IRS Automatic Notices Alienate Taxpayers - A New Scandal Looming?

If you want a good example of the harm that the brokenness of the IRS is causing, I have a story for you. My brothers and sisters on #TaxTwitter could give you many more stories, but they really don't have the time that I do. 

I am going to make up a bit of the story to disguise the identity of the taxpayers involved. Their names are not Blynn and Ashley, but that is what I will call them. Their LLC is not called Soft Rider LLC (SRLLC) and it does not produce a newsletter on the easy ways to acquire Spanish American War memorabilia. The rest is all true.

A Microbusiness With DIY Tax Compliance

SRLLC does not produce much income for Blynn and Ashley, who are in their late sixties and living mostly on pension and social security. It got to the point where they were paying a CPA most of their profit to do the partnership return. So Ashely decided to tackle it along with the joint 1040. Everything went along fine until this year.

Their habit was to file the 1065 and the 1040 together around the due date using Turbo Tax. Ashley missed that that the due date of Form 1065 has been pushed back to March 15. Ashley had issues with with the tax software and could not get the electronic filing to work, so they paper filed. They are still waiting for their refund and will be probably waiting a long time, but that's not the problem.

A Troubling Notice

In early October Blynn opened a notice from the IRS. It was labelled CP162.

We charged a penalty under Internal Revenue Code Section 6609(a)(1), because according to our records, you filed your partnership return late.

The penalty is pretty nasty. $205 per partner per month or part of month. That puts it in the thousand dollar vicinity, which is a lot of money to SRLLC and Blynn and Ashley. 

Fortunately Blynn has a friend who is a retired CPA who knows a thing or three about partnerships. That would be I. That would be me. The author of this blog. I told Blynn about Revenue Procedure 84-35. That provides that there are no late penalties for partnerships of ten or fewer partners, if all of the partners timely report the income.

A More Troubling Response

I coached Blynn on sending in a letter in response to the CP 162 - making sure it went in well before the required response time with certified mail and all that. My guess was that Blynn and Ashley would not get a response anytime soon. By Blynn's reckoning I was wrong. Two weeks after the date that Blynn was supposed to respond to the CP162, IRS issued SRLLC Notice CP504B.

After the amount due in large bold print (the penalty plus a few bucks of interest) we have:

This is a notice of intent to levy your property or rights to property. As we notified you before, our records show you have unpaid taxes .........

Blynn does not want to call them, because of fear of saying "the wrong thing". The notice gives the option of sending in Form 9423. I had never dealt with that form before, but it didn't seem like rocket surgery, so I coached Blynn on it. To be extra sure, we had a mutual friend who is a retired tax attorney take a look at that. I have a very bad feeling that if this goes on, there will be a Tax Court petition.

What Happened ?

Here is what I think happened. Blynn's timely response to CP 162 is still sitting in the IRS unopened mail pile. They have their programs in place to issue a collection notice two weeks after not receiving a response to the CP 162. They actually have a response, but the left hand doesn't know that the right hand is not keeping up.

Now they have two things to deal with from Blynn. I fear that a more threatening collection notice will be coming before they look at either of them and I will be helping Blynn with Form 12153 and it really may come to needing a Tax Court petition. I attribute all this to an underfunded, under-resourced IRS and a silo style of organization.

The Real Harm

The real harm that this sort of thing does is the effect that it has on people like Blynn. Blynn kind of has libertarian leanings and believes that taxation is theft. Nonetheless, Blynn is determined to be compliant. Blynn's view of what is happening is much darker than mine:

My theory is that because of Covid, revenue is low. This is likely exacerbated by record spending by a Democrat administration. An easy way for the IRS to raise revenue is to change the filing date for the partnership forms, then automatically flag all of those that come in late. I suspect that many who have LLCs are like me – small business owners who are not very tax savvy, with limited resources to hire high-powered financial advisors. IRS is wielding a heavy club, sending out one notice of exorbitant penalties, followed up the threat of taking the funds directly from the account of the business if not paid immediately. I suspect most people will simply cave and give the bully their lunch.

I don't agree with any part of Blynn's analysis, but I understand the reasoning. I'm hoping that somebody at the IRS will figure out a way to shut off the automatic notice streams until they can pare down their backlog. Otherwise we will have a mess that makes the last IRS scandal about delayed exempt organization applications look like a cakewalk.