The tax season that’s due to open when the Internal Revenue Service begins accepting tax returns next Monday is promising to bring a host of challenges. Tax professionals are largely ready to forge ahead to help their clients get through it, but now they may have trouble getting power of attorney forms processed.
The IRS is still dealing with a backlog of millions of tax returns, including 6 million unprocessed original individual returns (Forms 1040), 2.3 million unprocessed amended individual returns (Forms 1040-X), more than 2 million unprocessed employer’s quarterly tax returns (Forms 941 and 941-X), and about 5 million pieces of taxpayer correspondence as of late December, according to National Taxpayer Advocate Erin Collins in her report to Congress last week (see story). On Wednesday, she warned in a blog post of delays with processing Form 2848, Power of Attorney and Declaration or Representative, and Form 8821, Tax Information Authorization.
“Although the IRS informs taxpayer representatives they should anticipate long processing times, practitioners who have submitted authorizations not processed may still wonder if theirs were lost or misprocessed,” Collins wrote. “These delays impinge on taxpayers’ right to retain representation. This lack of transparency isn’t doing taxpayers or the IRS any favors, and it could be making matters worse.”
She predicts that online tools like the Tax Pro Account and online account will eventually reduce demand and decrease backlogs awaiting manual processing, but that will take time. “Since the Tax Pro Account launched five months ago, fewer than 2,700 authorizations have been completed through the tool, while over 1.6 million authorizations were submitted that require manual processing,” Collins wrote. “That means the IRS needs to manually process more than 600 authorizations for each authorization processed automatically. The goal is to reverse the equation and have most authorizations processed electronically.”
A coalition of 11 tax and accounting professional groups, including the American Institute of CPAs, the National Association of Enrolled Agents, the National Association of Tax Professionals, the National Conference of CPA Practitioners and the National Association of Black Accountants, is urging the IRS to fix some of the problems they have been encountering, especially with automated penalty notices that have been going out despite the long backlog (see story).
Given all the problems last year in dealing with the various changes in tax law stemming from pandemic relief programs like the Paycheck Protection Program and Employee Retention Credits, multiple rounds of Economic Impact Payments, some practitioners think this tax season may at least be a little better.
“We’re cautiously optimistic that tax season 2022 will be better than tax season 2020, which was the first year of the pandemic,” said Tim Speiss, co-leader of EisnerAmper’s personal wealth group. “We’re being very proactive in speaking to our clients. We started in the fourth quarter of last year to obtain and accumulate 2021 tax information, not only just with compliance filing, but also for planning purposes. That’s really been the big push, to get started early.”
He is encouraging his clients to do estate planning, gift planning, charitable planning and investment planning early in the year as well. “Estate planning truly should remain on everyone’s mind, especially those who were unable to do anything over the past two years because of challenges due to COVID 19,” said Speiss. “That also leads to gifting. We always recommend that clients make gifts early in the year, in the first quarter, not earlier, meaning March and February. The gift tax exemption now is $16,000. That’s something we keep an eye on. It’s easy to do. Many people make gifts to family members directly or in trusts or otherwise. Also charitable contributions, probably doing those early in the year as well. From that perspective, making your charitable contributions in the first quarter allows you to take a first quarter tax deduction. This is the time of year we’re also helping our clients review their investment portfolios, rebalancing portfolios, looking to perhaps harvest losses against gains. We typically don’t try to do that in the fourth quarter because that becomes a 2021 taxable event to the extent that you’re disposing of securities. But if you have losses, you could have mitigated that. So in the first quarter, we’re going to be helping clients really look at their investment portfolio with their investment advisors and determine if any rebalancing should occur or any disposition should occur.”
Others are anticipating problems just getting through this tax season. “I honestly think it’s going to be a challenging season,” said Edward Renn, a partner in the private client and tax team at the law firm Withers. “I think the IRS has done a good job since COVID kicked off. The CARES Act created a lot of new laws and a lot of new responsibilities for them that they simply didn’t have any procedures or staff for, and somehow they got it done. Last year as part of Biden’s proposals we suddenly had refundable Child Tax Credits and the change to the Employee Retention Tax Credit on the employer’s side. All of that came along in 2021. It just kept changing and morphing. I think they’ve done a relatively good job. That said, they’ve got 6 million unprocessed returns primarily from 2020 still floating around out there. The 941’s are slow and any amended returns — any 941-X or 1040-X — are ridiculously slow.”
Correct reporting of the advance monthly payments of the enhanced Child Tax Credits and the third round of Economic Impact Payments that went out last year under the American Rescue Plan will be important. The IRS has been sending letters to taxpayers with these amounts to use. “The IRS is paying specific attention to correct reporting of not only the advance Child Tax Credits, but also the Economic Impact Payments,” said Speiss. “I was reading a list of the top 25 items that the IRS will most likely be focusing on this year, and reporting Economic Impact Payments is one of them.”
The IRS has been stretched thin trying to deal with Child Tax Credits, Economic Impact Payments and other pressing demands. “You’re just asking the same number of people to do more and more jobs,” said Renn. “None of this stuff is particularly difficult, but they’ve got other things to do as well. With the refundable tax credits, they didn’t have the staff and the resources. They’re suddenly sending out checks on a regular basis to a lot of people. I think there’s going to be a lot of problems with the Child Tax Credit this year. There are people who didn’t do quarterlies most of the time because they got a big Child Tax Credit, and that sort of took care of the liabilities. They have been getting the checks, but they don’t understand that it won’t be there when they go to file that ’21 return. I think there are going to be a lot of problems with that.”
The Biden administration had been hoping to extend the enhanced Child Tax Credits this year as part of its Build Back Better Act, but that effort has stalled in the Senate, where moderates like Sen. Joe Manchin, D-West Virginia, and Kyrsten Sinema, D-Arizona, are reluctant to sign off on the sprawling bill. During a news conference Wednesday, Biden admitted he may have to break up the legislation into smaller pieces, and that will probably mean the Child Tax Credit will be left out (see story).
The monthly Child Tax Credit payments have been a heavy lift for the IRS. “They’ve placed the additional burdens of the Child Tax Credit being a monthly run, and more bells and whistles being placed on them,” said Dean Zerbe, a former senior counsel and tax counsel to the Senate Finance Committee who is currently national managing director at the tax consulting firm Alliantgroup.
He would like to see more steady funding of the IRS to help with taxpayer service as opposed to $80 billion for more tax audits and enforcement, which was supposed to help pull in more tax revenue to pay for the Build Back Better Act, although the Congressional Budget Office didn’t agree with all of the Biden administration’s projections. “It doesn’t raise all the money that the administration thinks it does, at least as far as the official scorekeepers,” said Zerbe. “The one thing that’s been useful with this is when we first heard about the IRS and its funding, it was really all about it going to exam and audit to get the rascals. There were some things about modernization, but very little about service. My hope is now that we’re hearing more discussion about service, I think it would be useful if the administration expressed that more clearly.”
He sees IRS funding as a three-legged stool to provide a higher level of taxpayer services, fund the exam function to do its job across the board, and be respectful of taxpayer rights. “Taxpayer rights are nowhere to be found in this bill, which is concerning, and there are lots of easy bipartisan provisions they could put in there,” said Zerbe. “They need to emphasize the service part. It’s really brought home we’re in a bad place regarding service. If you do all three of those, you can garner long-term support. You will always have people who are grinding their teeth about the IRS examining, but I think in general there’s a recognition that we’ve got to collect revenues and there needs to be an enforcement presence. But I think where the wheels fall off is when the feeling is it’s all just one or it’s all just the other, and there’s not that balance. I think the IRS funding piece will stay in, but they need to be smart about it, and assume they get the message out there about how they see the concerns with the filing season. They need to reflect how that’s going to be addressed with the additional funding. I think the drumbeat has been on the $80 billion and we’ll have an agent in every pot, and we’re going to balance the budget. That remains in play. Having just spent a great deal of time with a host of accountants, I think they’re just absolutely at the end of their days with concerns with the IRS filing season, getting phones answered, and getting the most basic services provided by the IRS.”
The additional funding may help, but it will take time to train staff. “There’s got to be a management of expectations with everybody too,” said Zerbe. “The IRS is not going to be able to turn this on a dime. You need to build long-term support across the board, as opposed to we’re just going to gut it through this time. It takes a long time to hire up and train these folks for whatever work they’re doing. We need to recognize that it’s not just going to be turning on the lightswitch and all is well. I think that sustained support will get us into a better place. It will be well received for them to get the funding to provide that level of service that’s needed.”
A group of Republicans on the House Ways and Means Committee sent a letter to IRS Commissioner Charles Rettig on Wednesday urging him to improve taxpayer service. “The ongoing IRS return processing backlog and related customer service failures have reached crisis levels as the new filing season approaches,” they wrote. “We write to ask for an explanation of what significant actions the IRS will take in the coming weeks to mitigate this crisis. Urgent action is needed, and it is needed now.”
They cited the latest data from the Treasury Inspector General for Tax Administration showing a backlog of 8.2 million unprocessed tax returns, 4.2 million returns in suspension, and 3.6 million pending amended returns. “This means that more than 16 million returns are outstanding at the IRS with less than two weeks until the start of the new tax filing season,” they wrote.
They are urging swift action. “Since the start of the pandemic, members of Congress have been expressing concerns about the unfolding crisis and urging you to take action to resolve the backlog as soon as possible,” said the lawmakers. “We understand that at this point significant tradeoffs may be required at the agency to meaningfully reduce the backlog in the next few weeks, but we think the time for such tradeoffs and drastic action is now.”
They insist the problem isn’t a lack of funding, although Republicans have been resisting increases in the IRS budget for enforcement. “This crisis is not due to a lack of funding,” they wrote. “We understand that the IRS began fiscal year 2022 with more than $1.4 billion in unobligated supplemental funds that it received from Congress over the last year. We would like to understand why those funds have not been used to address this crisis.”
The lawmakers are hearing from taxpayers about the problems they have been experiencing in contacting the IRS for help. “Our offices are being flooded with requests for help from constituents who are unable to reach the IRS for assistance,” they wrote. “This situation is an unfolding crisis that will only get worse without drastic action.”
A group of federal managers said the problem is due to Congress not providing sufficient funding, however. “Congress is responsible for stripping the IRS of its funding and personnel for more than two decades and must take immediate action to adequately fund the agency,” said Chad Hooper, executive director of the Professional Managers Association, a national membership association representing the interests of professional managers, management officials and non-bargaining unit employees in the federal government. “As PMA has consistently argued to lawmakers, the problems at the IRS will not be solved by small and sporadic funding increases. The IRS needs robust, stable funding to modernize its systems and give taxpayers the service they deserve. We understand the prior-year tax return backlog is a critical area of concern for Congress. But the IRS cannot reduce the backlog without resources, personnel and time. The IRS cannot reduce the backlog while it is still struggling to implement overlapping mandates far outside the traditional scope of tax administration. The IRS cannot reduce the backlog when relying on a technology system that will turn 60 years old this year — older than most IRS employees and the oldest computing system in use in the federal government. If Congress wants the IRS backlog to be reduced and taxpayer services to be adequately provided, the solution is simple: Congress must fund the IRS.”