Because of the Covid-19 pandemic, federal and state governments are focusing almost exclusively on combatting the virus, and on giving residents the support and resources needed in order to survive—physically and financially. For example, the federal government has mobilized the IRS to provide much-needed financial assistance to both individuals and businesses, through programs such as economic impact payments to individuals, and sick/family leave and employee retention tax credits to businesses.
During this crisis, federal and state taxing authorities have taken temporary steps to accommodate taxpayers. These steps include extending filing deadlines and pausing certain enforcement activities. As federal and state governments spend unprecedented amounts of money to provide financial support to residents and businesses, in the future those governments will likely look to their taxing authorities to help bring in much-needed capital. Therefore, any short-term pauses in federal and state taxing enforcement will likely be followed by strong future enforcement to pay for these critically needed programs.
This article explores the various relief taxpayers may obtain from taxing authorities’ enforcement procedures at the federal and state levels; such relief, particularly at the state level, is not uniform and has been changing frequently. This article then details certain practical steps that taxpayers should consider taking in order to benefit from the short-term relief, and to prepare for inevitable future enforcement.
FEDERAL RELIEF POLICIES
Internal Revenue Service
Through its sweeping People First Initiative (the “Initiative”), the IRS has implemented a variety of policies temporarily limiting and postponing enforcement activities. See IRS News Release IR-2020-59.
Limiting and Postponing Some Federal Examinations
Federal examination activities continue, with limitations and modifications. In IRS News Release IR-2020-59, the IRS announced that it would generally not start new field, office, and correspondence examinations prior to July 15, 2020. Likewise, in an internal memorandum IRS’s Large Business & International Division (LB&I) announced that it will not begin an examination of most new returns. However, in that same memo LB&I stated that it will continue to open certain examinations under the Large Corporate Compliance campaign, FATCA, and certain other enumerated compliance programs and campaigns, including the new TCJA issue-based campaign. LB&I-04-0420-0009. The IRS may also start new examinations when it deems necessary to preserve the applicable statute of limitations. See IRS News Release IR-2020-59 and LB&I-04-0420-0009.
For pre-existing examinations, the LB&I Division has suspended until July 15, 2020, Information Document Request (IDR) procedures for taxpayers unable to respond timely to an IDR due to the Covid-19 pandemic. However, examiners may continue to issue and receive IDRs for taxpayers who are able to respond notwithstanding the pandemic, and managers retain the discretion to continue with the enforcement process if the interests of tax administration so warrant. LB&I-04-0320-0007. Thus far, in our experience, the IRS has been accommodating with respect to taxpayers that lack access to their information due to restrictions imposed in response to Covid-19 or face other hardships as a result of Covid-19.
Postponing Deadlines for Appeals, Installment Agreements, and Offers in Compromise
The Independent Office of Appeals will continue to work on existing cases, although all conferences will be held telephonically or by videoconference. The Initiative provides certain relief to taxpayers in the offer in compromise (OIC) process, including permitting extra time for taxpayers to provide requested information to support a pending OIC and suspending payments on accepted OICs. Any deadlines relating to appeals, installment agreements, and OICs that fall between April 1 and July 14, 2020 (inclusive) have been postponed to July 15, 2020. IRS Notice 2020-23 and IRS News Release IR-2020-59.
Limiting Collection Activities
The IRS will not transfer any new cases to private debt collectors until July 15, 2020. Similarly, liens and levies initiated by field revenue officers are generally suspended. See IRS News Release IR-2020-59.
Improving Digital Communications
The IRS has also implemented procedures to enable digital communication. For example, it has permitted IRS employees to accept and transmit documents to taxpayers, using email and secured messaging systems, to accept images of signatures and digital signatures on certain documents, and to accept faxes, eFaxes, and emails of certain documents from taxpayers. NHQ-01-0320-0001 and IRS Revenue Procedure 2020-29. Some attorneys in the IRS Office of Chief Counsel (OCC) have video software to hold virtual meetings.
The IRS OCC is pioneering two “virtual settlement” days on May 9 (for cases docketed in Detroit Tax Court trial sessions) and May 21, 2020 (for cases docketed in Atlanta Tax Court trial sessions), to give taxpayers opportunities to settle cases. During these sessions, invited taxpayers will have an opportunity to meet with IRS OCC attorneys and paralegals via WebEx. The IRS OCC is planning on continuing virtual settlement days, even after the Covid-19 crisis subsides. IRS News Release IR-2020-87.
Taxpayers and practitioners should be aware of the requirements and limitations of various digital communications opportunities. For instance, with respect to electronic signatures, the IRS requires the taxpayer submit an additional statement verifying the signature. See NHQ-01-0320-0001. Similarly, the IRS permits faxes of Forms 1139 and 1045 pursuant to its FAQs on temporary procedures relating to such forms, but only for claims allowed under CARES Act Sections 2303 and 2305.
The U.S. Tax Court has implemented operational and procedural measures to cope with the coronavirus health crisis. Operationally, according to the Tax Court website, all trial sessions from March 16 through June 29, 2020 (inclusive) have been postponed. The Tax Court building was closed to the public as of March 13, and has been closed entirely since March 18. However, the Tax Court’s eAccess and eFiling systems remain operational, and the Tax Court announced that it would continue to process items received electronically, serve orders and opinions, and enter and serve decisions.
While some items sent by mail to the Tax Court are being held to be delivered once the building reopens, other mail may be returned as undeliverable. In those instances, the Tax Court through its website has urged senders to resend the documents once the Tax Court has reopened, along with a copy of the original postmarked envelope in which the document was first sent. The Tax Court similarly advised senders to retain copies of any documents sent to the Tax Court, along with proof of mailing.
Procedurally, the Tax Court website confirmed that IRS Notice 2020-23 extended deadlines to July 15, 2020, to file a Tax Court petition or a notice of an appeal from a Tax Court decision, if the statutory deadline for filing such petition or notice of appeal falls on or after April 1, 2020, and before July 15, 2020. It is important to note, though, that there is a period of time during which the Tax Court was closed, but deadlines were not extended. However, in Guralnik v. Commissioner, the Tax Court has held that filing deadlines for petitions may be extended under Civil Rule (6)(a)(3)(A) when the Tax Court building is inaccessible until the day the building reopens.
The IRS has clarified in its FAQs on filing payment and deadlines that taxpayers may take advantage of all of the extended deadlines granted as a result of the Tax Court’s closure and pursuant to IRS Notice 2020-23. Thus, taxpayers have until July 15, 2020, to make filings with the Tax Court, unless the Tax Court building has not reopened by that date, in which case taxpayers will have until the building’s reopening date.
Although the U.S. Court of Federal Claims remains open, public access has been restricted. Deadlines have not been extended. Policies among the U.S. District Courts and Courts of Appeal vary by jurisdiction. The Supreme Court will continue to hear oral arguments telephonically in May in a limited number of cases that were previously postponed.
STATE RELIEF POLICIES
Many states have not provided any tax relief beyond the postponement of filing and payment deadlines. Where it has been provided, relief from enforcement actions among states is inconsistent and continually changing.
Some states are continuing examinations while limiting in-person activities. In Massachusetts, for instance, the Department of Revenue (Massachusetts DOR) has announced that it continues to work on appeals cases and conduct audits, although no activities are conducted in person.
Only a small number of states have officially postponed state examinations. The California Franchise Tax Board (California FTB) announced through Covid-19 FAQs on its website that it generally will not start a new field or correspondence audit through April. It will continue activities regarding existing audits, subject to modifications to permit virtual communications, electronic signatures, and deadline extensions for responding to document requests. Further, in Notice 2020-02, the California FTB extended the statute of limitations for the California FTB to issue a Notice of Proposed Assessment in the case of any limitations period that expires between March 12, 2020, and July 15, 2020.
In proposed guidance on its website, the Wisconsin Department of Revenue has announced it plans to delay the start of most new audits of small businesses.
Limiting Collection Activities
Like their federal counterparts, many states have paused collection activity. For instance, pursuant to its FAQs, the California FTB has temporarily suspended a number of collections activities, similar to the IRS, including wage attachments, bank levies, liens, field agent contacts, and offsetting of income tax refunds. In addition, the California FTB will not issue denials on any OICs before July 15, 2020.
The Indiana Department of Revenue has also issued comprehensive collection relief measures, such as suspending the creation of most tax filing bills and new warrants, levies, and liens, among other relief policies. The Massachusetts DOR announced it has suspended certain collections activities: collections staff will not make unsolicited calls to taxpayers, nor will cases be transferred to private collection agencies. Similarly, the Comptroller of Maryland will not send out lien warning notices, issue liens, attach bank accounts, prevent driver’s license renewals, or offset vendor payments for Maryland taxes, pursuant to Tax Alert 04-14-20A.
Improving Digital Communications
Consistent with federal policy, some states, including Massachusetts, Maryland, and New York, have begun accepting digital signatures on documents relating to the determination or collection of tax liability. In Maryland, the policy set out in Tax Alert 04-20 extends to scanned or photographed signatures. Such announcements also permit the use of secure email for correspondence between taxpayers and the relevant state agency.
Some states, including Massachusetts, require that an electronically signed document be accompanied by a statement from the taxpayer regarding the validity of the electronic signature. See Mass. DOR Directive 20-01. Several such states impose precise requirements on the contents of the statement, with Massachusetts requiring that the statement contain the following language: “The attached [insert document name] includes [insert name of taxpayer or representative]’s valid signature and the taxpayer intends to transmit the document to the Massachusetts Department of Revenue.” Further, like the IRS, state-level exam teams and administrative appeals offices continue to hold telephonic and/or video conferences with taxpayers. For instance, the Massachusetts DOR Office of Appeals is not holding in-person conferences, but is continuing to hold telephonic conferences.
Similarly, the Alaska Department of Revenue announced that while Appeals employees will not hold in-person meetings, conferences may be held telephonically or over video conference.
State Tax Tribunals and Appellate Courts
Some state tax tribunals have been closed, and some state filing deadlines have been postponed. In California, the Office of Tax Appeals continues to hear cases telephonically. In Notice 2020-02, the California FTB postponed the period to file a timely appeal or petition for rehearing with the Office of Tax Appeals to July 15, 2020, for taxpayers whose time period to file expires between March 12, 2020, and July 15, 2020.
Similarly, the New Jersey Supreme Court in an Order extended the statutory time frame in which taxpayers may file certain appeals and protests with state taxing authorities. The Pennsylvania Department of Revenue announced similar relief. Ohio has also provided that the statute of limitations for a refund claim set to expire during a particular emergency period is tolled during that time. Ohio H.B. 197, Section 22.
Unlike other states, Massachusetts and New York have not automatically extended tax court filing deadlines. In Massachusetts, the Appellate Tax Board (ATB) has been closed since March 24, 2020. According to the ATB’s website, all motion hearings have been suspended and hearings scheduled for the “several weeks” following March 24 have been continued for approximately three months. Documents may be filed with the clerk’s office by mail or by email (except for petitions). The ATB announced that taxpayers may comply with statutory deadlines by timely mailing a petition or notice of appeal, as determined by its postmark.
In New York, the Tax Appeals Tribunal and Division of Tax Appeals remain open with a limited staff. The New York tribunals will not accept in-person filings or hold hearings, and they have not extended statutory deadlines.
In most cases, state courts—including appellate courts—have separate procedures in place for handling cases during the pandemic. Not all are closed for business. For instance, the Massachusetts Appeals Court recently held oral arguments using Zoom in an appeal of a decision by the Appellate Tax Board.
PRACTICAL CONSIDERATIONS FOR BENEFITING FROM FEDERAL AND STATE ENFORCEMENT RELIEF
The variety of temporary procedures enacted by the federal and state governments have practical implications for taxpayers and practitioners.
Taxpayers should ensure they are eligible to take advantage of the various relief offerings. While some relief is broadly available to all taxpayers on the presumption that all taxpayers are impacted by the Covid-19 pandemic, certain options are limited to those who are affected in a particular way. Similarly, IRS Notice 2020-23 only extended filing deadlines for enumerated time-sensitive actions, and only deadlines falling between April 1, 2020, and July 15, 2020, although certain other deadlines may have been extended by virtue of the Tax Court’s closure. As an example, notwithstanding the broad scope of IRS Notice 2020-23, Form 941 for the first quarter of 2020 remained due April 30, 2020. Taxpayers should take care to ensure compliance with any deadlines that have not been delayed.
Retain Documentation of Meeting Filing and Court Deadlines:
Due to the closure of courts and taxing authorities’ service centers, taxpayers and practitioners should retain copies of documents and tracking information for any correspondence sent to courts or submitted to taxing authorities to ensure that filing deadlines are ultimately deemed met.
In the event such filings or correspondence is returned, the sender should retain the returned documents, any receipts or tracking information, and the original postmarked envelopes. Given these challenges with traditional mail, electronic correspondence (when feasible and permissible) is currently the most reliable option for communication. It is also the preferred option by many tax authorities for certain filings during the current health crisis. As discussed, the IRS and Tax Court are urging (at times, mandating) electronic communication.
Maintain Favorable Momentum in Existing Audits (if Possible):
Taxpayers and practitioners should also be aware that a delay in an audit or other enforcement proceeding may not always be preferable. For instance, a taxpayer may find it advantageous to continue promptly responding to IDRs if the taxpayer is able and the audit has developed positive forward momentum. Moreover, taxpayers should consider whether they will have the necessary personnel and information to continue to comply with IDRs after the Covid-19 crisis has abated. In any event, where necessary, IRS audit teams have tended to be understanding of disruptions in the IDR process. However, the IRS has also been granted an extension with respect to certain actions under Notice 2020-23, and thus a delay in audit proceedings may be unavoidable. Taxpayers and advisers should expect delays and remain patient.
Remain Prepared for New Audits:
Federal and state examination activity is continuing, even if limited and moderated. For the IRS, although it has generally suspended the initiation of new audits, it may continue to initiate examinations where it deems necessary to preserve the statute of limitations. As noted above, a new examination may also be initiated for returns that fall within the scope of permitted continued activities, including the Large Corporate Compliance program, FATCA, and any future campaign related to the Tax Cuts and Jobs Act. New limited examinations will also be opened in connection with certain requests for tentative refunds (including those related to the CARES Act changes of law).
On the state level, state responses are varied, but all states are continuing with some type of examination activity. Taxpayers may also expect to receive new audit notifications from both federal and state taxing authorities after the emergency declaration expires for cases on which auditors began work during the emergency declaration.
Taxpayers should continue to retain documents and information necessary to respond to an audit arising before, during, or after the Covid-19 emergency. They may also consider preparing for audits now if examinations are foreseeable (e.g., audits of CARES Act tentative refund claims, as well as traditionally filed large CARES Act refund requests).
Remain Flexible in Using Digital Communications:
Taxpayers and practitioners should ensure that they have the technological capabilities to communicate with taxing authorities, administrative tribunals, and courts during government-ordered shutdowns. This may include relying more heavily on video, phone, and email communications rather than traditional, in-person examinations and hearings. While taxpayers and advisers may prefer to wait until the pandemic subsides to hold in-person meetings, appeals conferences, and hearings, the government may not be willing to defer. On the flip side, if the government is unable to hold virtual meetings or hearings, taxpayers and advisers may need to remain patient in resolving their outstanding matters during the government-ordered shutdown.
Video and telephonic conferences present both challenges and opportunities not typical of in-person meetings, so taxpayers and their advisers should prepare in advance to ensure an effective remote presentation of materials, head off any technology-related issues, and identify strategies for communicating during meetings while not being present in the same room. In addition, practitioners should ensure such methods of communication are sufficiently protected with respect to securing taxpayer information.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Kat Gregor is a tax partner and co-founder of the tax controversy group, Elizabeth Smith is counsel, and Isabelle Farrar and Andrew Yarrows are associates at Ropes & Gray LLP.