Taxable Talk

Earlier today, the IRS announced extremely broad penalty relief for 2019 and 2020 late-filed tax returns.  Here’s the beginning of the IRS’s press release:

To help struggling taxpayers affected by the COVID-19 pandemic, the Internal Revenue Service today issued Notice 2022-36, which provides penalty relief to most people and businesses who file certain 2019 or 2020 returns late.

The IRS is also taking an additional step to help those who paid these penalties already. Nearly 1.6 million taxpayers will automatically receive more than $1.2 billion in refunds or credits. Many of these payments will be completed by the end of September.

Besides providing relief to both individuals and businesses impacted by the pandemic, this step is designed to allow the IRS to focus its resources on processing backlogged tax returns and taxpayer correspondence to help return to normal operations for the 2023 filing season.

“Throughout the pandemic, the IRS has worked hard to support the nation and provide relief to people in many different ways,” said IRS Commissioner Chuck Rettig. “The penalty relief issued today is yet another way the agency is supporting people during this unprecedented time. This penalty relief will be automatic for people or businesses who qualify; there’s no need to call.”

The relief applies to the failure to file penalty. The penalty is typically assessed at a rate of 5% per month and up to 25% of the unpaid tax when a federal income tax return is filed late. This relief applies to forms in both the Form 1040 and 1120 series, as well as others listed in Notice 2022-36, posted today on IRS.gov.

The returns impacted by this include:

• Form 1040 (Individual Income Tax Returns)
• Form 1041 (Trust/Estate Tax Returns)
• Form 1120 (C-Corporation Tax Returns)
• Form 1120-S (S-Corporation Tax Returns)
• Form 1065 (Partnership Tax Returns)
• Some foreign information returns, such as Forms 5471 and 3520

Let’s say you haven’t filed your 2020 tax return.  You’re being given a golden opportunity to avoid a 25% penalty.  You will still owe the late payment penalty (0.5% of the tax due per month late) and interest, but these pale in comparison to the late filing penalty.  If I were an impacted taxpayer, I would immediately contact a tax professional to get the return filed!  Most tax professionals are extremely busy (especially with the extension deadlines approaching), but things will only be worse in two weeks.

If you did file one of these returns and late and were assessed a penalty, you should receive your refund by the end of September.

In yesterday’s mail we received several IRS CP59 Notices for clients. What’s a CP59 Notice? Well, here’s the first two lines:

You didn’t file a Form 1040 tax return.

You haven’t filed your tax return for the tax year ending on December 31, 2019.

Of course, all the clients had filed their 2019 tax returns in October. However, these clients had to paper-file for various reasons and the IRS simply has not yet processed those returns. Based on a phone call with the IRS, it appears that the IRS is still processing paper returns from July! Yikes! Based on that timeline these returns may not be processed until May.

These notices were issued because these clients had income that showed they needed to file a tax return (1099s, etc.) and none had been noted. The notices, dated February 15, 2021, are automatically sent four months after the extension deadline.

The CP59 notice includes a Form 15103 that you’re supposed to complete and return along with a copy of your tax return. The helpful individual I spoke with at the Practitioner Priority Service noted that taxpayers who paper-filed after July and who receive the CP59 notice should simply ignore the notice and should not file Form 15103 and send another copy of their tax return.

The IRS is simply backlogged with paper, and while IRS Commissioner Rettig has stated the IRS is caught up, that’s simply not the case. The handy IRS Operations Status Page says that the IRS is opening mail within normal timeframes. Unfortunately, that same page states:

The IRS has also made significant progress in processing returns. As of January 29, 2021, we had 6.7 million individual tax returns in the processing pipeline…

How long you may have to wait:  It depends on where you sent your tax return and where it is in the process. We are processing returns we received over the summer due to the extended July 15 tax filing due date and, in some cases, are processing tax returns dated as early as July 15, 2020. However, we are rerouting tax returns and taxpayer correspondence from locations that are behind to locations where more staff is available, and we are taking other actions to minimize any delays. Tax returns are opened in the order received. As the return is processed, it may be delayed because it has a mistake, is missing information, or there is suspected identity theft or fraud. If we can fix it without contacting you, we will. If we need more information or need you to verify that it was you who sent the tax return, we will write you a letter. The resolution of these issues depends on how quickly and accurately you respond, and the IRS staff trained and working under social distancing requirements to complete the processing of your return.

What you should do: Other than responding to any requests for information promptly, there’s no action you can take. We’re working hard to get through the backlog. Please don’t file a second tax return or contact the IRS about the status of your return. [emphasis added]

There’s no blame to the IRS–this is the reality of dealing with Covid. Unfortunately, with 2020 returns about to start flowing into the IRS I don’t see improvement coming on return processing anytime soon. What can you do? Basically, efile if at all possible. Electronically filed returns, for the most part, are processed smoothly. But if you have to paper-file for any reason, just expect your return to take time to be processed. I’d estimate nine months for a paper-filed return to be processed. (The IRS will be backdating the filing date to the postmark date.)

And if you do have to paper-file a return, make sure you use certified mail. It’s inevitable that some returns are going to get lost. If you have your certified mail receipt, your return should be treated as if it was filed on the date you mailed it to the IRS. This year, it’s absolutely worth the additional $5.

One of our clients received a CP14 Notice alleging she owed the late payment penalty (“Failure to Pay under Internal Revenue Code Section 6651). The notice noted he had an unpaid balance of $583 as of July 15, 2020 on 2019 tax of $8,855. The late payment penalty is assessed on the unpaid balance as of the tax filing deadline. If you have paid 90% of the tax due by the tax filing deadline, there is no late payment penalty.

If you do the math you will see that my client paid $8,272 of the $8,855 she owed, or 93.4%. That’s more than 90%, so the late payment penalty should not have been charged. I spoke with an individual at the Practitioner Priority Service (PPS), and this is the second such case he’s seen. However, it’s not happening with all such individuals as another client with a similar balance due did not receive a CP14 notice.

As we tell all of our clients, do not assume a notice from the IRS is correct. Indeed, the last study on IRS notices shows that about two-thirds of IRS notices are wrong in part or in whole. If you have any doubts, ask your tax professional.

In this case, the helpful individual at PPS reversed the penalty, so my client doesn’t need to pay anything. Still, it would be better if the IRS didn’t issue erroneous notices but given everything that happened during 2020 some hiccups are to be expected.

This morning, I found a very small deposit in my bank account; it was coded “IRS 310”. It’s the second stimulus payment, and it’s real. Kudos to the IRS for getting these out almost instantaneously with the signing of the legislation Sunday night.

Remember, your tax professional will need to know the amount of payment you received. In theory, you will get another letter in the mail noting this amount. Give that letter (and the previous letter) to your tax professional. The stimulus payments (technically, the Economic Recovery Payments) are advances on a refundable tax credit on your 2020 tax returns.

If you received less than the full amount you should have, you will be able to obtain the tax credit on your 2020 return. If you received more than you should have (let’s say your income increased in 2020), you do not have to pay the credit back.

Back in May, clients of mine discovered they left something out of their 2018 tax return. We prepared an amended return, the clients included a check for the additional tax, and it was mailed off to Kansas City. The check was cashed in July, so the amended return was received.

Fast forward to today. The amended return still has not been processed (and no one knows when it will be; it’s almost certainly sitting in a bin with thousands of other amended returns), but the IRS Automated Underreporting Unit discovered the error and sent the clients a notice. They found the same error. So now my clients have to respond to this notice, telling the IRS there’s an amended return somewhere in Kansas City.

Normally, when a taxpayer submits an amended return for a year the IRS computer system notes the return exists so that no AUR notices are sent until the IRS processes the return. Because of Covid the IRS is behind. Way, way behind. At last report the IRS still has 8+ million pieces of mail to go through. So what my clients are going through is going to be repeated by many others, just adding to the IRS’s backlog.

Unfortunately, I don’t see a solution to these issues. Covid isn’t going away until likely next summer (based on the vaccine news, I expect most Americans to be vaccinated by then), meaning the IRS issues we face today will continue for months. (Even when the IRS fully reopens we’re looking at months to clear the backlog.) And it’s not just amended returns. I have a payment issue for a client (the IRS misapplied a payment) where I sent a response in September 2019; that response has still not been assigned to anyone. An Appeals request sent in February has just been assigned to somebody, but the helpful staff at the Practitioner Priority Service (and they did help me this morning) have no idea when the case will actually be worked. We all do need to be patient, but many taxpayers aren’t which is adding to the issues.

We prepare a few split-interest charitable trust returns (IRS Form 5227) every year. Coincidentally, I serve as trustee of a split-interest trust. Imagine my surprise when I received a CP259F Notice from the IRS for the trust that I am trustee of stating, “You didn’t file a Form 5227.” The only problem is that I did file it (mailing it certified mail, return receipt requested) and it shows as delivered on March 4th. (Form 5227 cannot be electronically filed.) Meanwhile, multiple clients received the same letter; all filed their returns on or about the same date (and have proof of filing).

I called the IRS this morning and confirmed that these returns are most likely sitting in a trailer in Ogden, Utah waiting to be processed. Because of Covid, the Ogden, Utah mailroom did not reopen until mid-June. It could be tomorrow or three months from tomorrow before the Form 5227s are processed. The IRS asked that we ignore these notices and not send a second return because a second return (a) could be processed before the first return (causing another set of issues, including erroneous late filing penalties), and (b) sooner or later the backlog will be cleared (the returns will be considered filed on the date received, not the date the IRS eventually processes the returns). The IRS representative I spoke with stated these notices should not have gone out.

I do want to point out that this issue shows why using certified mail is essential when sending anything to a tax agency. While I’m hopeful that the trust return is sitting in the trailer and will eventually be filed, it’s inevitable that something is going to get lost. (There were over 23 million pieces of mail waiting to be processed at one point; the backlog is still more than 5 million.) Should the IRS lose the Form 5227, I have proof of filing that should hold up and prevent the imposition of late filing penalties.

This also is definitely the year to have patience with the IRS.

As I write this, it’s September 30th. Two weeks from tomorrow is Thursday, October 15, 2020. That’s the deadline for individual taxpayers on extension to file their tax returns (except for those in disaster areas such as the fires that impacted California, Oregon, and Washington). If you have yet to send your paperwork to your tax professional it’s past the time to do so. Yes, it’s time to panic!

If your return is simple and straightforward, stop procrastinating and get it done and filed. If your return has any sort of complexities, you must start working on it now. Your tax professional needs time to get it done correctly. You need to turn in that paperwork post haste. If you’ve procrastinated, stop, sit down, and get it done–NOW.

It may already be too late for your return to be timely filed with many tax professionals. For example, our official deadline was September 15th. Luckily, we’re only a day or two behind so our procrastinating clients are still in relatively good shape. However, that might not be the case with all tax professionals. And I can guarantee if you drop off your paperwork with us on October 13th your return is almost certainly not going to be timely filed.

If you file late, it’s as if you never filed your extension. So sit down and get everything done now! Of course, if you like paying a 25% penalty, simply procrastinate for another three weeks.

When I eventually go to the pearly gates, I assume I’ll be leaving income tax behind. It would be a rather rude surprise to find I have lifetime employment in the great beyond, too.

This past week I needed to amend a 2019 federal return. A couple left off one item from their return. It had no impact on their tax, but the return did need to be amended. The IRS is now allowing amended 2019 federal returns to be electronically filed, so after obtaining the signature document I efiled the return. That’s a lot more efficient than mailing the return to the IRS.

But the return was rejected, because the spouse was deceased. That was true, and was noted on the originally filed return. The original return was electronically filed, so I couldn’t see why the amended return couldn’t be. Silly me, I missed yet another exception to the ability to electronically file amended returns. You cannot electronically file an amended return if a spouse is deceased. This wasn’t listed in any of the IRS notices announcing electronic filing of amended returns.

Unfortunately, that exception is real and is an IRS issue. My software company confirmed it’s an IRS programming issue and at least for now any amended return with a deceased taxpayer needs to be mailed to the IRS. Still, at least most 2019 amended returns can be electronically filed.