The IRS’s backlog in processing 2020 and 2021 returns has caused the service to issue a memorandum[1] with special procedures for handling offers in compromise where the taxpayer’s 2020 and/or 2021 return has not yet been processed by the IRS.

The IRS was facing a massive backlog of returns as of May 1, 2021 per information provided by Erin Collins, the National Taxpayer Advocate in a Senate Hearing.[2] This backlog of over 30 million unprocessed returns is creating problems for processing offers in compromise, as the officer attempting to process an offer may be unable to access the filings for the last two years—and not know if that is because the taxpayer has not filed those forms or they are just stuck somewhere in the backlog.

The memorandum provides temporary guidance through September 30, 2021 for employees of the Specialty Collection Offer in Compromise (SCOIC) section when an Individual Master File (IMF) or Business Master File (BMF) may not have been processed due to the IRS’s issues revolving around the COVID-19 pandemic. The memorandum temporarily changes procedures found in various sections of the Internal Revenue Manual.

The memorandum’s first section is entitled “Procedural Change — IRM 5.8.2 — Process Examiners (PE)” and provides:

If a Tax Year (TY) 2019 or 2020 IMF return (or a TY 2020 BMF return, as applicable) is not located, process the incoming offer until notified that IRS has processed all returns. At this time, do not return as not-processable if there is an unfiled TY 2019 or TY 2020 IMF return or unfiled TY 2020 BMF return. An OE or OS will need to address these returns during the investigation of the offer and update the AOIC Remarks.

The current guidance under IRM 5.8.2.4.1(4), Unfiled Tax Returns (Both IMF/BMF), states that offers submitted where IDRS does not indicate a required return has been received will be deemed not processable. Under this temporary deviation, until all backlogged IMF and BMF returns (as applicable) are processed, do not return as not processable for unfiled returns. (emphasis added) Forward to the appropriate OE/OS inventory. Update comments on AOIC to state the following: No return(s) on file for (insert MFT and tax period for the missing returns). Offer forwarded to (insert inventory number, for example, 6000).[3]

The second section is entitled “Procedural Change — IRM 5.8.7 — Offer Examiners (OE) and Offer Specialists (OS)” and reads:

If the taxpayer provides evidence of filing, do not return the offer until IRS has processed all backlogged IMF and BMF returns, as applicable. If the offer is acceptable and the returns will have a balance due, hold the offer open until the return has processed. If the TIPRA mandatory acceptance date is within 90 days and the balance due return has not posted, advise the taxpayer that you can continue to recommend acceptance, but without the liability and they will have to fully pay the new balance due when they receive notice. The taxpayer can also choose to withdraw the offer and wait for the assessment.

The current guidance under IRM 5.8.7.2.2.1(2) states that if the return has not posted or is not pending and the offer is going to be accepted, schedule follow-ups during the eight-week period after the due date of the return for the posted return. Under this temporary deviation, until all backlogged IMF and BMF returns (as applicable) are processed, do not return for filing compliance issues.[4]

The final segment is entitled “Procedural Change — IRM 5.19.7 — MOIC Tax Examiners (TE)” and reads:

If the taxpayer provides evidence of timely filing, do not default the accepted offer until IRS has processed all backlogged IMF and BMF returns, as applicable.

The current guidance under IRM 5.19.7.14.4.1(2) states to allow ten (10) weeks for an IMF return and twenty (20) weeks for a BMF return to post to the master file. Under this temporary deviation, until all backlogged IMF and BMF returns (as applicable) are processed, do not default an accepted OIC for failure to adhere to compliance terms.

[1] SBSE-06-0621-0029, release date June 16, 2021 (memorandum date June 1, 2021), https://www.taxnotes.com/research/federal/other-documents/other-irs-documents/memo-provides-temporary-oic-process-due-to-backlogged-returns/76mlk (retrieved June 16, 2021)

[2] Written Statement of Erin M. Collins, National Taxpayer Advocate, Hearing on Internal Revenue Service: Narrowing the Tax Gap and Improving Taxpayer Services, before the Subcommittee on Financial Services and General Government, Committee on Appropriations, United States Senate, May 19, 2021, p. 6, https://www.irs.gov/pub/irs-utl/national-taxpayer-advocate-testimony-senate-approps-fsgg-hearing-5-19-2021.pdf (retrieved June 16, 2021)

[3] SBSE-06-0621-0029, release date June 16, 2021 (memorandum date June 1, 2021)

[4] SBSE-06-0621-0029, release date June 16, 2021 (memorandum date June 1, 2021)