Summertime Means IRS Notices – What Taxpayers Need To Know
While the IRS has indicated that the backlog of unprocessed paper-filed returns is going down, it remains clear that a huge volume of mail remains unprocessed. Unfortunately both the end of the regular 2021 filing season and the clearing of the backlog of unprocessed returns is creating more mail for both taxpayers and the IRS. One notice in particular is causing issues this summer: the CP-14.
CP-14 notices are issued when a taxpayer has an unpaid balance due. In early June tax professionals on social media started reporting problems with electronic payments made by the taxpayer listed as the spouse on jointly filed returns. Specifically, CP-14 notices were being issued for accounts where an electronic payment was made by a spouse using IRS Direct Pay and the payment was not applied to the balance due on the jointly filed return. On a jointly filed return, each spouse has “joint and several” liability for paying the balance due, so any payment made by a spouse should be applied to the balance due on a jointly filed return. But that isn’t what has been happening. And tax professionals cannot figure out why.
Some tax professionals who have called the IRS’ Practitioner Priority Line (PPL) on behalf of their clients have been told by some IRS representatives that “there is no way of knowing” that the payment is for the jointly filed return and not some other tax debt that is attached to the spouse’s SSN. This is, quite simply, not correct. When making a payment using Direct Pay taxpayers must specify a reason for the payment (balance due, estimated payment, etc.), the tax form to which the payment applies (Form 1040, etc.) and the tax year to which the payment applies. If the spouse of a taxpayer makes a Direct Pay payment for a balance due on a Form 1040 for a year that they filed jointly with their spouse (the primary taxpayer on the jointly filed return) there is really no reason that payment should not be automatically and correctly applied. And yet, the CP-14s continue to arrive in taxpayers’ mailboxes.
The problem has become so pervasive that some tax professionals on #TaxTwitter recently decided to report the problem to the IRS Systemic Advocacy Management System (SAMS) en masse. As of this writing, the SAMS representative handling the issue has noted that a subject matter expert (SME) has been assigned and that any cases that are reported will be passed along to the SME to determine if a systemic problem actually exists and that the issue is still in the “information gathering” part of the process. In other words, just because tax professionals think the problem is systemic doesn’t necessarily make it so. Matthew Cordes, EA owner of Cordes & Associates Financial Group in Garrett, IN, noted that when he reported the issue and spoke with the SAMS representative that “She was cordial and seemed to want to find out more information” but “was unwilling to call this a systemic issue” based on Matthew’s three clients’ information and his presentation of the facts. Instead Matthew’s clients’ facts were provided to the SME for further investigation.
It’s the SME’s job to ensure the same set of circumstances are causing the same problem over and over again. As with most errors in computer programming and other complex systems, the problem must be repeatable to be defined as systemic and then solved. When I spoke to SAMS on behalf of one of my clients, the SAMS representative urged tax professionals to report the problem. She noted it was always “better to say something” otherwise the IRS has no idea that the problem is widespread rather than isolated.
Unfortunately, reporting the issue to SAMS does not help individual clients or their representatives. Matt Holmquist, a tax professional in Arlington, TX, has reported the issue to SAMS on behalf of two of his clients. He noted that for smaller clients his firm typically asks the client to attempt to call the IRS themselves in order to minimize fees. It’s only when the client cannot resolve the issue themself that Matt’s firm goes through “the more time and cost-consuming process of obtaining a POA [IRS Power of Attorney, Form 2848]” and either calling the PPL or drafting and sending a certified letter on behalf of the client. Brian Borawski, a CPA in the Detroit area, also reported the problem to SAMS on behalf of four of his clients. While he felt that the call was “partially productive” in terms of getting what appears to be a systemic issue on the IRS’ radar he still notes that “the fact that our clients even got notices was a waste of time” (theirs, his, and the IRS’) and that it was annoying to be told to “just address them how [he] normally would” because there was not any wholesale resolution forthcoming.
In truth, until the issue is identified as systemic (and if so identified, fixed), tax professionals and taxpayers only have two options: they can call or they can write to the IRS to attempt to get the payment applied to the proper balance due. It’s been well reported that attempting to call the IRS is a nightmare. Mail isn’t any better. Robert Broome, the Director of Advocacy for the North Carolina Association of CPAs, noted that mailing anything to the IRS is a “joke of an option.” How could it be otherwise when the National Taxpayer Advocate’s Objectives Report to Congress for FY2023 notes that “Through May 21 , the IRS processed five million taxpayer responses to proposed adjustments, and it took an average of 251 days to do so – more than eight months.” So, eight months after mailing proof that a payment was made timely, the payment may be applied to the correct account. In the meantime, the automated notices just keep coming because the response is sitting in a stack of opened but unprocessed mail.
Of course, calling isn’t any less frustrating for taxpayers or their representatives. Some tax professionals have used the word “relentless” to describe their dialing efforts in an attempt to get put into the PPL’s hold queue. Others’ social media posts have them wondering whether to leave their desk to use the restroom or eat or continue to remain on hold. One reported being on hold for over two hours and then being disconnected. Attempting to resolve anything with the IRS by phone or by mail right has been an exercise in frustration for well over 18 months. The frustration has been exacerbated by the IRS’ failure to provide a number that can be used to provide a response via fax and by the fact that so many of these letters are simply incorrect.
Many tax professionals can quickly write a response and provide the proof necessary to quickly resolve these matters and would prefer the option of faxing the response and receiving immediate confirmation the fax was received rather than mailing a response into a black hole or spending hours on the phone. Nevertheless, Matt Smith, a CPA in Manhattan Beach, CA, notes “I have instant confirmation they [the IRS] got something a year ago that they have no record of having so…not always a sure thing.” The situation has become so frustrating that on June 24, 2022, Broome’s organization wrote a letter to North Carolina’s full congressional delegation on behalf of its members and North Carolina’s taxpayers asking them to address this issue with the IRS.
Taxpayers can be reassured that as long as they can prove the payment was made and when it was made (using the Direct Pay confirmation information and/or information from bank statements) that they will be given credit for the amount paid and the payment will be applied to the balance due on the date it was made. In other words, as long as they can prove the payment was made timely, the penalties and interest specified in the notice will not apply. Still, the notices are frightening. Kiva Reissig, an Enrolled Agent in Stockton, CA, had to make multiple calls to PPL before getting through to advocate on behalf of a client who received a CP-14 notice about a six-figure balance due. The penalties and interest were in the five figures. Needless to say the client was panicking. Fortunately Reissig was not. It took some time but she was able to resolve the issue once she was able to reach the IRS by phone. Reissig also noted that Direct Pay has been available for several years and that this is the first year that she has seen this particular issue arise in such high volume.
Philip Hwang, a tax attorney with Optima Tax Relief in Santa Ana, CA, has also seen issues with client payments. Optima is one of the largest tax resolution firms in the country and often works with clients who owe back taxes. While Hwang could not speak specifically to the CP-14 issue he did note that he has seen an increase in payments made by credit card being delayed in posting to a taxpayer’s tax transcript. In some cases the delay is long enough that the client receives a notice that their negotiated installment agreement (IA) is about to default. Resolving the issue usually takes a phone call but again, the entire situation is frightening for taxpayers and frustrating for their representatives. Hwang’s firm handles a high volume of cases and, while he admits he has no data or anything other than anecdotal evidence, it seems to him that after the IRS resumed mailing of certain automated collections notices that were paused for the 2022 filing season all parts of the IRS’ enormous computer system are not talking to each other correctly. Hwang reminds taxpayers that some processing delays are “par for the course when servicing millions of taxpayers” and that non-systemic issues are typically outliers that will have to be addressed case by case. Nevertheless Hwang feels that “The important thing is that the service verifies quickly that it is or isn’t systemic and corrects [the problem] quickly as applicable.” At this point neither payment posting delays nor the erroneous notices have been identified as systemic problems, but the problems may be closely related to the temporary pause in notice issuance.
The problems with erroneous notices may not be isolated to CP-14 notices either. Kathy Buchs, CPA, is the Senior Tax Advisor and Team Leader Director at MAI Capital Management in Cleveland, OH. She notes that while her firm has not seen a pattern of erroneous CP-14s, it is rare that they use the spouse’s SSN to make the payment. What she has noticed, however, are notices from the IRS stating that they never received a payment made using automatic debit from a client’s account. She noted her firm is also seeing a much higher volume of these notices than they have in prior years. She feels that erroneous notices in general are presenting an issue this year. She says that her firm is seeing an increase in not only the number of notices that are erroneous (but where the problem can be explained) but also notices that simply make no sense—the firm’s tax professionals cannot figure out where the numbers came from, what kinds of adjustments were made to the return, or otherwise tie out the information in a way that reconciles to the taxpayer’s tax return. Lea Garrity, EA owner of Garrity Enterprise, Inc. in Dixon, CA, wonders if all of the new staff the IRS has brought on to process the backlog of paper-filed returns may be contributing to the problem. She notes that inexperienced staff may be more prone to data entry and other processing errors and that this could result in an increase in CP-2000 matching notices (where the data on the tax return doesn’t match what the IRS has on file from third-party information returns such as W2s and 1099s).
In general, Buchs recommends that taxpayers who receive any notice from the IRS (or a state taxing authority) carefully review the notice for accuracy and never simply assume the notice is correct and pay the amount due. Buchs’ firm typically provides this type of low-level notice resolution as a courtesy to its clients but she notes that it is perfectly reasonable for firms to charge either hourly for notice resolution or to offer notice resolution with return preparation for an additional fee. Whether or not a given tax professional charges for the work and how much is charged will depend on the firm and its client base and its office policies. If your tax professional won’t handle the notice or you don’t want to pay an additional fee, it’s still good to provide your tax professional with a copy of the notice. Often they will review it and, at a minimum, they will have it for your tax file should other issues arise in the future. Buchs also recommends that taxpayers and tax professionals continue to “bring a dose of patience” to their dealings with the IRS.
So what can the IRS do? In January of this year, tax industry associations asked the IRS to discontinue issuing automated compliance actions “until the IRS has the resources to achieve proper and timely resolutions to the matters.” As noted above, the IRS paused some, but not all, of the notices. The IRS could also make the investigation of the CP-14 issue through SAMS a high priority and, if the problem is identified as systemic, make immediate efforts to resolve it. They could also make clearing the CAF backlog of representative authorization requests a priority and provide a way for taxpayers or their representatives to securely resolve this issue by submitting necessary information online. Finally the IRS could extend or even suspend response deadline times (or provide more than a modicum of grace when a taxpayer’s response to an erroneous CP-14 is received after the deadline) until they right their ship.