New Taxpayer Advocate sees tax challenges from CARES Act
National Taxpayer Advocate Erin Collins released her first report to Congress Monday, discussing some of the difficulties confronting taxpayers and the IRS during the COVID-19 pandemic, which has only exacerbated problems with taxpayer service as the IRS struggled to implement the provisions of the CARES Act and the Taxpayer First Act.
Collins took over from Nina Olson, who led the IRS’s Taxpayer Advocacy Service for 18 years. The report also discusses the extended 2020 filing season along with other areas of focus, and includes the IRS’s responses to the recommendations proposed last year in Olson’s final annual report.
“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 discussed the unusual situation earlier this month at the online NYU Tax Controversy Forum. “My timing is great,” she said at the forum. “I started the day that the commissioner made the decision to pretty much shut down the entire IRS across the country. The good news for us is we have a really great IT group within TAS. They had, I think, about 100 percent of our people up online with computers and access to the IRS equipment within one week. So within about the first week we were able to operate remotely. The biggest challenge we have is we can’t do the work on our own. We need to coordinate with folks on campus and in the service centers in order to complete the tasks. We can start the process, but we can’t finalize it, and there are a number of remote groups that are still not back into the office. As the IRS goes back more online, we’re able to start closing cases. That was our biggest challenge.”
In the report, Collins praised the IRS for acting quickly to postpone more than 300 filing, payment and other time-sensitive deadlines, provide broad relief from compliance actions under its “People First Initiative,” and disburse some 160 million Economic Impact Payments (EIPs) authorized by the CARES Act, enacted on March 27, 2020.
But despite the IRS’s best efforts, there have been several significant negative impacts on taxpayers this year from the pandemic, including:
- Taxpayers who filed a 2019 paper return and are entitled to refunds may have a long wait ahead of them. The IRS needed 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. While the IRS is still reopening some of its core operations, it’s not clear when the aency can open and process all the returns sitting in mail facilities.
Some taxpayers whose returns were incorrectly 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 the Taxpayer Advocacy Service 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 hasn’t opened or processed a great deal of its mail, delaying their refunds. Refund delays can have a major financial impact on low-income taxpayers, as refunds often make up a significant percentage of their annual household incomes. Some of the refund delays have been generated by claims for the Earned Income Tax Credit or Additional Child Tax Credit, which are often claimed by low-income taxpayers.
- Taxpayers who have needed help from the IRS have had trouble getting it. The IRS closed down its Accounts Management telephone lines, so taxpayers couldn’t reach live help by phone. The IRS shut down its Taxpayer Assistance Centers, making it impossible for taxpayers to get in-person help either. The IRS also closed down its mail facilities, so it couldn't track or process taxpayer responses to compliance notices. The only resources readily available were on IRS.gov and automated phone lines. The IRS has started reopening its operations, but it will take some time before they are restored to full capacity.
- IRS systems prepared over 20 million notices during the pandemic that couldn’t be mailed due to closure of notice production centers between April 8 and May 31. The IRS is sending out these notices now. However, some collection notices have old dates and include response deadlines that often have already 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.
Taxpayer challenges from the CARES Act
“The IRS issued 160 million separate checks or debit cards or direct deposits to taxpayers across the United States, and they did that in a very short period of time,” Collins said during the NYU Tax Controversy Forum, “Kudos to them. But if you think about it, even if there’s a 1 percent error rate on 160 million, that’s 1.6 million, so we still have the challenge of a number of issues that the IRS is facing that they don’t have a fix for yet. They don’t have a system in place that we at TAS can leverage to fix the challenge for the taxpayer.”
The report said the IRS generally did a commendable job implementing the CARES Act. but taxpayer challenges remain, including:
- Individuals who didn’t receive some or all of their economic 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. Congress enacted the CARES Act both to provide emergency financial relief to taxpayers on an individual level and to boost spending on the national level. TAS will continue to urge the IRS to provide full EIPs to eligible taxpayers throughout 2020 as rapidly as possible. The report says that making taxpayers wait until next year to receive their EIPs harms the affected taxpayers and is inconsistent with congressional intent.
- 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. To address these complexities, the IRS has provided considerable guidance regarding when and how to claim the ERC. However, several areas require further clarification. If clarity is not provided, taxpayers will be more likely to make unintentional errors, increasing the risk of an audit. Having to untangle these issues in an audit environment would drain the limited resources of both the IRS and the businesses affected by the COVID-19 pandemic. TAS will continue to advocate that the IRS further clarify the rules governing when and how employers should claim this credit.
- 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. The report says the IRS has provided timely guidance in the form of frequently asked questions (FAQs), but it expresses concern that FAQs are not authoritative or binding on the IRS.
Implementation of Taxpayer First Act
The Taxpayer First Act, enacted one year ago, is probably the most far-reaching revisions to tax administration since the IRS Restructuring and Reform Act of 1998. The TFA included some 23 provisions recommended by the National Taxpayer Advocate. A centerpiece of the new law is a requirement that the IRS develop four strategic plans: (i) a comprehensive taxpayer service strategy; (ii) a plan to redesign the IRS’s organizational structure; (iii) a comprehensive employee training strategy that includes training on taxpayer rights and the role of TAS; and (iv) a multi-year plan to meet IRS information technology needs. The TFA required the IRS to submit its comprehensive taxpayer service strategy to Congress by July 1, 2020. Because of disruptions caused by COVID-19, the IRS has been delayed in developing these plans, but it expects to deliver its taxpayer service strategy to Congress by the end of the year.
The report describes some steps the IRS has taken to receive input from taxpayers, practitioners and TAS, and identifies over two dozen TFA provisions that the IRS has implemented. It expresses concern that the IRS has not properly implemented a provision directing it to establish a single point of contact for identity theft victims and that it may not properly implement a provision directing it to exclude taxpayers with adjusted gross incomes at or below 200 percent of the Federal Poverty Level from assignment to private debt collection agencies by December 31, 2020.
“I have been impressed by many ideas the IRS is considering, and I look forward to working with the leadership as it refines its taxpayer service strategy in the coming months,” Collins said in a statement Monday.
2020 filing season review
The National Taxpayer Advocate’s mid-year report usually includes an assessment of the filing season that measures performance against the results of prior filing seasons. Because the IRS closed most of its operations in March and delayed many filing and payment deadlines from April 15 until July 15, this filing season cannot fairly be compared with prior years. The disruption caused by COVID-19 and the postponed due date has had — and continues to have — a huge impact on the 2020 tax filing season, reflected in the number of returns received, the volume of correspondence received from taxpayers, and the reduction in toll-free telephone service. Among the impacts were:
- Due to IRS campus and office closures, the agency couldn’t staff its phone lines to help callers starting the week of March 21, 2020.
- After March 20, 2020, taxpayers no longer had access to face-to-face customer service.
- There’s a tremendous backlog of incoming mail (about 10 million pieces of mailed tax returns or correspondence sitting in trailers at IRS campuses). The IRS couldn’t process paper returns and process or respond to other written correspondence from taxpayers.
- The IRS has sent only a very limited amount 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 closed down, depriving taxpayers of a way to acquire pre-printed forms.
Because of the IRS’s limitations and the delayed filing deadline, an assessment of the filing season is therefore incomplete. The report said the Taxpayer Advocacy Service may offer a more thorough analysis at a later date.