The IRS is in trouble, and everyone—taxpayers, tax practitioners, Congress, and even Treasury and the IRS themselves—is keenly aware.
In his opening statement at a House Ways and Means Subcommittee on Oversight hearing, Chairman Bill Pascrell Jr. (D-N.J.) remarked: “The Commissioner must also update us on the status of the gigantic backlog. This includes 2019 returns filed last year. These returns must be processed now so taxpayers can get the money they are owed. Many of these taxpayers have been receiving erroneous notices saying they haven’t timely filed. We have demanded that these notices must stop but we keep hearing horror stories of the IRS sending confusing, incorrect notices to struggling taxpayers.”
This was not a statement made at one of the recent, and many, Congressional hearings on the 2022 tax filing season; rather, those words were uttered more than a year ago on March 18, 2021. As Yogi Berra famously said, “It’s deja vu all over again!”
So, what’s happened in the last year? According to National Taxpayer Advocate Erin Collins in a recent Taxpayer Advocate Directive 2022-1, “Over the past year, the IRS has not made progress in reducing its backlog. As of March 19, 2021, the number of unprocessed original Forms 1040 stood at 4.6 million. As of March 18, 2022, the number had ticked up slightly to 4.7 million.”
And that’s just individual income tax returns. The number jumps to a staggering 14.7 million unprocessed paper returns when you add 4.9 million original business tax returns, 1.3 million returns that the IRS has not yet been able to classify, 2.6 million amended individual income tax returns, and 1.2 million amended business tax returns. And 14.7 million doesn’t even include the unopened mail or the unprocessed Master File adjustments sitting on IRS campus desks.
A survey of AICPA members shows that satisfaction with the IRS among tax professionals has hit an all-time low – dropping from an already low 21 percent in 2016 to a dismal 10 percent in 2020.
The last two years have been like none of us could have imagined. Frankly, we expected a little more flexibility and empathy from IRS leadership. We’ve heard stories from many CPAs that encapsulate the current challenges. In one instance, a CPA’s firm was hit by COVID in 2020 and was unable to timely file all their clients’ returns.
One particular client was assessed a late filing penalty and the IRS would not accept Covid as reasonable cause to abate the penalty. In addition, again, in this instance, the corporate return was paper filed; the penalty assessment was communicated by paper; and the abatement requests—numerous ones—were all by paper. This 2019 corporate tax return penalty situation has still not been resolved after three years.
The pandemic shined a spotlight on various obstacles in our tax system, the antiquated nature of our tax administration system and the need for modernization at the IRS which has reached a critical level. And while the IRS announced a series of measures intended to blunt the impact on taxpayers of the current backlog, these measures are little more than patchwork in a system that, without extensive modernization measures, will find itself addressing these same challenges again very soon.
The AICPA recognizes that, while there is a greater need for modernization at the IRS, there is also a more immediate need for relief. As the work piled up beyond historic proportions, the AICPA has given suggestions to reduce some of that work. Let me be clear: our suggestions won’t fundamentally fix the problems but will provide meaningful relief when it is most needed.
At a hearing just this past March, Commissioner Charles Rettig publicly stated that the IRS has had a backlog plan “since the pandemic began.” In response to the backlog and pressure from the AICPA and other stakeholder organizations, the IRS announced the creation of two “surge” teams to deal with returns. They also announced that they would pause numerous automated notices to taxpayers and delayed a planned closure of an IRS processing facility. Finally, the IRS secured direct hiring authority to more quickly hire and onboard additional IRS employees.
In addition to our request to pause automatic penalty notices, the AICPA identified additional actions the IRS could take now to help alleviate some of the burden and put them on a path towards offering functional services to taxpayers.
Among these recommendations are aligning requests for account holds with the time it takes the IRS to process any penalty abatement requests and postponing the use of the new Schedules K-2 and K-3 until the 2023 tax filing season. The IRS also could announce today that it will offer taxpayers a special penalty waiver from Covid impacts or IRS backlog issues. Offering a special “backlog” or Covid penalty waiver would preserve the use of “first-time abate.” Additionally, this special waiver should be implemented in a way that would avoid sending mail which would further burden the processing backlog.
The simple elegance of these measures is that they can be implemented today and would reduce taxpayer contact with the beleaguered IRS. Voluntary compliance, even with the best of intentions, becomes difficult when the IRS is broken.
A priority of Erin Collins’ Taxpayer Advocate Directive 2022-1 was to help IRS more efficiently process paper. We also believe that eliminating paper, as our suggestions would do in the short run, would help us avoid having the same conversation about backlogs a year from now.
We encourage the IRS to strive to be a modern-functioning agency for the 21st century where it prioritizes customer satisfaction, including from enforcement actions, a modernized technological infrastructure, and provides IRS employees with the experience and training to understand and address taxpayer needs.
Yogi Berra once said, “When you come to a fork in the road, take it.” We hope the IRS is listening to Berra.
This article does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Edward S. Karl is vice president of taxation for the American Institute of Certified Public Accountants. He is responsible for reviewing, formulating, and submitting technical and policy recommendations to Congress, the Treasury Department, and the Internal Revenue Service for improving the federal tax process.
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