Federal Tax Enforcement in the Time of COVID-19

April 17, 2020Articles

The COVID-19 pandemic and the President’s declaration of a national emergency have upended the Internal Revenue Service’s enforcement agenda in a dramatic way, both in the short term and for the feasible future. Already resource-constrained due to years of budget cuts and employee attrition, the IRS is now operating in fully uncharted waters, with its workforce of thousands working remotely, the tax filing season moved to July 15 and the release of billions of dollars of relief funds to taxpayers expected to generate significant fraudulent activity.

In this environment, the IRS has had to revamp its enforcement priorities and activities in nearly every area. At the same time, the IRS has significantly eased its enforced collection activities, affording taxpayers who owe back taxes some much-needed breathing room and a unique opportunity to work out payment arrangements over the next few months.

The 'People First Initiative'

To help individuals and businesses facing the myriad challenges posed by the COVID-19 pandemic, the IRS announced on March 25 an unprecedented series of relief measures for taxpayers who have tax issues. Dubbed the “People First Initiative,” this program calls for the suspension of many audit activities and postponement of most collection activity through July 15. IRS Commissioner Chuck Rettig described the People First Initiative as a series of “extraordinary steps to help the people of our country.” In addition to extending tax deadlines and working on new legislation, Rettig said, the IRS "is pursuing unprecedented actions to ease the burden on people facing tax issues. During this difficult time, we want people working together, focused on their well-being, helping each other and others less fortunate.” Specific provisions of the People First Initiative are described in detail below.

Current Status of IRS Operations

Virtually the entire IRS workforce has been ordered to work from home, with only a few essential employees still working in IRS offices throughout the country. On Friday, March 27, the IRS issued an evacuation notice directing that nearly all of its employees work from home on mandatory telework starting March 30. Only employees performing “mission-critical duties” are permitted to come into the office. Access to IRS offices will be restricted, with employees allowed only to pick up work files and mail. Affected employees were instructed to take home whatever they needed to work remotely for the foreseeable future.

All IRS service centers nationwide are also closed, with the last service center that had remained open, in Ogden, Utah, closing on April 8. All customer service hotlines, including the Practitioner Priority hotline, are closed. The IRS is, however, staffing what is calls a “COVID-19 Disaster Relief Hotline,” which can be reached at 202.317.5436.

The IRS is discouraging taxpayers from sending anything to the agency by regular mail, as no personnel are available to read and respond to correspondence. In fact, earlier this week a senior IRS executive disclosed that all mail sent to the IRS is being diverted to storage trailers because there is no available space in IRS offices to store the increasing volume of unopened mail. Taxpayers who send correspondence to the IRS by regular mail should expect significant delays in receiving a response.

Extensions of Tax Filing and Payment Deadlines

Virtually all tax filing and payment deadlines have been postponed until July 15, 2020. Initially, only the individual tax filing and payment deadline was extended. On April 9, the IRS issued Notice 2020-23, which grants relief to many additional returns, tax payments, and other tax-related actions. As a result, the extension to July 15 now applies generally to all taxpayers who have a filing or payment deadline falling on or after April 1, 2020, and before July 15, 2020. Individuals, trusts, estates, corporations and other non-corporate tax filers qualify for the extra time. No late-filing penalty, late-payment penalty or interest will be assessed. The extension of time to July 15 is automatic. Taxpayers do not have to call the IRS, file any extension forms or send letters or other documents to obtain this relief.

For 2016 tax returns, the normal April 15 deadline to claim a refund has also been extended to July 15, 2020. The law provides a three-year window of opportunity to claim a refund. If taxpayers do not file a return within three years, the money becomes property of the U.S. Treasury. The law requires taxpayers to properly address, mail, and ensure the tax return is postmarked by the July 15, 2020, date.

Relaxation of Original Signature Requirements on Tax Documents

To ease burdens on taxpayers, the IRS has temporarily relaxed its requirement that most tax documents be signed with original signatures. The IRS will now accept digital signatures on a variety of tax documents, including statute of limitations waivers; waivers of statutory notices of deficiency and consents to assessment; closing agreements; and any other form requiring a taxpayer signature.

In addition, the IRS is discouraging taxpayers from sending mail to the IRS. Instead, taxpayers are asked to communicate via fax (if possible). The IRS will temporarily allow taxpayers to communicate via email, as long as security precautions are observed, and IRS employees are now permitted to communicate with taxpayers by email, but only with the taxpayer’s consent.

Audits, Appeals and U.S. Tax Court Proceedings

I. Audits

As part of the People First Initiative, the IRS will not start any new taxpayer audits until July 15. However, the IRS may start an audit if necessary to protect any impending statute of limitations, and taxpayers are encouraged to cooperate in extending statutes where necessary. IRS agents will continue to work open audits and refund claims remotely, without any in-person contact. The IRS will continue to issue Notices of Deficiency where necessary to protect the government’s interests.

Taxpayers who have claimed the Earned Income Tax Credit will have until July 15, to respond to the IRS to verify that they qualify for this credit. Taxpayers who are subject to a Wage Verification Review will similarly have until July 15 to provide the IRS with verification of their income. The IRS encourages these taxpayers to exercise their best efforts to obtain and submit all requested information, and if unable to do so, to so notify the IRS indicating the reason such information is not available. The IRS will not deny these credits to any taxpayer based upon a failure to provide requested information prior to July 15.

The IRS Large Business & International Division issued a memorandum on April 14, 2020, announcing its compliance priorities during the COVID-19 pandemic. According to that memorandum, LB&I will focus its efforts only in the following areas: Compliance Assurance Process Program; Large Corporate Compliance Program; Foreign Account Tax Compliance Act; Qualified Intermediary Program; Voluntary Disclosure Program; Syndicated Conservation Easements campaign; Micro-captive Insurance campaign; Section 965 Transition Tax campaign; and any future compliance campaigns related to the Tax Cuts and Jobs Act. However, no in-person contact is permitted with respect to any of these activities. LB&I will continue to work existing audits, and managers have the discretion to expand open audits into prior or subsequent years, or into related tax returns.

The IRS recognizes that some corporate taxpayers may prefer that an audit begin while personnel and records are available and respective staffs have capacity. In such instances, when it is in the best interest of both parties and appropriate personnel are available, the IRS may move forward with an examination, with the understanding that COVID-19 circumstances may change.

LB&I has also suspended its Information Document Request enforcement process. Normally, when a taxpayer fails to respond to an Information Document Request (IDR), the examining agent would initiate a process of graduated steps in order to compel the taxpayer to respond. The process consists of a (1) Delinquency Notice; (2) a Pre-Summons Letter; and (3) a Summons. Under the terms of the LB&I memo issued on March 25, these IDR enforcement procedures are suspended, recognizing that taxpayers may be unable to respond to IDRs in a timely manner due to the COVID-19 pandemic. The memorandum does provide, however, that managers may authorize the IDR enforcement process if the interests of tax administration warrant, such as cases involving short statutes of limitations, listed transactions, or potential fraud development.

II. Appeals

IRS Appeals employees are working remotely and are continuing to work their cases. No in-person Appeals conferences will be held, but such conferences will continue to be conducted by telephone or videoconference.

III. Tax Court

The COVID-19 pandemic has required the U.S. Tax Court to significantly modify its operations. The Tax Court building in Washington, D.C., has been closed since March 18, and all Tax Court staff, including judges, are working remotely. All trial sessions through the end of June have been cancelled. The court’s electronic filing system remains operational and litigants are required to comply with any filing deadlines in docketed cases.

On April 9, the IRS issued Notice 2020-23, extending deadlines to file Tax Court petitions and notices of appeal from a Tax Court decision. If the statutory deadline for filing a petition or notice of appeal falls on or after April 1, 2020, and before July 15, 2020, the filing deadline is now extended to July 15, 2020.

The closure of the Tax Court building has created problems with delivery of mail to the court. Mail sent by U.S. Postal Service standard delivery is being held while the Tax Court building is closed. Items sent through a private delivery service such as Federal Express or UPS may be returned as undeliverable. If a document sent to the court is returned, it should be resent as soon as possible after the court announces it has resumed receiving mail. A copy of the original envelope or container in which it was first sent should be included with the resubmission.

Attorneys in the IRS Office of Chief Counsel are working remotely on cases in litigation in Tax Court as well as supporting IRS operating divisions on their enforcement and examination activities. Chief Counsel Attorneys are not meeting with taxpayers or their representatives in face-to-face meetings or taking depositions, but are available to discuss cases by telephone.

Collection Activities

The IRS Collection Division has suspended most of its activities through July 15, affording much-needed relief to taxpayers who owe back taxes and may have been facing enforced collection activity such as liens and levies. Revenue Officers are teleworking, but have been instructed to stand down on virtually all collection activity due to COVID-19 absent exigent circumstances, such as an imminent expiration of the statute of limitations or an indication that the taxpayer may dissipate assets. Notably, the fact that a taxpayer may file for bankruptcy is not an exigent circumstance.

I. Suspended Collection Activities

As provided in a memorandum addressed to all collection executives dated March 30, 2020, absent exigent circumstances, IRS employees should not:

  • Meet in-person with taxpayers or their representatives;
  • Issue final levy notices or warn taxpayers of enforcement actions;
  • Issue levies;
  • Request the filing of new federal tax liens;
  • Seize any personal residence;
  • Issue summonses to taxpayers or third parties;
  • Pursue Trust Fund Recovery Penalty investigations or assessments; or
  • Pursue civil tax collection lawsuits.

Employees are instructed to handle levy releases expeditiously. In addition, the IRS has suspended all automated levy programs, including the Federal Payment Levy Program, the State Income Tax Levy Program, and the Municipal Income Tax Levy Program. The IRS has also suspended referral of delinquent taxpayers to private debt collectors.

II. Installment Agreements

Taxpayers with installment agreements are relieved of their payment obligations between April 1 and July 15. The IRS will not hold taxpayers in default of their installment agreement obligations during this time. Taxpayers who make installment payments using direct debit agreements should contact their banks to stop payments, but should reinitiate those payments on July 15 to avoid a default once the suspension period is lifted. Taxpayers who wish to enter into a new installment agreement may still do so.

III. Offers-in-Compromise

The IRS announced significant modifications of office-in-compromise (OIC) procedures through July 15. Taxpayers with pending OIC applications need not provide any information requested by the IRS until July 15, and the IRS will not close any pending OIC request prior to July 15 without the taxpayer’s consent. Taxpayers may suspend all payments on accepted and pending OICs until July 15, although interest will continue to accrue. Finally, the IRS will not default an OIC for taxpayers who are delinquent in filing their 2018 income tax return. Taxpayers who wish to submit a new OIC application now may still do so.

IV. Passport Certifications to State Department

The IRS has suspended all new certifications of taxpayers with “seriously delinquent tax debt” to the State Department for passport revocation. Taxpayers who have been certified to the State Department are prevented from receiving or renewing their passports. Existing certifications will, however, remain in place.

V. Collection Activities That Will Continue

Only a limited number of IRS collection activities will continue through July 15. Revenue Officers are permitted to make contact with taxpayers, but are instructed to do so with “caution and extreme sensitivity to the taxpayer’s personal circumstances” and to take due account of stress and fatigue facing taxpayers “even in instances where taxpayers have not experienced any personal illness or monetary loss from the pandemic.” Under no circumstances are Revenue Officers permitted to warn taxpayers of enforcement action.

One notable exception to the nearly wholesale suspension of collection activity concerns “high-income nonfiler” cases. High-income non-filer taxpayers are those who generally received income in excess of $100,000 during a tax year and did not file a tax return with the IRS. Earlier this year, the IRS announced that a new initiative to reach out to this category of taxpayer in order to bring them back into compliance. Revenue Officers will continue to investigate and work these cases, although summonses to taxpayers and third parties will not be issued absent exigent circumstances.

Opportunity for Non-Filers

In its announcement of the People First Initiative, the IRS encouraged individuals who have not filed returns during the last three years to file their delinquent returns now. The IRS noted that more than one million households that have not filed during the last three years are actually owed refunds, and they still have time to claim these refunds. Such individuals should contact a tax professional to consider various available options to file back returns and claim refunds if applicable. Once the returns are filed, taxpayers can take advantage of the unique opportunity presented by the collection suspension until July 15 to work out an installment agreement or OIC with the IRS.

Criminal Investigation Division Activities

Like all other operating divisions, the IRS’s Criminal Investigation Division has been significantly affected by the COVID-19 crisis. While Special Agents are teleworking, they are continuing ongoing investigations and are authorized to conduct face-to-face interviews if permitted in the states and localities where they are working. The pace of criminal investigations and frequency of criminal tax indictments will likely slow down significantly, however. For example, in some federal judicial districts, new grand juries are not being convened, meaning that prosecutors will be unable to present evidence to grand juries in order to obtain criminal tax indictments.

In addition, the COVID-19 crisis will likely require that IRS-CID reassess all of its enforcement priorities, at least in the short term. Prior to the pandemic, IRS-CID’s investigative priorities included employment tax, virtual currency, offshore tax evasion and return preparer fraud, among others.

Under the CARES Act and other recently enacted relief legislation, individuals and businesses are eligible for billions of dollars of payments from the U.S. Treasury. This includes economic impact payments to eligible individuals and the $350 billion Paycheck Protection Program for businesses. With this much money flowing from the U.S. Treasury, IRS-CID is bracing for a wave of new fraud investigations and prosecutions. The division is also preparing to work with the Justice Department on investigations of a broad range of COVID-19 fraud, including companies offering fake treatments or medications. IRS-CID field offices throughout the Unites States are partnering with other law enforcement agencies, including state attorneys general, to form regional COVID-19 task forces to prosecute fraud. IRS-CID is also publicly warning Americans to be wary of COVID-19 scams.

Taxpayer Advocate Service

The Taxpayer Advocate Service remains open and available to assist taxpayers with hardship situations or difficult tax problems. While all in-person Taxpayer Advocate Services offices are closed, employees are working remotely and are responding to taxpayer assistance requests. The IRS National Taxpayer Advocate’s Case Intake Line has been closed, but calls are being answered at local Taxpayer Advocate Service offices throughout the country. The Taxpayer Advocate Service is warning of delays in working cases and in telephone response times due to high call volume.

Conclusion

In a relatively short time, the COVID-19 pandemic has transformed the landscape of tax enforcement. The IRS’s announcement of many common-sense measures to ease the burdens of tax compliance on individuals and businesses is welcome news. It remains to be seen how the health crisis will affect the IRS in the long run, but for the foreseeable future we can expect the IRS enforcement focus to shift significantly toward shutting down fraudulent schemes involving relief payments from the U.S. Treasury and other COVID-19 scams. In the midst of this ever-changing environment is an opportunity for taxpayers with tax problems to take advantage of the IRS’s suspension of collection activity to get their financial affairs in order and to work out an acceptable payment arrangement with the IRS.