Last week, National Taxpayer Advocate Erin M. Collins released her first report to Congress on the challenges taxpayers have faced related to the coronavirus pandemic, including the taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. changes made through the Coronavirus Aid, Relief, and Economic Security (CARES) Act. The National Taxpayer Advocate’s findings show that policymakers should prioritize simplicity in the next round of pandemic relief for individuals and businesses.
Released on June 29th, the report by the National Taxpayer Advocate found that despite the significant relief to struggling firms and individuals that Congress provided in the CARES Act, many of these taxpayers have had difficulty navigating the variety of tax provisions.
One huge part of the challenge taxpayers faced this spring relates to taxpayer service limitations within the IRS, which had to operationally adapt to the coronavirus pandemic by closing many in-person offices, reducing the accessibility to many taxpayer services. This prevented taxpayers, for example, from discussing tax issues with an IRS representative.
Similarly, the IRS had delayed processing 2019 tax returns and issuing refunds at the end of March and is now returning to that task. Correspondence examinations and auditA tax audit is when the Internal Revenue Service (IRS) conducts a formal investigation of financial information to verify an individual or corporation has accurately reported and paid their taxes. Selection can be at random, or due to unusual deductions or income reported on a tax return. s were also impacted by the pandemic, with examinations started dropping by 65 percent between April 1 and June 1 compared to the same time in 2019.
For individual relief, the administration of direct payments—known as recovery rebates within the CARES Act—took up much of the IRS’ time this spring. As of June 3rd, about 160 million individuals received about $267 billion in economic impact payments. While those with direct deposit information with the IRS received their payments quickly, others lacking this information, such as non-tax filers and beneficiaries of programs such as Social Security, waited longer.
While the new “Find My Payment” and direct deposit information tools helped smooth out the administration of the rebates, some individuals are still navigating problems related to their payments, including errors related to qualifying children and payments being sent to the wrong bank accounts.
Firms seeking liquidity through CARES Act tax changes have also faced challenges. For example, the CARES Act allowed firms to carry back certain net operating losses (NOLs) to tax years accrued in 2018, 2019, and 2020 by five years. The IRS provided a six-month extension to file an application to receive a refund for an NOL carryback for the 2018 and 2019 tax years, but firms must submit these applications by fax. So far, at least 133 firms have reported over $5 billion in NOL refunds, and more are likely to come as firms offset 2020 losses next year.
While computing NOL carrybacks can be simple for some firms, complexities related to applying NOL rules to international income—especially repatriated income under Internal Revenue Code Section 965—may create uncertainty for many firms. The IRS has provided detailed guidance through FAQs, but these are not considered binding rules. Because many of the refunds would be complex and large, the Taxpayer Advocate recommended that “the IRS also consider providing additional guidance in a binding and authoritative manner.”
Similarly, firms faced challenges with the employee retention credit (ERC), which provides a 50 percent tax creditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly. on qualified wages—including health plan expenses—up to $10,000 per employee for a maximum amount of $50,000 per employee between March 12, 2020 and January 1, 2021.
Firms that were shut down due to the pandemic were eligible for the employee retention credit, but uncertainty remains over how the IRS is defining a full or partial suspension by government order. For example, it is unclear if firms forced to have employees work remotely have continued operations “comparable” to their prior operation due to the closure, making it ambiguous if these firms are eligible for the credit. Other challenges with the credit remain, such as uncertainty over whether firms are eligible for the credit if they incur costs related to social distancing requirements.
The sheer size and scope of the tax changes within the CARES Act created significant administrative challenges for the IRS, and the agency has done well—despite some areas for improvement—given all the hurdles confronted while having much of its staff work remotely. This makes it even more important for policymakers to prioritize simplicity in the next round of individual and business relief being considered this month.
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