Let’s say you filed your tax return on time but the IRS says you didn’t. You mail in proof, but your letter is stuck in a pile in an IRS office waiting to be opened. The computer system only knows it didn’t get a response, so collection notices go out and penalties and interest begin to accrue.
Help isn’t necessarily a phone call away. There are dedicated collection call lines, but in the 2021 filing season, just 38% of calls were answered.
Delays in processing returns are triggering premature collection notices – and that in turn can negatively affect low-income taxpayers, warned National Taxpayer Advocate Erin M. Collins.
In a report to Congress, Collins called out the IRS for starting collection actions before the agency had processed a taxpayer’s response to an issue raised by the agency.
While acknowledging the herculean efforts of IRS staff working through a pandemic, labor shortages and budget cuts, Collins was highly critical of backlogs that trouble taxpayers who can least afford a financial fight with the IRS.
The processing times for some categories of correspondence have been running six months or longer, Collins reported. That’s far in excess of the “normal” processing time for taxpayer correspondence of 45 days, she said.
To prevent enforcement actions from moving forward before the IRS processes taxpayer responses, the agency reprogrammed its computer systems to allow additional time. But gaps remain, Collins said.
As of late December, the IRS had a backlog of about 5 million pieces of taxpayer correspondence, the report indicated – with some of these submissions dating at least to April.
If the IRS is wrong, of course, no taxes will be due or penalties and interest assessed. But for those who do owe, a lengthy resolution process can become stressful and costly. Generally, interest accrues on the amount owed from the due date until the date of payment.
More than half – 53% – of individual audits were conducted on taxpayers with total incomes below $50,000 in fiscal 2019, according to IRS data. And the vast majority of those – 82% – were of taxpayers claiming the anti-poverty earned-income tax credit.
Automated audits have a high nonresponse rate and the highest volume of cases assessed by default. Forty percent or more of taxpayers with incomes below $50,000 don’t respond to the IRS.
Collins said taxpayers in this income range are less likely to be represented by tax professionals and more likely to have difficulty contacting the IRS for audit assistance.
“The IRS makes little effort to reach these taxpayers if they are unresponsive or if their IRS correspondence is returned as undeliverable,” Collins said in her report.
The IRS responded that the agency “closely reviews these reports and factors these comments into our ongoing work plans.”
“COVID hit us all, and we are still working through the impacts,” IRS Commissioner Charles Rettig said in a statement. “This has been a challenging period on many levels for taxpayers, tax professionals and the IRS.”
Although the past two years have been horrendous for the agency, some issues raised by Collins predate the pandemic.
“For the most part, the pandemic did not create new challenges for the IRS as much as it highlighted longstanding challenges and areas that require attention,” she said in her report.
Collins said the question the IRS should have tried to answer long ago is: Why do a higher percentage of low-income taxpayers fail to respond to its notices?
Are they too frightened to respond? Probably.
A letter from the IRS, even when you know you are right, can be terrifying.
Many IRS letters may come back undeliverable because, when you’re struggling, your housing situation can be unstable as you move around trying to settle into more-affordable housing. If there were more data on how to reach these folks, they might get the help they need to correct errors on their returns, figure out options to settle for less than they owe or set up a payment plan.
Then there’s the wonky way the IRS communicates. IRS letters are peppered with overly technical language, Collins said.
The IRS sent tens of millions of notices to taxpayers during 2021, including letters indicating that a tax return might have a math error or that an amount reported on a return did not match the corresponding amount reported to the IRS on Form 1099. In many cases, taxpayer responses were required. Yet a massive backlog means the IRS isn’t processing the responses fast enough, sometimes resulting in adverse collection actions, penalties and fees, or a refund that may not be released.
“Paper is the IRS’s Kryptonite, and the agency is still buried in it,” Collins said.
What can taxpayers do?
“It’s kind of silly to say, but call the IRS,” she said. “You can request a freeze on collections while the IRS is considering your matter.”
Yes, do call, repeatedly if needed.
But unless the IRS gets more money to deal with millions of pieces of mail, the most economically vulnerable Americans will continue to be adversely affected by an outdated, overwhelmed system.
It’s really unfair to put so much responsibility on taxpayers to slog through the IRS’s byzantine collection process. Make it easier and most people will pay what they owe, or at least they won’t be afraid to call for help if they can’t.