Effects of the COVID-19 Pandemic on Business Tax Return Processing Operations
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TREASURY INSPECTOR GENERAL FOR TAX ADMINISTRATION Effects of the COVID-19 Pandemic on Business Tax Return Processing Operations September 2, 2021 Report Number: 2021-46-064 [email protected] | www.treasury.gov/tigta 1 HIGHLIGHTS: Effects of the COVID-19 Pandemic on Business Tax Return Processing Operations Final Audit Report issued on September 2, 2021 Report Number 2021-46-064 Why TIGTA Did This Audit What TIGTA Found This audit was initiated to provide The closure of Tax Processing Centers created a significant backlog of selected information related to business tax returns, correspondence, and other types of business the IRS’s 2020 Filing Season, taxpayer-related work that needed to be processed. As of the week including information related to ending December 31, 2020, the IRS had more than 7.9 million the impact of the Coronavirus paper-filed business returns that still needed to be processed. In Disease 2019 (COVID-19). The comparison, the IRS had 239,285 paper-filed business returns that overall objective of this review were in process as of December 31, 2019. was to assess the IRS’s actions to Some penalties were inappropriately assessed due to delays address the backlog of unworked in processing payments or tax forms. For example, the IRS inventory affecting business erroneously assessed 211 Failure to Pay penalties totaling $45,451 taxpayers as a result of Tax due to a programming error. The IRS also incorrectly assessed Processing Center closures. 1,256 estimated tax penalties from April 1, 2020, through Impact on Taxpayers December 31, 2020. The IRS submitted an information technology work request on July 15, 2020, to update penalty processing, but the In response to COVID-19, the IRS programming was not implemented until January 2021. As a result, took unprecedented and drastic estimated tax penalties assessed for business taxpayers with tax years actions to protect the health and ending between April 2020 and December 2020 and filed before safety of its employees and the January 2021 had penalties calculated without considering the relief. taxpaying public. These actions included closing its Tax In addition, systemic payment processing limitations caused further Processing Centers nationwide as delays in processing payments. The IRS’s system was limited to of April 6, 2020. processing payments that were received within 30 days or less. However, upon the June 2020 reopening of the Tax Processing In addition, on April 9, 2020, the Centers, most payments exceeded this limit. The IRS did not revise Department of the Treasury the limit until October 1, 2020, because it was unaware that the extended the Federal income tax programming could be changed. filing due date for various tax filing and payment deadlines that Finally, redirecting more payments to the lockbox sites could occurred starting on April 1, 2020, facilitate reducing the backlog. While the majority of paper to July 15, 2020. As a result, payments are directed to a lockbox location, more than 6.9 million affected businesses had until payments totaling more than $37.6 billion were processed at the July 15, 2020, to file returns and IRS’s Tax Processing Centers during Fiscal Year 2020. This includes pay any taxes that were originally more than 339,000 payments totaling $3.4 billion received by IRS due during this period. field office employees. What TIGTA Recommended TIGTA recommended that the Commissioner, Wage and Investment Division, ensure that the incorrectly assessed estimated tax penalties are corrected, and evaluate the feasibility to direct additional types of payments from Tax Processing Centers to lockbox sites. IRS management agreed with both recommendations. Corrections were made to the incorrectly assessed estimated penalties. The Lockbox Electronic Network Imaging Functional Specification Package has been updated to include processing capability for several additional notices. Analysis of the volumes of notices is being performed to determine if all notices can be directed to lockbox sites. However, management determined it was not feasible for payments received in field offices to be directed to lockbox sites. U.S. DEPARTMENT OF THE TREASURY WASHINGTON, D.C. 20220 TREASURY INSPECTOR GENERAL FOR TAX ADMINISTRATION September 2, 2021 MEMORANDUM FOR: COMMISSIONER OF INTERNAL REVENUE FROM: Michael E. McKenney Deputy Inspector General for Audit SUBJECT: Final Audit Report – Effects of the COVID-19 Pandemic on Business Tax Return Processing Operations (Audit # 202040637) This report presents the results of our review to assess the Internal Revenue Service’s actions to address the backlog of unworked inventory affecting business taxpayers due to Tax Processing Center closures resulting from the COVID-19 pandemic. This review is part of our Fiscal Year 2021 Annual Audit Plan and addresses the major management and performance challenge of Responding to the COVID-19 Pandemic. Management’s complete response to the draft report is included as Appendix III. Copies of this report are also being sent to the Internal Revenue Service managers affected by the report recommendations. If you have any questions, please contact me or Russell P. Martin, Assistant Inspector General for Audit (Returns Processing and Account Services). Effects of the COVID-19 Pandemic on Business Tax Return Processing Operations Table of Contents Background .....................................................................................................................................Page 1 Results of Review .......................................................................................................................Page 3 Processing Business Tax Returns ....................................................................................Page 6 Recommendation 1: ...................................................................Page 12 Case Inventories Continue to Grow as Backlogged and Current Year Business Returns Are Processed ..........................................................Page 12 Systemic Payment Processing Limitations Caused Delays in Processing Remittances .................................................................................Page 13 Recommendation 2: ...................................................................Page 14 Appendices Appendix I – Detailed Objective, Scope, and Methodology ................................Page 16 Appendix II – Outcome Measures .................................................................................Page 18 Appendix III – Management’s Response to the Draft Report .............................Page 19 Appendix IV – Abbreviations ...........................................................................................Page. 23 Effects of the COVID-19 Pandemic on Business Tax Return Processing Operations Background As we previously reported, the Internal Revenue Service (IRS) took unprecedented and drastic actions in response to the Coronavirus Disease 2019 (COVID-19) pandemic to protect the health and safety of its employees and the taxpaying public.1 This included closing its Tax Processing Centers, Taxpayer Assistance Centers, and other offices nationwide.2 The backlog of returns, correspondence, and other types of work resulting from the pandemic has and will continue to have a significant impact on the associated business taxpayers. Figure 1 provides a comparison of business tax return inventory levels in various stages of processing that the IRS normally carries into a new calendar year compared to inventory levels carried into Calendar Year 2021. Figure 1: Comparison of Business Return Inventory as of the End of Calendar Years 2019 and 2020 Percentage Type of Inventory Calendar Year 2019 Calendar Year 2020 Change Unprocessed Paper Returns 239,285 7,967,182 3,230% Error Resolution3 6,867 34,303 400% Rejects4 31,052 82,476 166% Unpostables5 310,557 746,294 140% Amended Returns6 372,339 291,763 (22%) Source: IRS Filing Season Statistics and IRS inventory numbers provided to the Treasury Inspector General for Tax Administration (TIGTA) for the end of Calendar Years 2019 and 2020. The Department of the Treasury extended the income tax filing due date To assist businesses impacted by COVID-19, the Department of the Treasury extended the Federal income tax filing due date and permitted taxpayers to defer Federal income tax 1 Treasury Inspector General for Tax Administration, Report No. 2021-46-023, Results of the 2020 Filing Season and Effects of COVID-19 on Tax Processing Operations (Mar. 2021). 2 All IRS Taxpayer Assistance Centers were closed as of March 23, 2020, and all Tax Processing Centers were closed as of April 6, 2020. The Tax Processing Centers were re-opened in June 2020. 3 Tax returns identified with an error condition are suspended from processing and sent to a tax examiner for correction. 4 Tax returns that cannot be processed, usually due to missing or incomplete information. Tax examiners correspond with the taxpayer to clarify an entry on a return. When the taxpayer responds, the tax examiner will resolve the issue and the return will continue processing. 5 Transactions that will not post to the taxpayer’s account because they failed validity checks. The unpostable condition must be resolved in order to complete processing of the transaction. 6 Corrected tax returns filed that are either being worked by the Submission Processing or Accounts Management functions. Page 1 Effects of the COVID-19 Pandemic on Business Tax Return Processing Operations payments. On April