Earlier this month, the IRS announced that it would put a temporary hold on automated collection notices, unfiled tax return notices, and balance due notices that it sends to taxpayers.
The IRS said the stop would last until the existing backlog is “worked through.” However, the timing of that happening is anyone’s guess since, as of early this month, the IRS still had in its inventory about 17.6 million tax returns—not including amended returns—that require manual processing.
Rather than offer a target date, the IRS stated that it will continue to assess its inventory and will “determine the appropriate time to resume the notices.”
According to National Taxpayer Advocate Erin Collins, the IRS sent tens of millions of notices to taxpayers during 2021. These included nearly 14 million math error notices, automated underreporter notices, notices requesting that taxpayers authenticate their identity, correspondence examination notices, and collection notices. If that number seems high, it is. Last year, I reported that while the IRS made 628,997 math error corrections through July 15, 2020, it made about 9 million math error corrections on returns filed by taxpayers in the same period in 2021—a more than 1400% increase.
Making matters worse, when responses are required, the IRS hasn’t been able to process them. That becomes yet another domino to fall, causing more automated processes to happen, further delaying tax refunds. Collins reported that last year, the IRS received 6.2 million taxpayer responses to proposed adjustments and took an average of 199 days—nearly seven months—to process them. That’s a significant increase from just 74 days in fiscal year 2019, the most recent pre-pandemic year.
The notice suspension is good news for taxpayers and tax professionals who have been increasingly frustrated with the receipt of inaccurate notices and those requiring a response which may not be processed or acknowledged in a timely manner. That’s why Collins, as well as lawmakers and a coalition of tax and accounting professional groups asked the agency to put a hold on the notices, allowing taxpayers, tax professionals—and, quite frankly, the IRS—some space to breathe.
The IRS is not suspending all taxpayer notices. The suspended notices are targeted to those which may involve processing or manual reviews of payments or returns. As of now, the suspended notices for individual taxpayers include:
- CP80, Unfiled Tax Return: Generally sent when the IRS credited payments and/or other credits to a taxpayer’s account, but the IRS hasn’t received a corresponding tax return for that tax period.
- CP59 and CP759 (in Spanish), Unfiled Tax Return(s) - 1st Notice: There is no record of a prior-year return being filed.
- CP516 and CP616 (in Spanish), Unfiled Tax Return(s) - 2nd Notice: Second notice requesting information when there is no record of a prior-year return being filed.
- CP518 and CP618 (in Spanish), Unfiled Tax Return(s) - Final Notice: Final reminder that there is no record of a prior-year(s) return filed.
- CP501, Balance Due - 1st Notice: There is an outstanding balance.
- CP501, Balance Due- 2nd Notice: Second notice requesting payment when there is an outstanding balance.
- CP504, Balance Due - 3rd Notice, Intent to Levy: Final notice that a payment has not been received for an unpaid balance, along with a Notice of Intent to Levy (seize your assets under Section 6331 of the Tax Code)
- 2802C, Withholding Compliance Letter: Under-withholding of federal tax from wages, with instructions on making a correction
The suspended notices also include the following for business filers:
- CP259 and CP959 (in Spanish), Return Delinquency: There is no record of a prior-year return being filed.
- CP518 and CP618 (in Spanish), Final Notice – Return Delinquency: Final reminder notice that there is no record of a prior-year tax return(s).
Notices Could Still Be in the Mail
Some taxpayers and tax professionals may still receive automated notices while the processes shut down. The IRS advises that there’s generally no need to call or respond to these notices if they are inaccurate or reflect something that has since been resolved—like a notice alleging an unfiled return when one has been filed.
However, the agency cautions that if a taxpayer or tax professional believes a notice is accurate, such as a balance due notice, they should take steps to resolve the issue. The hold does not affect outstanding balances, and penalty and interest will continue to accrue.
The suspension of automated notices is a good first step. Tax professionals—like me—and the Taxpayer Advocate also suggest a related issue could easily be addressed for taxpayers: penalty relief for 2020 and 2021 tax returns.
By statute, relief for penalties for failure to file and failure to pay, as well as failure to deposit must be abated if a taxpayer can show that the failure to comply was “due to reasonable cause and not due to willful neglect.” The IRS considers reasonable cause “based on all the facts and circumstances in each situation” and “is generally granted when the taxpayer exercised ordinary business care and prudence in determining his or her tax obligations but was nevertheless unable to comply with those obligations.” For example, forgetfulness wouldn’t count, but death or sickness of a taxpayer or members of their family—a likely scenario for many taxpayers in a pandemic—could be reasonable cause.
The IRS can also abate these penalties under its first-time abatement, or FTA, procedures. This is an administrative waiver, implemented in 2001, and is available when a taxpayer is otherwise compliant and has not claimed an FTA penalty waiver within the past three years. To reduce compliance and administrative burdens, the Taxpayer Advocate suggests that the IRS provide systemic FTA penalty relief for all eligible taxpayers. At the same time, the IRS should advise taxpayers that they can request consideration for reasonable cause relief if it makes sense and the taxpayers want to hold onto the FTA waiver for future tax years. That’s important since, by policy, the IRS typically considers and applies administrative waivers like FTA before reasonable cause.
The IRS claims that this won’t be the last word on notices and other relief. IRS Commissioner Charles Rettig says, “Our efforts are not limited to suspension of these additional letters and the possibility of similar actions going forward. We have redeployed and reallocated resources throughout the IRS and have implemented innovative strategies in an ongoing effort to provide a meaningful reduction in our inventories.” Stay tuned!
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.
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