April 18, 2022

By Anita Dennis

After deals dropped dramatically during the pandemic, the mergers and acquisitions (M&A) market is hot once again in the accounting profession, according to Terrence E. Putney, partner, Whitman Transition Advisors LLC, which advises CPA firms on M&A issues. Economic uncertainty and discomfort with making decisions based on video meetings caused many to put off dealmaking during the past two years. However, the market has heated up since late last year, given a more stable economy and strong firm profitability. "It's driving M&A to unprecedented levels," he said. "Even during tax season, firms are closing deals."

For CPAs considering jumping into this active market, Putney and Amber Goering, CPA, CGMA, an owner of Goering and Granatino PA, offer these tips on meeting some of the biggest challenges in buying or selling a firm. Both will participate in a session on small firm acquisition at AICPA & CIMA ENGAGE 22, which will take place June 6–9 in Las Vegas and online.

• Be prepared for a buyer's market. The market is flooded with owners seeking to retire in the next five years, according to Putney. Many firms have one to five partners, and no one within the firm is ready to take over. "Succession is a huge problem," he said. As a result, there is a greater supply of firms being sold than buyers, which has pushed prices down. That means retiring CPAs may be in line for a surprise. "Sellers are expecting to get 1 times revenues," he said. "Buyers are expecting to pay 0.8 times or less."

• Avoid pitfalls for inexperienced buyers. Even in this market, there may be hurdles for buyers. For example, many who are new to purchasing a firm may not understand the level of resources required. Firms that are used to operating off their cash flow will have to pull together the necessary capital. For a $2 million acquisition, the buyer might need $500,000 in capital, Putney said.

Deals may also run aground if all the partners aren't completely behind the idea of acquiring one particular firm or even of making any acquisition at all. "The managing partner may be on board, but others may hesitate," Putney noted. "But time kills all deals," he said, so those who aren't ready to strike may lose out on promising prospects.

• Make sure cultures are aligned. Goering's 33-person firm has acquired five firms during the last 10 years. She recommended that CPAs seriously consider how well two merged firms will mesh before moving forward with any deals. Buyer firms should investigate critical areas, such as a target firm's approaches to technology and client service, before sealing a deal, because incompatible cultures may cause problems later. Success may also depend on the selling partners and their attitude toward the merger. A merged-in partner who is a cheerleader for the deal can inspire his or her people to embrace change. If someone is unwilling to accept new processes or approaches, however, the employees they bring along are often not motivated to do so either, she said.

Transparency from the outset may be crucial in ensuring that employees become effective firm members, Goering advised. She has had success in incorporating new people when she meets with them before the merger to answer questions and reassure them about their place in the new firm.

• Be more flexible about being a good fit for the acquiring firm. Sellers often come to a deal with a wish list, Putney said. For example, they may not be willing to move their office, adapt their operations to new processes, or accept that some employees may not be hired by the buying firm. "All of those requirements eliminate a percentage of the buyer market," he said. "They drive down value because you're less likely to find an interested buyer."

In particular, sellers should remember that it's all about talent. A decade ago, M&A was driven by a desire to acquire clients, Putney said. Today, because of the talent shortage, buyers may no longer be interested in a firm if the owner plans on immediate retirement. The buyer may be gaining new clients but may also need to depend on the seller's help in serving them. As a result, willingness to remain with the new firm through and beyond the transition period may be a competitive advantage for a seller firm.

April 14, 2022 04:13 PM

By News staff

Citing the disruptive blizzard that has blanketed much of North Dakota in snow, Tax Commissioner Brian Kroshus put a waiver on all income tax penalties and interest through after Monday, April 25.

The state flag flying in front of the North Dakota Capitol violently flaps in the wind during a blizzard on Tuesday, April 12, 2022. Jeremy Turley / Forum News Service

BISMARCK — North Dakota Tax Commissioner Brian Kroshus announced Thursday, April 14, that tax filers will have an extra week to return and pay their state income taxes.

Citing the disruptive blizzard that has blanketed much of the state in snow, Kroshus put a waiver on all income tax penalties and interest through after Monday, April 25.

"Given the magnitude of the storm, the waiver is appropriate and will hopefully provide a level of relief to some as the state slowly digs out," Kroshus said in a news release.

The waiver only applies to the state income tax deadline, and filers must still send in their federal income tax returns by Monday, April 18, or request an extension to avoid penalties.

Kroshus' office will be open from 8 a.m. to 7 p.m. on April 18 to help residents file their individual income tax returns before the end of the Tax Day deadline. The office's individual income tax staff is reachable at 701-328-1247.

April 11, 2022

Ted Knutson

The Internal Revenue Service was plagued by taxpayer service problems last year including refund delays, scant online refund information, and a decline in in person service, the Government Accountability Office asserted in a new report.

The refund delays were blamed on an unprecedented volume of returns requiring manual review with similar tax credit errors and the IRS suspended and reviewed 35 million returns with errors primarily due to new or modified tax credits.

The errors, which can be made by both taxpayers and the IRS, increased from the COVID-19 legislation, according to the study, since the new provisions of the tax law are new to IRS, paid preparers, and taxpayers, and can make the overall returns process more complicated.

“As a result, millions of taxpayers experienced long delays in receiving refunds,” the authors of the GAO report said.

At the end of the 2021 tax filing season in December, IRS still had about 10.5 million returns to process.

GAO faulted the IRS for not estimating how long it would take to resolve the backlog of mail correspondence from taxpayers.

“Providing such estimates periodically, and communicating this information to taxpayers and stakeholders, will better set taxpayer expectations for a response as well as potentially reduce further calls or correspondence follow up from taxpayers,” the study asserted.

The correspondence inventory the IRS expects at the end of the 2022 fiscal year exceeding 10 million, is more than five times the volume of correspondence as of the end of fiscal year 2019 and more than three times the inventory as of the end of fiscal year 2020.

The decline in in-person services, GAO noted started in 2015 before offices were closed as a result of the pandemic as the agency has stressed alternative choices for service.

In 2015 the agency served 5.5 million taxpayers in person. That number declined to 700,000 during 2020 with decline primarily due to its shift from walk-in service to appointment-only service.

“Developing and communicating a plan for how it will provide in-person service to taxpayers will better position IRS as it considers expanding and changing other service options, such as virtual service.

The IRS has said it intends to more broadly implement video conference appointments for taxpayers so that they can work with an IRS specialist using a computer, tablet, or mobile phone from the taxpayer’s home.

To lessen the problems, the report by the investigative arm of Congress recommended IRS find out the causes for the taxpayer errors on returns, modernize its online “Where's My Refund” application; address its backlog of correspondence; and assess its in-person service model.

“While 2021 was a trying year for IRS, it can address its persistent challenges to better serve taxpayers and manage future difficulties,” GAO said.

March 2, 2022

AICPA Insights

The Certified Public Accountant (CPA) license matters. The proof presents itself every day in the ethical, informed and trustworthy work CPAs do. Through their invaluable work, licensed CPAs bring confidence, experience, accuracy and honesty to an, often, uncertain financial world.

The CPA license signals to the public an accounting professional’s commitment to excellence and integrity in a complex, highly regulated, and constantly changing business world. The CPA license is much more than permission to work in a highly specialized field. It matters to the public, businesses and the broader financial world because of the tremendous substance and commitments that stand behind it.

When businesses and individuals hire a CPA, they know that they are hiring a well-qualified professional. With accounting, auditing, tax and technology at the core, the CPA licensure process prepares accountants to work in at least one of three disciplines: tax compliance and planning; business analysis and reporting; or information systems and controls.

Licensure also reflects reliability. A CPA enters a social contract with the public as a professional who has met exhaustive requirements, and practices with financial integrity, whether for an individual, company, governmental body or non-profit enterprise.

In their learning and public practice, an individual who seeks to become a CPA must submit to what is known as “integrity of the rigor.” In other words, CPAs must prove in multiple, concrete ways over time that they are qualified to meet the highest standards and uphold a code of conduct; state laws and regulations; and those from federal regulators, such as the PCAOB (Public Company Accounting Oversight Board) and IRS (Internal Revenue Service).

These four pillars stand behind every CPA license:

Education - Accounting students learn the fundamentals of the profession in college, completing 150 semester hours of education for licensure. To maintain their license, CPAs must also complete continuing professional education.
Experience - Candidates must also meet an experience requirement before a license can be obtained. Experience can be gained through several avenues including public accounting, industry, and government.
Examination - Passing the CPA Exam provides evidence that an accountant is qualified to practice at the highest level of the profession. The Uniform CPA Examination is the same exam for every CPA candidate in all 55 licensing jurisdictions in the United States.
Ethics - In daily practice, CPAs comply with a code of ethics, including the AICPA® (American Institute of CPAs®) Code of Professional Conduct, which reinforces a career-long commitment to integrity, objectivity, due care and competence.

Moreover, every CPA reinforces and revisits these pillars as they build their experience and further develop sound judgment; take continuing CPA education courses; and work overtime to abide by the regulations and laws that guide their work and promote public confidence.

In the business world, CPA licensure matters as only CPAs can perform what is known as the attest function — an independent review of a company’s opinion financial statement. This important level of assurance positions the CPA as a trusted adviser.

All of this taken confirms the CPA profession’s dedication to creating a system where licensure represents a true gold standard in training, practice, ethics, and career-long development. The CPA profession has decades of commitment to meeting and maintaining its contract with the public, creating a finely tuned, nuanced system to define and uphold best practices. This work constantly evolves as the nature of business, accounting, tax and capital markets change. Just as they have over generations, licensed CPAs monitor and adhere to the laws, rules and standards that guide them.

This, combined with keeping in place time-tested pillars that build rigor and promote public confidence, mean that accounting professionals who commit to upholding the highest standards of ethics, skill, independence, judgment and professional development proudly carry the CPA designation.

February 17, 2022

By Paul Bonner

There's still time to salvage this year's tax filing season, or at least make a difference, if the IRS adopts recommended taxpayer relief measures, Jan F. Lewis, CPA, the chair of the AICPA's Tax Executive Committee, told the U.S. Senate Committee on Finance in a hearing Thursday.

Lewis, who is also a tax partner with Haddox Reid Eubank Betts PLLC in Jackson, Miss., was joined by National Taxpayer Advocate Erin Collins and Jessica Lucas-Judy, director, Strategic Issues, with the U.S. Government Accountability Office, in the committee's hearing, titled "Spotlighting IRS Customer Service Challenges."

Practitioner difficulties

Over the past few years, Lewis said in her testimony to the committee, tax practitioners have experienced difficulties in dealing with the IRS, mostly with the Service's sending erroneous notices to taxpayers, being slow to process returns and correspondence, and failing to answer a large majority of phone calls.

"These problems have been magnified the past two years," Lewis said, "and at times, we as CPAs feel powerless to help our clients navigate these IRS service issues."

Some clients have received notices instructing them to file forms and returns they had already filed or to allow more time to resolve an issue about which they did not receive any original notice, she said.

"We've had clients receive notices regarding payroll Form 941 [Employer's Quarterly Federal Tax Return], stating that the IRS needs more time, but the client has no employees and does not even file payroll tax returns," she said.

Other clients who did file Form 941 or the amended version, Form 941-X, on which they claimed an employee retention credit for 2020 or 2021, are still waiting for the resulting refunds, she said.

"I could go on for hours with examples," Lewis said, but she described one particularly frustrating example: Several passthrough entities were unable to file returns before the 2020 extended due date because of pandemic-related difficulties, she said. None of the returns were more than a couple of months late.

"But despite the IRS's indication that there would be penalty relief for late filings due to COVID, the telephone assisters had no knowledge of any special pandemic relief when we called," and penalties were assessed, Lewis said.

The IRS did have its own dislocations to deal with, she noted, including shuttered offices and significant new tasks handed it by Congress, such as administering economic impact payments.

"Frankly, though, we expected a little more flexibility, and a little more empathy from IRS leadership," Lewis said.

Strategic recommendations

While the AICPA has communicated long-term strategic recommendations to improve IRS service, it continues, with its partners in the Tax Professionals United for Taxpayer Relief Coalition, to advocate shorter-term recommendations that Lewis reiterated for the committee: temporarily postpone all automated compliance actions, adjust account hold times, liberalize the reasonable-cause penalty waiver process, and provide targeted relief from underpayment and late-payment penalties.

Lewis added another specific recommendation: The IRS should delay implementing its requirement that passthrough entities with "items of international tax relevance" file Schedules K-2, Partners' Distributive Share Items — International, and K-3, Partner's Share of Income, Deductions, Credits, etc. — International, and similar forms for S corporations.

She noted with appreciation that the IRS on Wednesday clarified that some entities did not have to file the schedules for 2021. But the schedules' instructions were revised during the current filing season, and affected entities are currently unable to e-file them, Lewis pointed out, potentially exacerbating existing challenges for both taxpayers and the IRS.

The Tax Professionals United for Taxpayer Relief Coalition also on Thursday released its letter dated Feb. 16 to the House Oversight Subcommittee in support of Collins's testimony there on Feb. 8 and restating the coalition's relief recommendations.

IRS resources and backlog

Several senators questioned the witnesses on issues of IRS funding and the Service's resources, particularly its outmoded and in some respects antiquated computer systems and processes that often rely on personnel performing manual tasks.

In describing the IRS's still "snowballing" backlog of unprocessed returns and correspondence, Collins reiterated her earlier assessment that the IRS is buried in paper. Clearing the backlog and putting the IRS in a stable and healthy condition will require expanding electronic submission and automating not just returns but other forms and taxpayer correspondence as well.

While e-filing can be efficient, "paper is different," Collins said.

"The IRS still transcribes paper line by line, number by number," Collins said. The Service received roughly 17 million original paper returns last year, and processing them has extended over 10 months.

"And still we have over 4 million amended returns that taxpayers are waiting to be processed," Collins said.

Lucas-Judy's testimony, which the GAO also released as a report Thursday, focused on challenges in the IRS's 2021 filing season, which included a tripling of taxpayer correspondence over 2019 levels and a fivefold increase in telephone calls.

Both Lucas-Judy and Collins pointed out the IRS's alternative for taxpayers' most likely reason for calling, its Where's My Refund? online portal, leaves much to be desired: It tells taxpayers at the beginning of the process that the Service has received a return and at the end that a refund has been authorized and sent, but little to no information about what happens in the meantime.

In response to a question from Sen. Ben Cardin, D-Md., about the impact of the IRS's problems on small businesses, Lewis said she is "passionate about" the issue, having grown up as the daughter of a pharmacist and store owner.

"It is burdensome, it is complex, but we're here to help in any way that we can," Lewis said. "But what's burdening my small business clients right now is the unending notices and not being able to reach the IRS."

February 16, 2022

By: Paul Bonner

The IRS provided transition relief Wednesday under which eligible passthrough entities will not have to file new Schedules K-2 and K-3 for tax year 2021. The relief is outlined in News Release IR-2022-38 and frequently asked questions on the IRS website ("Schedules K2 and K3 Frequently Asked Questions" — see FAQ 15).

Affected partnerships are required to file Schedule K-2, Partners' Distributive Share Items — International, and K-3, Partner's Share of Income, Deductions, Credits, etc. — International, with their Form 1065, U.S. Return of Partnership Income. The corresponding forms for S corporations to file with their Form 1120-S, U.S. Income Tax Return for an S Corporation, are K-2, Shareholders' Pro Rata Share Items — International, and K-3, Shareholder's Share of Income, Deductions, Credits, etc. — International.

The schedules, new for tax year 2021, have been the subject of widespread commentary among tax practitioners in the current return filing season, most of it unfavorable. They must be filed by partnerships, S corporations, and filers of Form 8865, Return of U.S. Persons With Respect to Certain Foreign Partnerships, with "items of international tax relevance," according to their instructions. The potentially wide reach of that rubric and difficulties inherent in finding and documenting those items have been the focus of much of the practitioners' expressed frustration.

The schedules are intended to make those international items less obscure for partners and shareholders needing the information to file their own returns. In stating that aim, the IRS has previously acknowledged the administrative burden the schedules impose and provided some transition relief last June, in Notice 2021-39.

The relief announced Wednesday applies where:

• In tax year 2021, the direct partners in the domestic partnership are not foreign partnerships, foreign corporations, foreign individuals, foreign estates, or foreign trusts. 
• In tax year 2021, the domestic partnership or S corporation has no foreign activity, including foreign taxes paid or accrued or ownership of assets that generate, have generated, or may reasonably be expected to generate foreign-source income (see Regs. Sec. 1.861-9(g)(3)).
• In tax year 2020, the domestic partnership or S corporation did not provide to its partners or shareholders, nor did the partners or shareholders request, the information on the form or its attachments regarding:
  • Line 16, Form 1065, Schedules K and K-1 (line 14 for Form 1120-S), and
  • Line 20c, Form 1065, Schedules K and K-1 (controlled foreign corporations, passive foreign investment companies, 1120-F, Sec. 250, Sec. 864(c)(8), Sec. 721(c) partnerships, and Sec. 7874) (line 17d for Form 1120-S).
• The domestic partnership or S corporation has no knowledge that the partners or shareholders are requesting such information for tax year 2021.

The IRS said earlier it was taking the step "in response to feedback we received from the tax community and our stakeholders."

The schedules are intended to provide greater clarity for partners and shareholders in computing their own income tax liability with respect to items of international tax relevance, in a standardized format. Previously, such information has been compiled in a variety of formats that may be difficult for partners to translate, the IRS stated. They replace and supplement the often cursory information formerly required to be entered on Schedule K-1, line 16, headed simply "Foreign transactions," which then often necessitated an attached document, but with no specified format or items of information.

In addition, the schedules are intended to help the IRS more efficiently verify compliance.

Practitioners may have felt misled when the IRS posted on its website a revision to the schedules' instructions about who must file them, said Ed Zollars, CPA, tax partner in Thomas, Zollars & Lynch Ltd. in Phoenix and lecturer and author for Kaplan Accounting Continuing Education, who has written about the issue. 

They may have construed the previous instruction that partnerships with no "items of international tax relevance (typically, international activities or foreign partners)" to mean that if they lacked foreign partners or foreign activities, they need not file.

But in a note on a webpage on Jan. 18, 2022, revising the partnership instructions, the IRS said that despite having no foreign-source income, assets generating it, and no foreign taxes paid or accrued, a partnership may still need to file the schedules if, for example, a partner claims a credit for foreign taxes the partner paid. Also, even if a partnership has only domestic partners, the schedules might be necessary if the partnership made certain deductible payments to foreign related parties of its partners.

Rereading the entire instructions in that light led to other unpleasant revelations, Zollars said, principally, the need in many cases to know whether each partner had any creditable foreign taxes.

"Just the act of getting that information from every partner would prove troublesome where the practitioner did not prepare the partners' returns," Zollars said.

The IRS issued draft versions of the schedules in July 2020. They are lengthy, with the final version of the partnership K-2 extending 19 pages and K-3 at 20 pages (both released in June 2021), and combined instructions covering 34 pages.

One surprise for many practitioners, besides the new schedules' complexity and length, has been the treatment of partners whose foreign or domestic status may be unclear (see Samtoy, "Complying With New Schedules K-2 and K-3," Tax Insider, Feb. 11, 2022). Although the latest IRS statement would seem to assure them that, without foreign partners, they will be excused from filing Schedules K-2 and K-3 this year, the difficulty of documenting partners' or shareholders' domestic status could remain.

"The schedules also require an in-depth understanding of technical rules that many tax professionals are not familiar with," said John Samtoy, CPA, a partner with HCVT in Irvine, Calif., and author of the Tax Insider article.

For example, Samtoy said, a practitioner preparing returns for rental real estate partnerships likely has never considered whether the partnership's qualified nonrecourse financing interest should be allocated at the partnership level or apportioned at the partner level.

"But they are now being asked to determine that on Schedule K-2 and Schedule K-3," he said.

Notice 2021-39 provided that, for tax year 2021, filers would not be subject to certain penalties if they could demonstrate a good-faith effort to comply by changing their systems, processes, and procedures for collecting and processing the relevant information, including obtaining information from partners, shareholders, or a controlled foreign partnership.

"But the assumption that everyone needed this foreign information was, for partnerships, not optional — so just not filing it would not be acting in good faith to attempt to comply," Zollars observed.

Meanwhile, tax software producers have struggled to implement a PDF attachment filing option for the schedules — which for now is the only available method. The IRS announced in December it would be ready to accept this data via the modernized e-File/extensible markup language e-filing protocol by March 20, 2022, for partnerships; in mid-June for S corporations; and not until January 2023 for filers of Form 8865 (see FAQ No. 7, on the IRS FAQ webpage).

When these practitioners checked their tax software for e-file status, in many cases, they got those March and June dates, causing a panic that virtually all passthroughs would need to go on extension," Zollars said.

Even so, obtaining a filing extension may be the best course for Schedules K-2/K-3 filers, while the Service continues to assess the situation, Samtoy said.

"I recommend talking to clients to make sure that they are aware of the requirements and the guidance that has been issued thus far," he said. "I would also consider filing extensions so that clients and preparers have time to consider any exceptions or relief that the IRS may announce."

In recent weeks there has been a big push by the AICPA, State CPA Societies as well as other organizations calling for continued ways to alleviate the burdens on taxpayers and tax professionals due to erroneous and automated notices.

We are thankful that our North Dakota representatives have been very responsive to our request for action.  Most recently, Senator Hoeven signed on to the following letter encouraging further action.

02.10.22 - Letter to Yellen and Rettig re tax filing season.pdf

February 10, 2022

By Paul Bonner

The IRS announced Wednesday in a news release the letters and notices it will not send taxpayers as it works through its backlog of unprocessed prior-year returns.

In a Jan. 27 announcement, the Service said it was suspending certain automated letters and notices without identifying them specifically, saying only that they included, for example, those for which it has received a payment but has no record of the corresponding tax return's having been filed. The IRS said it was doing so in recognition of the possibility that the return was in fact filed but had not yet been processed.

On Feb. 9, the IRS identified the letters and notices it is suspending and described their function. They include notices of unfiled returns and unpaid balances generally, including a final notice of an outstanding balance and intent to levy.

In a statement Thursday, the AICPA called the announcement a welcome step.

"We are encouraged by recent actions taken by the IRS to suspend more automated notices and pleased to know that the IRS is listening and acting," the AICPA said. "Taxpayers, practitioners, and IRS will benefit from reducing unnecessary contact, such as erroneous notices or warnings of levy, and provide much-needed relief during an already stressful and overwhelming tax season."

The AICPA said it continued, however, to urge the IRS to consider providing additional relief, until the Service "significantly and meaningfully" reduces its processing backlog.

These measures should include longer account holds, easier reasonable-cause relief, and expanded payment safe harbors, which are among four recommendations of the Tax Professionals United for Taxpayer Relief Coalition, of which the AICPA is part.

The IRS identified the suspended letters and notices as:

• CP80, notice of an unfiled tax return. The IRS sends this when it has credited payments or other credits to the taxpayer's account but has not received a tax return for the tax period.
• CP59, unfiled tax return, first notice. The IRS sends this when it has no record of a prior-year return's having been filed. The Spanish-language version, CP759, is included.
• CP516, unfiled tax return, second notice. This is a request for information on a delinquent return for which there is no record of filing. The Spanish-language version, CP616, is included.
• CP518, final notice — return delinquency. The Spanish-language version, CP618, is included.
• CP501, balance due, first notice. This letter is a reminder of an outstanding balance on the taxpayer's accounts.
• CP503, balance due, second notice.
• CP504 balance due, third and final notice. This also is a notice of intent to levy.
• 802C, withholding compliance letter. This letter notifies taxpayers whom the IRS has identified as having underwithheld taxes from their wages, with instructions on correcting their withholding amount.
• CP259, business return delinquency. The IRS has no record of a prior-year return's having been filed. The Spanish-language version, CP959, is included.
• CP518, final notice of a business return delinquency. The Spanish-language version, CP618, is included.

How long the letters and notices will be suspended or at what point the backlog can be considered sufficiently cleared to resume them remains unclear. The news release Feb. 9 said the IRS "will continue to assess the inventory of prior year returns to determine the appropriate time" to start sending them again. And there has been no mention of relieving taxpayers from their obligation to file returns or pay taxes that are the subject of the letters and notices, if those returns and taxes are indeed unfiled and unpaid.

The IRS encouraged taxpayers who believe they do have such an unfulfilled obligation to meet it. But if they receive a notice or letter they believe is incorrect because they have filed the return or made the payment it concerns, they need take no further action. Despite the suspension, some erroneous letters and notices may still be sent out, the IRS warns.

The IRS also reiterated its determination to reduce its backlog, even as the current filing season places renewed demands on its processing functions. In an internal memo on Feb. 2, IRS Commissioner Charles Rettig called for "all hands on deck" to bolster the Service's accounts management function, by temporarily reassigning personnel there.

In testimony before the House Ways and Means Committee on Tuesday, National Taxpayer Advocate Erin Collins noted that as of late December, the IRS had a backlog of 6 million unprocessed individual returns and 2.3 million unprocessed amended individual returns. In addition, more than 2 million Forms 941, Employer's Quarterly Federal Tax Return, and its amended version remained unprocessed. Many of the latter included claims of the employer retention credit emergency pandemic relief provision.

Roughly 17 million original returns were filed last year on paper, which have taken the IRS as long as 10 months to process, Collins said. They include about 3 million returns still awaiting scanning and manual transcription into IRS computer systems, she said.

January 10, 2022

By Paul Bonner

The IRS will begin accepting and processing 2021 tax returns starting Jan. 24, the Service announced Monday.

In News Release IR-2022-08, the IRS stated the date will allow it time to perform necessary programming and testing in advance of return filing, which it urged taxpayers and paid preparers to do electronically.

"Filing electronically with direct deposit and avoiding a paper tax return is more important than ever this year," IRS Commissioner Chuck Rettig said in the release.

Rettig acknowledged that the Service is still processing some tax year 2020 returns. All paper and e-filed returns with refunds owed that were received before April 2021 have been processed if they did not contain any errors or require further review; however, as of Dec. 23, 2021, there were still some 6 million unprocessed individual returns. And the Service has struggled to answer a record number of taxpayer and preparer phone calls, Rettig said.

"In many areas, we are unable to deliver the amount of service and enforcement that our taxpayers and tax system deserves and needs," Rettig said. "This is frustrating for taxpayers, for IRS employees, and for me."

This year, return processing may be complicated for taxpayers claiming monthly advance payments of the child tax credit, who must reconcile the total advance amount against their child tax credit for all of 2021. The IRS noted that it began late last month and is continuing to send affected taxpayers Letter 6419, 2021 Advance Child Tax Credit, which reports their total advance payments for the year. Taxpayers may also verify their advance payments on the IRS's CTC Update Portal.

Taxpayers who received the third economic impact payment during 2021 should receive Letter 6475, Your Third Economic Impact Payment, to help them and their preparers determine whether they are eligible to receive a rebate recovery credit for missing stimulus payments.

The IRS Free File program, which allows taxpayers with income of $73,000 or less in 2021 to self-prepare and e-file their federal return using commercial tax preparation software for no charge, will open Jan. 14.

For more on preparing 2021 returns, see "Spotlight on Tax Season," JofA, Jan. 1, 2021.

Returns and payments for most individuals will be due April 18, 2022, because of a weekend and Emancipation Day, a Washington, D.C., holiday. However, taxpayers who live in Maine or Massachusetts must file their returns and pay tax by April 19 due to the Patriots' Day holiday in those states. The extended due date for individual returns is Oct. 17.

For 2020 returns, the IRS began accepting returns on Feb. 12, 2021, citing programming changes needed for tax legislation passed in late 2020.

The Service noted Monday that by law, it cannot issue refunds for returns that involve the earned income tax credit or additional child tax credit before mid-February, although taxpayers claiming those credits may file their returns as early as Jan. 24.

— To comment on this article or to suggest an idea for another article, contact Paul Bonner at Paul.Bonner@aicpa-cima.com.

Download and print this quick guide for use during tax season, and look for our quick guide for individual taxpayers in the January 2022 issue.

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