Today’s tax professionals can confirm the many impacts of the Internal Revenue Service’s current resource limitations on taxpayer services this year. From long call wait times to tax return processing delays to increased instances of penalties being assessed against compliant taxpayers, the effects are evident. Perhaps most frustratingly, IRS examinations that could have been resolved with an adequately staffed agency have been unnecessarily drawn out and, in some cases, have become contentious.
To address these issues, the process of reform suggests a slow refunding of the IRS. However, it could take years of hiring and training for the organization to manage the full scope of its responsibilities. So, what do we do in the meantime?
Here are some suggestions for dealing with the IRS in today’s resource-constrained environment.
Closely monitor IRS accounts
The IRS’s most recent filing season was challenging to say the least. Some taxpayers who filed electronically have learned that their returns were recorded incorrectly in the IRS’s system, resulting in errors in taxable income or net operating loss carryforwards.
IRS input errors can have significant negative consequences for compliant taxpayers. If you remitted the proper amount of income tax (i.e., the income tax liability reported on your return), an IRS input error that results in a higher recorded income tax liability could lead to the wrong assessment of late payment penalties. Even worse, if the input error results in a lower recorded income tax liability, the IRS may refund your “excess” payment. If the taxpayer inadvertently accepts the refund (such as by depositing the refund check), the IRS will assess underpayment interest from the day it sent the refund until the day the taxpayer pays it back.
IRS input errors can also negatively impact taxpayers who overpaid their current year tax liability and elected to have the excess amount credited to the next tax year. If the input error increases the taxpayer’s current year tax liability, the IRS will credit a lower amount, possible initiating penalties for late payment in the following tax year.
If taxpayers are actively monitoring their IRS accounts, the errors that begin with an IRS input mistake and end with penalty and interest assessments can be caught early. In other words, taxpayers who create a login to the IRS’s eServices are able to track most activity on their tax accounts, confirm the IRS has accurately recorded their tax filings and ensure it has not sent any refund checks in error. Tax professionals can easily monitor their clients’ tax accounts with a properly executed Form 2848, Power of Attorney.
Monitor your IRS correspondence
It can take months for the IRS to respond to taxpayer correspondence. The IRS is similarly slow in processing amended tax returns, including amended returns that report a claim for refund. Because of these processing delays, the National Taxpayer Advocate’s office recently announced it had “made the difficult decision to suspend accepting cases where the sole issue involves the processing of amended returns until the IRS is able to work through its backlog.”
The IRS also appears to lack adequate staff to track and answer many taxpayer communications. As a general rule, if the IRS has not responded to you within eight to 10 weeks of initial contact, you should follow up with a phone call to determine whether the IRS is taking steps to resolve the issue. IRS call center representatives can often see notes on the taxpayer’s account that clarify what (if any) action has already been taken.
Although you can certainly try to follow up with the IRS themselves, a professional tax advisor will likely have a more efficient line of communication via the IRS’s Practitioner Priority Service hotline. It is only available to appointed taxpayer representatives.
Avoid paper communication whenever possible
The IRS’s ongoing battle with its paper backlog has been front-page news since the COVID-19 pandemic began. However, despite its efforts to hire and retain employees, the agency continues to struggle. The latest, highly optimistic announcement stated it will clear up its backlog “by the end of calendar year 2022.”
Although no form of communication is quick or easy right now, the IRS is generally processing electronic communications, such as e-filings and faxes, much more quickly than paper communications. So, it’s advisable to use electronic methods of communicating whenever possible. Not only is the IRS processing electronically filed tax forms more quickly than paper filings, it is also typically making fewer input mistakes with electronic returns, thus reducing the risk of inaccurate penalties and interest. If the IRS offers electronic filing of any tax form, whether through a third-party, IRS-authorized e-file provider or via a simple fax submission, you should consider taking advantage of these simple transmissions.
An important note: Make sure you retain and carefully store your IRS transmission receipts so you are prepared to show proof of filing.
Document and retain all IRS communication
The IRS processing centers are not the only area of the agency currently struggling with customer service. In fact, some IRS examination teams appear not to be performing the same comprehensive reviews that used to allow cases to close without the IRS Office of Appeals or tax litigation, which may lead to unnecessary assessments. These teams may also be slow to make progress on taxpayers’ cases, then request months-long statute extensions to finish their work. These types of examination strategies are also tied to IRS resource constraints.
You can alleviate examination issues by being proactive and documenting every important communication with the IRS. Every response to an IRS inquiry and communication with an IRS examiner should be clearly dated, printed to PDF and saved in a safe file.
You should also document every important conversation with an IRS examiner via an email to them — e.g., “Dear IRS Agent, please confirm my understanding of the following discussion we had today ….” We can’t emphasis enough how important it is to clearly record and save all important interactions with the IRS. With the current staffing shortage, the simplest of IRS examinations can turn sour quickly.
Your documentation of common understandings and examination delays is now critical to establishing a thorough defense if, for any reason, your case must go to appeals or litigation.