The IRS is Struggling

The IRS is asked to do more with less as each year passes. During the COVID-19 pandemic, the strain on the IRS has been more severe than ever. Many service centers were shut down or operating at significantly diminished capacity for lengthy periods during the early days of the pandemic. These shutdowns put an already strained IRS several months further behind. Often, letters dated in March 2020 were not mailed until May or June 2020. Many of these letters contained deadlines that expired before they were ever mailed. In addition to the service center shutdowns and swift move to a substantially remote workforce, the IRS has been asked to process three rounds of stimulus payments, the advance child tax credit payments and enforcement of Paycheck Protection Program loans and other payroll tax relief provided during the early days of the pandemic. The IRS issued hundreds of millions of economic impact payments to taxpayers through the three rounds of stimulus during the past 24 months.

During the last decade, the IRS lost approximately 17,000 enforcement workers, including revenue agents and revenue officers. For example, revenue officers fell from 5,922 at the close of fiscal year 2010 to 2,913 at the close of fiscal year 2020.

During Fiscal year 2020, the IRS received approximately 100 million calls and answered about 25%.[1] For fiscal year 2021, the rate of answering calls dropped significantly. The IRS answered 11% of taxpayer calls (32 million of 282 million).[2] It is not just taxpayers seeing significant delays or an inability to contact the IRS; practitioners were seeing the same low response rates from IRS. For fiscal year 2021, the practitioner priority service lines answered just 24% of calls received.[3] Often, the wait time to speak with someone, assuming you could get through, was more than an hour. The IRS has implemented a call back system for PPS calls. When prompted by the IRS PPS system, the practitioner enters the phone number where they want to receive the call back and the system provides an estimated call back time. The system makes two attempts to reach that phone number a few minutes apart. From experience, this system has generally worked very well. The range for the returned call is typically very accurate. Once the system returns the practitioner’s call, the wait time is normally less than five minutes to be connected to an IRS representative.

Mail and Return Processing Delays and Errors

By mid-2020, the unopened mail backlog was estimated to be between 10 and 14 million pieces. IRS representatives attached to certain service centers indicated that mail processing was about 90 days behind receipt. Although the IRS may have opened all mail received in 2020 by the end of the year,[4] it most certainly was not able to respond or otherwise address all of the written submissions. IRS Taxpayer Advocate Service (TAS) identified unprocessed returns and correspondence as one of the most serious problems facing the IRS in its 2021 Report to Congress. TAS identified nearly 11 million unprocessed returns and almost 5 million pieces of unprocessed correspondence as of December 2021.[5] With the IRS wide delays and processing errors, TAS has seen unprecedented requests for assistance. From personal experience, it is now taking several weeks for a TAS request to be assigned. Many TAS voicemail greetings indicate that they are returning calls with a four- to-six-week delay. Historically, these requests would often be assigned, and contact received from a TAS case advocate within a few days. TAS announced November that it will no longer address return processing issues/refund delays as the delays are systemic and TAS intervention will not result in faster action by the IRS.[6] Despite all of the gloom, TAS requests can still be a very effective tool in helping a client resolve a tax issue.

The mail delays and failure to timely communicate with taxpayers is permeating most aspects of the IRS. Although outgoing correspondence from the IRS is not as delayed as it was during the height of the pandemic, it is not unusual to receive correspondence with a date that is nearly two weeks prior. We are still seeing some correspondence arrive more than a month after the date on the notice. Although IRS outgoing correspondence does not always have a postmark, it is best practice to check the postmark and retain the envelope where correspondence is significantly delayed. Because many IRS notices provide 30 days to respond, appeal or petition the Tax Court, delays in mail processing can have a significant impact on a taxpayer’s rights.

Collection Issues

During the height of the pandemic shutdowns, the IRS paused IPA payments for several months, April through July 15, 2020. The original IRS guidance indicated that direct debit installment agreements (DDIA) would not have the payments automatically suspended. As a practical matter, many DDIAs did have payments paused and some did not restart when they were supposed. For some taxpayers, this error was due to the taxpayer or taxpayer’s bank failing to restart the payments; in some cases, it appeared that the IRS stopped taking the payments associated with the DDIA plans and failed to subsequently restart the payments. In situations where an IPA was defaulted due to errors in processing or debiting of payments, a taxpayer can request a collections appeals program (CAP) appeal to challenge the defaulted IPA. Generally, the IRS has been flexible with reinstating IPAs for otherwise compliant taxpayers. CAP appeals differ greatly from collection due process (CDP) appeals. Although a CDP appeal allows for the proposal of a collection alternative (e.g., installment agreement or offer in compromise), CAP appeals allow only for the challenge to a collection action. These collection actions include the decision to default an installment agreement or the denial of a proposed installment agreement.

Return processing delays and errors have also impacted IPA reinstatements or defaults. In one situation, the IRS processed a Form 941 on the wrong quarter generating a new balance and defaulting an otherwise compliant IPA. The taxpayer tried to communicate with the IRS representative identified in the notice proposing to terminate the IPA. After several months of trying to contact the named representative with no response, the collections case was reassigned to the revenue officer. The taxpayer did not exercise his right to the CAP appeal and the IPA was terminated; the taxpayer only sought assistance after the IPA was terminated, and the matter assigned to a revenue officer. Although tax practitioners historically have not viewed the CAP appeal as having significant value to resolving tax collection issues, this is an important appeal right for salvaging IPAs where the IRS is proposing to terminate the agreement or there is a denial. With processing issues as rampant as they have been over the last 24 months, it is an important right to consider.

Practitioners should be cautious when setting up an IPA through IRS service centers. The delays for processing fully executed Forms 433-D can be more than 60 days. In some instances, a case could remain in collections despite having an agreed upon IPA. It is critical that practitioners communicate with clients to be sure the IPA payments are being made or that direct debits begin when expected to avoid cases continuing in collections when they have already been resolved. Although Forms 433-D can be submitted via mail, the IRS does accept them via fax. Given the mail delays still plaguing the IRS, submission to an IRS representative via fax would be the best course of action.

The IRS resumed many of its normal collection activities during summer 2021, including issuance of Final Notices of Intent to Levy and Notices of Federal Tax Liens. However, the IRS is attempting to do this while incoming mail processing is still suffering from significant delays. As both notices implicate CDP rights, which have the right to appeal Tax Court, it is incredibly important to ensure that requests for CDP hearings are timely if you want to preserve Tax Court review. Best practice for submitting these requests would always be to submit them via certified mail. With mail processing as unreliable with IRS as it has been recently, it is necessary to have proof of the mailing in a form the IRS is required to respect. Although assignment of these appeals was taking nine to twelve months into early 2021, the CDP hearings are now typically assigned within three to four months.

Delays in processing received CDP appeals is causing collections to continue even though appeals were timely filed. Our firm had several clients who received Final Notices of Intent to Levy and timely requested CDP hearings in response. But in some cases, the CDP requests were sitting so long unprocessed that the cases moved into automated levies, primarily causing levies of Social Security benefits. A colleague of mine, Derek B. Wheeler, Esq., submitted a system advocacy management system (SAMS) request through the Taxpayer Advocate’s office to ensure this type of issue was addressed across the IRS. The TAS representative assigned confirmed that the automated levies were frequently occurring when they should not because CDP requests were not being input into the system timely. TAS was able to confirm that the IRS will halt automated levies while these mail processing delays persist. However, delays in mail processing have not been the only reason for these improper automated levies while CDP requests are outstanding. In one case, the automated levy occurred not only after the CDP was timely submitted but several weeks before it should have under the IRS procedures. Where a taxpayer has wrongly been subject of an automated levy, the taxpayer can request a refund of levied funds.

What Assistance is Available for Taxpayers?

The IRS introduced the streamlined installment payment agreement (IPA) several years ago. These IPAs have been beneficial for taxpayers with modest tax liabilities, generally under $50,000. For taxpayers accruing a liability for the 2019 tax year, the IRS has expanded streamlined IPA guidance to allow for balances up to $250,000. The IRS is also easing paperwork requirements for balances up to $250,000 that wouldn’t otherwise qualify for the streamlined IPA guidance.

The IRS has traditionally offered the option for a short-term payment plan. Under this plan, the IRS would allow up to 120 days to make full payment on a balance due. If at the end of this time full payment could not be made, the IRS would consider another collection alternative. The IRS has extended the time frame for short-term payment plans to 180 days.

The IRS has also extended guidance to automatically include new balances in existing IPAs. As a practical matter, we have seen some circumstances where the IRS has automatically added a new balance to an existing IPA, and circumstances where the IRS has simply defaulted the existing IPA for the newly assessed balance due. It is important that practitioners ensure that they are carefully watching the incoming correspondence. If an IPA is defaulted by the IRS and the practitioner or the taxpayer believe default is incorrect or improper, a CAP appeal can be taken. A CAP appeal typically must be requested within 30 days of the disputed action. Unfortunately, we have seen instances where a taxpayer reaches out to the contact on the IRS notice defaulting the IPA, with the belief that they can address the issue with the IRS as instructed and do not receive a response or is not able to reach anyone at IRS within the 30 days. Ultimately, once the deadline for submission of the CAP appeal passes, taxpayers are typically placed in a position where they need to request a new IPA through the collections function.

Private Collection Agencies

The IRS has been contracting with private collection agencies (PCAs) for the past several years. Cases assigned to PCAs tend to be smaller balances due, accounts nearing the expiration of the collection statute and often taxpayers with lower incomes. However, the IRS guidance excludes assignment of accounts to PCAs where the taxpayer’s income does not exceed 200% of the federal poverty level.

The taxpayer and/or POA will be noticed by correspondence from the IRS that the debt is being assigned to a PCA and will identify the assigned agency. The taxpayer can request to have the debt transferred back to IRS collections inventory.  The PCAs cannot take enforcement actions including filing notices of federal tax liens or issue levies. Cases where there is an active installment agreement, pending or effective offer in compromise or a right to appeal will not be assigned to PCAs. Generally, the PCAs have less success collecting from these taxpayers than the IRS overall collections success. It is also possible based on the types of cases assigned that assignment to a PCA could allow the collections statute to expire.

The IRS announced in September 2021 the newly contracted PCAs:[7]

IRS Updates to Voluntary Disclosure Program

Shortly after the IRS closed the offshore voluntary disclosure program (OVDP) in September 2018, it issued guidance significantly revising its voluntary disclosure directives found in the Internal Revenue Manual. With the perceived success of the rigidly formal provisions of the OVDP programs, this guidance began the process of formalizing the Voluntary Disclosure Program (VDP) for both domestic and foreign issues.

The Form 14457 is the application used to request participation in the VDP program. The program is extremely punitive, requiring assertion of civil fraud penalty and/or willful foreign bank and financial reports (FBAR) penalty. The IRS has made it clear that the program is inappropriate for taxpayers who do not believe they have criminal exposure. Participation in the program should be limited to those taxpayers with perceived criminal exposure.

In September 2021, the American Bar Association sent comments to the IRS to address concerns about the implementation of the new VDP.[8] These concerns included significant delays in IRS response to Part 1 of the Form 14457, lack of specific guidance or treatment for employment tax issues, vague guidance on the application of penalties or where the disclosure period might be expanded, and gaps in the disclosure options for individuals whose reporting failures do not arise to the level of criminal conduct. In October, the IRS announced forthcoming revisions to the VDP. The IRS will be updating Voluntary Disclosure Form 14457 to specifically account for employment tax issues.

For situations where the taxpayer is not concerned about criminal exposure, the IRS has emphasized use of other submission routes to get into compliance. Where foreign reporting issues are present, the streamlined filing compliance procedures are available. The streamlined programs both have narrow eligibility requirements, and these programs will not be appropriate for all taxpayers. Unfortunately, there are currently no other formal options for disclosing foreign reporting deficiencies. The penalties in this area can be significant, even for non-willful or unintentional reporting failures.  

Written Supervisory Approval of Penalties

The Tax Court has spent the better part of the last five years interpreting I.R.C. Section 6751 which requires written supervisory approval of most penalties applied under Title 26. Although this code section was added as part of the Restructuring and Reform Act of 1998 (RRA 98), there was little guidance on when and how it might apply for the first 20 years.

The case law has developed to require supervisory approval before the “initial determination.” Exactly what constitutes the initial determination can vary based on the type of penalty and the manner in which it is proposed. Where a practitioner is challenging a penalty that may require written supervisory approval, it is important to raise the issue as soon as possible. For example, courts have held where the supervisory approval issue is not raised in the initial refund claim, it cannot be raised for the first time before the District Court in the litigation of that refund claim.[9]

With the significant increase in remote work during the pandemic, the IRS appears to be continuing to fail to secure timely written supervisory approval of penalties. Additionally, when addressing this issue with an appeals officer or settlement officer, it will frequently need to request the physical file. Often, these requests result in significant delays or an inability for IRS Appeals to secure a copy of the supervisory approval, assuming it exists. Because the burden is on the government to prove timely written supervisory approval, failure to secure a copy of the timely approval would require full abatement of the penalty.

Penalties for Late Filed Forms 5471 and 5472

The IRS has been extremely aggressive in the assertion of penalties for late filed information reporting forms. Erin M. Collins, the National Taxpayer Advocate, has raised concerns with the manner of assessment and the assertion of penalties under I.R.C. Sections 6038 and 6038A. The penalties are often asserted by the IRS in response to a late filed return with little to no analysis by the IRS. The National Taxpayer Advocate Ms. Collins cited the high rate of abatement for these penalties, the significant financial burden placed on taxpayers, and the burden placed on taxpayers and the IRS addressing appeals and litigation of these penalties.  

The Road Ahead

The IRS is working to manage operations during the pandemic and lessen the delays and service interruptions we have seen over the past two years. With the added responsibilities of economic impact payments, advance child tax credit payments, persistent mail backlogs and return processing backlogs, it is likely that IRS operations will be disrupted for the remainder of 2022 and likely into 2023. On February 9, 2022, the IRS announced the suspension of certain notices which relate to inquiries for unfiled returns, reminders of balances due and withholding compliance issues.[10] While the suspension of these notices should help reduce the outgoing and incoming mail obligations for the IRS, these issues remain outstanding for impacted clients and tax professionals should continue to work to resolve these issues regardless of the IRS issuance of notices. 

As tax practitioners, it is imperative that we protect the rights of our clients and ensure disruptions in IRS service and processing do not harm our clients. In this environment, practitioners cannot assume that any issues or errors will be corrected without intervention. It is the practitioner’s obligation to ensure that deadlines for the submission of refund claims, appeals and Tax Court petitions are protected.

Disclaimer

This communication is for general informational purposes only which may or may not reflect the most current developments. It is not intended to constitute legal advice or a recommended course of action in any given situation. This communication is not intended to be, and should not be, relied upon by the recipient in making decision of a legal nature with respect to the issues discussed herein. The recipient is encouraged to consult an independent licensed attorney before making any decision or taking any action concerning the matters in this communication. This communication does not create an attorney-client relationship between Andreozzi Bluestein LLP and the recipient.

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Michael J. Tedesco, Esq., JD, is a partner at Andreozzi Bluestein LLP. He has practiced in the area of tax controversy since joining the firm in 2012. He focuses his practice on federal and state tax controversy and collection matters for business and individual taxpayers. He works with clients with respect to collection of past due taxes before both the IRS and NYS Department of Tax and Finance.