Filing season recently began, and with it came public pleas for the IRS to at least temporarily change its notification, collection and penalty procedures. The agency recently relented a bit by stopping some automated notices, but what it might do about penalties remains an open question. Balancing the burdens transferred to taxpayers due to the agency's backlog of unprocessed returns with the IRS's need to keep the system running is a challenge. The IRS has had a particularly difficult time in recent years, in large part because it was caught between pandemic security precautions that temporarily shut down some of its operations, resulting in a large backlog of unopened mail from taxpayers, and new and onerous responsibilities enacted by Congress to combat the economic effects of the pandemic, such as the advance child tax credit.
In a letter to the IRS, more than 200 members of Congress requested that the agency temporarily suspend automated collections and modify the penalty reduction and collection process. Lawmakers also requested targeted penalty relief for taxpayers who paid at least 70% of the tax due in 2020 and 2021 and expedited the processing of amended returns. In a concession to the effects of the processing delay, the IRS announced on January 26 that it will stop sending automatic notifications when a payment has been credited to a taxpayer but the return has not yet been processed. That wasn't exactly what members of Congress expected, but it's a reasonable step. Lawmakers had asked the IRS to stop all automated collections from now until at least 90 days after April 18.
Nobody wants to get a notice from the IRS, of course, but getting an automated notice demanding a payment you've already sent but hasn't yet processed is an understandably maddening experience. It's a good thing the IRS capitulated at that point and spared those taxpayers unnecessary anxiety. Proponents of more relief claim that IRS relief does not cover situations where the taxpayer has filed a return and their payment has cleared, but the payment has not been applied to their account. That problem also requires an early solution.
Avoid an even bigger disaster? Lawmakers' request to halt all automated collections for months could inadvertently compound the IRS's administrative difficulties because some of the notices it will send in the coming months will not be for amounts taxpayers have already submitted. Saddling the IRS with an additional backlog that must be reversed in a matter of months, and especially one that isn't designed to help financially distressed taxpayers, is probably not the ideal approach. In addition to the political problem, there is a technical one. The IRS says you can't flip a switch and turn off your automatic notices. The agency explained that its technology is so outdated that stopping printing and sending some notices would constitute "changes that cannot be made as efficiently as they should be." One might wonder if Congress really wanted the IRS to prioritize in the design of its operating systems a feature that would allow deficiency notices to be easily closed. In any case, the IRS maintains that "a seemingly simple modification could risk compromising the overall operating system critical for the current tax season." If that's a big risk, Congress should consult the IRS carefully before making any statutory changes to notice deadlines. Reasonable Cause Options Offering a simplified reasonable cause penalty reduction to taxpayers is one option the IRS could pursue, and it doesn't necessarily need Congress to do so. Section 6664(c) provides an exception to the civil fraud and accuracy-related penalties if the taxpayer can show that there was reasonable cause and that the taxpayer acted in good faith. The IRS determines what constitutes reasonable cause and good faith, and it is a determination of facts and circumstances under the regulations. There are also reasonable cause exceptions to penalties for failure to file a return and failure to pay, as well as making an incorrect claim for a refund or credit. And reasonable cause can be asserted against penalties for failure to file information reporting statements. Providing a streamlined program for taxpayers to use in any of these situations raises the same administrative issues that the agency directed to suspend the notices. It would require the agency to adjust its systems, which would likely take some time and divert resources from processing returns and performing other IRS business.
The letter from members of Congress called for a streamlined reasonable cause penalty reduction process “for taxpayers affected by the COVID-19 pandemic without the need for written correspondence,” which could be difficult for the IRS to fully implement. . It's easy to understand why lawmakers want the IRS to eliminate the need for taxpayers to write to request streamlined penalty reduction procedures, but the IRS must also establish that reasonable cause actually exists before granting penalty relief on that basis. That would seem to require some form of communication on the part of taxpayers. The American CPA Institute suggested a streamlined program could resemble the first-time penalty reduction waiver, which allows taxpayers to apply for forgiveness of failure-to-file or failure-to-pay penalties if they have a clean record of complying with their tax obligations. . A streamlined program would probably have to require taxpayers to communicate an application to the IRS, though perhaps the communication could be standardized to ease the burden on taxpayers and the agency. The IRS has promised to continue examining how it can help taxpayers and professionals, and has several options to do so. But Congress probably needs to step in if it wants the agency to stop all automated ads.
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