Taxpayer service has been a big part of what enabled the IRS to address its mission: to provide taxpayers with top-quality service by helping them understand and meet their tax responsibilities and by applying tax law with integrity and fairness. But that playing field has changed.
The traditional notion of dealing with the IRS — such as when handling an audit or collection case — is no longer true. Does that mean that routine face to-face office audits, field audits, and negotiating an installment agreement with a revenue officer are a thing of the past? Yes, it does.
You will notice that the word “service” is prominent in the description provided above of what the IRS is all about. That service aspect — at least what we’ve been accustomed to — is likely gone.
Here’s a quick recap of the difficulties engulfing the IRS: National Taxpayer Advocate Nina Olson released her 2014 annual report to Congress on Jan. 15, 2015. The report describes the decline in taxpayer service in detail, and attributes it to a combination of more work and reduced resources. She reported that the diminished service expectations for fiscal 2015 were as follows:
- The IRS would be unlikely to answer half the telephone calls it receives, and levels of service would average as low as 43 percent.
- Taxpayers who manage to get through should expected to wait on hold for 30 minutes on average, with considerably longer waits at peak times.
- The IRS would answer far fewer tax-law questions than in past years. During filing season, it would only answer “basic” tax-law questions; after filing season, it will not answer any tax-law questions. This means roughly 15 million taxpayers who file later in the year will be unable to get answers to their questions by calling or visiting IRS offices.
- Tax return preparation assistance has been eliminated.
Over the years, efforts have been made to maintain some level of service with fewer resources. Computer-generated collection notices and referrals to the IRS Web site to seek solutions to problems, for example, enable the IRS to reach more taxpayers at a lower cost. The IRS is responding to an environment of budget cuts, a shrinking workforce, travel restrictions, limited training budgets, and frustrated workers who are asked to do more with less. Based on this outlook, nobody could blame the IRS if it considered a name change to Internal Revenue instead of Internal Revenue Service, but I doubt its reduced budget would allow for new signage and letterhead.
With all that being said, CPAs and other tax professionals have a close relationship with the IRS, so we have to play the cards we are dealt.
The audits of individual returns are rarely conducted in a face-to-face setting. They have evolved into correspondence examinations. These correspondence examinations allow the IRS to reach more taxpayers at a lower cost. These examinations are generally conducted at one of the IRS campus offices (Service Centers), but the actual site assigned to work the examination is dependent on workload and worker availability. The Internal Revenue Manual 188.8.131.52.3 provides a list of issues that are conducive to correspondence examinations. Examples include dependency exemptions and related credits (Earned Income Tax, Child Care, Adoption, etc.), Hope and Lifetime Learning Credits, Schedule C or F income and expenses, employee business expenses, home-office deduction (if a tour is not required), and some itemized deductions.
The problem, from what I have noticed, is that most items subject to correspondence examinations are not items in the IRS guideline. I have found that the No. 1 issue raised in correspondence examinations is employee business expenses. This is not easy to address through correspondence. Information for a salesman who drives 20,000 to 30,000 business miles a year just isn’t easy to submit. Forget about any other expense that may be claimed; think about the automobile expenses.
Depending on whom you are dealing with, the submission of the requested diary or calendar can be an adventure. First, mailing information into an abyss and not knowing how long you will wait for a response to the information submitted is nerve-wracking. Then, if the answer is an adjustment due to lack of proper substantiation, you do not have an opportunity to explain. I am of the opinion that certain types of expenses are easier to verify and explain if you can present them in person. So, the next step is to file an appeal.
An appeal, however, can end up in any of the appeals offices, and a “face-to-face” meeting could be via a telephone conference. Telephone conferences are not my idea of an appeals conference. You could request that it be transferred to your local office, but again we are dealing with an agency that is trying to do more with less. I have always tried to deal within the system, and have had successes. But I have also had my share of miserable failures.
One lesson that I learned is to never accept an appeal conference where the only option is to work through the matter with phone conferences. I think that requesting a transfer to your local office gives you the option to meet with the appeals officer if required, and I like to keep all options open.
In addition to the geographic and logistic pitfalls of the correspondence examination, the length of time it takes to review and respond to taxpayers’ responses can be very frustrating. Surely you’ve encountered situations when you respond to a notice, and then 45 days later you get a “Thank you for your correspondence letter. We have been unable to address this matter, but we will get back to you in the next 30 to 60 days.”
Staffing shortages and excessive workloads are now chronic and to be expected with the IRS. The shift to more correspondence examinations does not appear to have alleviated the situation. The truth of the matter is that unless you have a slam-dunk type of a case where your client maintains immaculate records, correspondence examinations will be less than ideal.
Say you encounter a situation where one of your clients is contacted to resolve a discrepancy between information reported on the return and third-party information available to the IRS. Your first reaction would probably be to call the Practitioner Priority Service telephone line.
How many times have you picked up the phone thinking the matter can be easily resolved if you can only get to a person who will listen and understand? Most of the time, the listening and understanding once you got through had rarely been a problem. Access to the Practitioner Priority Service has been an exclusive resource for tax professionals and requests related to resolving client-related issues. But now, before you dial, know that reduced training budgets at the IRS may mean the person you initially reach may not have the depth of knowledge or experience that you need.
With one recent inquiry, a 60-plus minute wait revealed that, although the power of attorney was signed properly, the client entered his title as managing partner. The entity I was inquiring about was an S corporation, so that title was not acceptable. Back to square one.
Another request to have an account transcript faxed (the issue involved a payroll tax issue, and these transcripts are not available through e-Services) was met with a question about a secure fax. I answered saying that the fax will come in as an e-fax and that I would have access to it through my computer, only to be told that that was not a secure delivery method. I gave a different number, one that prints out paper faxes, and was asked if the machine was in a room that was secured, and if only I would have access to it for the next 48 hours. That conversation, too, ended without getting the needed information, requiring another call and speaking with another representative to get the requested information. You might call this shopping for the answer. Yes, it is, and sometimes it will be required.
Not all phone contact will be as troubling. I find that certain penalty issues can be easily resolved with a phone call — at least when compared to sending a letter, waiting six months for a reply, and having the reply be a denial of your abatement request that sends you back to the start. For situations that qualify for reasonable cause penalty relief available under Revenue Procedure 84-35 to small partnerships or the first-time penalty abatement waiver, phone calls may be the way to go. I have been successful many times on the phone getting penalty relief by citing the revenue procedure or requesting the administrative relief provided for by the first-time penalty abatement waiver.
The criteria set forth in Revenue Procedure 84-35 can lead to reasonable cause basis penalty abatement for late-filed partnership returns. If the answers to all of the following questions are “Yes,” the IRS will abate this penalty:
- Is the partnership a domestic partnership?
- Does the partnership have 10 or fewer partners? (Husband and wife and their estate are treated as one partner.)
- Are all partners natural persons (other than a nonresident alien) or an estate of a deceased partner?
- Is each partner’s share of each partnership item the same as his or her share of every other item?
- Have all the partners timely filed their income tax returns?
- Have all the partners fully reported their share of the income, deductions and credits of the partnership of their timely filed income tax returns?
The first-time penalty abatement waiver, on the other hand, is an administrative penalty waiver that allows a first-time noncompliant taxpayer to request abatement of certain penalties, including failure-to-file, failure-to-pay, and failure-to-deposit. This is one of the easier requests to make by phone. The service person evaluates the request using decision-support software designed to help IRS employees make penalty relief determinations. It has been reported that this system can be flawed, but if it works and the penalty relief is granted, your mission is accomplished.
The current IRS collection process involves three possible phases:
- A series of computer-generated notices sent by IRS campuses;
- An automated collections system; and,
- Assignment to a revenue officer — if one is available — or placement in a queue awaiting assignment
The third item listed can be very frustrating. Like the rest of the IRS, the collection division has to do more with less. In recent years, the number of revenue officers has declined to such an extent that any assignment to an officer could take quite a while.
In one case, a nonprofit client ran into some administrative problems, which led to payroll returns being late and payroll deposits not being timely. The situation was short-lived and the matter was quickly corrected, but the tax, interest, and penalties associated were substantial. Initially the liability was addressed through setting up an installment agreement, and the amount negotiated was paid monthly. These payments were beginning to impact the organization’s ability to survive. The IRS was contacted, and a request was made to abate certain penalties. This could not be done.
Next was a request to have the case assigned to a revenue officer so all factors could be examined and something could be worked out. I was told by the telephone contact that this could only be done if we defaulted on the installment agreement. We did not want to default on the agreement, but I was told that since the entity had an existing installment agreement, this case had a low priority for assignment. Needless to say, we recommended defaulting on the installment agreement, and began the wait to be assigned.
ANSWERS ON THE WEB
The IRS Web site provides a lot of information on numerous topics. It is an effort to resolve some of the information-sharing shortcomings due to the decline in taxpayer services and the reduction of manpower.
The IRS e-Services Web site provides information on subjects such as payments and refunds, credits and deductions, forms and publications, help and resources, identity protection, filing, how to contact the IRS, getting a transcript, and numerous other topics. As with any online search, though, you have to be able to identify what you need, how to organize your search, and then understand what the provided text is talking about.
Remember, we are talking about Internal Revenue laws and regulations. I was told by someone once that the words in the Internal Revenue Code make sense ... until you put them in a sentence.
The relationship between CPAs and the IRS has changed, and not for the better. Just remember that you have to play the cards you are dealt, control your frustrations, and learn to like the soothing music while on hold waiting your turn.
If you can learn to live with the new normal, that’s terrific. If you want the “service” back in Internal Revenue, make sure your voice is heard.
James D. Mahoney, CPA, is a tax manager with CBIZ MHM LLC in Plymouth Meeting. Reach him at at email@example.com. Reprinted with permission from The Pennsylvania CPA Journal, a publication of the Pennsylvania Institute of CPA.
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