IRS Woes Equal Trouble for EOs Too

With the 2022 personal tax filing season well underway, there has been a lot of attention on the issues facing the IRS as they try to fulfill their tax administrations duties. The IRS employees are trying, but with pandemic shutdowns, COVID protocols, retirements, and additional COVID relief duties such as personal stimulus checks and employee retention credit processing, the obstacles for the IRS as a whole have been significant.  Some key issues are highlighted in the National Taxpayer Advocate 2021 Annual Report to Congress:

• The IRS had a backlog of over 35 million returns at the end of the 2021 filing season. Handling correspondence of any type remains a difficult task for the IRS, with 4.75 million pieces of paper correspondence that had not been worked on as of the date of the report.
• The IRS has shrinking resources—The IRS budget was reduced 20% in inflation-adjusted dollars from the federal fiscal year (“FY”) 2010 to FY 2021. The IRS workforce lost 16,050 full time equivalent employees from its FY 2010 total of 94,711 to 78,661 in FY 2021.  The IRS has begun to ramp up recruitment but finding staff and training them takes months.
• Only 1 out of 9 taxpayer calls was answered in FY 2021. Yes, 32 million calls were answered, but the IRS received a staggering 282 million calls in FY 2021.
• The IRS has very limited ability to use digital communications (e.g. secure email).
• E-filed returns process smoothly for the most part but there are various tax forms, schedules and attachments that cannot be e-filed and must be filed in paper.

While understandably much of the media attention has been focused on personal and business returns, exempt organizations have experienced the similar frustrations as any organization that has had difficulty e-filing their forms or has had to reply to an IRS notice can tell you. A unique aspect of IRS administration for exempt organizations is the  Exempt Organization Business Master File   (EO BMF).  The EO BMF is the record source of information about exempt organizations and the data in the BMF generally has to match key information in the return being filed in order for a Form 990 series return to be successfully e-filed.  The EO BMF is not updated on a timely basis and has generally lagged 60 days or more behind.  Common issues that arise include:

• Erroneous auto-revocation of exempt status
• Incorrect tax year-end information (even after a change in accounting period return has been filed)
• Incorrect entity names or name changes not reflected in the EO BMF (even after a change in name return has been filed)
• Organizations erroneously are deleted from the EO BMF, or they are not added timely to the EO BMF when exempt status has been received

Primarily these issues have to be resolved with hours of phone calls with multiple IRS representatives or long waits while the IRS handles the correspondence.  More can be learned about this by reading this AICPA blog on EO BMF issues .

IRS EO officials are aware of these issues and numerous groups continue to advocate for awareness and change, including the AICPA , EO Committee of the American Bar Association Tax Section, and TEGE EO Council .  Advocacy efforts have been helpful in having the IRS stop notices while they get caught up as discussed in more detail at IRS IR-2022-31, February 9, 2022, and the IRS has increased requested holds on accounts being levied for penalties and fines for generally 60 days rather than 30 days.

Due to the backlog in processing returns, the IRS on March 25th announced they are suspending issuance of 10 notices generally sent to tax exempt organizations about late return filings. The intent of this suspension is to avoid confusion when a filing is still in process. For more information on the suspended notices, refer to the update published in the Journal of Accountancy.

So what you can do if you are having an issue with the IRS?

• If you are our client, please inform us of any notice received, and we will work with you on the approach. Remember that we can not speak to the IRS on your behalf without a recognized power-of-attorney on file.
• Please be patient and expect delays while calling the IRS. While it can be frustrating to finally reach an IRS representative, remember that representative did not cause your issue and can only be a gateway to help you resolve it. Kindness and respect are always in order.
• If you have submitted correspondence, send it by certified mail, return receipt requested and expect it to take 60+ days to work its way through the system.
• E-file everything possible, and as our client, we will work with you do that.