After Forbes reported in early July that starting a month earlier, tax professionals had noticed a higher-than-usual volume of CP-14 notices — the type typically issued when a taxpayer has a balance due on their account — the IRS has finally admitted that this is a systemic issue.

In a statement issued last week, the IRS indicated that no immediate action or phone call is needed: Taxpayers who receive a notice but paid the tax they owed in full and on-time (electronically or by check) should not respond to the notice.

However, many taxpayers are scared and confused by letters such as this — and they may not know how to determine whether they did in fact pay their taxes on-time. Maybe the check was lost in the mail; maybe they selected the wrong period or type of payment when using the IRS Direct Pay system; maybe they reported their estimated tax payments inaccurately. Unfortunately, because tax issues can be terrifying, it’s not uncommon to presume the IRS is correct and pay any balance due on a notice.

Never fear — there are solutions. The IRS online transcript service has undergone improvements in the past few years that make it relatively painless to obtain a PDF of all payment and return activity on your account. In fact, due to the number and complexity of governmental aid such as stimulus checks and the advance child tax credit, our CPA firm requires clients to obtain a transcript before we will finalize their return preparation (I’ve written up instructions here). And the IRS Online Account Center also lists other types of useful information taxpayers can access.

But… this all begs the important question: why did this happen?

According to Amber Gray-Fenner at Forbes, “In early June tax professionals on social media started reporting problems with electronic payments made by the taxpayer listed as the spouse on jointly filed returns. Specifically, CP-14 notices were being issued for accounts where an electronic payment was made by a spouse using IRS Direct Pay and the payment was not applied to the balance due on the jointly filed return.”

Accounting Today reported that, “In general, when certain payments are processed, programming does not move the payment to the married filing jointly account when the payment is:

• Not electronic and is made by the secondary spouse.
• Electronic, is made by the secondary spouse, and posts before the joint return indicator is present to identify the primary taxpayer.
• Made by the secondary spouse using the Online Account ‘Make a Payment’ functionality.”

While this does line up with most of the issues tax professionals and their clients are seeing with these CP-14 balance due notices, it doesn’t jibe with our experience in past years. Spouses with separate tax payments have been filing jointly for many years, and the IRS Direct Pay system is not new — yet the number of these erroneous notices is far higher than in previous seasons.

Back to Amber Gray-Fenner at Forbes:

Some tax professionals who have called the IRS’ Practitioner Priority Line (PPL) on behalf of their clients have been told by some IRS representatives that “there is no way of knowing” that the payment is for the jointly filed return and not some other tax debt that is attached to the spouse’s social security number. This is, quite simply, not correct. When making a payment using Direct Pay taxpayers must specify a reason for the payment (balance due, estimated payment, etc.), the tax form to which the payment applies (Form 1040, etc.) and the tax year to which the payment applies.

If the spouse of a taxpayer makes a Direct Pay payment for a balance due on a Form 1040 for a year that they filed jointly with their spouse (the primary taxpayer on the jointly filed return) there is really no reason that payment should not be automatically and correctly applied.

However, this is what the IRS currently maintains is the source of the problem. Complicating matters, the second bullet above — the one that references the “joint return indicator” — is specifically referring to taxpayers who e-filed and paid on the same day, and the payment was made by the second partner on the return. In this case, if the payment was made and posted to the IRS system before the return was electronically accepted and posted, it sounds like the IRS computers didn’t know that the balance due payment was related to the jointly filed return.

Now that the overburdened and understaffed agency recognizes that this is a systemic issue — after thousands of tax professionals reported it to the IRS Systemic Advocacy Management System (SAMS) — hopefully they will be able to rectify it soon (automatically removing the associated penalties and interest)… and more importantly, prevent it from causing problems next year. The AICPA has mentioned numerous times on their regular Town Hall series that erroneous notices just compound the problems at the IRS. They aren’t just stress-inducing for the client and irritating for their CPAs — they actually further gum up the works at an already struggling government agency. The IRS has as a result, put a temporary hold on certain types of automated notices, but the CP-14 is unfortunately not on the list.

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