Monthly Archives: March 2022

The IRS's Small Business and Self-Employed (SB/SE) and Large Business and International (LB&I) divisions have issued guidance to their examiners on scrutinizing tax returns that report net operating losses (NOLs). The guidance focuses on issues related to NOL carrybacks.

Generally, eligible taxpayers that want to carry back an NOL to claim a refund may:

1. File an application for a tentative refund within 12 months of the end of the loss year, or

2. Amend the carryback year return within the normal limitations period for filing refund claims.

However, beginning in tax year 2021, NOL carrybacks are limited to farming and insurance company losses. 

The New Guidance Provides SB/SE And LB&I Examination Employees With Step By Step Instructions For Examining Tax Returns Reporting An NOL Carryback.

The guidance also reminds examiners that while carrybacks may be limited for 2021 and later years, it is important for examiners to remain aware of carryback losses when examining returns as the rules in this area are often modified.

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According to the Washing Post, nearly 24 million taxpayers are still waiting for the Internal Revenue Service to process their tax returns from last year, a number far larger than previously reported by the agency, with many refunds being held up for 10 months or more.

The inventory of unprocessed returns and related correspondence was provided by the IRS’s taxpayer advocate service to the tax-writing committees in Congress. The backlog will probably further slow service in the 2022 filing season; the Treasury Department, the IRS’s parent agency, warned in January that it expected its response to be subpar this year. 

The pileup of work that remains from last year, according to three people who spoke on the condition of anonymity because they were not approved to speak publicly, comes as the tax agency struggles to hire and train new staff to clear the logjam. In response, the IRS is considering suspending tax collections and excusing some penalty enforcement.

 

“For decades, Republicans have starved the IRS of funding, and now American taxpayers are paying the price,” said Rep. Richard E. Neal (D-Mass.), the chairman of the tax-focused House Ways and Means Committee, citing the statistics unearthed by The Washington Post. “The backlog of tax returns is but one symptom of the fundamental issue that has been ailing the IRS for too long: inadequate resources.”

 

The IRS’s productivity plummeted during the coronavirus pandemic as thousands of employees worked from home for months without access to returns, audits and other business difficulties that followed years of budget cuts. The federal stimulus measures also added to the agency’s workload, as it emphasized getting relief money to millions of Americans. Paper returns took the greatest hit, as mail piled up on trucks outside closed offices for months.

 

Adding to the challenges, a new report from the IRS inspector general this month found that the agency continues to suffer from severe hiring shortages, inefficient practices and old equipment. That includes mail processing woes, since its systems have “outdated dust collectors” that cause paper jams. Poor scanners, meanwhile, meant the IRS last year missed out on $56 million because of “untimely check deposits,” since the agency could not tell whether envelopes it received contained checks.

 

As of Jan. 28, the tally of outstanding individual and business returns requiring what the IRS calls “manual processing” an operation where an employee must take at least one action rather than relying on an automated system to move the case came to 23.7 million, the taxpayer advocate data shows.

 

“This entire ecosystem of pending cases gives the public a fuller picture of what the IRS is up against,” said Chad Hooper, executive director of the nonprofit Professional Managers Association, which represents hundreds of IRS managers. “And it’s a crazy number before most people have filed their taxes for this year.”

 

The stockpile does not include audits lingering because of pandemic slowdowns, enforcement and collection actions, appeals of audits, notices of tax liens, penalties or other business in the pipeline, Hooper said.

The IRS is taking at least 10 months to process paper returns filed for the 2020 tax year, and has caught up only to April 2021 for returns without errors, according to the most recent data on its website.

President Biden and top Democrats proposed boosting the IRS budget, arguing that the agency had been severely underfunded and understaffed for decades before the added responsibilities. But the effort has so far failed to gain enough support in Congress, while talks continue around a new spending deal to fund the government and prevent a looming shutdown.

 

IRS spokeswoman Jodie Reynolds referred questions on the lingering inventory to a letter Rettig sent this week to all 535 members of Congress. Rettig, an appointee of former president Donald Trump, acknowledged an “unprecedented amount of unprocessed tax returns and correspondence remaining in the IRS inventory during 2021.”

 

But he said the problem has been compounded by a lack of funding to hire new staff and modernize its aging computer software systems, some of which date to the 1960s.

 

The commissioner announced last week that he was temporarily reassigning 1,200 employees as part of a “surge team” to help. But Collins told the oversight panel of the House Ways and Means Committee this week that the staffing problems are far broader, compounded by recruiting challenges and low pay.

 

The agency sought to fill 5,000 positions for several campuses across the country in time for this tax season but was able to hire fewer than 200, she said. The situation is so dire that for the first time, officials are offering $500 referral bonuses to employees if a new hire stays in the job for a year.

 

The agency has one of the government’s oldest workforces. Its submission processing unit responsible for opening the mail lost 20 percent of its staff last year to retirements, departures and transfers to other IRS departments, officials said. The Treasury Inspector General for Tax Administration reported this past week that as of August 2021, the IRS faced a total staff shortfall in the submission processing unit of about 2,598 employees.

 

The watchdog said that although the IRS has several initiatives underway to help address its hiring shortages, “to date these approaches have not been successful.” It urged the agency to delay a planned closure of its processing center in Austin, part of a long-term consolidation as more business is done electronically, “until hiring and backlog shortages are addressed.”

 

“Just like many industries across the country, jobs are available, but people are not applying,” Reynolds, the IRS spokeswoman, said in an email. “In [our case,] applicants may not like the shifts or pay as many of these are lower graded positions that were below the $15.00 minimum hourly rate.”

Have an IRS Tax Problem?

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Marini & Associates, P.A. 

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Read more at: Tax Times blog

On we posted Circuit Court Dismisses Taxpayer's Challenge To Tax Debt Passport Denial Program, where we discussed that a Colorado federal court properly dismissed Jeffrey T. Maehr's arguments contesting the constitutionality of the program allowing the Internal Revenue Service to certify a person's tax debt as seriously delinquent in order to limit their passport use, a three-judge panel said in a published opinion. 

Under Code Sec. 7345, the State Department may deny, revoke, or limit an individual's passport after the IRS certifies that the individual has a "seriously delinquent tax debt." Generally, a seriously delinquent tax debt is an assessed tax debt of $50,000 or more, for which 1) the IRS has filed a tax lien, and 2) the individual's collection due process rights have been exhausted or expired.

The State Department revoked Jeffrey T. Maehr's passport after the IRS certified his seriously delinquent tax debt. Maehr then sued in a federal district court, arguing that the revocation violated various constitutional provisions.

The district court, upholding the State Department's right to revoke Maehr's passport, found that Code Sec. 7345 is constitutional because it bears a rational relation to a legitimate government interest, to wit, the collection of delinquent tax debts.

Maehr appealed to the Tenth Circuit, which upheld the district court's decision. The appeals court found that the State Department could revoke his passport because  Code Sec. 7345 doesn't violate the Constitution. 

Maehr argued that the government wasn't allowed to collect his tax debt by suspending his constitutional rights to travel internationally. The Supreme Court declined his request for review of the Tenth Circuit's decision. 

Now the U.S. Supreme Court on February 22, 2022 denied petitions for review. 

If You Have Serious Delinquent IRS Debt, You Should Consult with Experienced Tax Attorneys, As There Are Several Ways Taxpayers Can Avoid Having the IRS Request That the State Department Revoke Your Passport. 

Read more at: Tax Times blog

According to Law360, the Tenth Circuit on July 20, 2021 affirmed the dismissal of a man's constitutional challenge to a program that allows the U.S. State Department to deny passports to people with seriously delinquent tax debts.

A Colorado federal court properly dismissed Jeffrey T. Maehr's arguments contesting the constitutionality of the program allowing the Internal Revenue Service to certify a person's tax debt as seriously delinquent in order to limit their passport use, a three-judge panel said in a published opinion. The panel's review of the case was the first by a federal appeals court to consider the constitutionality of the passport certification program enacted in 2015.

The judges disagreed on the appropriate standard of review to apply to Maehr's assertions that the passport program violates substantive due process, with Circuit Judges Scott M. Matheson Jr. and George A. Phillips saying that the most favorable standard for the federal government should apply to that argument.

But all three judges ultimately concurred that Maehr's two other arguments — that there are protections for international travel in the U.S. Constitution and that certain standards for passport revocation should be applied — did not pass muster. And while Circuit Judge Carlos Lucero said he believed that a somewhat stricter standard of review should be applied to Maehr's due process arguments, Maehr failed to make a case for that standard on appeal, according to the opinion.

Maehr's $250,000 outstanding federal tax debt was certified by the IRS in 2018 as seriously delinquent, which led to the State Department's revocation of his passport, according to the opinion. The IRS certified that debt under Internal Revenue Code Section 7345 , under which federal tax liabilities can be certified as "seriously delinquent" if they exceed $50,000. The passport revocation program was likely intended to encourage tax compliance by threatening to limit a person's ability to travel internationally, according to the Tenth Circuit's opinion.

Maehr sued the federal government over the program in November 2018. The Colorado federal court dismissed his complaint in February 2020, saying Maehr didn't prove the government violated the Constitution in revoking his passport.

On appeal, Maehr argued that provisions known as the privileges and immunities clauses under Article IV, Section 2 of the Constitution and under the Fourteenth Amendment limit the government's right to restrict international travel. Moreover, standards that apply to the writ of ne exeat republica, which can confine a person to a particular jurisdiction, should apply to the passport revocation program, Maehr contended.

But in the unanimous portion of their opinion on Tuesday, the judges said Maehr's arguments concerning the clauses and the writ of ne exeat republica were misplaced. For instance, the privileges and immunities clauses don't deal with international travel but instead address interstate travel, and the U.S. Supreme Court has never understood these clauses to apply to international travel, the opinion said.

But the judges disagreed on arguments advanced by Maehr contending that the passport revocation provision violates substantive due process. Writing for the majority on the due process issue, Judge Matheson said Maehr didn't prove international travel is a fundamental human right that would require the court to review his passport revocation using the strict scrutiny standard.

That review is more stringent than the rational basis test, which is used when no fundamental rights are disputed and is "more deferential" to the government, the majority opinion said. The passport revocation provision passes muster under that standard, as the government has a reasonable interest in raising money through taxes, Judge Matheson said. 

But that rational basis test might not have been the appropriate standard to apply to Maehr's due process claims, Judge Lucero said in his separate opinion. While Maehr didn't himself advocate for the intermediate scrutiny standard, compelling the judge to still agree to dismiss the case, international travel is too historically and culturally important to apply the rational basis standard in this dispute, Judge Lucero said.

"To pass constitutional review, laws limiting international travel may not require a compelling governmental interest, as strict scrutiny would demand," Judge Lucero said. "But on the other hand, the court's cases do not consign international travel to the cavernous abyss of rational basis review."

The passport certification program has been subject to challenges in the lower courts. For instance, the U.S. Tax Court recently rejected a constitutional challenge to the program, saying in a decision in March that the law doesn't violate the Fifth Amendment.

A Georgia federal court likewise found that IRC Section 7345 didn't violate the due process clause or other language in the Constitution. 

Read more at: Tax Times blog