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National Taxpayer Advocate Report: Most Challenging Year Taxpayers And Tax Professionals Have Ever Faced

National Taxpayer Advocate Report

Issue Number:    IR-2022-11

Inside This Issue

National Taxpayer Advocate delivers Annual Report to Congress; focuses on taxpayer impact of processing and refund delays

WASHINGTON — National Taxpayer Advocate Erin M. Collins released her 2021 Annual Report to Congress, calling calendar year 2021 “the most challenging year taxpayers and tax professionals have ever experienced.” The report says tens of millions of taxpayers experienced delays in the processing of their returns, and with 77 percent of individual taxpayers receiving refunds, “processing delays translated directly into refund delays.”

The report credits the Internal Revenue Service for performing well under difficult circumstances. Since the start of the pandemic, the IRS, in addition to its traditional work, has implemented significant programs enacted by Congress. Among other things, it has issued 478 million stimulus payments (referred to as Economic Impact Payments or “EIPs”) totaling $812 billion and has sent Advance Child Tax Credit (AdvCTC) payments to over 36 million families totaling over $93 billion.

The report says “[t]he imbalance between the IRS’s workload and its resources has never been greater.” Since fiscal year (FY) 2010, the IRS’s workforce has shrunk by 17 percent, while its workload – as measured by the number of individual return filings – has increased by 19 percent. The report reiterates the National Taxpayer Advocate’s longstanding recommendation that Congress provide the IRS with sufficient funding to serve taxpayers well.

Major challenges for taxpayers

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NTA: Most Serious Problems Encountered By Taxpayers

Most Serious Problems Encountered By Taxpayers

IRC § 7803(c)(2)(B)(ii)(III) requires the National Taxpayer Advocate to prepare an Annual Report to Congress that contains a summary of the ten most serious problems encountered by taxpayers each year. For 2020, the National Taxpayer Advocate has identified, analyzed, and offered recommendations to assist the IRS and Congress in resolving ten such problems.

IRS RECRUITMENT, HIRING, AND EMPLOYEE RETENTION: Quality Taxpayer Service and Protection of Taxpayer Rights Are Directly Linked to the IRS’s Need to Improve Its Recruitment, Hiring, and Retention Strategies

Since FY 2010, the IRS workforce has shrunk by approximately 20 percent, about even with the inflation-adjusted reduction in the IRS budget. Inadequate funding combined with weaknesses in hiring and retention strategies have created an insufficient and disproportionately aging workforce, with an estimated 26 percent of IRS employees eligible to retire during FY 2021. The report says insufficient experienced staffing in the IRS’s Human Capital Office and hiring restrictions outside its control have left the IRS ill-equipped to handle the agency’s hiring needs. TAS recommends the IRS hire additional human resource specialists to meet hiring needs, restructure internal hiring processes to reduce cycle times, and renegotiate the hiring process with the National Treasury Employees Union to allow for up to 50 percent of all hiring announcements to be filled externally.

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National Taxpayer Advocate On IRS Math Errors – Part II

ERIN COLLINS - NATIONAL TAXPAYER ADVOCATE

Math Error Notices Aren’t Just Confusing; Millions of Notices Adjusting the Recovery Rebate Credit Also Omitted Critical Information

When the IRS uses its math error authority to correct an error on a taxpayer’s return, the taxpayer, under IRC § 6213(b)(2)(A), has 60 days from the time the notice was sent to dispute the correction and request an automatic abatement. After the abatement is made, the IRS must follow the deficiency procedures to reassess the tax, and it cannot collect the assessed amount during the 60-day period that the taxpayer has to request abatement.

As mentioned in the Math Error Blog: Part I, the IRS omitted the 60-day time period language for requesting abatement from over five million math error notices where the only adjustment was for the Recovery Rebate Credit (RRC). Ironically, neither the CP 11 nor CP 12 notices include the term “math error” or the authority provided by the Code.  So how are taxpayers even supposed to know what they are looking at?

Good news: The IRS is doing the right thing and will be issuing a supplemental notice providing taxpayers additional time, 60 days from the issuance of the new notice, to request an abatement, which includes providing taxpayers the ability to provide information or documentation to support the RRC.  If you received a prior RRC math error notice omitting the 60-day language, keep an eye on your mailbox for the supplemental letter and consider the options listed below.

This revelation of the missing 60-day abatement language raised many questions, but one thing is clear – this omission would have had serious implications for taxpayers and was a significant compromise of their rights, particularly the right to be informed, the right to a fair and just tax system, the right to challenge the IRS’s position and be heard, and the right to pay no more than the correct amount of tax. Specifically, this omission risked taxpayers losing their right to request an abatement, receive a statutory notice of deficiency, and seek judicial review in the U.S. Tax Court, the only pre-payment judicial forum.

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NTA On Math Error Corrections – Part I (Congress Has Given The IRS Authority To Make Changes On Your Tax Return)

National Taxpayer Advocate On Math Error - Part 1

In a previous blog, Lifecycle of a Tax Return, we set out the initial stages of a return’s journey once it’s been filed, including certain detours a return may take as it goes through reviews prior to being posted on IRS systems. One of these detours is a review by the IRS’s Error Resolution System (ERS) where the return is reviewed for possible errors or omissions. This filing season ERS has experienced a significant backlog causing delays in refunds.

To verify the accuracy of the Recovery Rebate Credit (RRC), Earned Income Tax Credit (EITC), Child Tax Credit (CTC) or Additional Child Tax Credit (ACTC), the ERS Unit is manually reviewing all returns where the taxpayer has claimed the RRC or used their 2019 earnings for the purpose of calculating the EITC, CTC, and ACTC. For more details on the backlog in processing returns, see the National Taxpayer Advocate’s 2022 Objectives Report to Congress, Review of the 2021 Filing Season.

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NTA Blog: 2021 Filing Season Bumps In The Road: Part III

NTA Blog: 2021 Filing Season Bumps In The Road: Part III

Despite all its challenges, the IRS processed 136 million individual income tax returns and issued 96 million refunds totaling $270 billion during the 2021 filing season. For those not familiar with IRS jargon, the term “filing season” is a term of art that includes income tax returns filed on or before the due date of the return, without considering returns filed after the due date or before the October 15 extension date. For example, the 2021 filing season consists of mostly tax year 2020 income tax returns filed between February 12, 2021, and the postponed due date of May 17, 2021.

In addition to its traditional work, the IRS was entrusted by Congress to issue three rounds of stimulus payments – over 475 million payments worth $807 billion – and delivered other financial relief programs to mitigate the impact of the pandemic on U.S. families and businesses. The IRS and its employees deserve tremendous credit for what they have accomplished under exceedingly difficult circumstances. The filing season challenges continue to date and, as the Commissioner has acknowledged, there is always room for improvement. This past year and the 2021 filing season conjure up many clichés for taxpayers, tax professionals, the IRS, and its employees – it was a perfect storm, it was the best of times and worst of times, patience is a virtue, with experience comes wisdom and with wisdom comes experience, out of the ashes, and throughout the past year we experienced historic highs and lows.

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National Taxpayer Advocate’s NTA Blog: 2021 Filing Season Bumps in the Road: Part II

National Taxpayer Advocate’s NTA Blog: 2021 Filing Season Bumps in the Road: Part II

The National Taxpayer Advocate Erin M. Collins follows up with Part II of her recently published NTA Blog on filing season challenges and refund delays. In her newest blog, Collins talks about the latest legislation, the new American Rescue Plan Act (ARPA), enacted in the middle of the tax filing season, its benefits to taxpayers and the challenges the IRS faces in executing the provisions of.

The National Taxpayer Advocate draws attention to two specific legislative changes:

  1. Partial Exclusion of Unemployment Compensation Benefits from Income

In most cases, the IRS will automatically recompute any deficiencies or refunds for taxpayers who qualify for the partial exclusion of taxation of unemployment benefits up to $10,200 for each taxpayer if the modified adjusted gross income (AGI) is less than $150,000 and will make the necessary adjustments, eliminating the need for millions of taxpayers to file amended returns. There are certain caveats which apply for taxpayers with qualifying children who might now be eligible for other tax credits not claimed on the original tax return.

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National Taxpayer Advocate: IRS Resumes Passport Certification Program

The IRS recently announced that it resumed its Passport Certification program on March 14, 2021. The IRS is again notifying the Department of State of taxpayers certified as owing seriously delinquent tax debt. On March 25, 2020, the IRS suspended certain collection activities including passport certification under the People First Initiative in response to the Coronavirus (COVID-19) pandemic. Affected taxpayers will receive notices and are encouraged to pay what they owe or enter into a payment agreement with the IRS to avoid putting their passports in jeopardy – see the Actions you can take section below. The great majority of certifications are related to pre-pandemic liabilities that are considered a priority for the IRS due to the amount owed and length of time the taxpayers have been delinquent without working with the IRS to resolve their tax debts. The law generally requires the IRS to certify individuals to the Department of State when they have unpaid, legally enforceable federal tax debt totaling more than $54,000 (including interest and penalties) for which a notice of federal tax lien has been filed and all administrative remedies under Internal Revenue Code Section 6320 have lapsed or been exhausted, or a levy has been issued. Per the law, the State Department generally will not renew passport or issue a new passport after receiving certification from the IRS, and in some cases may revoke the passport. If the taxpayer is overseas, the State Department may issue a limited validity passport good for direct return to the United States. However, before denying a passport renewal or new passport application, the State Department generally will hold the taxpayer’s application for 90 days to allow taxpayers to: Make full payment of the tax debt, or Enter a satisfactory payment arrangement with the IRS, or Resolve any erroneous certification issues. Once resolved, the IRS, generally, will reverse the certification within 30 days of the date of resolution and provide notification to the State Department as soon as practicable. Actions you can take Payment of taxes The IRS offers a number of programs to help taxpayers meet their tax obligations including payment agreements, Offers in Compromise, and, if the IRS determines a taxpayer cannot pay any of their tax debt, a temporary delay of the collection process. You can also view our Taxpayer Advocate Service Paying Taxes Get Help pages for descriptions of payment options if you are unable to pay in full. If you recently filed your tax return for the current year and expect a refund, the IRS will apply the refund to the debt. If the refund is enough to satisfy your seriously delinquent tax debt, the IRS considers the account fully paid. However, taxpayers should not solely rely on this option to resolve the issue at this time, because of 2019 and 2020 tax return processing delays due to the Coronavirus (COVID-19) pandemic. Disagree with the tax due If you disagree with the tax amount or the certification was made in error, you should contact the phone number on Notice CP508C: 855-519-4965; 267-941-1004 for international callers. If you’ve already paid the tax debt, please send proof of that payment to the address on your Notice CP508C. Imminent travel plans If you’re leaving soon for international travel, you should contact the IRS promptly using the phone number on the Notice: 855-519-4965 or 267-941-1004 for international callers. The IRS.gov Revocation or Denial of Passport in Case of Certain Unpaid Taxes webpage has more information about this program and actions you can take to resolve the debt. More resources Understanding Your CP508C Notice Understanding Your CP508R Notice; Note: this page also has answers to many common passport certification questions IR-2019-23: Individuals Who Need Passports for Imminent Travel Should Contact IRS Promptly to Resolve Tax Debt

The IRS recently announced that it resumed its Passport Certification program on March 14, 2021. The IRS is again notifying the Department of State of taxpayers certified as owing seriously delinquent tax debt. On March 25, 2020, the IRS suspended certain collection activities including passport certification under the People First Initiative in response to the Coronavirus (COVID-19) pandemic.

Affected taxpayers will receive notices and are encouraged to pay what they owe or enter into a payment agreement with the IRS to avoid putting their passports in jeopardy – see the Actions you can take section below. The great majority of certifications are related to pre-pandemic liabilities that are considered a priority for the IRS due to the amount owed and length of time the taxpayers have been delinquent without working with the IRS to resolve their tax debts.

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National Taxpayer Advocate Report To Congress

National Taxpayer Advocate

IRC § 7803(c)(2)(B)(ii)(III) requires the National Taxpayer Advocate to prepare an Annual Report to Congress that contains a summary of the ten most serious problems encountered by taxpayers each year. For 2020, the National Taxpayer Advocate has identified, analyzed, and offered recommendations to assist the IRS and Congress in resolving ten such problems.

Most Serious Problems Encountered by Taxpayers

IRS RECRUITMENT, HIRING, AND EMPLOYEE RETENTION: Quality Taxpayer Service and Protection of Taxpayer Rights Are Directly Linked to the IRS’s Need to Improve Its Recruitment, Hiring, and Retention Strategies
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Taxpayers, Bankruptcy, And The Statutory Notice of Deficiency

Taxpayers, Bankruptcy, And The Statutory Notice of Deficiency

Although extended unemployment benefits, eviction moratoriums, stimulus payments, small business loans, the Coronavirus Aid, Relief, and Economic Security (CARES) Act, the Consolidated Appropriations Act, 2021, and other government programs may have stemmed the tide of anticipated COVID-related bankruptcy filings, seeking bankruptcy relief may still be the most appropriate option for some taxpayers experiencing financial difficulties in the wake of the COVID pandemic. Bankruptcy relief allows debtors to receive forgiveness of many of their debts, subject to complex rules. Further, upon filing a petition in bankruptcy court, debtors generally receive a reprieve from their creditors’ collection actions, and that includes the IRS.

The filing of a bankruptcy petition generally triggers an “automatic stay” that immediately stops current and future collection actions for pre-petition debts and property of the bankruptcy estate for the pendency of the bankruptcy case. Pre-petition debts include taxes incurred before the filing of the bankruptcy petition, even if they were not yet assessed. Income taxes are considered incurred on the last day of the income tax year. Generally, the automatic stay lifts upon conclusion of a bankruptcy case, either upon entry of an order discharging the debtor’s eligible debts or an order dismissing the case.

While the automatic stay does not prohibit the IRS from assessing deficiencies that have been agreed to by the taxpayer’s signature of consent or full payment of tax, it does limit certain IRS compliance activity for unagreed deficiencies covered by the bankruptcy.

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Offset Of Recovery Rebate Credits: The IRS Has Agreed To Exercise Its Discretion To Stop Offsets of Federal Tax Debts

https://www.taxpayeradvocate.irs.gov/news/nta-blog-update-on-offset-of-recovery-rebate-credits-the-irs-has-agreed-to-exercise-its-discretion-to-stop-offsets-of-federal-tax-debts/

In a previous blog, I pointed out that a change in the law made in late December affected the treatment of recovery rebate credits (RRCs) claimed on taxpayers’ 2020 income tax returns. Unlike the advance payments issued to individuals last spring and in early January, the credit claimed on a 2020 tax return will be reduced to pay off certain outstanding debts. This offset creates an inconsistency between the treatment of the advance payments and the treatment of RRCs claimed on 2020 tax returns where the RRC will be reduced by outstanding liabilities. This is a big deal for taxpayers affected by the change.

Good news: The IRS has agreed to use its discretion to bypass offsets for federal tax debts for taxpayers who file 2020 returns that claim the RRC.

By Way of Background

When Congress directed the IRS to issue stimulus payments (otherwise known as Economic Impact Payments or EIPs) of $1,200 per adult and $500 per qualifying child in April 2020 and then for an additional $600 per person in December, it required that the payments be issued without reduction to satisfy other debts of the recipient (except for child support for the first round of payments). The rationale seemed clear: Individuals in debt are often the ones financially struggling the most, and Congress wanted the funds to reach these people without any reductions as soon as possible.

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Wait, When Did This Virtual Currency Question Appear On My 1040 Tax Form?

Wait, When Did This Virtual Currency Question Appear On My 1040 Tax Form?

The IRS Form 1040 now includes a checkbox which taxpayers must address regarding virtual currency. The form asks taxpayers if “at any time during 2020, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency?”  The key question at hand is who is required to answer “Yes” and who may answer “No?” National Taxpayer Advocate Erin M. Collins addresses these and many other questions taxpayers have when it comes to virtual currency and their taxes.

Given the explosion in virtual currency, the IRS has increased its focus on virtual currency tax compliance. In 2019, the IRS sent letters to over 10,000 American taxpayers who may have failed to report their virtual currency transactions and pay the associated income taxes. The National Taxpayer Advocate says, “taxpayers should proceed with care in order to experience the benefits of virtual currency while avoiding its pitfalls.”

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National Taxpayer Advocate 2021 Purple Book

National Taxpayer Advocate 2021 Purple Book

The National Taxpayer Advocate is releasing the National Taxpayer Advocate 2021 Purple Book. In it, she presents a concise summary of 66 legislative recommendations that she believes will strengthen taxpayer rights and improve tax administration. Most of the recommendations have been made in detail in prior reports, but others are presented in this book for the first time. She believes that most of the recommendations presented in this volume are non-controversial, common sense reforms that the tax-writing committees and other Members of Congress may find useful.

Among the 66 legislative recommendations for consideration by Congress are:

• Provide the IRS with sufficient funding to meet taxpayer needs and improve tax compliance. Since fiscal year (FY) 2010, the IRS’s budget has been reduced by about 20 percent after adjusting for inflation. As a result, the IRS has been unable to meet taxpayer needs (e.g., the IRS received over 100 million telephone calls in FY 2020, yet employees were only able to answer about 24 percent). IRS also has been unable to modernize its information technology (IT) systems. In FY 2020, the IRS collected about $3.5 trillion on a budget of about $11.51 billion, producing a remarkable return on investment of more than 300:1.

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