Tax Notes Today spoke with Mortimer M. Caplin and Christopher S. Rizek concerning the shutdown of the Internal Revenue Service and its economic impact on businesses and individuals. Taxpayers will face delayed refunds and the U.S. treasury may lose untold sums in assessed taxes due to the inability to meet statutory deadlines and the absence of employees. For the complete article, please visit Tax Notes Today's website.
Excerpt taken from the article "IRS Shutdown Adds to Economic Headwinds for Businesses, Individuals" by William Hoffman for Tax Notes Today.
"The accommodation of taxes in every business transaction doesn't work well when the IRS isn't working," said Christopher S. Rizek of Caplin & Drysdale. Taxpayers up against the October 15 filing and filing extension deadline will face delayed refunds and no IRS help resolving disputes over their assessments, he said. The U.S. treasury may lose untold sums in assessed taxes because the IRS doesn't have staff to meet statutory notice of deficiency deadlines, Rizek added.
The looming October 15 deadline could also cause anxiety for taxpayers who filed for six-month extensions back in April, Rizek said. Those include high-net-worth individuals with many information returns, such as Schedules K-1, that must be paired with the appropriate forms W-2 and 1099 through the IRS's matching programs. Those filers can meet their filing and payment obligations by postmarking their returns as late as October 15, Rizek said, but the taxpayers won't get any refunds during the shutdown and can't resolve any controversies over their tax obligations until IRS employees return to work.
Further, because the October 15 returns are usually matched in November, the work backlog could push that process back, Rizek said. Thus, people with minor deficiencies or math error notices may not get those notices before interest is imputed. "A month or two's interest at 2 or 3 percent is not your biggest concern if you're facing a tax adjustment," Rizek said, "but cumulatively it could be a pretty [big] effect."
The IRS has statutory deadlines, explained Rizek. Some of them will be little more than a nuisance for taxpayers. Taxpayers have 90 days to respond to statutory notices of deficiency and 30 days to appeal collection due process notices. As long as taxpayers meet the deadlines, they are fine, he said. The IRS doesn't have to do anything, he noted, and for the time being, it's not.
However, missing deadlines could cost the government. "They also have notices of deficiency with hard and fast deadlines, frequently tied to the return date, so it may be tied to the October 15" filing deadline, Rizek said. "If they don't get the statutory notice of deficiency out or get the tax assessed, as the case may be, before October 15, they'll lose that revenue forever." He added, "It's my understanding that there are skeleton crews who are trying to keep that from happening, but I expect a certain amount of it to slip through the cracks."
Refunds delayed more than 45 days from the date of filing the return are entitled to interest, Rizek noted. While it's not clear how many October 15 filers were overwithheld on or otherwise entitled to a refund, "that could be a huge hit to the Treasury Department," he said.
Former IRS Commissioner Mortimer Caplin of Caplin & Drysdale said, "If the IRS is blamed for this thing, it will hurt compliance more and more. They've been kicked around enormously for the last six months. But this is one of those intangibles in terms of whether people comply or not. And there are a lot of ingredients going into that. If compliance falls, that would hurt the bottom line a great deal."
Rizek added: "Even a small blip in compliance levels will have a much longer-term effect than whatever sort of short-term dislocations there are. . . . There are definitely those sorts of small dislocations, on a transaction-to-transaction basis, that cumulatively could add up to quite a bit. But in the long, long term -- beyond, you know, a year -- the bigger danger is that it hurts the IRS's compliance level one more time."