IRS tries to recover from government shutdown

The Internal Revenue Service reportedly had to cope with 5 million pieces of unopened mail when its employees returned to work after the 35-day government shutdown, and the agency posted advice on its website on how it was working to resume normal operations.

The IRS headquarters in Washington
The IRS headquarters in Washington. Photographer: Andrew Harrer/Bloomberg

For taxpayers who are undergoing tax audits and the tax professionals who represent them, the IRS posted a series of frequently asked questions and answers about examinations affected by the shutdown. For example, if a taxpayer sent documents to their IRS auditor but has not yet heard back, the IRS advised, “Your auditor will be reviewing mail they have received and will reach out to you to re-establish contact. It may take several business days before your auditor is able to make contact.”

The IRS also had advice for taxpayers who had planned to send material to their IRS auditor but didn’t because of the government shutdown. The IRS recommended that If taxpayers have already assembled the requested material, they can immediately send the material to their auditor. “You may call your auditor to discuss any items on your document request if you need clarification,” said the IRS. “Your auditor will also be reaching out to you to re-establish contact in the next several business days. During this contact, your auditor will be able to answer questions you have and will address the timeframe on when the requested information is due.”

The IRS added a FAQ page about IRS appeals on Friday. On the question of how soon appeals hearings would resume, the IRS said that once its appeals officers have reviewed their mail and voice messages, the status of their assigned inventory and completed administrative tasks to restart operations, they will begin to re-establish contact and schedule hearings. But the process will take several business days to complete. For taxpayers whose appeals hearings were canceled prior to the shutdown, and who are wondering when the hearings will be rescheduled, the IRS said that after completing the assessment of their assigned inventory, the appeals officer will reach out to the taxpayer to reschedule their hearing. But again it will take several business days before an appeals officer will be able to reach out to their assigned taxpayers.

Another FAQ page concerns IRS collections for taxpayers facing tax liens, levies, notices of deficiency, penalties, passports and private debt collection, along with their tax professionals. If taxpayers have received a Statutory Notice of Deficiency during the shutdown, the IRS said they have 90 days to petition the Tax Court if they want to protest the adjustments. “If you agree with the adjustments in the report, you can sign and return the report,” said the IRS. “If you feel you received the Notice in error, you should contact the person listed on the letter or your assigned auditor.”

On the question of whether failure-to-pay and failure-to-file penalties would be abated during the shutdown period, the IRS pointed out that the lapse in federal appropriations during the government shutdown didn’t affect the federal tax law. “Individuals and businesses were required to keep filing their tax returns and making payments with the IRS,” said the IRS. “Failure to pay and failure to file penalties are charged on tax from the due date of the return until the date of payment. Taxpayers who make their deposits and payments in-person at an IRS Taxpayer Assistance Center and were unable to do so due to the shutdown can file a request that the penalty be abated for reasonable cause.”

The IRS also posted a FAQ page about the Tax Court, which closed soon after the shutdown began. On the question of what taxpayers should do if a document they mailed or sent to the Tax Court was returned to them undelivered, the IRS pointed out that the Tax Court website already indicates that mail sent to the court through the U.S. Postal Service or through designated private delivery services may have been returned undelivered during the shutdown. “If a document you sent to the Tax Court was returned to you, as the Tax Court website indicates, re-mail or re-send the document to the Court with a copy of the envelope or container (with the postmark or proof of mailing date) in which it was first mailed or sent. In addition, please retain the original,” the IRS suggested.

Bill Smith, managing director of the National Tax Office at CBIZ MHM, found the guidance somewhat weak, but understandable given the chaotic situation during and after the shutdown. “To me the guidance they issued was like ‘we have a lot of catching up to do, but we’ll get back to you when we can. By the way, we’re not the Tax Court. That’s governed by statute, so good luck with that. We can’t do anything about a 90-day letter. You need to file a petition with the Tax Court.’ That’s statutory,” he said. “On the other hand, they implied, and I think that’s right, for purposes of the Tax Court, and hopefully for any other document you’re filing, as long as you kept the original mail information or FedEx or any other of the services that are allowed that got returned, you should still be OK when you resubmit it because the government shutdown doesn’t change the statutory requirements that timely filed mail is timely filed, and if you used a proprietary service, that’s OK. If you mailed it and even if it came back, you complied with the statute, so you should be fine. Otherwise it was, by and large, ‘look, we’ll get back to you when we can.’”

The Tax Cuts and Jobs Act adds further confusion to this tax season, even though the IRS managed to produce some guidance and final regulations for some of the provisions, even during the shutdown. On Friday, the IRS posted some corrections to the hastily issued final regulations on the Section 199A pass-through deduction that the IRS managed to issue last month in the midst of the shutdown. The corrected final rules on the new qualified business income (QBI) deduction under section 199A, include , among other edits, corrections to the definition and computation of excess section 743(b) basis adjustments for purposes of determining the unadjusted basis immediately after an acquisition of qualified property, as well as corrections to the description of an entity disregarded as separate from its owner for purposes of section 199A and subsections 1.199A-1 through 1.199A-6.

But Smith still foresees some problems with the section 199A provisions governing qualified business income. “We don’t even have for our tax software the schedules and disclosures that are going to have to be provided on the K-1s for the QBI 199A deduction,” said Smith. “There are a million issues there. We’re expecting that the tax software is going to provide those. At least one of the Big Four released its own information on that. That’s just one indicator of how difficult this filing season is going to be. If the IRS has all of this backdated correspondence issues it has to go through, it can’t do anything but make it more difficult for them.”

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