You’ve Got Mail (from the IRS)—But What Happens When You Don’t?

Each year, the Internal Revenue Service sends millions of notices and letters to taxpayers.

According to the Taxpayer Advocate, from the time that the IRS shut down due to the Covid-19 pandemic through June 2020, the agency generated more than 20 million notices for individual taxpayers. If you annualize those numbers, that would suggest that the IRS sends out at least 80 million notices to individual taxpayers.

Those notices are sent to taxpayers via the United States Postal Service (USPS). Taxpayers should be aware of this by now, since the IRS has spent countless hours—and dollars—reminding taxpayers and tax professionals that, due to security concerns, it will not initiate contact by text, social media, phone, or email, but by mail.

As Congress debates the fate of the USPS and whether there might be alternatives to the current structure, tax professionals are concerned about the impact that the current slowdown might have on taxpayers.

Yes, we all want modernization at the IRS, but for now, that’s not a reality. What is a reality are the numbers.

In addition to the notices and letters, most amended returns can only be filed by paper. While the IRS announced this month that taxpayers can now submit Form 1040-X electronically with commercial tax-filing software, that’s only for the 2019 tax year. All other years must be filed by paper until the program is expanded. According to the agency, approximately 4 million amended returns were filed for each of Fiscal Years 2013 and 2014 (the most recent years for which complete data are available).

And while an overwhelming number of individual taxpayers file their federal income tax returns electronically, millions of taxpayers still file by mail. Last year, almost 90% of those taxpayers filed electronically, but nearly 18 million taxpayers filed by mail. That number includes identity theft victims, who are typically required to file a paper return once an electronically filed return is rejected.

The IRS has been actively encouraging more taxpayers (and tax professionals) to file tax returns and pay electronically, boasting that it’s accurate and easy, secure, convenient, and means faster refunds. However, the infrastructure is not in place to do the same for collections and controversy work.

While you can arrange an installment plan online for individuals who owe $50,000 or less in combined tax, penalties, and interest ($100,000 for a short-term plan), taxpayers must call or file by paper if they are outside of those criteria. Similarly, Offers in Compromise (Form 656) and most Innocent Spouse Appeals (Form 8857) must be submitted by mail or by private delivery service.

What if you disagree with an assessment? Most tax appeals must be filed by paper. The IRS makes this clear on its website, noting that you must “complete your protest and mail it to the IRS address on the letter that explains your appeal rights.” The same is true to request an appeals conference.

Tax Court filings also have limitations. Since 2010, eFiling is mandatory for most tax practitioners. However, initial filings, such as a petition, may be filed only in paper form. That means that eFiling happens only after a petition has been filed in a Tax Court in that case—and that happens by mail. Pro se petitioners are typically instructed to hand-deliver or mail petitions.

Refunds and checks are also sent via U.S. mail. Of the 103 million individual tax refunds issued this year, about 85 million were direct deposited. That means that 18 million taxpayers received paper checks worth about $47 billion.

As for those Economic Impact Payments (EIPs, or stimulus checks), while most taxpayers got paid by direct deposit, 35 million taxpayers received a paper check, and an additional four million received prepaid debit cards.

Many taxpayers also send tax payments through the mail, even though electronic options are available. Those checks and money orders have largely remained in mailbags, unopened, even as overdue notices have gone out.

The IRS recently advised that “if a taxpayer mailed a check (either with or without a tax return), it may still be unopened in the backlog of mail the IRS is processing due to Covid-19.” The agency followed up by advising that it has suspended the mailing of certain notices until the backlog is cleared.

There’s no doubt that the modernization of the IRS should be a top priority in the coming year. While there have been steps forward, like accessing taxpayer transcripts online, practitioners have clamored for more electronic options, like filing Form 2848 (Power of Attorney) online. The agency’s in-person shutdown due to the pandemic has highlighted how dependent taxpayers and tax practitioners are on the mail system and how easily a disruption to the processing of paper refunds, payments, and returns can bring the entire system to a halt.

This is a weekly column from Kelly Phillips Erb, the TaxGirl. Erb offers commentary on the latest in tax news, tax law, and tax policy. Look for Erb’s column every week from Bloomberg Tax and follow her on Twitter at @taxgirl.