The Good, the Bad, and the Ugly: The Impact of the Goverment Shutdown on Taxpayers and the IRS

In the mid-1960’s there were a series of popular Western film, produced in Europe by Italian film makers that came to be known as “spaghetti westerns”. These films include “A Fistful of Dollars”, “For a Few Dollars More” and “The Good, the Bad and the Ugly” all starring Clint Eastwood and directed by Italian director Sergio Leone. “The Good, the Bad and the Ugly” is widely regarded as one of the greatest and most influential westerns of all time and any time I run across it while scanning the channels, I immediately stop down for a viewing. In addition to Eastwood (the Good), the movie included Lee Van Cleef (the Bad) and Eli Wallach (the Ugly). The plot revolves around three gunslingers competing to find a fortune in a buried cache of Confederate gold amid the violent chaos of the Civil War. The movie also includes one of the most well-known movie songs in movie history, available here.

As we all know the federal government, including the IRS, has been shutdown for almost three weeks and there does not appear to be any end in sight. The potential impact of this shutdown on taxpayers and the IRS is best described as good, bad and ugly. The IRS contingency plan for the government shutdown can be found here.

The Good

While the government is shutdown, the IRS is working on a short staff of essential personnel. We know that roughly half of the workforce has been furloughed until further notice. As a result, most IRS activity, including examinations have stopped and the IRS is not starting new examinations. However, the statute of limitations for the IRS to assess additional tax, typically three years from the date a tax return is filed, is not stayed and continues to run. Likewise, the statute of limitations for IRS collection, typically ten years, is not stayed and continues to run during a government shutdown. The longer the stalemate in Washington lasts, the more likely statute of limitations for assessment and collection will run. When the shutdown is over, the IRS may ask taxpayers about extending statutes of limitations. Before agreeing to do so, taxpayers should consult with a competent tax advisor to discuss whether an extension makes sense in their situation.

The Bad

Taxpayers usually have three years from the filing date or two years from the payment date, whichever is later, to claim a refund. Even if IRS staffers are unavailable to process claims or sign agreements extending the statute of limitations, the refund clock keeps ticking. In addition, if the IRS has denied a refund claim, a taxpayer has two years from the date of the denial to file a refund lawsuit in federal court. Importantly, that lawsuit clock also keeps ticking even if the taxpayer filed a protest with the IRS Office of Appeals. Any taxpayer who intends to file a refund claim, has a pending refund claim or a refund denial pending in the office of appeals should keep a close eye on the refund clock and know the deadline for filing. This should be of particular interest to any business that has a pending ERC claim.

The Ugly

The ugly is that there is no one available at the IRS to open the mail, respond to taxpayer or tax advisor questions, process refund claims or issue refund checks. In addition, interest and penalties continue to accrue on any underpayment. It is likely that any automated functions, like automated collection notices, lien filings and the like will continue. A taxpayer who receives a collection notice will be hard pressed to find someone at the IRS with whom to discuss the notice. The bottom line is that we are looking at longer wait times and delayed responses from an agency that was already struggling to respond in a timely manner.

The Bottomline for Taxpayers

1. Keep an eye on those filing deadlines.

2. File early (and electronically) where possible to reduce exposure to delays.

3. Use direct deposit for refunds to minimize waiting.

4. Keep copies and documentation in case you need to follow up after the shutdown.

5. If you owe taxes, pay by the deadline to avoid further penalties/interest.

6. Be patient and monitor IRS communications — once funding returns, agencies often issue guidance or catch-up plans for delayed cases.

For questions regarding this blog post or any other civil or criminal tax related matter, please feel free to contact me at jcrouch@meadowscollier.com.