It's day #7 of the shutdown. So far, there's no sign that it will be ending any time soon.
By now, we know what the shutdown means on paper. The Internal Revenue Service has a contingency plan (you can read about it here) outlining which services are available during the shutdown. In addition, the IRS web site has a "Lapse In Appropriations" page which addresses some frequently asked questions.
But what's the real story for taxpayers? The reality is that the shutdown is affecting how taxpayers are able to manage and pay their tax liabilities. And while Congress continues to fight about how to spend the money, all of the money that could be collected isn't being collected.
I've been fielding phone calls from panicked taxpayers all over the spectrum for the past two weeks – first, anticipating and worrying over the potential shutdown and now, worry over what it might mean for the long term. Here's some of what's happening on my end:
Installment plans are next to impossible for some taxpayers. There are a couple of ways you can enter into an installment agreement. Clearly, paper applications and phone applications are out of the question right now – there's nobody at IRS to open the mail or answer the phone. All is not lost, however: if you owe $50,000 or less in combined individual income tax, penalties and interest, you can apply online. Great, right? Maybe. If your situation is straightforward, setting the agreement up online isn't a problem so long as you have the right information together and you are willing to commit to a payment plan by check or direct debit (if the amount is over $25,000, you must use direct debit for an online agreement). However, taxpayers who have experienced tax compliance issues are having difficulty with the system because one of the requirements for participation in the program is that, according to IRS, you "must have filed all required tax returns." Only that's not exactly true. You must have filed those returns and IRS must have processed those returns. When we called about taxpayer returns this summer, IRS was already operating on a delay: normally, it takes 6-8 weeks to process amended returns on paper. We were told to add at least 60 days to that time frame for many taxpayers. In fact, one taxpayer who submitted returns in spring and as of late summer has returns at IRS marked as "received" but not "processed." That taxpayer is still technically not eligible for an installment agreement – and now, we have no immediate way of sorting it out with IRS. Similarly, another taxpayer wants to enter into an agreement to pay off his 5-figure debt but as he's over the threshold for an online agreement, he'll simply have to wait.
Additionally, business taxpayers or taxpayers that file anything other than a form 1040 will also have to wait. And so will the Treasury.
There's no word on pre-clearances. For purposes of the IRS Offshore Voluntary Disclosure Program (OVDP), taxpayers can submit an initial inquiry to the IRS Criminal Investigation Lead Development Center as to whether they are eligible to make application. IRS Criminal Investigation will then notify taxpayers or their representatives via fax whether or not they have been cleared to make a voluntary disclosure – this is commonly referred to as "pre-clearance." Even before the shutdown, calls regarding pre-clearance were a bit delayed due to "high call volume." It's unclear whether pre-clearances are being accepted and processed: CI is technically operating but since ODVP is civil and criminal, I'm not sure what's open. I have inquiries into IRS at a couple of levels and I'll update you (and my clients) as soon as I know. For now, clients are wary about making a pre-clearance request without more information. (Quick update: IRS is accepting pre-clearances by fax (267-941-1115) but there may be a delay in processing.)
Speaking of the Offshore Voluntary Disclosure Program, several pieces of that program and the process are in limbo. If you make a pre-clearance request and it is initially accepted, you generally have 45 days to submit your application. Once the application is approved, you generally have 30 days to submit the remainder of the information, including payment for penalties, to IRS. While the IRS has advised that timeframes for filing and making payment remain in effect, the kinds of information and the level of dollars involved in many of these disclosures is making taxpayers worry about exposure during the wait. In particular, certain foreign banks have imposed deadlines for repatriating assets to the U.S.: taxpayers who hope to make application before repatriation now fear that will be an impossibility.
No third party transcripts are available. As a tax attorney, a lot of what I do is assess a taxpayer's position and recommend next steps for compliance. More often than not, a notice from IRS may be confusing to a taxpayer. In some cases, it may be incomplete or may only be one part of the bigger picture: for example, a Notice of Deficiency for 2010 would not indicate whether a taxpayer is compliant for other years. In other cases, correspondence may be plain wrong: one of my taxpayers was issued a substitute return as "Married Filing Separate" – the taxpayer has never been married and we're not sure whether the same filing status has been applied to other years. To figure out where to start, I need to see a tax transcript. Unfortunately, third party (meaning anyone other than taxpayer) transcripts are unavailable during the shutdown. Individual tax transcripts are available to taxpayers directly but only for the last three years. This means that simply developing a strategy for compliance is at a standstill. And the transcript issue is not limited to compliance matters: since tax transcripts are often requested by third parties like financial institutions for mortgages, re-financing and the like, the ramifications of not having a transcript available can cause serious delays for home sales and purchases, refinances, business loans, credit card applications and more.
Liens and levies keep coming. Technically, as reported earlier by Forbes, all "auto-pilot" notices, including liens and levies, could be issued by IRS; the likelihood of this happening is concerning enough that National Taxpayer Advocate Nina Olson has weighed in on the matter. While Reuters has reported that IRS is not sending out levies or liens during the shutdown except in "isolated instances where we need to take immediate action to protect the government's interest," my clients would beg to differ. Taxpayers are receiving those notices but IRS says those would have been slated to be mailed out before the shutdown. Fair enough. But that doesn't help taxpayers who sometimes have only between 10 and 21 days to appeal the notice: we're on day 7 of the shutdown and no one is answering the phone. It is entirely possibly that levy and garnish orders on wages or bank accounts have already been issued to third parties, making it nearly impossible to appeal or stop; liens could have been filed in federal courts (those remain open) making applications for credit, mortgages and jobs difficult. Janet Novack has several calls and emails into IRS on these points and will update as soon as she has a response. For now, taxpayers are uncertain whether they will be able to pay their regular bills while they cope with potentially erroneous or unfair garnishes, levies and liens.
Tax Court is closed. Statutory deadlines still apply. If you're acting without counsel – and you have questions – you're out of luck. If you do have counsel – or you don't have questions – you can still file in U.S. Tax Court and you must do so by the deadlines (remember, the mail is still running). Just plan on delays. In many situations, you can negotiate with IRS before filing suit – but that clearly isn't the case right now. There's nobody to negotiate with and missing the deadline while banking on a negotiation is irrevocable: you don't get a "do over." I'm telling clients to file anyway. And yes, that's more stress and money. But the alternative could be worse. No refunds. This not something that I want to tell taxpayers – especially those that filed amended returns long before the shutdown and have been waiting patiently for a refund. But it is, unfortunately, the case: refunds aren't being issued until the shutdown is over. I will say in my gentlest Mom voice: "Don't spend that money until you have it in hand."
It's not a fun week to be a taxpayer. Or a tax professional. Or work for the IRS. We're all more or less at the mercy of Congress. It's not clear how long the shutdown will drag on or how quickly IRS can get back up to speed when the doors open again.
My advice to taxpayers: pretend things are normal. Yes, that feels nearly impossible. But to the extent possible, file as usual and make payments as usual. But don't get too complacent: all of those meetings, calls and audits will be rescheduled eventually: it's a delay, not a complete reprieve.
And don't beat up on your tax professionals. To quote Billy Joel, "we didn't cause the fire."
That's the view from my desk. What about you? Taxpayers and tax professionals alike, share your shutdown experiences below.
Written by: Kelly Phillips Erb
October 07, 2013