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Taxpayer Advocate: Pandemic Exposed Need for IRS Tech Overhaul

Posted on June 30, 2020

The IRS needs a significant, long-term boost in technology funding from Congress to overcome paper-centric operational and service shortfalls exposed by the coronavirus pandemic, according to the national taxpayer advocate.

“Rather than just fixing pieces of [IRS technology infrastructure], I think it really needs to have a total overhaul,” National Taxpayer Advocate Erin M. Collins told Tax Notes June 29 upon the release of her fiscal 2021 objectives report to Congress.

Collins’s 228-page objectives report focused primarily on the effects of the COVID-19 pandemic on IRS operations during the filing season, the distribution of economic impact payments, and the agency’s ongoing challenges meeting mandates of the Taxpayer First Act (P.L. 116-25) and the Coronavirus Aid, Relief, and Economic Security (CARES) Act (P.L. 116-136). The report also discusses the daunting complexity of CARES Act provisions for net operating loss carrybacks and the employee retention refundable tax credit, as well as IRS stipulations that might prevent some stimulus recipients from getting their money until 2021.

New details are provided on the taxpayer service and enforcement impacts of the IRS’s sudden shutdown in late March. Agencywide call attempts from taxpayers for the week ending May 23, 2020, were up 50.9 percent over the same week a year earlier, but IRS-answered calls were down 48.2 percent, and IRS or taxpayer hang-ups were up 45.3 percent, the report said. Examinations started between April 1 and June 1, 2020, dropped 65 percent overall from the same period in 2019.

The IRS also faces a backlog of at least 10 million returns filed on paper, despite numerous agency campaigns for electronic filing and warnings about long paper processing delays, the report noted. “It appears that no matter how much the IRS attempts to drive taxpayers to the internet, many taxpayers will still attempt to use their service channel of preference,” it said.

And the IRS is still straining to provide taxpayers with prompt electronic return processing and refunds, Collins noted. Total returns processed as of the week ending June 19, 2020, were down 11.4 percent from the same week a year ago, while e-filing receipts were off just 3.4 percent compared with a year earlier, according to recent IRS statistics.

“It appeared before the pandemic that [the IRS was] on target to be where they anticipated being” without a sudden global outbreak, said Collins. “Considering everything that’s going on, I’d give them a high grade,” she said.

‘Good Business Decision’

Collins elaborated to Tax Notes on some of the themes and recommendations in her report to Congress.

Officially, Collins said, the Taxpayer Advocate Service recommends that relatives or next of kin return to the IRS the approximately 1 million economic impact payments made to dead people — as the agency suggested in its May 6 FAQ.

“Behind the scenes with the IRS, if the payments are not returned, I am highly recommending the IRS does not spend the time and resources” to claw those payments back, Collins said. “Is it a good business decision?” she asked. Ultimately, the policy will be set by Treasury Secretary Steven Mnuchin and IRS Commissioner Charles Rettig, she said.

Collins also commended IRS legal and regulatory staff for their prolific use of FAQs to provide guidance on thorny new tax issues — more than 100 FAQs for the complicated, refundable employee retention tax credit alone, the report noted.

The IRS should also make clear to tax professionals and their clients that compliance with its FAQs can be relied on as a defense against penalties, Collins said.

“My concern on FAQs is . . . it doesn’t give me penalty protection if the IRS changes its mind,” Collins said. The IRS “should live with those [FAQ] answers for purposes of penalty protection,” including the 20 percent accuracy-related penalty, “if somebody follows” the FAQ, she said.

The IRS also needs to provide a central repository of all FAQs, preferably sorted by date and including prior FAQs involving the same subject, so taxpayer and practitioners can refer to them, Collins added.

But Collins punted on whether the extended July 15 filing season deadline should be further delayed.

“It’s going to be a big-picture policy question,” decided by Mnuchin and Rettig in light of the latest pandemic developments and the recent decline in federal tax revenue, Collins said. “The filing [deadline] is not necessarily the issue; it’s the payment” deadline, she added.

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