In my October 14 blog, The IRS and Private Collection Agencies: Four Contracts Lapsed and Three New Ones Are in Place: What Does That Mean for Taxpayers?, I noted that the IRS’s contracts with two private collection agencies (PCAs) had expired, which prompted the IRS to recall 1.2 million accounts that had been assigned to those companies (Performant and Pioneer). I also reported that taxpayers who had entered into payment arrangements with these two PCAs were sent letters from the PCAs (but not from the IRS) informing them that the payment arrangements were terminated. I advised taxpayers, among other things, to contact the IRS to resolve their tax debts, to be aware that their accounts could be assigned to one of three other PCAs in the future, and of their right to work with the IRS rather than with a PCA. Approximately 17,000 taxpayers had informal payment arrangements with a PCA whose contract was terminated.

As the National Taxpayer Advocate, I have previously recommended reforms to prevent scam victims from being penalized by the tax system. Chief Counsel’s memo shows that more victims than perhaps previously thought might qualify for the theft loss deduction, but it also illustrates how much work remains to help all taxpayers who find themselves victims of fraud.

Theft Loss Deductions Then and Now

Section 165(c) of the Internal Revenue Code allows taxpayers to deduct losses sustained during the taxable year that are not reimbursed by insurance or other compensation. Historically, this provision has been a help to individuals suffering financial losses from theft, fraud, or other criminal conduct. Before the Tax Cuts and Jobs Act (TCJA) of 2017, theft losses – whether personal or investment-related – were subject to certain limitations based on adjusted gross income thresholds.

Taxpayer receives a letter or notice from the IRS and either chooses to respond to the letter or notice by filling a missing tax return, paying their balance in full (tax plus any penalties and interest due), or pursuing a payment option

In a previous blog, Lifecycle of a Tax Return, we set out the initial stages of a return’s journey once it’s been filed, including certain detours a return may take as it goes through reviews prior to being posted on IRS systems. One of these detours is a review by the IRS’s Error Resolution System (ERS) where the return is reviewed for possible errors or omissions. This filing season ERS has experienced a significant backlog causing delays in refunds. To verify the accuracy of the Recovery Rebate Credit (RRC), Earned Income Tax Credit (EITC), Child Tax Credit (CTC) or Additional Child Tax Credit (ACTC), the ERS Unit is manually reviewing all returns where the taxpayer has claimed the RRC or used their 2019 earnings for the purpose of calculating the EITC, CTC, and ACTC.

Learn if Medicaid waiver payments are tax-exempt, how to report them, and when to file an amended return to claim a refund or tax credits.

For millions of taxpayers facing financial hardship, paying off their tax debt through an IA is often the only option. IAs allow taxpayers to pay their tax liabilities over time in manageable amounts. However, while this payment option can help taxpayers regain control over their tax situation, it comes at a cost. The IRS charges user fees to set up and maintain these agreements, creating an additional financial burden for taxpayers already struggling to pay what they owe.

These fees may seem modest, but they can discourage low-income taxpayers from entering into agreements that would allow them to manage their tax liabilities in a structured and predictable way. Instead of offering an affordable solution to manage tax debt, these fees may cause low-income taxpayers to delay or avoid making an IA with the IRS. This usually leads to penalties, interest accruals, and ultimately, more costly enforcement actions, creating a vicious cycle of debt that could have been prevented with the right support.

Are you still waiting for the IRS to issue a refund for a deceased taxpayer’s tax year  2022 or 2023 final income tax return?  You are not alone.  The IRS significantly delayed issuing refunds for final income tax returns filed with an attached Form 1310, Statement of Person Claiming Refund Due a Deceased Taxpayer.

The IRS corrected one or more mistakes on your tax return due to a miscalculation.

This is acknowledgement of the Collection Due Process and/or offer in compromise hearing request. The first step in the appeals process, informing you about a conference, acknowledging the assigned Appeals Officer, and affording you the opportunity to state why you disagree with the collection action taken by Compliance and request a collection alternative to resolve the tax liability. It also informs you of Appeals’ responsibilities during the hearing