We begin a new year with the IRS pulling off another near-miraculous feat of issuing the second round of COVID-relief stimulus payments almost simultaneously with the President’s signing of the authorizing legislation. I thought it might be a good time to make up a list of wishes I have regarding tax administration for 2021. My list has a heavy emphasis on the role the IRS plays in the economic health of our nation; that it is a very major role should be clear to everyone who hasn’t lived under a rock this past year.
But before I launch into my list, let me do some level setting. Deep in irs.gov is an interesting webpage IRS Operations during COVID-19: Mission-critical functions continue. This page is updated periodically with information about the status of return processing, check payment processing, mailing of notices, Power of Attorney processing, and many other items. Everyone practicing in the field of tax should bookmark this page.
On this page, the IRS informs us that as of November 24, 2020, it had 7.1 million unprocessed individual tax returns and 2.3 million unprocessed business returns in its backlogged mail. This is an unprecedented number of 2019 returns that have not been processed by the end of the year, and the situation appears to have gotten worse, rather than better, as the year went on. According to the National Taxpayer Advocate, as of September 19, 2020, the IRS backlog was about 5.8 million pieces of mail, including 2.8 million tax returns. The IRS says it “expects to issue all refunds for 2019 individual tax returns in 2020 where there are no issues with the return. For refunds that cannot be issued in 2020 because the tax return is being corrected, reviewed or awaiting correspondence from a taxpayer, the refund will be issued as a paper check in 2021 per our normal processes.” [Emphasis added.]
Now it is not clear to me why, in the 21st century, the IRS can’t make direct deposits of tax refunds after the filing season for that tax year has passed, e.g., for amended returns that result in a refund. Maybe it is some programming rule in the submission processing pipeline, or maybe it isn’t the IRS’s problem but some issue with the Bureau of Fiscal Services. But the problem in the COVID-economy is that many of these taxpayers who filed a 2019 return that has not been processed in 2020 will have moved – even if they aren’t evicted, they may move to less expensive housing, or they may move in with relatives, or they may have become homeless. So not only will these taxpayers not get a direct deposit, but the paper check, once mailed, will be returned to the IRS. Taxpayers won’t know anything about this unless they keep checking the “Where’s my refund?” website – the IRS says if a refund check is returned, an option will pop up on that website that allows the taxpayer to enter a change of address. But even after you enter your address, the check will be mailed yet again, with all the attendant postal service delays.
So here’s my first wish for 2021:
The IRS should create a mobile-friendly, multi-lingual digital application for taxpayers to change their address; this application should require only two-factor authentication.
I will save for another day my tirade about the archaic revenue procedure that governs when the IRS is considered to be notified of the taxpayer’s last known address. I note Keith’s PT post about the Gregory case, in which Keith and his students prevailed against the government on this issue. It is unconscionable in the 21st century that the IRS should be routinely given 45 days from the date of posting a return to be considered notified of an address change. Here’s what Rev. Proc. 2010-16 says:
Returns that are not filed in a processible form may require additional processing time. If additional processing time is required, the 45-day processing period for address changes will begin the day after the error that caused the return to be unprocessible is corrected.
The 2019 return processing delays make glaringly clear the harmful impact of provision and the lack of a quick digital means to update one’s address. And yes, I know there are legitimate concerns about fraudulent address changes; that is an issue that can be addressed as part of the programming. But such concerns should not be an obstacle to creating an application that would be available to most, if not all, taxpayers.
Mail delays and my second wish
Now let’s get back to this mail backlog. The IRS webpage references 2019 returns that have been flagged for further correction, review or taxpayer correspondence (by mail?????). It states that “[i]f we need more information or need you to verify that it was you who sent the tax return, we will write you a letter. The resolution of these issues depends on how quickly and accurately you respond, and the IRS staff trained and working under social distancing requirements to complete the processing of your return.” Now of course, if the taxpayer responds quickly and accurately via the U.S. Postal Service, that response will be sitting in a pile along with the millions of other documents not processed. The IRS COVID operations website says the IRS is opening mail within 40 days of arrival and is taking 60 days to process (on a first-come, first-served basis).
The Taxpayer Advocate Service has reported that even in “normal” times, the IRS non-identity theft refund fraud filters result in high false positive rates (i.e., the frozen return/refund was actually legitimate) of 81 percent for the period from January 1 to October 3, 2018, and 71 percent from January 1, to October 2, 2019. [See 2019 NTA Annual Report to Congress, p. 39.] TAS analysis found that over 75 percent of their cases involving wage verification received in the last week of August, 2019, “waited an average of 141 days from the return filing date for the IRS to screen and determine that it could not verify the information on the returns. As of October 1, 2019, the IRS had only assigned 36% of those returns to a particular treatment stream for resolution.” [2019 NTA Annual Report to Congress, p. 40]
Thus, even before the pandemic, for many taxpayers, the IRS refund resolution processes were overwhelmed and not working. Can we only imagine what is happening today? We have not seen the numbers for these returns for the period from January 1 to October 1, 2020 (or December 31, for that matter), but I am willing to bet the backlog is … huge.
Now, what is going to happen to all these taxpayers whose 2019 returns are unprocessed? First of all, they won’t receive the $600 COVID-relief payments. Second, when they file their 2020 returns, it is very likely that these returns, too, will be flagged because their 2019 returns have unresolved issues. This means that two years of refunds, and two rounds of stimulus payments will be frozen. In. The. Midst. Of. A. Pandemic.
I know the IRS has been working full-tilt trying to get through this nightmare. But the taxpayers of the United States deserve much more transparency and better information than we are receiving. We need to know whether the employees who are working in the questionable refund programs are actually working – that is, have they received laptops so they can telework? Or are there parts of their jobs that require them to be physically present in IRS offices, as the submission processing employees must be?
Which leads me to my second wish for the IRS in 2021:
The Federal government should classify IRS workers whose jobs are related to return and correspondence processing as essential workers and arrange for them to receive the COVID-19 vaccine with the same priority as front-line workers (i.e., after health care workers and nursing homes).
The government can do this – and it should. I am sure there are many other federal employees in other government agencies who should also be prioritized in this way (umm … meat inspectors in meat processing plants?). They, too, should be prioritized to receive the vaccine. But as I said earlier, the IRS’s issuance of tax refunds and stimulus payments in 2020 and refunds and the recovery rebate credits in the 2021 filing season are vital to the economic recovery of hundreds of millions of taxpayers throughout the United States. To assist that recovery, we need an IRS workforce that is able to do its job. For it to do its job with the speed and urgency this crisis requires, IRS employees involved in return and correspondence processing and resolution should be prioritized for vaccination. I hope the incoming Administration makes this a priority. The taxpayers of the United States will be grateful.