When Will Relief Arrive for the Current Tax Year Challenges?

In her 2022 annual report to Congress, National Taxpayer Advocate Erin Collins labeled 2021 the most challenging year that taxpayers and professionals have ever experienced, with a large backlog of unprocessed returns leading to financial hardship. As of mid-December, the unprocessed return backlog included 6.2 million individual income tax returns, 2.4 million amended individual income tax returns, 2.8 million quarterly payroll tax returns and 500,000 amended quarterly payroll returns. While e-filed returns did fare better than paper returns in terms of processing times, millions of e-filed returns were added to the paper backlog because of discrepancies between the returns and IRS records. All this has led to millions of notices sent to taxpayers indicating that their returns have not been filed or, worse, assessing large balances due.

Collins highlighted certain recommendations that could help resolve the issues the IRS and, as a result taxpayers, are facing. Her main recommendation was for Congress to provide the agency with additional funding to increase staffing levels and upgrade technology. However, with the stalling of the Build Back Better Act, such funding is not likely to be appropriated in the near term.

To begin alleviating these pressures, the IRS recently announced that it is suspending automatic notices in situations where the IRS has credited taxpayers for tax payments, but has no record of the corresponding tax returns being filed. Such notices indicating the missing returns are increasingly frustrating for taxpayers and their tax preparers since many of these “missing” returns are actually stuck in the processing queue for months.

While it is a start, many have recommended other steps the IRS should be taking to provide relief, such as extending the usual 60- to 90-day taxpayer account holds on collection and audit activities to match the current processing times of backlogged returns. In a January 26, 2022 letter from nearly 200 members of Congress to the Treasury Department, a group of House Representatives called for additional actions from the IRS, including:

• Halting automated current collections activities until at least 90 days after April 18, 2022 (the current year’s tax deadline);
• Delaying the collection process for filers until any active or pending penalty abatement requests have been processed;
• Streamlining the reasonable cause penalty abatement process for taxpayers affected by the pandemic without the need for written correspondence;
• Targeting penalty relief for taxpayers who paid at least 70% of the tax due for tax years 2020 and 2021; and
• Expediting the processing of amended returns and providing the Taxpayer Advocate Service caseworkers with timely responses.

In response to the letter, the IRS said it is evaluating the recommendations but will need to work with Congress to achieve many of them. One particular constraint that would require Congressional action is to address the fact that many IRS notices must be statutorily mailed within a specified timeframe to be legally valid. Further, the proffered relief would necessitate significant overhauls to an antiquated IRS computer system without which may result a domino effect impacting other systems and e-file processing.

Unfortunately, the current tax season is shaping up to be even more challenging than those of past years, if that is even possible. The backlog of unprocessed returns and continued peppering of deficiency notices has frustrated taxpayers and accountants alike. If you are caught in the vortex of unprocessed tax returns for which you are owed refunds or have been the subject of threatening notices and need help, please contact Alan Goldenberg, Principal and Leader of the State and Local Taxation and Tax Controversy groups, or your Anchin Relationship Partner.