AICPA Recommends Coronavirus Penalty Abatement Process 

December 2, 2020

The Honorable Bill Pascrell, JR
Chairman
Oversight Subcommittee
House Ways & Means Committee
United States House of Representatives
1102 Longworth House Office Building
Washington, DC 20515

The Honorable Mike Kelly
Ranking Member
Oversight Subcommittee
House Ways & Means Committee
United States House of Representatives
1102 Longworth House Office Building
Washington, DC 20515

Re: November 20, 2020 Hearing with the Commissioner of the Internal Revenue Service

Dear Chairman Pascrell and Ranking Member Kelly:

The American Institute of CPAs (AICPA) respectfully submits the enclosed statement for the record of the hearing on November 20, 2020 with the Commissioner of the Internal Revenue Service (IRS). We appreciate the leadership taken by the Subcommittee for your commitment to ensuring that taxpayers affected by the Coronavirus Disease 2019 pandemic receive reasonable treatment from the IRS.

The AICPA is the world's largest member association representing the CPA profession, with more than 431,000 members in the United States and worldwide, and a history of serving the public interest since 1887. Our members advise clients on federal, state and international tax matters and prepare income and other tax returns for millions of Americans. Our members provide services to individuals, not-for-profit organizations, small and medium-sized businesses, as well as America's largest businesses.

We appreciate your consideration of these comments and welcome the opportunity to discuss these issues further. If you have any questions, please feel free to contact Melanie Lauridsen, Senior Manager — AICPA Tax Policy & Advocacy, at (202) 434-9235 or Melanie.Lauridsen@aicpa-cima.com; or me at (612) 397-3071 or Chris.Hesse@CLAconnect.com.

Sincerely,

Christopher W. Hesse, CPA
Chair, AICPA Tax Executive Committee
American Institute of CPAs
Washington, DC

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WRITTEN STATEMENT
OF THE AMERICAN INSTITUTE OF CPAs
SUBMITTED FOR THE RECORD OF THE
NOVEMBER 20, 2020

HEARING OF
THE UNITED STATES HOUSE OF REPRESENTATIVES
COMMITTEE ON WAYS & MEANS
SUBCOMMITTEE ON OVERSIGHT
WITH
THE COMMISSIONER OF THE INTERNAL REVENUE SERVICE

INTRODUCTION

The American Institute of CPAs (AICPA) appreciates the leadership taken by the House Ways & Means Committee to ensure that taxpayers are receiving the service they deserve from the Internal Revenue Service (IRS). As a result of the Coronavirus Disease 2019 pandemic (commonly known as “Coronavirus”) many taxpayers and tax preparers faced insurmountable challenges and were unable to pay taxes or timely file tax returns by the extended due date, despite making good faith efforts to do so. Given these exceptional circumstances, penalty relief should be a priority as part of the IRS's efforts to mitigate the negative impact of the Coronavirus.

In this statement, we provide recommendations that are fair, reasonable, practical and address the issues that taxpayers and tax practitioners are currently struggling with daily. Specifically, the IRS should offer an expedited and streamlined reasonable cause penalty abatement process to taxpayers affected by the Coronavirus. Additionally, the IRS should develop specific Coronavirus examples that qualify for reasonable cause abatement and share these examples with all telephone assistors through an Interim Guidance. Furthermore, the IRS should develop a dedicated telephone number, or a dedicated prompt, for taxpayers or their advisors to call to request Coronavirus-related penalty relief.

RECOMMENDATIONS

For taxpayers that have received failure to file or late payment penalty notices, due to the monumental difficulties of the Coronavirus, the AICPA recommends the IRS create an expedited and streamlined reasonable cause penalty abatement process that eliminates the need for written requests. The IRS should offer a penalty waiver, similar to the procedures of first time abate (FTA) administrative waiver, based on the Coronavirus impacts on both the taxpayer or the practitioner.¹ As the Coronavirus is an extraordinary event, unlike anything faced in recent history, penalty relief based on a Coronavirus impacts should not be considered first time abate. A taxpayer's eligibility for first time abate should not be impacted in future tax years even if the taxpayer was granted penalty relief due to Coronavirus impacts.

This expedited and streamlined relief should also be available through oral requests² and by the practitioner, rather than requiring the request in writing.³

Furthermore, it is critical that immediate guidance, such as Interim Guidance, with specific Coronavirus examples that qualify for reasonable cause is developed and provided to all telephone assistors. The examples should illustrate situations where reasonable cause relief should be granted as a result of the effects of the Coronavirus on either the taxpayer or the practitioner.

Finally, a dedicated telephone number, or a dedicated prompt within the already existing taxpayer call lines and the Practitioner Priority Service line, should be established to call and request Coronavirus-related penalty relief. To ensure that assistors are familiar with the Interim Guidance and have authority to abate or waive penalties, training should be provided to the telephone assistors.

BACKGROUND

Taxpayers are required to file their federal income taxes by the return due date or the extended due date if an extension to file is requested and approved. In order to avoid failure to file penalties, the taxpayer must show such failure to file was due to reasonable cause and not due to willful neglect.⁴

Taxpayers are also required to pay the amount of tax shown on their U.S. income tax return by the tax deadline or the taxpayer is subject to failure to pay (“late payment”) penalties. If the taxpayer can show reasonable cause for not paying on time, the taxpayer may not have to pay the late payment penalty.⁵ Historically, the IRS has granted relief to taxpayers that request an extension of time to file their income tax return and pay at least 90% of the taxes owed with the request. Taxpayers must pay the remaining balance by the extended due date.⁶

A taxpayer can request reasonable cause penalty relief for “[a]ny reason that establishes a taxpayer exercised ordinary business care and prudence but nevertheless failed to comply with the tax law may be considered for penalty relief.”⁷ However, the taxpayer must provide documentation to support their claim, such as hospital records, and must submit a written request.

Throughout the summer, the AICPA heard from practitioners expressing concerns about being able to complete returns by the September 15 and October 15 extended due dates because of the significant impact the Coronavirus has had on their clients and on their practices. Practitioners, and clients, are still managing remote work environments, often have had difficulty communicating with the IRS, and many are caring for sick family members or are sick themselves. Practitioners are helping small businesses with the Paycheck Protection Program applications and forgiveness, and otherwise advising small businesses on the brink of closure. Despite making every good faith effort to comply, these practitioners and taxpayers were fearful of missing the due dates.

These concerns were relayed to the IRS and a comment letter was submitted on July 2 in hopes of preventing further distress.⁸ Specifically, the AICPA requested the IRS automatically waive all penalties under section 6651(a)(1) (failure to file penalty) and section 6651(a)(2) (failure to pay penalty) for the 2019 tax year through the extended filing deadline. Additionally, the AICPA requested an expedited process to approve new installment agreements or modifications of existing installment agreements, based on realistic and affordable payment arrangements, for taxpayers impacted by the Coronavirus. Furthermore, the AICPA recommended that the IRS halt its automatic collections activities of liens and levies by at least 90 days after July 15 and, at that time, the IRS should reassess the appropriateness of re-establishing any collection activities

Starting approximately a month after the September 15, 2020 filing deadline, many taxpayers that missed the filing and payment deadline, due to the Coronavirus, started to receive notices for failure to file penalties. We are fearful that a second wave of notices for failure to file and late payment penalties will soon be sent to taxpayers for returns that were due October 15 but were filed late as a result of the impact of the Coronavirus.

On November 2, the IRS released IR-2020-248, which made it easier for taxpayers to set up payment agreements. For example, the IRS has allowed short-term payment plan options to extend up to 180 days (instead of 120 days) and flexibility on payments for taxpayers unable to meet the payment terms of an accepted Offer in Compromise, among other payment accommodations.

On November 17, Commissioner Rettig announced, in an AICPA conference, that the IRS would not provide global penalty relief and that taxpayers should focus on a series of relief procedures such as reasonable cause which require a written submission. The Commissioner also provided an update on the mail backlog that the IRS still had over 3 million pieces of mail to go through before they could start to respond to any new written requests.⁹

CONCLUDING REMARKS

The circumstances associated with the late filed returns or late payment of taxes, due to the Coronavirus, should generally qualify for reasonable cause penalty waivers. From a broad policy perspective, this year, the IRS should liberally waive penalties for late filing returns or late payments that are delayed due to the effects of the Coronavirus on taxpayers and their advisers. Furthermore, the procedures for granting penalty relief should be expedited and should not unnecessarily increase burden for the taxpayer, the practitioner, or the IRS. Indeed, the IRS has indicated that it still has a 3 million-piece mail backlog, questioning the efficacy of requiring abatement requests in writing. An expedited and streamlined reasonable cause penalty abatement process is both necessary and appropriate to provide the needed penalty relief during these extraordinary circumstances.

The AICPA appreciates the opportunity to submit this written statement for the record in support of taxpayers and the tax system.