IRS Backlog Paralyzing Penalty Abatement Process
By: William L. Bricker, Linda Galler, Inhyuk Yoo & Maria Pigna
The IRS is significantly behind in processing pre-2021 tax returns as well as responding to taxpayer correspondence. According to National Taxpayer Advocate Erin Collins, as of early February 2022:
the IRS had 13.6 million unprocessed original tax returns, 4 million unprocessed amended returns, and 6 million pieces of unanswered taxpayer mail, and
IRS customer service representatives answered only 1 in 9 telephone calls (11%) in 2021. While the IRS claims that hold times averaged 23 minutes, taxpayers and their representatives report that hold times frequently far exceed 23 minutes.
The IRS’s reasons for the issues are office closures and a shortage of staff. Despite the backlog, the 2021 tax filing season has begun, resulting in millions of 2021 tax returns adding to the IRS’s workload. Moreover, some 2021 tax returns will rely on the unprocessed 2020 returns, such as by claiming an estimated tax payment in 2021 for a 2020 overpayment applied to estimated tax.
Delayed Penalty Abatement Process and Premature Collection
A frustrating example of the IRS backlog is the systemic assessment of penalties without even reviewing timely abatement requests. Taxpayers at times are late in filing international information returns such as Forms 3520 and 5471. Based on professional advice and the IRS’s own recommendation, these taxpayers voluntarily file their information returns with a reasonable cause statement explaining why they are tardy. Although the IRS specifically recommends this filing procedure, it frequently fails to read the reasonable cause statements and simply sends out penalty notices.
More importantly, affected taxpayers’ penalty abatement requests and appeals are not being timely or properly processed. These items are added to “the pile” while collection efforts continue. The IRS’s response time to a taxpayer’s appeal request can be months, and it is tremendously difficult (if not impossible) to communicate with the IRS regarding an appeal due to the IRS’s inability to answer telephone calls. In the meantime, the IRS computer system sends out automatic collection notices, and interest accrues. This can result in premature collection actions, such as federal tax liens and levies of taxpayer bank accounts and property, while taxpayer appeals are pending. This not only violates taxpayers’ rights but needlessly consumes taxpayers’ and the IRS’s time and resources, as the IRS will have to deal with the inevitable collections appeals and, possibly, litigations.
On January 26, 2022, a bipartisan group of almost 200 members of Congress sent a letter to Treasury Secretary Janet Yellen urging her to take steps to provide relief to taxpayers. The letter requested that the IRS:
halt automated collections until at least 90 days after the current filing season ends (April 18, 2022),
delay the collections process until all active and pending penalty abatement requests have been processed,
streamline the reasonable cause penalty abatement process for taxpayers impacted by the pandemic,
provide targeted penalty relief for taxpayers who have paid at least 70 percent of the tax due for the 2020 and 2021 tax years, and
expedite processing of amended returns.
The same day, the IRS announced that it was suspending the issuance of certain automated letters and notices, including notices of balance due and notices of intent to levy. Although this may provide some relief to taxpayers, the IRS announcement is very limited. For example, the suspension of the automatic issuance of notices does not protect taxpayers who have already received collection notices. The IRS announcement also does not expedite penalty abatement requests that are already pending.
Limiting Future Problems
To avoid further delays, the IRS recommends that taxpayers file their tax returns electronically. When filing delinquent international forms, even if the IRS is not reading reasonable cause statements, taxpayers should still attach them to the forms. For penalty abatement requests that have not been answered for an extended time, taxpayers might consider requesting assistance from the Taxpayer Advocate Service to help in nudging the process along.
 The IRS’s website had stated that penalties for late filing would be imposed only if the IRS did not accept a taxpayer’s explanation of reasonable cause. The IRS suddenly removed this statement from the website in November 2020 without providing any explanation.  Ms. Collins has stated that the current response time for taxpayer correspondence exceeds six months. The IRS provided a list of the notices it was suspending on February 9, 2022.