In her annual report to Congress for 2024, National Taxpayer Advocate (“NTA”) Erin M. Collins identified the processing of Employee Retention Credits (“ERCs”), the administration of civil penalties, and changes to the criminal voluntary disclosure program (“VDP) as major ongoing issues facing taxpayers and the Internal Revenue Service.
Employee Retention Credits
During the Covid-19 pandemic, Congress enacted the ERC to provide employers affected by government-imposed suspensions of business operations or a certain specified reduction in gross receipts with a tax credit to keep employees on their payroll. The complexity of the ERC made it a source of confusion for businesses and an easy target for bad actors. Ostensibly for these reasons, the IRS drastically slowed down its process of approving ERCs, with more than one million claims still awaiting IRS action.
In its report, the NTA recommended that the IRS expedite ERC claim processing, with a goal of processing future claims within six months of receipt, provide regular updates on the processing of outstanding ERC claims with estimated timeframes for completion, and provide clear explanations to taxpayers about their why ERC claims are being disallowed.
Civil Penalty Administration
The NTA reports that during fiscal year 2023, “IRS assessed almost 46 million civil penalties totaling almost $66 billion against taxpayers.” However, the IRS often doesn’t timely consider taxpayers’ defenses to these penalties and does not provide taxpayers with the opportunity to have their defenses considered before the assessment of assessable penalties, resulting in penalty assessments that shouldn’t have been made.
Among other things, the NTA recommends that the IRS update the Internal Revenue Manual to require consideration of reasonable cause relief before assessing penalties and that the IRS stop automatically assessing international information return penalties without considering a taxpayer’s facts and circumstances.
Criminal Voluntary Disclosure
The NTA noted that there was a “[l]ack of enthusiasm for the program is partly due to recent changes the IRS has implemented that have made taxpayers and tax professionals wary of using the program and many professionals uncomfortable recommending it to taxpayers.” The NTA notes that among the issues with the current VDP are the requirement that applicants admit willfulness in their tax noncompliance for the periods subject to the disclosure, the requirement that taxpayers participating in the VDP full pay all taxes, penalties, and interest for the disclosure period, and, with regards to voluntary disclosures involving digital assets, the requirement that taxpayer provide full digital asset transactional data for the disclosure period.
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