Taxable Talk

My client received a letter from the IRS dated November 22, 2021:

Taxpayer identification number: [redacted]
Tax Period(s): Dec. 31, 2018
Form: 1040

We received a payment of $2,002.00 on Oct. 08, 2020.

We don’t have enough information to apply this payment correctly.

Attach a clear copy of both sides of the canceled check or checks.

If the $2,002.00 you paid is for a bill you received, send a copy of the bill so we can identify the tax period. An incorrect identification could result in a bill for the period you intended to pay….

My client did indeed make this payment on October 8, 2020.  The $2,002 was for an amended 2018 return so the IRS has (already) applied it to the correct tax year.  This payment was made using IRS Direct Pay.  When you use IRS Direct Pay you must specify the tax year, the reason for the payment, and the tax form.  My client correctly noted the tax year (2018), the reason (Amended Return), and the tax form (1040X) when he paid, so the letter is nonsensical.  So why did the IRS send it when they had this information?

The real reason is that my client’s amended return (which was mailed to the IRS on October 8, 2020 and was received one week later) is sitting in a bin in the Austin Service Center waiting to be reviewed.  Yes, the IRS is more than one year behind in processing paper-filed amended returns (I recently had a client who filed eighteen months ago have his amended return processed).  I spoke to the Practitioner Priority Service yesterday (PPS) seeing if I could resolve this over the phone.  The PPS representative told me that the client’s amended return does not even show up in the IRS computer system. This is typical (unfortunately) for paper-filed amended returns.  I was told (a) don’t send another copy of the amended return, (b) respond to the letter (but without sending another copy of the amended return), and (c) you may be asked to resend the amended return if the IRS can’t find it.

Why didn’t we electronically file this amended return? You cannot electronically file pre-2019 federal amended returns; they must be paper-filed.  My client did pay electronically, and he did mail the amended return using certified mail so we are certain the return was received.

This is another IRS issue caused by the IRS’s response to the pandemic.  Yes, the IRS was not at fault for the pandemic, but the ongoing response (did you know that IRS employees are still not completely back at IRS Service Centers?) is a cause of this issue (and many others).  This is costing taxpayers time and money.  It’s also costing the IRS time and money (which means taxpayers) because (a) someone must read the response I sent and (b) my client can–and will be able to–get some penalties and interest abated once this amended return is processed (given that the IRS is at fault for the slow processing time).  This episode also makes the IRS look stupid.  My client told the IRS exactly where the payment should be applied…and the IRS still couldn’t figure it out.

This morning I received an announcement (below) that the IRS will, sometime this summer, allow electronic filing of amended personal tax returns (Form 1040X). Unfortunately, there’s a major “but” included:

When the electronic filing option becomes available, only tax year 2019 Forms 1040 and 1040-SR returns can be amended electronically. In general, taxpayers will still have the option to submit a paper version of the Form 1040-X and should follow the instructions for preparing and submitting the paper form. Additional enhancements are planned for the future. [Emphasis Added]

This will definitely help for the future; however, most amended returns are not the current-year tax returns. For example, I prepared three 2018 amended returns today.

This isn’t to say this is a bad thing. On the contrary, over time this is a very, very good thing. In the best of times it takes the IRS four months to process an amended return filed by paper. (I suspect the amended returns I prepared today will take at least six months to be processed given the IRS’s current backlog.) Being able to have an amended return quickly sent, without risk of it being lost, is a wonderful improvement over what must be done today and will undoubtedly lead to faster processing of amended returns.

Here is the IRS announcement in full:

WASHINGTON — The Internal Revenue Service announced today that later this summer taxpayers will for the first time be able to file their Form 1040-X, Amended U.S Individual Income Tax Return, electronically using available tax software products.

Making the 1040-X an electronically filed form has been a goal of the IRS for a number of years. It’s also been an ongoing request from the nation’s tax professional community and has been a continuing recommendation from the Internal Revenue Service Advisory Council (IRSAC) and Electronic Tax Administration Advisory Committee (ETAAC).

Currently, taxpayers must mail a completed Form 1040-X to the IRS for processing. The new electronic option allows the IRS to receive amended returns faster while minimizing errors normally associated with manually completing the form.

“This new process is a major milestone for the IRS, and it follows hard work by people across the agency,” said IRS Commissioner Chuck Rettig. “E-filing has been one of the great success stories of the IRS, and more than 90 percent of taxpayers use it routinely. But the big hurdle that’s been remaining for years is to convert amended returns into this electronic process. Our teams have worked diligently to overcome the unique challenges related to the 1040-X, and we look forward to offering this new service this summer.”

About 3 million Forms 1040-X are filed by taxpayers each year.

The new electronic filing option will provide the IRS with more complete and accurate data in an easily readable format to enable customer service representatives to answer taxpayers’ questions. Taxpayers can still use the “Where’s My Amended Return?” online tool to check the status of their electronically-filed 1040-X.

When the electronic filing option becomes available, only tax year 2019 Forms 1040 and 1040-SR returns can be amended electronically. In general, taxpayers will still have the option to submit a paper version of the Form 1040-X and should follow the instructions for preparing and submitting the paper form. Additional enhancements are planned for the future.

“Adding amended returns to the electronic family also complements our partnership with the tax software industry, which continues to work with us to provide better ways to help taxpayers,” said Ken Corbin, Commissioner of the IRS Wage and Investment division.