Effects of COVID-19 on Business Tax Returns

Post Date: 9/27/21
Last Updated: 9/27/21

Summary

Cross References
• TIGTA Report Number 2021-46-064, September 2 , 2021

The Treasury Inspector General for Tax Administration (TIGTA) recently issued a report on the effects of the COVID-19 pandemic on business tax return processing operations. This TIG audit was initiated to provide selected information related to the IRS’s 2020 Filing Season, including information related to the impact of the Coronavirus Disease 2019 (COVID-19). The overall objective of this review was to assess the IRS’s actions to address the backlog of unworked inventory affecting business taxpayers as a result of Tax Processing Center closures.

TIGTA found that the closure of Tax Processing Centers created a significant backlog of business tax returns, correspondence, and other types of business taxpayer-related work that needed to be processed. As of the week ending December 31, 2020, the IRS had more than 7.9 million paper-filed business returns that still needed to be processed. In comparison, the IRS had 239,285 paper-filed business returns that were in process as of December 31, 2019.

Some penalties were inappropriately assessed due to delays in processing payments or tax forms. For example, the IRS erroneously assessed 211 failure to pay penalties totaling $45,451 due to a programming error. The IRS also incorrectly assessed 1,256 estimated tax penalties from April 1, 2020, through December 31, 2020. The IRS submitted an information technology work request on July 15, 2020, to update penalty processing, but the programming was not implemented until January 2021. As a result, estimated tax penalties assessed for business taxpayers with tax years ending between April 2020 and December 2020 and filed before January 2021 had penalties calculated without considering the relief.

In addition, systemic payment processing limitations caused further delays in processing payments. The IRS’s system was limited to processing payments that were received within 30 days or less. However, upon the June 2020 reopening of the Tax Processing Centers, most payments exceeded this limit. The IRS did not revise the limit until October 1, 2020, because it was unaware that the programming could be changed.

Finally, redirecting more payments to the lockbox sites could facilitate reducing the backlog. While the majority of paper payments are directed to a lockbox location, more than 6.9 million payments totaling more than $37.6 billion were processed at the IRS’s Tax Processing Centers during Fiscal Year 2020. This includes more than 339,000 payments totaling $3.4 billion received by IRS field office employees.

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.
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