Recently I was puzzling about how it could be that the Tax Court had by mid-August received more petitions than it had in total in each of the past three years. Had I not had the good fortune to retire from active practice in 2018, I might have known. There is a good chance that the Automated Underporter Program, what I call the IRS robots, bears a large share of the responsibility.
About AUR
AUR is why good tax preparers will tie themselves in knots to make sure that every number that comes from a third-party source shows up on a 1040 where it is supposed to be, even if the third-party form is wrong. You figure out some way or other to back it out of the total. It is why you don’t want to take numerous forms and add them up into a single number.
Based on anecdotal evidence accumulated over 40 years, I am of the opinion that a document mismatch is the second most likely thing that the IRS will catch. Being wrong about what the actual payments made were is the most likely. Back in the day, I concluded that they were usually right, but times have changed.
At any rate if there is a mismatch, you can be sent a form letter usually CP2000. Here is a nice upbeat explanation.
Your response to the notice is supposed to prompt human intervention and tell the robots to take a break. Spoiler alert – this is the weak point.
If you don’t respond or they end up agreeing to disagree with you, you will get IRS Letter CP3219A, which is referred to as a statutory notice of deficiency. Lew Taishoff refers to it as a SNOD, which sounds a little gross. It is also called a 90 day letter. The 90 days is the amount of time you have to file a petition with the United States Tax Court. Here is a nice explanation of Form CP3219A.
Now you can try to give them more information to change their mind, but that does not stop the 90 day clock from ticking. So unless you think they are right or the amount is too small to worry about, you need to at least start the petition. And the smart thing is not to get anywhere near the deadline.
The Problem
It appears that the IRS problems with dealing with its backlog of unopened mail may be the source of the petition flood. Remember the system is automated. If there is no response to the CP2000, the CP3219A goes out without any human intervention. But what if the response is in the stack of unopened mail? They really should not be cranking out the SNODs while they have unopened mail, but apparently that is what is going on.
The evidence I have for this explanation is anecdotal. I heard from Russ Fox EA. His blog Taxable Talk goes back to 2005, which makes it quite venerable. His firm Clayton Financial and Tax has a focus on professional gamblers. Because of peculiarities of their business, professional gamblers are prone to document mismatches. Russ warns them about it and takes care of it when it happens.
In his 20 year career up until 2021 Russ has had eight clients need Tax Court petitions. Four of those were from AUR. He wrote me about how it is going this year:
So far in 2021, I’ve had another eight clients file Tax Court petitions. One of those was an interpretation dispute (Tax Court is your ticket to Appeals); the other seven were because the IRS never processed/read timely responses to AUR notices—these responses were timely faxed or timely mailed (certified mail) and were simply ignored by the IRS. Now, this is (of course) a small sample size—8 out of 26,000—but I strongly suspect what I’ve seen so far in 2021 is a direct cause of the flood of petitions.
Then there it #TaxTwitter where you can get insight from tax pros dealing with the latest problems.
I picked up two more from an inquiry I posted there. I also heard from W Robert Brammer EA from Fredericksburg Virginia:
The part of the problem that is most apparent to me is the IRS computers continue to issue CP series notices and more when the answer to their issues is somewhere in the great warehouse of unopened mail. Documentation. Amended returns. And on and on.
What’s Next?
The Taxpayer Advocate Service – NTA Blog tells us that the IRS has issued five million math error notices without including information about the taxpayer’s appeal right. The notices can be pretty confusing. but you can always call IRS for help. Only more like than not, they will not answer.
Taxpayers who receive these confusing math error notices will likely reach for their phones to call the IRS, asking for a clear explanation as to what the notice means. Unfortunately, they may have a difficult time reaching the IRS because of its poor level of service. From January 1 through June 30, 2021, the level of service (LOS) for Accounts Management (AM) phone lines was only 16 percent. Although it is understandable that the LOS during this unprecedented time would be lower than in past years, even the LOS during “normal” times left hundreds of thousands of calls unanswered. Specifically, for the same time period last year, AM’s LOS was almost 56 percent, meaning more than 40 percent of all calls to this help line went unanswered.
There will be follow-up notices informing taxpayer’s of their rights. The really interesting tidbit on the blog is this.
The IRS is currently correcting more errors on returns and issuing more math error notices than in previous years. Specifically, in calendar year (CY) 2020 through July 15, 2020, there were 628,997 math error corrections made on returns filed by taxpayers. For the same time period in 2021, the IRS made about 9 million math error corrections on returns filed by taxpayers, about 7.4 million of which were related to the RRC.
RRC is the Recovery Rebate Credit. Those 7.4 million math error notices might make for another record setting year for Tax Court petitions in 2022.