Most people do not like going to their mailbox and finding a letter from the IRS. However, more than 109,000 taxpayers recently received a letter (designated by the IRS as a “Notice CP21C”) informing them the IRS was offsetting their Economic Impact Payment (EIP). The IRS issues letters such as a CP21C when informing taxpayers of account adjustments.

• The critical news: The letters were wrong, as I explain below. The letter was supposed to have said that the IRS couldn’t issue the first EIP (EIP1) to the taxpayer because the IRS hadn’t processed the taxpayer’s 2019 return and there was no 2018 return on which to base that EIP.
• The bad news: The IRS couldn’t issue EIP1 to taxpayers who didn’t submit a timely claim or return or for whom the IRS had not issued a payment by December 31, 2020. These are the taxpayers who received the CP21C Letter.
• The good news: Taxpayers can disregard the notice and eligible individuals can claim the Recovery Rebate Credit (RRC) on their 2020 tax return.
• But more bad news: Taxpayers will have to wait to receive the RRC until their 2020 return processes, and the RRC is subject to regular offset rules for unpaid federal tax liabilities and certain other debts (such as child support or state income tax obligations).

The IRS’s Letter

The IRS’s more than 109,000 CP21C letters informed the recipient, “We applied a credit to your 2007 [that is not a typographical error!] tax account due to new legislation. We used (offset) all or part of your economic stimulus payment to pay your federal tax as the law allows … As a result, you don’t owe us any money, nor are you due a refund.” Unsurprisingly, the letter directs the taxpayer to a general phone number to resolve this issue. Equally unsurprisingly, taxpayers will face more frustration because the official level of service so far in 2021 is 14 percent on the Accounts Management telephone lines, down from 61 percent for the same period last year, and employees have answered only nine percent of taxpayer calls. The CP21C letter may very well drive the more than 109,000 recipients to the phone lines on the cusp of filing season when taxpayers may already be struggling with filing and RRC questions. The letter and taxpayers’ phone experience may both escalate taxpayer frustration.

The IRS’s Response: The Question and Answer Page on IRS.gov

The IRS added Questions and Answers(Q/A) to its coronavirus tax relief site on January 28 which explains that the notices were issued in error. The Q/A says the notice was intended to inform taxpayers that the IRS must mail or issue EIP1 by December 31, 2020, and that the IRS was unable to process their 2019 tax return in time to issue EIP1.

But what about directly informing the more than 109,000 taxpayers that the information in its CP21C letter was incorrect? My office is working with the IRS and has recommended that these 109,000 taxpayers receive a subsequent notice explaining the error.

The IRS’s Information Technology (IT) Challenges Are a Root of the Problem

We shouldn’t be baffled by yet another correspondence debacle. As I discussed in my 2020 Annual Report to Congress, Most Serious Problem #6, Antiquated Technology Jeopardizes Current and Future Tax Administration, Impairing Both Taxpayer Service and Enforcement Efforts, the IRS is overwhelmingly reliant on “legacy” IT systems. The IRS’s IT function defines these systems as those that are at least 25 years old, use obsolete programming languages (e.g., Common Business-Oriented Language), or lack vendor support, training, or resources to maintain. Issuing the CP21C may be an example of this — it was a remnant from 2008, when economic stimulus payments were subject to offset. Although the IRS is making efforts to improve its IT infrastructure and processes, as described in its six-year Integrated Modernization Business Plan as well as in its recently released Taxpayer First Act Report to Congress, the IRS cannot implement this modernization plan until Congress provides adequate funding — which is outside the IRS’s control. Not only must Congress provide the IRS with sufficient appropriations, but such funding must be consistent and reliable from year to year.

I renew my call to Congress to fund the IRS’s IT infrastructure to make it robust, nimble, and customer friendly. Regrettably, taxpayers are once again caught in the mire of the IRS’s challenges to issue correct correspondence.

TAS Is Advocating That the IRS Waive the Offset of Refunds Against Federal Tax Debts for Certain Taxpayers Who Claim the RRC on Their 2020 Tax Returns

The CP21C letter debacle presents yet another issue related to the IRS’s administration of the two EIPs. As I discussed in my January 28 blog post, the Consolidated Appropriations Act, 2021 (CAA) revised the Coronavirus Aid, Relief, and Economic Security (CARES) Act Section 2201(d), the section authorizing EIP1, subjecting the RRC claimed on a 2020 individual federal income return to regular offset rules for unpaid federal taxes and certain other debts. This means that RRCs are treated differently from EIPs solely based on when the IRS pays this benefit. I continue to advocate for the IRS to explore exercising its discretion to help vulnerable taxpayers experiencing economic hardship by utilizing its Offset Bypass Refund (OBR) authority to bypass offset of their refunds to repay federal tax debts.

I recognize the IRS faces many challenges in administering the two EIP programs. At the same time, I recognize that many taxpayers are facing even greater challenges as the pandemic continues to adversely affect us all. As the pandemic continues to negatively impact taxpayer services with no immediate relief in sight, I strongly encourage the IRS to continue to provide relief to vulnerable individuals to the maximum extent possible.