By mid-2022, the IRS was saddled with a backlog of just over 10 million unprocessed returns for individuals across the country. This may be due to lingering delays from the pandemic, but the problem is much bigger and more systemic than that. Congress has steadily cut funding for the IRS over the past decade. At the same time, new responsibilities for tax professionals have piled on, and the IRS neglected to upgrade its legacy systems.
Congress is now on the verge of sending $80 billion through the Inflation Reduction Act to help spark unprecedented tech modernization. But will it make a difference?
A rapid infusion of cash sounds like the overhaul the American taxpayer and the IRS itself have been waiting for, but things aren’t going to change overnight. Much like calling a cable company to fix a service problem or renewing licenses at the DMV, the IRS is seen as a necessary evil. Dealing with it each year is just something every law-abiding American must do. It’s the reason why so many rely on tax consultants such certified public accountants, enrolled agents, financial advisers, or online services and software to do their tax returns and other filings for them.
While there are short-term workarounds and specific actions to take before professionals deal with the yearly black box of the IRS, a real long-term solution requires an overhaul of attitude and process.
Creating Private Sector Expectations
Certain companies dominate because of the way they consistently conduct and execute their overall business plan. But when it comes to dealing with the government, there’s a willingness to allow incompetence. It’s a defeatist attitude that seems to be playing itself out with the promises made in the new legislation.
In private sector businesses, leaders can replace and appoint people to solve problems until they chart a new course and succeed. A similar approach may be needed to solve our current issues. The funding and intent are there, and the IRS may rise to the occasion if we all expect private sector-type results.
Until those changes are made, and specialists see an actual difference for their clients, they are essentially stuck. Or are they? While the IRS gets its act together, taxpayers and their representatives don’t have to be left in the dark.
What Tax Professionals Can Expect
Let’s take filing for the Employee Retention Credit as an example. It’s a very manual and burdensome process for any company interested in claiming it. Created through the CARES Act to assist small businesses that were negatively affected by the pandemic, the ERC allows business owners to file for up to hundreds of thousands—if not millions—of dollars in reimbursements. Although it expired at the end of 2021, many people do not realize businesses now have up to three years from the end of the program to claim eligibility.
Much like most things with the IRS, knowing how to get the money back is confusing. The process begins with document collection, including company payroll ledgers, profit and loss reports, 941 forms for the years being considered for the credit, Paycheck Protection Program applications, forgiveness documents, and more. Sixty separate documents are required in total, all before eligibility for the credit can be determined and an estimated credit amount can be calculated.
Once the credit for all eligible years and quarters has been calculated, an amended payroll tax document called a 941-X is prepared. The last step requires individuals to play into the antiquated IRS systems themselves by physically printing the 941-X, then signing and mailing them. What comes next is the dreaded waiting game and battle to obtain claim status updates, but it doesn’t have to be that way.
Taking Advantage of the Process
You get massive delays and dissatisfied people when you add complicated processes to antiquated technology. Instead of waiting for state-of-the-art processes from the IRS to ease the burden on those filing for taxpayers, professionals can rely on pre-file third-party strategies to cut down on the time needed to gather and process these documents, ultimately getting vital tax credits back more quickly.
Continuing with the ERC example, given the volume of documentation that is required to properly file an ERC claim, third-party solutions that have partnerships with payroll and accounting software companies can gather a good portion of the required documentation directly on behalf of claims.
An additional game-changer strategy is a Form 2848, or limited power of attorney. Filing this form allows licensed tax attorneys to speak on a person’s behalf. This means that the actual work on a claim is done by a licensed tax attorney who helps navigate all the difficulties, signs off on documents, and accepts liability associated with the decision-making by certifying that what they do is lawful and appropriate. Essentially, it takes the confusion out of the equation by using legal means to make the upfront process significantly easier.
This, coupled with the potential use of transcript software, allows third-party solutions to obtain real-time claim status updates directly from the IRS to cut down on wait times. Once a company’s ERC claim is ready for filing, additional shortcuts such as e-signing services to deliver the prepared 941-X to email inboxes help enable easy delivery directly to the IRS.
By eliminating the need to print and mail physical versions of these documents, not only does this turn into an eco-friendly process, but it is also faster and more efficient for the taxpayer—all while the IRS struggles internally to keep up.
Congress can leave the IRS without sufficient funding and no real plan for a technological change besides legislative platitudes. The headlines touting $80 billion in upgrades sound good, but there will continue to be an unmanageable situation with an inability to process returns and other lifeline tax credits. The real question is what can professionals do right now while the essential changes happen over time to create a win for everyone.
This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Howard Makler is founder and CEO of Innovation Refunds, a company that helps small- and medium-sized businesses apply for the Employee Retention Credit. He is also an adjunct professor of finance at the Wharton School of the University of Pennsylvania.
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