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MSP #9: AMENDED RETURNS

The IRS Processes Most Amended Returns Timely But Some Linger for Months, Generating Over a Million Calls That the IRS Cannot Answer and Thousands of TAS Cases Each Year

TAS Recommendations and IRS Responses

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1.

TAS RECOMMENDATION #9-1

Revise the IRM to provide that if a request for tax abatement is incomplete, the employee should solicit the necessary documentation from the taxpayer, and if the documentation is not forthcoming or is insufficient, the employee should deny the request, explain the reason for the denial, and explain the different procedures that apply to requests for tax abatement and requests for refund.

IRS RESPONSE TO RECOMMENDATION: We are currently working on Internal Revenue Manual (IRM) updates to remove the “no consider” process for tax abatements. We will emphasize the need to contact the taxpayer for any missing information and to fully consider the claim when the missing information is received. Complete claims will still be subject to all review processes.

CORRECTIVE ACTION: We are currently working on Internal Revenue Manual (IRM) updates to remove the “no consider” process for tax abatements. We will emphasize the need to contact the taxpayer for any missing information and to fully consider the claim when the missing information is received. Complete claims will still be subject to all review processes.

Update 9/20/2021 – IPU 21U0874 issued for IRM 21.5.3.4.6 to revise the IRM to follow incomplete claims procedures and contact the taxpayer for the missing information.

TAS RESPONSE: The National Taxpayer Advocate is pleased that the IRS is revising the IRM to correct the procedures for handling requests for tax abatements. We look forward to reviewing the modified IRM.

ADOPTED, PARTIALLY ADOPTED or NOT ADOPTED: Adopted

OPEN or CLOSED: Closed

DUE DATE FOR ACTION (if left open): N/A

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2.

TAS RECOMMENDATION #9-2

If the IRS determines the taxpayer is not entitled to an abatement, issue a 30-day letter providing taxpayers the right to file a protest with the Independent Office of Appeals for abatement of tax and updating and clarifying the IRM’s No Immediate Tax  Consequence provisions by referencing abatement cases.

IRS RESPONSE TO RECOMMENDATION: Based on our actions to remove the “no consider” process for tax abatements in response to Recommendation MSP 9-1, a 30-day letter process will no longer be needed as we will be providing the taxpayer an opportunity to provide the missing information without first paying the tax.

CORRECTIVE ACTION: Based on our actions to remove the “no consider” process for tax abatements in response to Recommendation MSP 9-1, a 30-day letter process will no longer be needed as we will be providing the taxpayer an opportunity to provide the missing information without first paying the tax.

Update 9/15/2021 – IPU 21U0874 issued for IRM 21.5.3.4.6 to revise the IRM to follow incomplete claims procedures and contact the taxpayer for the missing information

TAS RESPONSE: Even if the IRS improves the process for considering requests for tax abatements by removing the “no consider” process, taxpayers should still have the opportunity to seek review by the Independent Office of Appeals. The IRS response is misleading as the IRS does not agree to implement the TAS recommendation.

TAS discussed with W&I and agrees actions were taken.

ADOPTED, PARTIALLY ADOPTED or NOT ADOPTED: Adopted

OPEN or CLOSED: Closed

DUE DATE FOR ACTION (if left open): N/A

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3.

TAS RECOMMENDATION #9-3

Remove any selectable paragraph in Letter 916C that states the law does not allow taxpayers to file a claim to reduce the tax they owe or appears to advise taxpayers that they cannot seek an abatement of tax without first paying the amount of tax already assessed (Paragraph N in the current version of Letter 916C).

IRS RESPONSE TO RECOMMENDATION: We are currently working with other internal functions to update the referenced letter after considering input relative to removing this paragraph. We will take appropriate actions based upon this effort.

CORRECTIVE ACTION: We are currently working with other internal functions to update the referenced letter after considering input relative to removing this paragraph. We will take appropriate actions based upon this effort.

Update: IRM 21.5.3.4.6, No consideration and Disallowance of Claims and Amended Returns, has been revised to no longer suggest the use of this paragraph. We are having preliminary discussions with various stakeholders including Counsel and Appeals about possible revisions to the letter. Securing approvals of the various BODs who use the letter and making actual changes to the letter is a multi-year effort.

TAS RESPONSE: We look forward to reviewing an updated version of Letter 916C.

ADOPTED, PARTIALLY ADOPTED or NOT ADOPTED: Partially Adopted

OPEN or CLOSED: Open

DUE DATE FOR ACTION (if left open): 12/31/2022

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4.

TAS RECOMMENDATION #9-4

Revise the IRM to instruct employees not to use a fill-in paragraph in Letter 916C to state the law does not allow taxpayers to file a claim to reduce the tax they owe or to inform taxpayers they cannot seek an abatement of tax without first paying the amount of tax already assessed.

IRS RESPONSE TO RECOMMENDATION: We will revise the IRM in conjunction with the revisions referenced in our response to Recommendation MSP 9-1.

CORRECTIVE ACTION: We will revise the IRM in conjunction with the revisions referenced in our response to Recommendation MSP 9-1.

Update: IRM 21.5.3.4.6, No consideration and Disallowance of Claims and Amended Returns, was revised to no longer suggest or require use of this paragraph.

TAS RESPONSE: We look forward to reviewing the revised IRM.

Update: W&I has updated their IRM. However TAS is checking with SBSE Examination to discuss their procedures.

ADOPTED, PARTIALLY ADOPTED or NOT ADOPTED: Adopted

OPEN or CLOSED: Open

DUE DATE FOR ACTION (if left open): 12/31/2022

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5.

TAS RECOMMENDATION #9-5

Identify and address the cause of lengthy examination times for amended returns.

IRS RESPONSE TO RECOMMENDATION: The Small Business/Self-Employed Division (SB/SE) reviewed the cycle time for examinations of amended returns as well as other returns selected for audits. The cycle time to conduct an examination on amended returns is lower than other examinations both in Field and Campus operations. When an amended return is examined, the scope is not necessarily limited to just the claim issue; therefore, the expectation of the amount of audit work needed to examine the return should be similar to a regular examination.

The Large Business & International Division (LB&I) also reviewed cycle times for examinations of claims. For mid-sized corporations, there was an increase of a few months in cycle times for claims (other than claims that are statutorily subject to review by Congress’ Joint Committee on Taxation), but that increase in cycle time is diminished as we move to cycle time for large corporations. Claims reviewed by the Joint Committee added around 8 months to the cycle time, which is expected due to the Joint Committee process.

The timing of when a claim or amended return is received within the LB&I examination cycle may impact how long it takes to resolve. The initial examination could be the result of the claim or an amended tax return being filed; the claim may be incorporated into an ongoing examination; or the claim may be received at the conclusion of the initial examination of a tax return. Examination teams fully apprise taxpayer corporations that an examination of issues raised by filing an amended return prior to or during the course of an audit will increase the length of time needed to conduct the examination.

In summary, the length of any audit is based on the facts and circumstances of each  case and may be impacted by the necessity to balance competing priorities as well as other extenuating circumstances such as disasters.

CORRECTIVE ACTION: N/A

TAS RESPONSE: The IRS’s response shows that it reviewed cycle times and has some ideas about what drives cycle time but does not agree to implement the TAS recommendation.

ADOPTED, PARTIALLY ADOPTED or NOT ADOPTED: Not Adopted – IRS states they have already implemented this recommendation in full. However, TAS disagrees per the information in the TAS Response above.

OPEN or CLOSED: Closed

DUE DATE FOR ACTION (if left open): N/A

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6.

TAS RECOMMENDATION #9-6

Identify and address the cause of the increase in processing time for corporations’ unaudited amended returns.

IRS RESPONSE TO RECOMMENDATION: We continually review and monitor all inventories, including the unaudited corporate amended returns. Multiple factors influence processing times each year, such as government shutdowns, legislation, available resources, and even nationwide pandemics. Each year, we tailor our efforts to address processing timeframes to the specific circumstances that have contributed to them. The circumstances surrounding our current situation include the following:
• Historical data shows the 1120X receipts have not increased as compared to prior years, but closures were down considerably compared to the prior year. Both campuses assigned business (BMF) returns have validated that the CP80 inventory (for BMF taxpayers who make a payment but fail to file a return within six months after the return due date) did not contribute to the backlog of amended returns.
• The BMF campuses were heavily impacted by the pandemic due to building closures, across the board staffing shortages, various systemic issues, and limited paper time because of phone demand. The two BMF campuses have about 720 Customer Service Representatives trained and working these cases and many other types of work, so they are spread between the various paper programs and phone lines.
• We are expecting staffing increases from employees returning from Weather and Safety leave and about 200 new hires in the upcoming weeks. As a result, we should see improvements in the amount of staffing we can apply to this inventory.
• The corporate amended inventory is portable and processed via Account Management Services/Correspondence Imaging Services, so we are exploring options for in-office and telework employees to do this work. However, delays in working these cases are compounded by document requests not yet fulfilled due to Federal Records Center closures/staffing shortages. Increasing staffing will not help if we can’t get the returns needed to work these cases.

CORRECTIVE ACTION: N/A

TAS RESPONSE: The TAS analysis was based on the IRS’s performance in FYs 2017-2019, before the onset of the pandemic, yet the IRS response primarily references problems created by the pandemic. The pandemic may have worsened the problem, but the problem was already evident. The IRS detailed response does not agree to implement the TAS recommendation.

ADOPTED, PARTIALLY ADOPTED or NOT ADOPTED: Not Adopted – IRS states they have already implemented this recommendation in full. However, TAS disagrees per the information in the TAS Response above.

OPEN or CLOSED: Closed

DUE DATE FOR ACTION (if left open):

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7.

TAS RECOMMENDATION #9-7

Add additional status updates to the “Where’s My Amended Return” tool to allow taxpayers to see when the IRS selects their amended return for audit, when it assigns the audit to an examiner, and what an estimated completed processing time is based on the return’s current status.

IRS RESPONSE TO RECOMMENDATION: Expanding “Where’s My Amended Return” beyond its original use may provide inaccurate and/or confusing information to taxpayers, as all amended returns selected (or referred) for examination may not be audited. If an audit will be conducted on the amended return, taxpayers are notified in writing.

CORRECTIVE ACTION: N/A

TAS RESPONSE: It is unclear why taxpayers would be confused if they were informed that their amended return was selected for examination and may or may not be audited. Moreover, once an amended return is selected for examination, it is assigned to an examiner, who may decide to survey, rather than audit, the return. The IRS could inform taxpayers, for example, how long this step alone is currently taking.

ADOPTED, PARTIALLY ADOPTED or NOT ADOPTED: Not Adopted

OPEN or CLOSED: Closed

DUE DATE FOR ACTION (if left open): N/A

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8.

TAS RECOMMENDATION #9-8

Revise the IRM and Form 1120X instructions to more accurately reflect the expected processing time for amended returns.

IRS RESPONSE TO RECOMMENDATION: The current instructions for Form 1120X state, “It often takes 3 to 4 months to process Form 1120X.” Wage and Investment confirmed that the timeframe for processing Form 1120X as stated is still accurate. Therefore, the instructions will not be updated. Processing time does not include the time expended if an amended return is selected for examination. Once a definitive decision is made to examine the assigned amended return, the taxpayer will be notified in writing.

CORRECTIVE ACTION: N/A

TAS RESPONSE: Perhaps the IRS could simply adjust the current instructions to inform taxpayers that processing time does not include time expended if an amended return is selected for examination.

ADOPTED, PARTIALLY ADOPTED or NOT ADOPTED: Not Adopted

OPEN or CLOSED: Closed

DUE DATE FOR ACTION (if left open):

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