Congress has been demanding action from the IRS and the IRS has been acting, albeit perhaps not in the way Congress would prefer. On the same day that almost 200 House members sent a bi-partisan letter requesting specific measures for taxpayer relief to the IRS, a mostly Democratic coalition of U.S. Senators did the same. The Senate letter requests the same relief measures requested by the house and similar to those recommended by a coalition representing the tax industry:
- Halt automated collections from now until at least 90 days after April 18, 2022;
- Delay the collection process for filers until any active and pending penalty abatement requests have been processed;
- Streamline the reasonable cause penalty abatement process for taxpayers impacted by the COVID-19 pandemic without the need for written correspondence;
- Provide targeted tax penalty relief for taxpayers who paid at least 70 percent of the tax due for the 2020 and 2021 tax year; and
- Expedite processing of amended returns and provide TAS and congressional caseworkers with timely responses.”
The IRS issued a statement with their response to the House on January 27. On January 28 the Professional Managers Association (PMA), “which was formed in 1981 by IRS Managers as a national membership association representing the interests of professional managers, management officials, and non-bargaining unit employees in the federal government,” shared a “charge and response” letter (as a press release) that addresses each specific request.
Halting Automated Collections and Delaying the Collections Process
According to the letter, halting automated collections specifically those lien and levy notices is possible but they request that Congress clarify that it is lien/levy actions they want halted and not other automated collections (ACS) activities such as helping taxpayers establish payment plans, etc. Delaying collections until active and pending penalty abatements have been processed is “already part of the IRS’s procedure.” The letter acknowledges that penalty abatement requests may be sitting in unopened mail and proposes “robust appropriations” for hiring, onboarding, and training of new employees. The appropriations proposed in the Build Back Better (BBB) Act were largely targeted towards enforcement actions with the aim of reducing the tax gap, not daily operations. Nevertheless, if the IRS were granted unlimited operations funding tomorrow, the “hiring, onboarding, and training” would still have a long lead time and that assumes that the IRS gets enough candidates applying for their job openings, which is not currently the case.
Streamlining Reasonable Cause Abatement Requests
With respect to streamlining the reasonable cause (RC) abatement process for taxpayers affected by the pandemic (virtually all of them) such that written correspondence (which only adds to the mail backlog) is not necessary the PMA states that the “objectives of the request” are unclear. The letter notes that “Taxpayers are already eligible for a ‘first time abatement’ [FTA] without any documentation. Therefore, this change will particularly impact individuals who repeatedly incur penalties. The IRS does not typically accommodate repeat offenders and it is unclear why “COVID-19” is a valid reason for an individual to repeatedly fail to file and/or pay their taxes in a timely manner.” This response perfectly exemplifies the IRS insistence on enforcement without considering the effects of consistently poor customer service on voluntary filing and payment compliance. It refuses to acknowledge the dire customer service situation at the IRS while also ignoring the effects of more than two years and three filing seasons of Covid-related chaos for taxpayers.
Additionally, the FTA only applies under certain circumstances to taxpayers who qualify. Indeed the Internal Revenue Manual requires the use of FTA before RC for eligible taxpayers. Why? Because it’s the path of least resistance. The FTA requires the least amount of work for the IRS when the taxpayer qualifies so they use it instead of evaluating the taxpayer’s RC abatement request. That makes procedural sense on the IRS side. Problems arise, however, when a taxpayer requests an RC abatement, has an FTA substituted, and then has a situation where FTA could apply and RC wouldn’t. First-time abatement can be used once every four years as long as the taxpayer had no penalties the previous three years. According to the IRM, “A penalty assessed and subsequently reversed in full will generally be considered to show compliance for that tax period.” So imagine a taxpayer has an odd circumstance that would qualify for an RC abatement but also qualifies for FTA. The IRS uses FTA instead of evaluating the RC abatement request. Then two years later the same taxpayer has a penalty that qualifies for FTA but not RC. They cannot get relief under FTA because they already used it two years ago. Had the RC abatement request been evaluated and granted the taxpayer would be entitled to the FTA relief. The IRS could, if it wished to do so, find a way to define and issue Covid-related reasonable cause abatements in a way that would not “use up” the taxpayer’s FTA and temporarily adjust the IRM accordingly. Unfortunately, when the IRS focuses so much on not having its kindness mistaken for weakness it eliminates out of hand measures that could provide relief both to taxpayers and to its staff.
Providing Targeted Penalty Relief to Certain Taxpayers
The PMA correctly notes that if Congress wants taxpayers to receive penalty relief, they can pass legislation to make it so. “Representative Judy Chu (D-CA) has introduced the Taxpayer Penalty Protection Act (H.R. 5155) into the House of Representatives to do exactly this. The legislation has bipartisan support and is currently being considered in the House Ways and Means Committee. We encourage the U.S. Senators who signed this letter to introduce and support companion legislation.” Nevertheless the letter goes on to state that the PMA “highly discourage[s] Congress from requesting the IRS engage mid-season retroactive tax changes. Rather, Congress should pass legislation on this issue to go into effect in subsequent filing seasons.” The letter cites concern over retroactive tax law changes that require the IRS to “halt and reprocess their inventories.” It also expresses concern that taxpayers would have to file amended returns for completed tax years. Both concerns are well founded, but it is unclear just how applicable they would be to penalty notices, especially for tax year 2021. Return processing is handled separately from penalty assessment. It seems that the IRS could, after this filing season, focus some of its efforts on how to address tax year 2020 penalties and how it could program its systems to evaluate taxpayers who qualify for targeted relief for tax year 2021 in a way that prevents automatic penalty notices from being sent to those who qualify for the relief. If both couldn’t be managed with existing resources, perhaps meeting in the middle and providing relief for tax year 2021 would suffice. Providing the relief would not be a simple task, especially for tax year 2020, but where there’s a will, there’s a way. It may just take Congress to provide the will by passing the appropriate legislation (and providing some additional funding for the effort would also help).
Expediting Amended Return Processing
Congress asked the IRS to expedite processing of amended returns and to provide the National Taxpayer Advocate Service (TAS) and congressional caseworkers with timely responses. The PMA replied “It is our understanding that TAS is not taking these cases because TAS is also overwhelmed with work and not because the IRS is delayed in responding to them.” It is true that TAS is no longer taking new cases concerning unprocessed amended returns. It is, however, still actively working its existing case inventory and the IRS should be doing everything in its power to respond promptly to TAS and congressional caseworkers in order to clear these cases.
Clearly, there is plenty of blame to go around. Congress passes laws without fully understanding “the implementation bits” and they have been underfunding both the operations and enforcement activities of the IRS for years. Until recently Congress had largely abdicated its IRS oversight role. Perhaps the 88.5% increase in tax account inquiries directed to members of Congress over the last year has something to do with their renewed interest in IRS operations. Nevertheless, in response to the additional Congressional scrutiny the IRS remains obstinately enforcement biased even when relaxing certain enforcement efforts could free up resources that could then be reallocated to other problem areas. Indeed at times the IRS seems completely oblivious to the fact that providing even a portion of the requested relief would also reduce the workload for the employees tasked with processing the mail and answering the phones. Meanwhile, taxpayers are (as usual) caught in the middle, many at the end of their rope, and there’s no relief in sight.