorizes the use of net operating losses to offset taxable income in prior years (and in some cases to receive refunds). For businesses to determine the optimal application of the CARES Act provisions so they can exercise their right to pay no more than the correct amount of tax, they may need to create and run complex financial models involving multiple tax years.
What was in the National Taxpayer Advocate's 2020 filing season review?
Usually, the National Taxpayer Advocate’ report to Congress includes a wrap-up on the year’s income tax filing season. Since the filing and pay deadlines were extended due to the COVID-19 pandemic, filing season is still ongoing. But Collins notes that the effects of the various IRS closures and shutdowns had an enormous effect on taxpayers. Among those setbacks were:
- Due to campus and office closures, the IRS could not staff phone lines to assist callers beginning the week of March 21.
- After March 20, taxpayers no longer had access to face-to-face customer service.
- There is a large backlog of incoming mail (about 10 million pieces of mailed tax returns or correspondence sitting in trailers at IRS campuses). The IRS could not process paper returns and process or respond to other written correspondence from taxpayers.
- The IRS has sent only a very limited volume of outgoing taxpayer correspondence.
- There was a substantial reduction in Volunteer Income Tax Assistance, Tax Counseling for Elderly, and Low Income Taxpayer Clinic services.
- The National Distribution Center was shut down, depriving taxpayers of a means to acquire pre-printed forms.
Because of the IRS's limitations and the postponed filing deadline, an assessment of the filing season is necessarily incomplete. The report says TAS may provide a more thorough analysis later.
The report also takes a look at how the recommendations from the previous report to Congress were viewed by the IRS. The Internal Revenue Code gives the National Taxpayer Advocate authorization to submit administrative recommendations to the IRS Commissioner. The agency is required to respond within three months. However, in 2019 the Acting Taxpayer Advocate made 19 administrative recommendations. The IRS claims it is not required to respond to them and has made only general narrative responses.
Collins writes the intent of the federal statute is clear.
"If the National Taxpayer Advocate makes an administrative recommendation to mitigate a taxpayer problem – regardless of whether or where it has appeared in a report – the IRS should evaluate it and respond in writing so that TAS, Congress, and the taxpaying public know whether the IRS plans to implement the recommendation and, if not, why not. General narrative discussions that do not address recommendations directly fail to satisfy this objective."