Advocating for Clients Amid IRS Chaos

IRS layoffs will impact taxpayer services and rights

As part of the Trump administration’s restructuring of the federal workforce, the IRS laid off approximately 6,700 probationary employees this week. While no probationary employees directly related to tax season operations were supposedly laid off at this time, those spared will likely be laid off after tax season is over.

Many of these employees were in the enforcement area (revenue agents, revenue officers, and tax compliance officers) but could have been anywhere at the IRS. I have colleagues who know these employees and have talked to them, and it is indeed happening — and IRS morale is cratering, exacerbating the effects.

In the future, practitioners can expect reduced service levels (e.g., unanswered phone calls, delayed responses, and active cases being placed on hold).

While you may be either angry or elated about these changes, practitioners must now be invested in proactively and defensively working with clients in this new IRS environment in which taxpayer rights, such as the right to quality service and the right to challenge the IRS position and be heard, can be inadvertently violated.

Many of the strategies below are prudent in any IRS service-level environment but are especially important in a reduced service-level environment.

Assessment Statute of Limitations

The IRS generally has three years from the filing date to issue the notice of deficiency. This prior edition of Tom Talks Taxes reviews these rules and when the three years is tolled (or extended).

If examinations are delayed, the IRS may neglect to send the notice of deficiency by the assessment statute expiration date (ASED). Tax professionals should verify the ASED for all active examinations to ensure the IRS still has the legal right to attempt to assess tax for that tax year and period.

Collection Statute of Limitations

The IRS generally has ten years from the assessment date to collect a tax liability; after the collection statute end date (CSED), the IRS writes off the balance due.

If collection actions are delayed, the IRS may be unable to collect the entire tax liability before the CSED. Tax professionals should verify the CSED for each unpaid balance to ensure the IRS still has the legal right to attempt to collect the tax. The collection strategy may be waiting to see if the tax balance expires due to IRS inaction.

Voluntary Payments

If a taxpayer can choose to make a payment, they can apply it in their best interests; on the other hand, if the IRS compels a payment (i.e., levy or installment agreement), they can apply it in the IRS’s best interest. See Rev. Proc. 2002-26. If the designation is essential, it is best to mail it (yes, I know) with a memo notation on the check and a cover letter repeating the designation instructions. The designation must include the taxpayer identification number (TIN), tax form, tax period, and tax type (if applicable).

If cases are delayed, taxpayers have the opportunity to voluntarily pay their past-due taxes in a way that is optimal for their situation and reduces interest accruals.

If a business has unpaid trust fund taxes, it should designate any voluntary payments to the trust fund taxes to mitigate §6672 trust fund recovery penalty (TFRP) exposure. The designation on the check should include the employer identification number (EIN), the form and quarter (i.e., Form 941: 2023-12), and “Trust Fund Taxes Only.” When designating trust fund payments, consider the TFRP assessment statute of limitations, which is generally three years from the filing date (but consider the deemed filing date under §6501(b)(2)). The periods with the most time on the TFRP assessment statute of limitations period should be paid first in many cases.

In general, for taxpayers with unpaid tax balances, the periods with the most time on the collection statute of limitations should be paid first; however, there are other considerations. Suppose some periods are open to IRS levy, and some are not. In that case, it may be prudent to pay down the periods open to levy first, as the IRS cannot take enforced collections on the other periods without giving the taxpayer the right to go to the IRS Appeals Office for a Collection Due Process (CDP) hearing.

Document Everything

Document IRS interactions as much as possible when working on a case:

• After discussing a case verbally with an IRS employee, get their name and employee identification number and reference that conversation in future written communication, if possible.

• Use certified mail when sending paper documents to the IRS, especially when timely filing is essential to protecting a taxpayer’s rights since §7502 ensures that if it is timely mailed, it will be considered timely filed. Be sure to include the certified mail tracking number on the cover letter inside the package, and scan the entire package immediately prior to mailing. The cover letter should explicitly explain that the document was timely filed with dates and reference §7502.

IRS Authorizations

Due to processing delays with the Centralized Authentication File (CAF) unit, which will likely get worse in a reduced workforce environment, consider the following:

• If future representation needs are possible, bypass Form 8821, Tax Information Authorization, and go directly to Form 2848, Power of Attorney and Declaration of Representative. This allows the practitioner to immediately address the issue without fear of delays in a later Form 2848 filing. Be sure the client’s engagement letter clearly states the scope of the services.

• Get “wet” signatures, not electronic signatures, on authorizations. An IRS employee receiving an authorization directly by fax will not accept it if it is electronically signed.

• Send and execute authorizations electronically via the IRS Tax Pro Account and the taxpayer’s IRS Individual Online Account.

• Do the authorization for the maximum time in the future to minimize the number of subsequent authorizations that need to be filed. For authorizations filed in 2025, they can go to tax year 2028.

Transcript Monitoring

This is the time to offer taxpayers the option of engaging practitioners to access their records directly via an IRS authorization on file. The goal should be to offer proactive services that reduce the need for interaction with the IRS as much as possible. If the interaction is needed, the practitioner can immediately act on the client’s behalf (subject to the scope of the services provided under the engagement letter). A subscription model is ideal for this engagement.

At a recent IRS practitioner meeting, the IRS stated that 2024 wage and income transcripts would be available on March 30 (hat tip to Phyllis Jo Kubey, EA, for the information). If true, transcript access may be even more helpful for completing Form 1040 returns that do not go on extension.

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