INDIANAPOLIS — A new report issued Monday explains why so many Hoosiers are still waiting for their tax refunds.
National Taxpayer Advocate Erin M. Collins released her first report to Congress, identifying taxpayer challenges arising from the COVID-19 pandemic.
The National Taxpayer Advocate is required to submit a year-end report to Congress that makes administrative recommendations to resolve taxpayer problems.
The report found taxpayers who filed a 2019 paper return and are entitled to refunds may be in for a long wait.
The IRS had to suspend the processing of paper tax returns, and as of May 16, it estimated it had a backlog of 4.7 million paper returns, according to the report.
Although the IRS is reopening some of its core operations, it is not clear when it can open and process all the returns sitting in mail facilities, the report found.
Many Hoosiers have contacted Call 6 Investigates about delays receiving their federal tax refunds including Doretta New, an Indianapolis resident on Social Security, who filed her taxes via mail on March 11.
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Doretta didn’t get her federal tax refund until June 22.
The taxpayer advocate’s report found the IRS’ processing filters mistakenly flagged some taxpayers’ returns, which resulted in lengthy delays for some in receiving their refunds.
“All tax returns claiming refunds are passed through filters designed to detect identity theft and other types of refund fraud,” read the report. “Some of these filters produce ‘false positive rates’ of more than 50 percent meaning that more than half the taxpayers whose returns are stopped by certain filters are entitled to the refunds they claimed. Affected taxpayers are often asked to mail in documentation to substantiate their claims, but the IRS has not opened or processed many of their responses, delaying their refunds.”
The taxpayer advocate said refund delays can have a significant financial impact on low-income taxpayers, as refunds often constitute a significant percentage of their annual household incomes.
Among the report’s other findings from the Taxpayer Advocate Service (TAS):
- Taxpayers who have needed help from the IRS have had difficulty obtaining it. The IRS shut down its Accounts Management telephone lines, so taxpayers could not reach a live assistor by telephone. The IRS shut down its Taxpayer Assistance Centers, making it impossible for taxpayers to obtain in-person assistance. The IRS also shut down its mail facilities, so it was unable to log or process taxpayer responses to compliance notices. The only resources readily available were IRS.gov [lnks.gd] and automated telephone lines. The IRS has begun reopening its operations, but it will take some time before they are restored to full capacity.
- IRS systems prepared over 20 million notices during the pandemic that could not be mailed due to closure of notice production centers between April 8 and May 31. The IRS is mailing these notices now. However, some collection notices bear old dates and include response deadlines that often have passed. The IRS plans to include “inserts” with these notices explaining that response deadlines have been postponed, but the report expresses concern that receiving compliance notices with response deadlines that have passed will be confusing and concerning to many taxpayers who may not read the inserts.
- Individuals who did not receive some or all of their stimulus checks may have to wait until next year to receive them. To date, the IRS has taken the position that most taxpayers who did not receive their full payments must wait until they file their 2020 income tax returns to claim the amounts as credits against their 2020 tax liabilities, even though there is no legal constraint on the IRS’s ability to issue additional Economic Impact Payments (EIPs) amounts as advance refunds during 2020. Congress enacted the CARES Act both to provide emergency financial relief to taxpayers on an individual level and to boost spending on the national level. TAS will continue to urge the IRS to provide full EIPs to eligible taxpayers throughout 2020 as rapidly as possible. The report says that making taxpayers wait until next year to receive their EIPs harms the affected taxpayers and is inconsistent with congressional intent.
- Employers are struggling to determine whether they qualify for the Employee Retention Credit (ERC) and in what amounts. The ERC is a complex, refundable tax credit that requires employers to determine when a trade or business was fully or partially suspended by government order; the employer’s number of full-time employees; what constitutes qualified wages; whether a business’s operations post-COVID-19 are comparable to its pre-COVID-19 operations; and the application of aggregation rules. To address these complexities, the IRS has provided considerable guidance regarding when and how to claim the ERC. However, several areas require further clarification. If clarity is not provided, taxpayers will be more likely to make unintentional errors, increasing the risk of an audit. Having to untangle these issues in an audit environment would drain the limited resources of both the IRS and the businesses affected by the COVID-19 pandemic. TAS will continue to advocate that the IRS further clarify the rules governing when and how employers should claim this credit.
- Businesses are facing challenges when seeking to utilize the CARES Act provision that authorizes the use of net operating losses to offset taxable income in prior years (and in some cases to receive refunds). For businesses to determine the optimal application of the CARES Act provisions so they can exercise their right to pay no more than the correct amount of tax, they may need to create and run complex financial models involving multiple tax years. The report says the IRS has provided timely guidance in the form of frequently asked questions (FAQs), but it expresses concern that FAQs are not authoritative or binding on the IRS.
The IRS responses are published in full in an appendix to the report.
The Taxpayer Advocate Service (TAS) is an independent organization within the IRS that helps taxpayers and protects taxpayer rights. Your local advocate’s number is in your local directory and at https://taxpayeradvocate.irs.gov/contact-us [lnks.gd]. You can also call TAS toll-free at 877-777-4778.
