IRS Updates

An IRS computer programming problem resulted in over $43 million in erroneous refunds being issued to the accounts of 7,765 individual taxpayers whose checks were dishonored, the Treasury Inspector General for Tax Administration (TIGTA) has found. The overpayments occurred when the taxpayer's check was posted to their account before the financial institution honored (paid) it.

Although IRS employees are supposed to review any accounts with dishonored payments, TIGTA found overpayments are still being sent out to those taxpayers. After reviewing 20 of the affected taxpayer accounts, the IRS determined the refunds were posted to the accounts before the system confirmed the checks were paid. Through further analysis, the IRS located a timing issue in the software and agreed to postpone issuing refunds for two posting cycles to allow for the receipt of any information on the unpaid items. TIGTA recommended the same procedural change to avoid future issues, given that the IRS processed over 1.5 million unpaid checks totaling almost $4.7 billion from Jan. 1, 2023, through March 28, 2024.

While a recent federal court ruling has temporarily blocked the Trump administration's buyout offer, the IRS Human Capital Office has informed the agency's staff that employees in positions critical for the 2025 filing season could not accept the offer until May 15. A letter sent to IRS employees Wednesday specified that critical filing positions in Taxpayer Services, Information technology and the Taxpayer Advocate Service are exempt from the buyout offer until after tax season. The agency is attributing the decision to exempt the filing season employees to Treasury Secretary Scott Bessent.

The letter was sent one day before the deadline for accepting the Office of Personnel Management's (OPM's) “deferred resignation” program allowing federal employees to resign while receiving full pay and benefits through September. The offer excludes employees in the military, postal service, immigration enforcement, national security and other specified roles. The IRS's decision to exempt certain employees from the buyout aligns with the department's operational needs during the 2025 filing season.

A Massachusetts federal judge issued an order postponing the deadline for federal employees to accept the buyout offer until he can hold a hearing Monday afternoon. The order came after three federal unions asked for a temporary restraining order suspending today's deadline for federal employees to accept the offer.

On Jan. 30, the Government Accountability Office (GAO) released its findings regarding the IRS's readiness for the 2025 tax season. The GAO report reviewed IRS customer response times both by phone and by mail in addition to reviewing 2024 tax return processing times. Although the IRS has recently modernized its systems using funds received from the Inflation Reduction Act (IRA), the GAO found the agency has not improved its speed for processing mail despite new sorting and scanning machines. While the IRS has hired more staff to assist in return processing and customer service, the GAO found the IRS has not done enough to significantly address the delays.

The IRS has processed 98% of the 174 million individual and business returns filed by April 2024. However, the general processing time for a paper-filed return was 20 days, a week longer than the IRS's goal of 13 days. Even with the ability to file more business forms electronically, the IRS has not been able to reduce the wait time for those returns that must be mailed in or that require additional correspondence.

The IRS website now allows an individual or business taxpayer to see when their mail or documents were received, which is a great improvement from previous years. Unfortunately, there is no information on when they can expect an IRS response. The GAO recommends that the IRS determine what is causing its processing shortfall and correspondence backlog of nearly 6.9 million as of November 2024. These recommendations are in line with the six key improvements the GAO identified when reviewing the IRS' efficiency in June of 2022. Those six items were as follows:

1. Improving taxpayer services
2. Reducing tax fraud and improper payments
3. Improving cybersecurity
4. Enhancing information reporting
5. Improving audit effectiveness
6. Enhancing strategic human capital management

The IRS has acknowledged that it had a significant backlog of unprocessed tax forms and refunds claimed on behalf of deceased taxpayers but has taken steps to resolve the issue. National Taxpayer Advocate Erin Collins said in her blog that the backlog was the result of paper Forms 1310, Statement of Person Claiming Refund Due a Deceased Taxpayer, received for 2022 and 2023 not being properly processed by the IRS. The IRS has prioritized its processing of Forms 1310 and only had about 1,100 unprocessed returns at the beginning of August.

While the IRS has added Form 1310 to its modernized e-file platform, not all Forms 1310 are supported, and some require paper filing. Unfortunately, the Forms 1310 filed for 2022 and 2023 were not properly processed. If a Form 1310 is unprocessed, the IRS can't process the associated final return and issue a refund. Because the IRS must manually issue a refund once the Form 1310 has been processed, there were significant delays in issuing the refunds for 2022 and 2023. The IRS has identified the cause of the issue and worked to decrease the backlog of unprocessed Forms 1310 and manually issue the associated refunds.

The IRS has announced additional actions it is taking to help small businesses with their employee retention credit (ERC) claims and prevent improper payments to ineligible taxpayers. The steps being taken include accelerating the payment of some ERC claims it has received and continuing its compliance work after the agency was flooded with claims following misleading marketing of the credit.

The moratorium period on new ERC claims that has been in place since September 2023 will be “shifted” and the IRS will begin processing claims filed between Sept. 14, 2023, and Jan. 31, 2024. As with the rest of its ERC inventory, the agency will focus on the highest and lowest risk claims where the IRS has a sound basis for paying or denying the claim.

The IRS is moving too quickly pay 50,000 of the claims it has received and deemed to be low risk. Payments will begin in September and another large block of low-risk claims will be processed and paid in the fall. The agency has also sent out 28,000 disallowance letters in recent weeks to businesses with claims that showed a high risk of being incorrect, preventing up to $5 billion in improper payments.

In those cases where ERC claims have been improperly denied, the IRS said it will work with taxpayers to ensure any errors are corrected. It reminded businesses with denied ERC claims that they can file an administrative appeal by responding back to the address of the denial letter. While some recent mailings omitted a paragraph highlighting the process for filing an appeal to the IRS or district court, the agency is taking steps to ensure that taxpayers receive notices with the correct language.

The IRS has released information on a new round of processing for employee retention credit (ERC) claims it received and believes have a low risk of error. However, the agency will be denying tens of thousands of high-risk claims where it concluded the taxpayer is clearly ineligible for the credit. The IRS added that 60-70% of those claims not falling into the high- or low-risk categories still show an unacceptable level of risk and additional analysis and information will be needed. During a recent review, the IRS reached the following conclusions about the ERC claims it has received:

• 10-20% show a low risk of error and are likely to be paid
• 60-70% show an unacceptable level of risk and will require additional information
• 10-20% show high-risk indicators that will be rejected

Taxpayers with ERC claims that are still being processed are being urged not to take any further action or contact the IRS. The agency said it is taking longer to process claims that it did last summer and that taxpayers should await notification from the IRS. The moratorium on new ERC claims continues.

The IRS says it is aware that some taxpayers are receiving CP14 (Balance Due, No Math Error) notices showing they have a 2023 balance despite having made payments with their returns. Taxpayers who receive the notice but paid their tax bill in full and on time electronically or by check should not respond to the notice at this time, the IRS says. The agency apologized for any inconvenience the notices may have caused, is researching the matter and will provide an update as soon as possible.

According to the IRS, taxpayers who paid electronically or by check with their 2023 return may show their accounts as pending, even though the IRS received and processed the payment through their bank. The IRS says the notice may have been initiated before the payment was processed, or the payment may have been processed, but contained errors requiring additional handling before the account could be updated.

Any assessed penalties and interest will be adjusted automatically when the taxpayer's payment is applied correctly by the IRS. However, taxpayers who paid only part of their 2023 tax due should pay the remaining balance or follow the instructions on the notice to enter into an installment agreement or request additional collection alternatives.

The IRS has closed its Direct File pilot program after more than 140,000 taxpayers in 12 states used the system to e-file returns. The IRS implemented the Direct File pilot to test the feasibility of a system that allows taxpayers to file their federal income tax returns directly with the agency for free but has not decided whether it will continue the program.

Since the pilot program began in March 2023, the IRS has collected and analyzed user data. The agency will continue its analysis and plans to issue a report on Direct File's scope, technology and taxpayer experience, customer support, state integration, costs and benefits. Over the next few weeks, the IRS will also meet with a variety of partners and stakeholders to learn more about how taxpayers interacted with the Direct File system.

By the final week of the filing season, Direct File was accepting more than 5,000 returns a day and taxpayers using the system claimed more than $90 million in refunds and reported balances due of $35 million. The states from which the most Direct File returns were accepted were California (33,328), Texas (29,099) and Florida (20,840).

IRA beneficiaries subject to the 10-year payout period are not required to take required minimum distributions in 2024, according to IRS Notice 2024-35. The SECURE Act of 2019 provides that most non-spouse beneficiaries of IRA owners who die after 2019 are subject to a 10-year payment rule with a required beginning date (RBD) that is usually April 1 of the year after the owner turns 73. The IRS required that the annual RMDs be paid in years 1-9 of the 10-year period if the IRA owner died on or after the date the RMDs were required to begin.

The IRS had previously excused annual RMDs for non-spouse beneficiaries of IRA owners who died in 2020 or later for 2021-2023. The agency also excused annual RMDs for 2022 and 2023 for beneficiaries who inherited in 2021 after the owner's RBD and 2023 RMDs for those who inherited in 2022 after the owner's RBD. Notice 2024-35 adds an additional year of relief so taxpayers who inherited after 2019 and subject to the 10-year payout rule won't be required to receive annual RMDs before 2025, but will be required to do so beginning that year.

The IRS has announced that it plans to begin dozens of audits related to the personal use of business aircraft after conducting few examinations of aircraft use for the past decade due to a lack of resources. The audits will focus on whether the usage of aircraft by large corporations, large partnerships and high-income taxpayers is being properly allocated between business and personal use. The number of audits could increase in the future based on the initial results and as the IRS continues hiring examiners.

The examinations are part of a larger effort by the IRS to ensure large corporations, large partnerships and high-income individual filers pay the taxes they owe. The agency has already collected $482 million as part of its efforts to recoup taxes owed by 1,600 millionaires. The IRS is also pursuing multi-million-dollar balance sheet discrepancies at partnerships and ramping up audits of more than 75 of the largest partnerships using artificial intelligence.

The U.S. Department of the Treasury's Financial Crimes Enforcement Network (FinCEN) has published a Small Entity Compliance Guide to help small businesses meet the new beneficial ownership information (BOI) reporting rules that go into effect Jan. 1, 2024. The guide contains answers to key questions, interactive flowcharts, checklists and other items to help companies determine whether they need to file a BOI report.

The reports include information on the entity, beneficial owners and company applicants. A beneficial owner is usually an individual who owns or controls at least 25% of a company or has substantial control over it. A company applicant is generally the person primarily responsible for filing the documents to register the company.

Reports must be filed electronically using FinCEN's secure filing system beginning Jan. 1, 2024, but reporting companies created before that date will have until Jan. 1, 2025, to file their initial BOI report. Companies created or registered to do business after registration begins will have 30 days to file after receiving notice of its creation or registration.