The IRS’s backlog of mail has reached historic proportions. Whereas under “normal conditions,” the IRS advises taxpayers that it generally takes 6 to 12 weeks to process any tax returns and correspondence mailed to the agency, 2020 has been far from normal.
How big is the backlog of mail?
In June 2020, the IRS had already generated a backlog of 11 to 14 million pieces of mail. Plus, it was continuing to receive an estimated 1 million items each week. And since the normal April 15 tax deadline had been extended to July 15 due to COVID-19, an increase in volume was expected over the coming weeks. Most IRS offices were still closed at the time or had voluntary work-from-home policies in place, so the backlog was continuing to grow.
In mid- and late July, the IRS started reopening offices and mandating that employees come in. Certain offices had to temporarily close again, due to positive COVID-19 cases, including the Austin, TX, office, which serves most taxpayers with international interests.
With offices now reopened, the IRS is working to address the backlog. However, the agency is also seeing additional volume in advance of October 15, the extended deadline for those who requested extensions on their 2019 tax returns.
Is the backlog solely due to COVID-19?
Before COVID-19, the IRS was already suffering from backlogs due to budget cuts, staffing shortages, and government shutdowns. COVID-19 merely compounded these challenges.
Although some IRS essential functions remained operational when most of the US was shut down (between March and August 2020), many IRS mail rooms and offices ultimately closed or shifted to work-from-home. Since closures extended for months, COVID-19 greatly exacerbated the significant backlog at the IRS.
What kinds of things are affected by the IRS mail backlog?
- 2019 tax returns mailed to the IRS—US taxpayers who were unable to e-file their returns (either because their returns were ineligible for e-filing or because they didn’t have access) mailed their 2019 tax returns to a variety of IRS offices during 2020. The appropriate office depended on where the taxpayer lived, whether the return showed a refund or a balance due, and the type of return and forms being filed. Some offices have been more affected by the backlogs than others. Tax returns mailed between March 2020 and now (early October 2020) have been subject to significant delays in processing.
- Payments mailed to the IRS—Many taxpayers who e-filed their returns still mailed in checks or other payments to the IRS. They also sent checks to the IRS for other purposes, such as 2020 estimated tax payments, balances due on prior-year returns, or interest and penalties on tax notices. While the IRS usually processes payments quickly, payments sent since March 2020 have seen delays in processing.
- Amended tax returns for prior years—Until recently, amended returns had to be paper filed, by mail. Only in August 2020 did the IRS enable e-filing of amended returns, and then only for 2019 amended returns. Previously, the IRS warned taxpayers that processing times for amended returns were generally 8 to 12 weeks. With the mail backlog, processing of these returns has been delayed by months.
- Responses to IRS audits or tax notices—If the IRS sends a taxpayer a tax notice and the taxpayer disagrees with the findings (or would like to request relief), then they must typically mail a response to the IRS within a certain timeframe. Generally, the IRS then takes 6 to 12 weeks (or more) to process the mailed response and send their reply. Notice responses sent to the IRS since January 2020 have been delayed by the mail backlog.
- Applications for Individual Tax Identification (ITIN) numbers—If a taxpayer (or the taxpayer’s spouse or dependent) doesn’t qualify for a Social Security Number (SSN), then they must apply for an ITIN in order to file a return or claim certain tax benefits on a return. ITIN applications on Form W-7 must typically be accompanied by certified copies of passports and other documentation. As a result, they must be mailed (or provided in person) to the IRS. Most ITIN processing was shut down between March and September 2020. The ITIN unit already had a processing backlog and has since received numerous applications during COVID-19 shutdowns.
- Applications to reduce or eliminate tax withholdings on sale of US homes—When a US nonresident sells real estate in the US, there is a mandatory 10% to 15% tax withholding on the gross sales price of the home. Sellers who anticipate a loss on the sale (or who will ultimately owe less tax) can file a Form 8288-B to request a reduced rate of withholding. Typically, these applications are time sensitive. With COVID-19-related closures and the mail backlog, the IRS has not been processing these applications timely. See our blog on 8288-B processing delays.
How is this backlog translating into problems and frustrations for taxpayers?
Delayed refunds. For taxpayers expecting refunds from mailed-in 2019 returns, prior-year returns, or amended returns, the IRS’s delay in processing those returns has been frustrating. Especially when so many taxpayers are facing economic uncertainty or hardship due to COVID-19. And unfortunately, there isn’t usually a way to speed up the process to receive the cash. A small consolation is that when the refunds are processed, taxpayers may receive an interest payment on the refund. This interest payment is taxable, of course, as interest income on the 2020 tax return.
Inappropriate letters and tax notices from the IRS. While mail sat unopened and unprocessed at IRS mail facilities, the IRS’s systems were still sending out computer-generated tax notices to taxpayers, requesting returns, payments, and other information. The IRS notices provided deadlines to respond and also specified that further action would be taken if a response wasn’t received by the deadline. For taxpayers who received these notices but had already sent the requested information, the notices caused stress and panic. The notices directed taxpayers to contact the IRS for assistance, which was problematic due to the agency’s limited staffing. And sending correspondence to the IRS via mail could further compound the mail backlog.
Finally, in August 2020, House Ways and Means Committee Chair Richard E. Neal (D-Mass.) intervened, sending a letter to the IRS. The letter admonished the IRS for causing “extra stress during the current economic crisis.” It directed that the IRS should stop sending incorrect notices to taxpayers who have already mailed payments, pause sending notices to taxpayers potentially affected by the correspondence backlog, and ensure that taxpayers aren’t charged interest and penalties for delays resulting through no fault of their own. Shortly thereafter, the IRS announced that it would indeed pause many tax notices.
Delays in time-sensitive matters. For nonresidents selling houses in the US, the IRS’s delays have meant that their requests for reduced withholding haven’t been processed. So, if the taxpayers were counting on the cash from the sale of their homes to buy another home or to help them through economic hard times, that cash hasn’t materialized. Instead, the cash remains held in escrow until the IRS processes the Form 8288-B, Application for Reduced Withholding. Individuals seeking ITINs are facing similar frustrations. If the ITIN application wasn’t processed before 2020, then lack of an ITIN may be preventing them from filing 2019 returns timely or taking other time-sensitive actions. Finally, certain actions must be taken before the statute of limitations closes on certain returns. The IRS backlog has caused uncertainty as to whether certain requests for refunds and other matters still fall within the statute of limitations.
What are we advising our clients with regard to the IRS mail backlog?
- Be prepared for a long and delayed IRS response. As mentioned earlier, COVID-19 has just exacerbated delays that the IRS was already facing due to budget cuts and staffing shortages. Many IRS offices have reopened and instituted mandatory employee attendance. But the reality is that it will take a while for the IRS to process most mail it receives. The agency estimated it can process an estimated 4 million pieces of mail per week, and it is chipping away at the backlog.
- Want proof the IRS opened your mail? Enclose a check for $1. If you can’t e-file your current-year or prior-year return, we recommend mailing the IRS an accompanying check for $1 along with your return. The IRS always cashes the check, and this provides you with a “real” receipt. If you don’t take this extra step, then you have no proof that the IRS received your return and has processed it.
- If you’ve already waited or have an urgent need, we may be able to expedite matters. We can contact the IRS on behalf of our clients. To do so, clients sign a Form 2848, Declaration of Representative. This form gives us a limited Power of Attorney for tax matters only. It allows us to contact the IRS on your behalf through the Practitioner Priority Service (PPS). The PPS is a special hotline for practitioners that has a higher success rate of contact with IRS representatives. It is commonly used by tax professionals to inquire and resolve IRS issues.
- If you need to amend prior-year returns for a refund, be sure to check the “Refund Statute Expiration Date.” If clients need to amend prior-year tax returns to obtain a refund, we work with them to determine the “Refund Statute Expiration Date.” This is the latest date that you can file an amended return in order to request a refund. In most cases, taxpayers have 3 years to amend a return. However, it’s not always clear, 3 years from what date? And the date you identify is not always the date the IRS has in its records. So, we obtain a signed Form 2848 from you, contact the IRS through the Practitioner Priority Hotline on your behalf, and confirm the specific expiration date. Then, we work with you to identify the appropriate filing strategy and timing to maximize your chances of timely success.
- Don’t assume IRS tax notices are correct. Many taxpayers panic when they receive correspondence from the IRS. The IRS can seem intimidating. And IRS correspondence uses language to impart a sense of urgency. It does so by providing deadlines for responding and outlining what will happen if you fail to respond. The truth is, many IRS tax notices are computer-generated and may or may not be correct. They are the IRS’s way of flagging a discrepancy or something unusual. To get you to respond, they propose an unfavorable result that you can only avoid if you respond with an explanation or further information. You typically receive multiple reminders (over several months) before the IRS escalates its actions. To get a better understanding of tax notices, see our blog post, “Should I be worried if I receive a tax notice?” To assist our clients who receive tax notices, we review the notice, explain what it means, opine on the accuracy, and advise on the steps to resolve it. For tax notices requiring action, we obtain a signed Form 2848 from you, contact the IRS through the Practitioner Priority Hotline on your behalf, and prepare the necessary correspondence to resolve the issue.
- Engage the National Taxpayer Advocate (NTA) to improve the outcome. If our clients’ situation isn’t getting resolved to anyone’s satisfaction through normal IRS channels, then in addition to the Form 2848, we can file Form 911 to open a case and escalate the issue to the National Taxpayer Advocate (NTA). The NTA is a third-party organization that works directly with the IRS on behalf of taxpayers who:
- Are experiencing significant economic hardship,
- Are being threatened with immediate adverse action,
- Could incur significant costs if relief is not granted, or
- Have experienced a delay of more than 30 days and/or did not receive a response or resolution to their issue by the IRS on the promised date.
- If you are a nonresident selling a US home, let’s explore your options to get your cash as soon as possible. The IRS unit that processes Form 8288-Bs for reduced rates of tax withholding can be “hit or miss.” Sometimes, these forms get processed quickly; sometimes not. If a Form 8288-B has already been sent, we can contact the IRS unit the processes the form, under a signed Form 2848, Power of Attorney for Tax Matters. If you are considering filing a Form 8288-B, we recommend you contact us for a non-billable discovery call to discuss options and expectations.
- If you need an ITIN, let’s discuss your options. This a challenging time for individuals requesting ITINs for the first time. Only the individuals themselves can check the status of an ITIN application with the IRS. Without an issued or temporary ITIN, tax professionals are unable to execute Form 2848, Power of Attorney for Tax Matters, on behalf of clients. If the client faces significant harm or adverse impacts, relief may be possible via the National Taxpayer Advocate. In some cases, though, it may make sense to temporarily forego the ITIN or take another approach. We advise clients on their options and the implications.
Are State Taxing Authorities Experiencing the Same Problems with Backlogs?
Like the IRS, many state tax authorities have experienced challenges with mail backlogs and COVID-19 shutdowns. The extent of the challenges has varied by state. At one point early in the COVID-19 shutdowns, reports surfaced that some taxing authorities were not processing mailed-in returns at all. Other states, such as Maryland, announced specific dates (e.g., April 15, 2020) they would temporarily stop processing the returns mailed to them until COVID-19 closures were lifted. Since then, many states have restored their operations and have made good progress on the backlog of mail.
When Do We Estimate These Issues Will Be Resolved?
Since IRS offices reopened in late July and the IRS curtailed its sending of tax notices in late August, the agency has been able to make significant progress on the backlog of mail. Specialty offices, such as the ITIN office, also resumed operations and recently began reaching out on ITIN applications made in early 2020.
Although good progress is being made now, events of the coming weeks may dictate how long the backlog will persist and at what point the IRS will catch up:
- An influx of mail is anticipated for the October 15, 2020, extended tax return filing deadline. This increased volume may temporarily delay or exacerbate the IRS’s ability to catch up.
- Health experts fear a rise in COVID-19 infections as temperatures drop and winter approaches in the US. If cases rise, additional shutdowns could impair the IRS’s ability to stay on top of taxpayer correspondence.
- On September 30, 2020, the President signed a stop-gap funding measure to fund US Government operations through mid-December. However, a fiscal year 2021 budget has yet to be passed, and it’s unclear what the budget will hold for the IRS.
- The US federal elections scheduled to take place on November 3, 2020, will affect the composition of the US House, Senate, and Presidency (and thus Cabinet). The results may affect future IRS funding and priorities.
- Finally, as reported in our recent blog post, “The impact of RBG’s death on your past tax returns,” if the US Supreme Court hears a case on the Affordable Care Act in mid-November, the outcome may spur a new influx of amended tax return filings.
Is Getting a Solution Just a Matter of Time and Patience?
2020 has been an exceptional year, worldwide and in tax matters. If you have been or are currently affected by the IRS mail backlog, the good news is that the IRS is working hard to catch up. While time and patience go a long way in these extraordinary times, if you have tax concerns and would like further assistance, please contact us. We are happy to assist in reviewing your case, explaining your options and what to expect, and helping to expedite a resolution.