It’s the type of job computers (even really old computers running arcane software) should be good at—
“IF” a ZIP code = [some number] “THEN” [do something]. Or don’t do something. In this case, IF a ZIP code is one that is on the list as being in a California county that was affected by the recent flooding, THEN don’t send taxpayers in those ZIP codes a balance due notice when they file their taxes because they were allowed an extension of time to file and time to pay until October 16, 2023.
What IRS Deputy Commissioner for Collection and Operations Support, Darren Guillot, recently referred to as “peak notice season” began in earnest in late May and continues through this week. Taxpayers in disaster affected counties in California are receiving CP14 balance due notices demanding payment within 21 days or risk being subject to penalties and interest.
According to many California tax professionals, the problem seems to be happening not with returns filed on or before this year’s April 18 filing deadline, but with returns that are being filed during the extension period. During the regular filing season, tax professionals often file client’s returns as they are finished and set up direct debit or other payments to occur on or shortly before the payment deadline. In other words, a tax professional might file their client’s return on March 10 but, for cash flow or other reasons, have the client’s payment debited on April 10.
Many California tax professionals (and tax professionals with California clients) are doing the same thing for their clients who were granted the disaster-related filing and payment extension. They are processing and filing the returns as quickly as possible (e.g., in May), while setting up payments for closer to the payment due date (e.g., in early October). IRS computers are handling the situation with their usual lack of grace.
Under normal circumstances extensions give taxpayers extra time to file their tax returns but not to pay their taxes. It would appear that IRS computers are processing the California returns, despite tax professionals following IRS guidance as to how to mark the returns for processing and special handling, as if they were normal returns on extension being received from taxpayers who had not been granted disaster relief. In other words, as soon as a balance due return has been processed the tax is considered assessed and the IRS has 60 days to issue a demand for payment.
The requirement to issue a demand for payment within 60 days of the tax being assessed is statutory (i.e., it is required by law). Nevertheless, tax is typically considered assessed on the filing deadline—again April 18, 2023 for tax year 2022 returns. But if the assessment date has been moved out due to disaster relief, doesn’t that move the 60-day deadline for issuing CP14 notices as well? Not according to the IRS.
Consequently, the IRS erred on the side of caution and continues to issue the CP14s as the returns are processed. They are, however, including an insert that is referenced in the body of each CP14 notice. The insert notes that for taxpayers in areas that were granted disaster relief, the relief dates, not the dates in the notices, still apply.
While the idea of including an insert with the notices may have appeared to be a reasonable approach to the IRS, they perhaps failed to consider just how many other pieces of correspondence contain marketing inserts that taxpayers simply disregard (throw away) before reading the actual correspondence. They may have failed to consider just how many taxpayers don’t carefully read their IRS correspondence or don’t read it at all (even when the IRS tries to write the correspondence in plain language). Many taxpayers simply see the return address and panic.
Panicked taxpayers are calling their tax professionals. Dan Herron, a CPA at Better Business Financial Services on California’s central coast, has been advising his clients “to call the number on the notice and tell the IRS that they are in a ZIP code that was impacted by the floods and that they have until 10/16 to pay the balance due.” Herron expressed frustration that while practitioners have followed IRS instructions, the clients are still receiving notices. When clients get notices they often assume that the tax professional made an error. Consequently, many Calfornia tax professionals, including Herron, are facing not only extra work (which many clients expect to be free of charge) but angry and frustrated clients.
Katy Ayer, a CPA in Arroyo Grande, California, says “I’m not going to bother calling. But for my clients who want me to do something, I’m going to have a boiler plate letter that says ‘Taxpayer is in a disaster area, this notice is incorrect, no balance is due until October 16 2023.’” Ayer is also frustrated with the extra work.
Other tax professionals have mentioned in social media forums that when their clients have called the IRS, hold times have sometimes been up to two hours, sometimes the IRS representatives seem unaware that the notices are incorrect, and that the IRS responses have been inconsistent. Some taxpayers have been told to ignore the letters. Others have been told to set up an installment agreement.
Setting up an installment agreement is the wrong answer because the tax isn’t due until October 16. Typically, installment agreements can’t be set up until after the tax is assessed (which also begs the question of when the 60-day statutory clock for mailing the notices starts ticking). Additionally, this “solution” ignores the fact that there is an opportunity cost (time spent) and an actual cost associated with setting up an installment agreement. Why spend the resources on something that isn’t necessary in the first place?
And ignoring the notice? Oh my. Both the IRS and tax professionals have spent untold amounts of time and money convincing taxpayers not to ignore IRS notices. Now the IRS is saying it’s OK to ignore this one. It’s not a good look.
The entire situation seems so preventable. Different programming. More consideration as to how the audience might handle the correspondence. A more proactive approach in general. Instead, yesterday (June 7, 2023), the IRS issued the following statement:
“The IRS reassures California taxpayers that they continue to have an automatic extension until later this year to file and pay their taxes for those covered by disaster declarations in the state. The current mailings being received by some taxpayers, the IRS Notice CP-14, are for taxpayers who have a balance due, and they are sent out as a legal requirement. While the notice received by taxpayers says they need to pay in 21 days, most California taxpayers have until later this year to pay under the disaster declaration. These letters include a special insert that notes the payment date listed in the letter does not apply to those covered by a disaster declaration, and the disaster dates remain in effect.
The IRS apologizes to taxpayers and tax professionals for any confusion as we continue to review the situation. Taxpayers receiving these letters do not need to call the IRS or their tax professional.”
The clarification is appreciated but it may take a while to percolate out to taxpayers and many tax professionals and that means one more flood—this one of unnecessary phone calls and correspondence heading towards the IRS.