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Bankruptcy court awards damages for automated IRS notices By: National Association of Tax Professionals
June 22, 2022

A West Virginia bankruptcy court has ordered the IRS to pay damages after the agency sent automated notices to taxpayers who’d had their tax debt discharged through bankruptcy. The court rejected the IRS’s claim that it had not willfully violated the discharge order because the collection attempts were made through automated delivery systems that were affected by the COVID-19 pandemic

The In re. Williams-McAuliffe (Bankr. N.D.W. Va. 2022) decision by the U.S. Bankruptcy Court for the Northern District of West Virginia found the IRS must pay damages when an employee willfully violates a discharge order by sending a collection notice. It is a violation of federal law to attempt to collect a debt after it has been discharged in bankruptcy.

While the court only awarded the taxpayers $498 in damages (and refunded the $235 fee for reopening the bankruptcy case), the decision is notable for finding the IRS liable for damages taxpayers suffered because of erroneously issued collection notices. In February the IRS suspended most of its automated collection notices after coming under pressure from the Taxpayer Relief Coalition — which includes NATP — and other advocacy organizations because many of the notices were being issued erroneously due to the IRS’s substantial backlog of unprocessed returns.

Couple files for Chapter 13 bankruptcy

The McAuliffes are a married couple who filed for Chapter 13 bankruptcy in 2016, the bankruptcy court said. The IRS filed a bankruptcy court claim seeking $13,625 in unpaid taxes for 2010 and 2011, $7,230 of which was secured. While the couple entered into an installment agreement to repay the IRS, they terminated their agreement and paid their outstanding debt through the Chapter 13 repayment plan. The McAuliffes received a bankruptcy discharge in September 2019 and the IRS received 22% of the unsecured portion of its claim, which was roughly $1,400.

Despite the IRS debt having been discharged, the bankruptcy court said the agency sent the McAuliffes demand letters in February and March 2020 seeking to collect the monthly payment due under the terminated installment agreement. The husband, a bankruptcy attorney, sent a letter to the IRS in March 2020 explaining the error, but sent it to the wrong office. The couple received another collection letter in August 2020.

Despite the third demand letter, the IRS failed to acknowledge the McAuliffes’ March 2020 letter until Sept. 29, 2020, at which point the IRS said it would need 60 days to review their liability. However, contrary to the statement that it would review the couple’s liability, the IRS had already abated their 2010 and 2011 taxes the day before the letter was sent. The IRS attributed the seven-month delay in responding and miscommunication to a combination of the COVID-19 pandemic and the McAuliffes’ mailing their letter to the wrong office.

While the couple’s bankruptcy case was before the bankruptcy court, they incurred additional tax liabilities for the 2018 tax year, which they did not contest. The McAuliffe’s said they intended to enter into an installment agreement for those debts but were prevented from doing so by the IRS’s claims they had unpaid 2010 and 2011 tax debts. The court said they tried to contact the agency in an attempt to enter into an installment agreement regarding their debts for 2018 as early as January 2020.

The bankruptcy court reopened the McAuliffes’ bankruptcy case in December 2020 and the couple filed for an adversary proceeding shortly thereafter. The IRS was granted no relief through administrative remedies, but in August 2021 it sent the couple a letter stating its intent to end their installment agreement and that $1,150 must be paid immediately to avoid default. It also sent a notice of intent to levy. About this time the couple was notified by the IRS that it was accepting their installment agreement to pay their 2018 debts, which was almost 20 months after their initial request.

Taxpayers seek damages based on bankruptcy law

The McAuliffes sought damages under §7433(e) of the U.S. Bankruptcy Code, which allows debtors to seek damages for violations of a bankruptcy discharge.

The IRS claimed the automatic collection notices were “non-threatening” and should not be viewed as a collection action. The court disagreed, noting the letters state that a monthly payment is due immediately and threatens the taxpayer with default if no payment is made. Additionally, the court observed the notice contained no disclaimers stating that it was not trying to collect a debt. “This surely gives the appearance of an attempt to collect, whether sent to a layperson or a well-experienced bankruptcy attorney and his spouse,” it concluded.

Next, the IRS argued that to find a willful violation, the court needed to find that a specific employee violated the discharge order; it also cited cases where courts found that clerical errors were inadvertent. The bankruptcy court found the IRS failed to enter the discharge into its system for almost 12 months and the McAuliffes made multiple attempts to resolve the issue only for the agency to continue trying to collect the debt. It said that those did not qualify as clerical errors.

The IRS also contended the automatic nature of the collection notices removed them from the control of IRS employees, which should shield the agency from penalties intended to punish employee misconduct. The bankruptcy court rejected the argument, finding that if the IRS employees and automated systems are disconnected from the actions of other offices, it is the agency that should be held responsible and not the taxpayer.

Finally, the bankruptcy court did not agree with the IRS’s claim that the COVID-19 pandemic should be taken into account when assessing the agency’s actions. “While COVID-19 is having a significant impact on all levels of the federal government, it does not excuse repeated attempts to collect on a Plaintiff doing everything possible to correct any miscommunications,” the court explained.

Damages based on interest and penalties accrued

The McAuliffes asked the court for damages related to the IRS’s unlawful collection attempts, court costs and legal fees. Among other things, the couple claimed they accepted an offer for their house that was $15,000 below its market value because they were concerned about the notices they were receiving from IRS about the discharged tax debt. However, the court found the sale took place nearly a year after they received an abatement for their 2010 and 2011 taxes from the IRS; therefore, the claim was speculative and not concretely proven.

The bankruptcy court did award the McAuliffes damages based on the interest and penalties assessed by the IRS on their 2018 tax liability. It found that the interest and missed payment penalties the couple accrued between the time they received their first collection letter until the IRS’s decision to accept their settlement offer were actual damages resulting from the agency’s violation of its discharge order. It concluded that the interest and failure to pay penalties had increased by $498 during the time between the IRS issuing the March 2020 notice and the time the IRS accepted an installment agreement.

For more information on bankruptcy, installment agreements and other collection alternatives, check out the NATP’s on-demand online workshop on resolving back tax debts.

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Preparers dealing with unprocessed 2020 returns, continuing COVID-related complexities and other issues this filing seasonBy: National Association of Tax Professionals
April 13, 2022

After the filing deadlines for 2019 and 2020 were postponed due to COVID-19, tax professionals will be expected to get most of their clients’ 2021 returns to the IRS by the traditional mid-April due date for the first time in three years.

For some preparers, the IRS’s backlog of more than 23 million unprocessed 2020 returns may make it a challenge for them to get some clients’ returns in by April 18—April 19 in Massachusetts and Maine. While some of the unprocessed 2020 returns have refunds or other carryover information that needs to be applied to 2021, the IRS maintains that taxpayers “generally” need not wait until their 2020 returns are processed to submit their 2021 returns.

However, the IRS has said that most individuals who file electronically will receive their refunds within 21 days if they choose direct deposit and no issues are found with the returns.

New legislation resulted in new letters

The federal government’s efforts to minimize the economic impact of COVID-19 has created additional situations that preparers faced for the first time in 2022, including accounting for advance child tax credit payments. The IRS began sending Letter 6419, Advance Child Tax Credit Reconciliation, to recipients in late December 2021.

An additional hurdle for tax preparers is that, for 2021 returns, they needed to fill out and file Form 8867, Paid Preparer’s Due Diligence Checklist, for tax returns claiming qualifying children for the child tax credit even if the return claims no child tax credit after reconciling advance child tax credit payments made in 2021.

Taxpayers who took advantage of the credits should turn over copies of the letter to their preparers so they can be properly accounted for. Taxpayers who did not receive the letters — or lost them — are encouraged by the IRS to visit their online account, which include summaries of the advance child tax credit and third economic impact payment amounts.

The IRS repeatedly reminded taxpayers that both Letter 6419 and Letter 6575 contain information necessary to file an accurate 2021 return. It explained errors that result from a failure to use the information contained in the letters for preparing returns could slow down processing of the returns and refunds.

Revised Form 1040 virtual currency inquiry

Preparers should note the IRS’s revision to the Form 1040 question regarding virtual currencies for 2021. Some taxpayers and preparers were confused by the wording of the question on the 2020 form, which said “At any time during 2020, did you receive, sell, or otherwise acquire any financial interest in any virtual currency?” Many preparers and taxpayers were unsure of whether buying or holding cryptocurrencies should be reported.

For 2021, the Form 1040 question now reads: “At any time during 2021, did you receive, sell, exchange, or otherwise dispose of any financial interest in any virtual currency?” The IRS also addressed the new wording during its March updates to the virtual currency FAQs. It now says that taxpayers whose only virtual currency transaction during 2021 was purchasing virtual currency with real currency can answer the question by checking the “No” box.

Extended filing date for victims of storms and wildfires

The IRS announced that the victims of the December 2021 tornadoes that swept through parts of Illinois, Tennessee and Kentucky will have until May 16, 2022, to file their 2021 returns. The extension applies to the filing of individual and business returns due April 18 and business returns that are normally due March 15 as well as payments.

Additionally, the IRS said victims of the December wildfires in Colorado now have until May 16 to file their individual and business returns and make payments.

Finally, the IRS announced that victims of severe storms, flooding in and landslides in Puerto Rico beginning Feb. 4, 2022, will have until June 15 to file individual returns and make tax payments.

Filing for an extension is still and option

Even though the IRS has kept the filing day for 2021 returns in April for most taxpayers, preparers always have the option of filing for an extension if they need more time to file. The due date for those who requested an extension for filing their 2021 returns is Oct. 17, 2022. As a reminder, the extension only applies for filing the return, to avoid penalties and interest, payments must be made by the April due date. If you need more information on preparing valid extensions, NAPT offers a webinar on the subject.

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2022 tax season going just as preparers predicted, according to survey resultsBy: National Association of Tax Professionals
March 2, 2022

The 2022 tax filing season has proven to be more frustrating, for taxpayers and tax professionals alike, than any previous season. In preparation for the 2022 filing season, the National Association of Tax Professionals (NATP) surveyed its members to gauge tax preparers’ confidence around recent tax law changes and the impact these changes will have on their business.

Overall, survey data indicated NATP members are concerned about the workload and stress for themselves and their employees. Only 13 percent of respondents indicated they think this year will be better than last year.

Members noted they were most concerned about accurate reporting of economic impact payments and advance child tax credit payments, as well as reporting of Paycheck Protection Plan and other COVID-related loans.

Additionally, much of the concern about increased workload came from the assumption that only 4 percent of taxpayers are knowledgeable about tax law changes.

Through conversations with preparers and NATP members, anecdotally, it seems as though tax season is just as frustrating as they predicted, said Jennifer Van Elzen, director of member relations and analytics at NATP.

“Unfortunately, it looks like tax season is going about as well as our members thought it would,” Van Elzen said. “Serving their tax clients has been further complicated by an increase in delays and lack of IRS resources; a persistent effect from the pandemic.”

Van Elzen said the association is working to make members feel confident by offering more resources and education courses to tax pros during tax season than ever before, including blog posts, publication articles and webinars on topics such as preparing the new Form 7203, calculating the earned income credit on a 2021 return, and reporting and reconciling the child tax credit.

For full survey results, or to speak with someone further, please contact Nancy Kasten (nkasten@natptax.com) or Samantha Strong (sstrong@natptax.com).

2022 Tax Season Impact Survey (1)
2022 Tax Season Impact Survey (2)
2022 Tax Season Impact Survey (3)

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Watch: NATP discusses changes to Schedule 8812 for 2021 tax season (Facebook Live replay)By: National Association of Tax Professionals
February 8, 2022

Many tax preparers are facing new challenges during the 2022 tax season related to their clients claiming (or not claiming) the child tax credit and reconciling the advance payments.

NATP went live on Facebook to discuss these challenges and possible solutions to accurately completing the forms required for clients to claim the credits and report or reconcile the advance payments.

There is also detailed information and in-depth examples in March’s TAXPRO Monthly (available to Professional and Premium level members). If you’re not a member and want to become one, go to natptax.com/join. Use the code 22SOCIAL at checkout to take $25 off the new member fee. 

Listen to a replay of the live conversation with Sheri Fronsee, NATP tax research specialist, below!

NATP is hosting a webinar (live on Feb. 15 and Feb 16, or on demand) on reporting and reconciling the child tax credit. We’ll discuss how to determine credit eligibility, use Letter 6419 for reconciliation of advanced CTC payments, calculate the safe harbor repayment protection amount and provide examples explaining how to report it on the tax return, specifically Schedule 8812 (Form 1040).  

Questions include:

  1. Roughly 39 million households received monthly advanced child tax credit (CTC) payments. During the next few weeks, those advanced payments will need to be reported and reconciled on the 2021 individual tax returns using the Schedule 8812. Sheri – what’s the latest with Schedule 8812, why are we talking about it?
  2. Let’s talk about another 2021 change making this even more complicated – parents had the option to receive advance child tax credit payments or not. How does this impact the taxpayer AND tax professional?
  3. What about the case where the taxpayer receives more money in their advance payments than they were actually eligible for. What’s going to happen in these situations?
  4. We all know there’s been quite a bit of fallout from the effects of COVID-19, financially and personally. Not all parents have been able to fare well and some split. What happens for these payments in the case where parents aren’t living together?
  5. The latest news we have is that some taxpayers are receiving incorrect letters from the IRS about their advance payments if they moved. Can you go into a little more detail on that and what tax pros should do if their client is in this situation?
  6. If someone is listening to this and needs more education on how this topic, what can they do?
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More information on the incorrect IRS notices (CP-80)By: NATP Research
January 28, 2022

According to recent reports, the IRS has a backlog of more than 6 million unprocessed individual returns; however, it has opened the majority of its mail and processed the payments accompanying these returns. As a result, many taxpayers received a CP-80 notice, which states the IRS has a credit on the taxpayer’s account but has not yet received a 2020 tax return. In most cases, though, the IRS has received the tax return, but just haven’t processed it.

This erroneous notice contains more conflicting information, as the CP-80 notice states, “Please file today. Send your signed tax return to the address shown on the top of your notice.” However, the IRS has stated in many news releases NOT to resubmit a tax return. The notice also states “If you don’t file your return or contact us, you may lose this credit. The Internal Revenue Code sets strict time limits for refunding or transferring credits.”

Here’s an example of the CP-80 notice:
CP80

In addition, NATP has heard reports of taxpayers receiving their payments back in the mail from the IRS. Other taxpayers have received, in addition to the CP-80 notice, failure to file notices resulting in penalties, liens, etc.

NATP reached out to our IRS liaison to find out what taxpayers and tax professionals should do when these situations occur. We’ll be in communication with our members when we receive additional guidance.

NATP members will receive email updates as we continue to follow this topic. If you’re not an NATP member and want to receive news updates like this directly to your inbox, visit natptax.com/join. Otherwise you can join our 30-day trial to test us out if you’re not ready to commit.

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