In essence, the IRS is currently broken. Many taxpayers have been complaining about receiving numerous IRS notices but not having any access to IRS employees. In fact, the IRS is currently only answering about 7% of their phonecalls. They are just now getting around to opening mail from April 2021. So the left hand of the IRS is sending out notices to taxpayers about delinquent accounts when they actually have taxpayer correspondence in their right hand and don’t know about it. Taxpayers are wondering if their CPAs have a secret way to access the IRS to resolve this frustrating situation, but accountants are in the same boat as far as having no ability to communicate to a severely understaffed IRS.
Additionally, a lot of tax fraud is currently taking place. Although some fraudulent tax returns have been filed, the IRS has not been able to respond to taxpayer complaints about this tax fraud. In some cases, taxpayers have not been able to receive their stimulus payments because of this fraud.
Taxpayers are asking about which tax letters are legitimate. IRS Letter 5071C is a legitimate and very common attempt by the IRS to counteract fraud attempts by asking taxpayers to verify their identity before they will release a refund. While the verification can be done online, many do not want to do so online or are running into difficulties when attempting to do so. For those who need to call the IRS about this issue, your best bet is trying to call them first thing in the morning at 8am. You may get a courtesy disconnect, but you will need to keep trying until you get through to someone. The American Institute of CPAs (AICPA) has requested that the IRS stop sending out these letters until they have the capability to answer phonecalls, but as of now that has not happened.
IRS.gov has a very complete status page about their current level of operation. Refer to this page to get informed, and remember that you are your own best advocate when it comes to resolving tax matters.
The IRS is asking that nobody calls to ask about the status of their refund. If you are still waiting for your refund, keep in mind that if you mailed in your tax return any later than March 2021, the IRS hasn’t even opened it yet. If they have opened it but there is something unique on it that earmarks the return as needing “special handling,” the IRS is advising that it will be at least 90-100 days before the taxpayer will hear from them as to next steps. At this point, that puts you into 2022. You can use the “Where’s My Refund?” tool on IRS.gov to find out if the IRS has even opened your mailed tax return yet. If you e-filed, use this tool to find out where your return is at in the process, including whether a payment has been issued yet. If your tax refund already came, and the amount has since been changed, the IRS will issue a letter explaining that change, but even those letters are coming almost two months after the change. There’s really nothing you can do until the IRS communicates with you.
Another very helpful page on IRS.gov is the Economic Impact Payment Information Center. It includes links taxpayers can click on to follow up if they didn’t receive their first stimulus payment, if they experienced fraud, or if they’ve run into any other problems. If you are in this position, you will need to initiate a trace with the IRS. It’s a cumbersome process, but this page walks you through it step by step.
Finally, the Child Tax Credit Update Portal on IRS.gov is extremely helpful. Many taxpayers have been receiving advance Child Tax Credit payments since July. The Child Tax Credit was increased to $3000 per child this year, and the IRS is advancing half of that between July and December. Be sure you understand that these payments may need to be repaid later if you usually break even or need to pay at tax time. This would be especially true for small business owners. If you receive advance CTC payments, that credit will not be available for you to offset the amount owed when you file your tax return. If you want to stop the advance payments, you can go to this portal and update it with your request.
Tax reform is upon us, but the effective date is still uncertain. An increase in capital gains tax is being proposed to be retroactive back to April 2021, but that will be challenged constitutionally. (It has been defeated in Massachusetts in the past when the MA Supreme Court found a retroactive capital gains increase to be unconstitutional since it doesn’t allow taxpayers to make informed investing decisions.) The hope is that the tax reforms won’t go into effect until 2022, since that will allow tax software to be updated in a timely manner so that additional delays and difficulties in the next tax season won’t occur. Much of the tax fraud is occurring because changes are being made too quickly before everything can be tested, causing vulnerabilities in tax software.
The middle and upper classes will see the biggest changes under tax reform. Everyone saved about 3% under the Trump tax reform, but that will now be rolled back and there will be significant increases in capital gains income and estate planning. Nobody knows yet what the exact law will be, but if the estate law changes the way it’s been trending, then the step-up in basis for estates would be removed for federal purposes. This would have a huge tax effect for small business owners who are considering transferring businesses to heirs. Once tax reform is issued, all those with estate plans will want to reevaluate them under the new law.
In terms of a realistic future outlook, it could take the IRS years to correct items, move forward, and get what they’ve been tasked with up-to-date and flowing. Everyone must continue being patient and using the available IRS tools to advocate for themselves.