The lingering impact of the pandemic on IRS collections

September 14, 2023 9:00 AM

At the beginning of the COVID pandemic in March 2020, the Internal Revenue Service appropriately stopped most enforcement with its People First Initiative. Like most businesses and organizations, the agency moved to remote work, causing a disruption in its ability to enforce compliance.

Most audits, field collection and automated compliance notices were halted so the IRS could focus on the massive effort of distributing rounds of stimulus payments. Remote work also meant return-processing backlogs. The IRS struggled to get back to normal operations as the backlog of unprocessed returns exceeded 35 million. During 2020-2022, the agency received an unprecedented number of phone calls, stifling its ability to return to compliance enforcement work.

There were some attempts by the IRS to re-engage its collection enforcement operations. The service restarted some collection enforcement in 2020 and 2021, with mostly Social Security and starting income tax refund levy notices and some reminder notices — but this enforcement was short-lived due to mounting service needs. In early 2022, IRS campus collection and non-filing compliance enforcement halted in favor of the IRS catching up on its backlog of returns and answering its phone lines. The IRS refocused its workforce in a surge effort to get back to normality.

Campus compliance functions were not the only areas affected by the pandemic. IRS field collection (i.e., its "revenue officers") was also halted in March 2020 — but field collection gradually returned later that year. In 2020-2022, IRS field revenue officers were appropriately sensitive to individuals and businesses that were negatively impacted by the pandemic. As such, the IRS provided a great deal of discretion in using levy and lien actions on delinquent tax debtors.

IRS field collection gradually increased in 2022. Currently, with additional newly hired and trained revenue officers, field collection appears to be back to full capacity.

Overall, during the pandemic, the IRS rightfully put aside many of its enforcement functions in favor of helping taxpayers through the pandemic. To that end, there were tradeoffs in not enforcing collection during the pandemic. IRS data and changes to collection operations over the past four years show 10 clear lingering effects on post-pandemic IRS collection, which are detailed below.

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1. The number of tax debtors has increased

In 2019, the IRS had 20.1 million tax debtors. On Dec. 31, 2022, the agency reported that there were 22.3 million individual and business taxpayers who owe back taxes. This represents an 11% increase in those who owe and have not paid since the beginning of the pandemic. Additional balance due filers will likely make this population increase in 2023 and 2024.

2. The amount owed still hovers around half a trillion dollars

More taxpayers owing the IRS means more taxes owed to the government, right? Not exactly. As of the end of 2022, the amount owed to the U.S. Treasury in back taxes was $443 billion. However, increases in tax breaks and payments have not increased this amount. From 2019-2022, despite low IRS enforcement, the total tax debt owed to the Treasury declined. With pandemic-related tax breaks now gone, it is likely, without enforcement, that the total taxes owed to the government will likely begin to increase again.

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3. More are filing with a balance due

This trend is probably the most disturbing for the IRS. In the 2023 filing season, it has already seen around 35 million taxpayers file a return with a balance due. Another alarming trend: More taxpayers are filing extensions — many because they have a pending balance-due return they are pushing off to the October deadline. As of the end of April 2023, more than 17 million Form 1040 filers have filed an extension. In 2019, only 11.8 million filed for an extension to file.

The lower 2023 filing season refunds give us some other data points to consider the potential causes of more taxpayers owing when they file. The average refund at the end of the tax season was down by over 7%. Pandemic-related tax benefits have been reduced and many taxpayers have not adjusted. Without future adjustments, the trend of more balance-due filers will stress IRS enforcement efforts further and add to the rolls of tax debtors.

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4. Liens and levies at an all-time low

The IRS's main collection enforcement tools — the tax lien and the levy — were in decline long before the pandemic mostly due to declining IRS resources. However, the pandemic shut down most lien and levy issuance. What few liens were issued were likely a result of taxpayers who entered into payment agreements in which the terms required a lien filing or from IRS field collection enforcement. Automated state income tax refund and Social Security levies, as well as field collection enforcement, accounted for the limited levies during the pandemic.

Passport restrictions remain — but they are dependent on pre-requisite lien or levy compliance enforcement functions before restrictions are in place. Lien and levy activity has been limited — as such, the IRS ability to enforce collection through passport restrictions has been limited.

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5. Non-filer enforcement has been almost non-existent

This is another disturbing trend for the IRS. The danger in not pursuing non-filers is that they will leave the tax system and continue to not file and pay their tax obligations.

The IRS experienced resource issues before the pandemic that reduced its ability to pursue non-filers. In 2017 and 2018, the service temporarily halted its non-filer program in which it would file a return for the taxpayer if the taxpayer failed to do so after a number of notice requests (the "substitute for return" or SFR program). The IRS restarted the SFR program in 2020 but had to quickly halt it. In 2022, it issued only 178,218 non-filer inquiry notices.

How big is this problem? IRS data shows that the number of known non-filers through information returns (W-2s, 1099s, etc.) were over 11.3 million in 2022 — up from 7.9 million in 2021. However, in 2022, IRS non-filer investigations were well under 200,000 for the year.

This is only part of the story. The non-filer count does not include the potentially millions of unknown individual taxpayer non-filers who do not get 1099s or W-2s. Business non-filers are also a big unknown. IRS data shows the agency knows of tens of millions of potentially past-due business returns based on businesses with a filing requirement, but no return received.

IRS non-filer identification is about to be improved in 2024, giving the agency more information on small-business and gig economy non-filers. Starting in 2024, the IRS will have improved electronic payment tracking through lower thresholds for merchant card payments (PayPal, Zelle, Venmo, etc.) to file a Form 1099-K. The increase in Forms 1099-K in 2024 will likely identify and add to the number of known non-filers. The Form 1099-K will also help the IRS collect back taxes by identifying potential new levy sources.

6. Collection reminder notices are still on hold

The IRS sends a series of notices before collection begins. These notices are known as the collection notice stream, which begins with a required CP14 notice that informs the taxpayer of a balance due. If the taxpayer does not pay, the IRS starts to issue several reminder notices (CP501 and CP503) before it issues a notice to levy (CP504). The taxpayer enters IRS collection enforcement on the final notice of intent to levy (LT11). Once that notice is issued, the IRS can levy if full payment or an agreement is not reached by the IRS within 30 days.

The notice stream has gaps of time (usually around five weeks) before the next notice is issued. During the pandemic, the IRS only issued the required CP14 notice to most taxpayers — forgoing the reminder and collection notice from its ACS function. These notices have not resumed, resulting in no IRS campus compliance enforcement activity.

Many taxpayers pay when they receive a reminder notice. Without reminder notices, IRS campus collection enforcement is handcuffed and the service's ability to collect by notice diminishes. The IRS has not provided any indication on when it will resume campus reminder notices.

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7. An alarming number of taxpayers aren't in an IRS agreement

Currently, only around 4.5 million of the 22.3 million taxpayers who owe the IRS are in good standing. The rest? They are either in collection awaiting pending enforcement or not being pursued by the agency. In short, 81% of taxpayers who owe are not in good standing. This is an alarming data point and a concern.

8. High-income non-filers and tax debtors beware

Throughout the pandemic, non-filers who have more than $100,000 in reported income have been under IRS enforcement. These "high income non-filers" and millionaires who do not file or owe back taxes are a priority for the IRS — especially with the increased enforcement funding from the Inflation Reduction Act in August 2022.

Recently, the IRS announced that it made some progress against collecting from millionaire tax debtors with larger tax debts owed. However, data shows the agency has some work to do on those who owe higher tax debts. Agency data indicates the number of individual taxpayers who owe over $50,000 amounts to almost 1 million taxpayers. These individuals make up only 4% of tax debtors, but 64% of all individual debt owed and 45% of all unpaid taxes (when you include business taxpayers) to the IRS (a total of $202 billion in tax debt owed). The IRS also has over 3.7 million businesses who owe the IRS over $127 billion (29% of all tax debt owed to the U.S. Treasury).

Many of these high-income non-filers and debtors are the target of IRS field collection's revenue officers.

Recently, the IRS announced it will no longer conduct unannounced visits of revenue officer to taxpayers. Pandemic-related scams, including IRS impersonation scams, necessitated the change to a more transparent collection process. Removing surprise visits will not improve IRS collection effectiveness but is a necessity, especially after a few years of pandemic-related scams.

9. OICs have declined

The pandemic brought many financial hardships. However, one IRS program that helps the financially distressed, the offer in compromise program, has declined. Taxpayers can settle a tax bill if they have little future collection potential to pay their taxes through assets and monthly income. The decline in the OIC program may seem counterintuitive given the financial impact of the pandemic, but with rising real estate equities and retirement portfolio gains that would have to be paid in an OIC settlement, many do not qualify or could not pay an IRS settlement amount. Also, without IRS enforcement, many taxpayers do not consider the OIC settlement option.

For the existing 22.3 million tax debtors, OICs are a rarely used option for back taxes owed. For 2022, the program was used by only 13,165 taxpayers.

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10. Taxpayers are moving to self-service tools

Perhaps one of the fortunate outcomes of the pandemic is the IRS's focus on modernizing its service tools. In the past, the agency's development of online service tools did not keep up with expected financial service platforms. The pandemic forced the IRS to refocus on modernizing to provide taxpayers with the expected online tools. Phone interaction as the primary service delivery method was no longer an option when millions inquired about stimulus payments and other questions related to their tax accounts.

As part of the Inflation Reduction Act, the IRS has committed to more online service options. For taxpayers, that means many more can self-serve when it comes to resolving a back tax balance issue. The IRS's Online Payment Agreement, which allows a taxpayer to enter a payment plan if they owe up to $50,000 or an extension to pay if they owe up to $100,000, has exploded. OPA-originated payment plans are up 57% from 2019 to 2022 and are now the preferred method to obtain a payment plan.

More than 95% of individual taxpayers qualify to use an OPA to set up a payment plan. In 2022, more than 70% of all new payment plans were set up online. The IRS also plans to improve its online account in 2023 and 2024 to allow taxpayers to respond to notices and to enter into more agreements with the IRS on back balances owed.

What's next?

Field collection is now back to full enforcement — and it will grow as the IRS starts to hire more revenue officers. However, after field collection, much of the status of collection and non-filer enforcement is a big unknown.

The big question is when will the IRS resume collection reminder notices and collection and non-filer enforcement from its campuses. As of September 2023, reminder notices (CP501, CP503, and CP504 notices), collection notices (generally LT11 and other federal payment levy notices), and non-filer inquires (CP59s) are on hold. The IRS has stabilized its service and processing operations needed to provide support for restarting collection and non-filer notices. But campus collection notices are still on hold.

The second big question is the extent of IRS collection and non-filer enforcement once it turns back on its campus compliance functions. Most agree that any enforcement restart will be gradual. But there are also other related questions: What will be the impact of the new Inflation Reduction Act funding for collections and non-filer enforcement? Will the IRS have to change its original enforcement plans due to clawbacks of IRA 2022 funding from the Fiscal Responsibility Act in May 2023? Will the IRS only target wealthy taxpayers, or will collection and non-filing efforts impact all taxpayers?

The date the IRS returns to campus enforcement is not known. Once campus enforcement starts, taxpayers who are not in good standing face additional scrutiny and IRS deadlines before adverse actions start to occur. Getting started now on filing back returns and/or getting into an agreement with the IRS on past balances owed is the key to avoiding the pending and inevitable IRS enforcement.