Since the beginning of the pandemic it has been a whirlwind of unprecedented economic impacts. With that came the Coronavirus Aid, Relief, and Economic Security (CARES) Act and a curtailment of enforcement actions by the Internal Revenue Service (IRS), including audits. Per the People First Initiative the IRS generally avoided launching new audits from April 1st through July 15th. This did not prevent the IRS from opening audits to protect the government’s interest in preserving statute of limitations. (See IRS, IR-2020-59) In a report released June 29th, National Taxpayer Advocate Erin Collins said that the IRS launched substantially fewer audits from April 1st to June 1st compared to the same period in 2019. The IRS launched 71% fewer Corporate audits, 79% fewer Partnership audits, and 65% fewer individual audits. In total across all types of examinations there was a 65% decrease during this time period. With July 15th approaching the assumption is that there will be an increase in audits launched. However, with the pandemic still in a critical state as numbers of COVID-19 cases rise it remains to be seen what will happen as things are more fluid and the rules of the game are constantly changing.
One issue that will more than likely cause some issues as the IRS ramps up its enforcement and audit activities is that the IRS systems prepared over 20 million notices during the pandemic. The notices could not be mailed due to closure of the notice production centers from April 8th to May 31st. Since the notice production centers have opened back up notices have started mailing. However, due to the backlog, some of the notices will bare dates that are old and contain past due deadlines. The IRS has included additional inserts at the end of the notice to explain the deadlines have been postponed. However, confusion and undue stress could arise if the inserts are not read.
Furthermore, the report released on June 29th also highlighted remaining challenges of the CARES Act including the complexity of the Employee Retention Credit (ERC). Employers are struggling to identify if they qualify for the ERC and how to calculate the amounts of the refundable tax credit. The IRS has posted guidance with its FAQs section but there still remains ambiguities such as what is “comparable” continuation of a businesses operations that don’t specifically meet the example in the FAQs or does an essential business that remained open but under restrictions qualify as partially suspended due to COVID-19 restrictions. If the additional issues due to the complexity of the credit are not addressed it could lead to errors in calculations that could increase the risk of an audit and a drawn-out audit process.
In addition, Treasury Secretary Steven Mnuchin announced in March that the filing deadline for individual and business tax returns was extended to July 15th. The IRS also moved the deadline for payment of owed estimated taxes for the second quarter of the 2020 to July 15th. The IRS announced on Monday, June 29th that it would not extend or postpone the filing or payment deadline beyond July 15th. The IRS did provide for an automatic extension of time to file to October 15th but Taxpayers will need to file for the extension by July 15th and will need to estimate their tax liability on the form and pay any amount due. All taxpayers can use IRS Free File to electronically request an automatic tax filing extension.
As is evident throughout this pandemic the landscape is constantly changing. The above are just a few highlights of the issues. New programs that are supposed to help Taxpayers navigate the economic hardships could lead to undue audit hardships. This in turn is due to the pressing need for economic relief and the speed of which it is released with gaps in the mechanics. More guidance will be released and is in the pipeline but consulting with a Tax Consultant my be necessary to navigate the proper route through this time of uncertainty.
For more information on these changes and other tax questions, please consult a tax specialist.