Federal housing law
0619 Publ 4054-C (PDF)
Federal housing law as enacted — verbatim and citable.
- Edition
- 2026-10-03
- Last updated
- 2026-10-04
- Jurisdiction
- United States
Official source: IRS Forms, Instructions & Publications (https://www.irs.gov/pub/irs-pdf/p4054c.pdf), retrieved 2026-10-03. U.S. Government work (17 U.S.C. § 105).
Volume 2¶
NATIONAL TAXPAYER ADVOCATE¶
to Congress¶
Fiscal Year 2020¶
IRS Responses and National Taxpayer Advocate’s Comments Regarding Most Serious Problems…¶
www.TaxpayerAdvocate.irs.gov/ObjectivesReport2020¶
Table of Contents¶
INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
IRS AND TAS RESPONSES
The Prefiling Stage: Taxpayer Access to Information
TAX LAW QUESTIONS: The IRS’s Failure to Answer the Right Tax Law Questions at the Right Time Harms Taxpayers, Erodes Taxpayer Rights, and Undermines Confidence in the IRS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
TRANSPARENCY OF THE OFFICE OF CHIEF COUNSEL: Counsel Is Keeping More of Its Analysis Secret, Just When Taxpayers Need Guidance More than Ever . . . . . . . . . . . . 7
NAVIGATING THE IRS: Taxpayers Have Difficulty Navigating the IRS, Reaching the Right Personnel to Resolve Their Tax Issues, and Holding IRS Employees Accountable . . . . 13
The Return Filing Process: Balancing Ease and Efficiency with Revenue Protection
FREE FILE: The IRS’s Free File Offerings Are Underutilized, and the IRS Has Failed to Set Standards for Improvement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
FALSE POSITIVE RATES: The IRS’s Fraud Detection Systems Are Marred by High False Positive Rates, Long Processing Times, and Unwieldy Processes Which Continue to Plague the IRS and Harm Legitimate Taxpayers . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
IMPROPER EARNED INCOME TAX CREDIT PAYMENTS: Measures the IRS Takes to Reduce Improper Earned Income Tax Credit Payments Are Not Sufficiently Proactive and May Unnecessarily Burden Taxpayers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
RETURN PREPARER OVERSIGHT: The IRS Lacks a Coordinated Approach to Its Oversight of Return Preparers and Does Not Analyze the Impact of Penalties Imposed on Preparers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
The Examination Process: Minimizing Taxpayer Burden in the Selection and Conduct of Audits
CORRESPONDENCE EXAMINATION: The IRS’s Correspondence Examination Procedures Burden Taxpayers and Are Not Effective in Educating the Taxpayer and Promoting Future Voluntary Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
FIELD EXAMINATION: The IRS’s Field Examination Program Burdens Taxpayers and Yields High No Change Rates, Which Waste IRS Resources and May Discourage Voluntary Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
OFFICE EXAMINATION: The IRS Does Not Know Whether Its Office Examination Program Increases Voluntary Compliance or Educates the Audited Taxpayers About How to Comply in the Future . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62
POST-PROCESSING MATH ERROR AUTHORITY: The IRS Has Failed to Exercise Self-Restraint in Its Use of Math Error Authority, Thereby Harming Taxpayers . . . . . . . 68
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The Notice Function: IRS Written Communication with Taxpayers
MATH ERROR NOTICES: Although the IRS Has Made Some Improvements, Math Error Notices Continue to Be Unclear and Confusing, Thereby Undermining Taxpayer Rights and Increasing Taxpayer Burden . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
STATUTORY NOTICES OF DEFICIENCY: The IRS Fails to Clearly Convey Critical Information in Statutory Notices of Deficiency, Making It Difficult for Taxpayers to Understand and Exercise Their Rights, Thereby Diminishing Customer Service Quality, Eroding Voluntary Compliance, and Impeding Case Resolution . . . . . . . . . . . . 80
COLLECTION DUE PROCESS NOTICES: Despite Recent Changes to Collection Due Process Notices, Taxpayers Are Still at Risk for Not Understanding Important Procedures and Deadlines, Thereby Missing Their Right to an Independent Hearing and Tax Court Review . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87
The IRS Collection Function: Minimizing Taxpayer Burden and Addressing Taxpayers’ Ability to Pay
ECONOMIC HARDSHIP: The IRS Does Not Proactively Use Internal Data to Identify Taxpayers at Risk of Economic Hardship Throughout the Collection Process . . . . . . . . 92
FIELD COLLECTION: The IRS Has Not Appropriately Staffed and Trained Its Field Collection Function to Minimize Taxpayer Burden and Ensure Taxpayer Rights Are Protected . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 99
IRS’S AUTOMATED COLLECTION SYSTEM (ACS): ACS Lacks a TaxpayerCentered Approach, Resulting in a Challenging Taxpayer Experience and Generating Less Than Optimal Collection Outcomes for the IRS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 106
OFFER IN COMPROMISE: Policy Changes Made by the IRS to the Offer in Compromise Program Make It More Difficult for Taxpayers to Submit Acceptable Offers . . . . 114
PRIVATE DEBT COLLECTION: The IRS’s Expanding Private Debt Collection Program Continues to Burden Taxpayers Who Are Likely Experiencing Economic Hardship While Inactive Private Collection Agency Inventory Accumulates . . . . . . . . . . . . . . . 119
The Litigation Stage: Access to Representation
- PRE-TRIAL SETTLEMENTS IN THE U. S. TAX COURT: Insufficient Access to Available Pro Bono Assistance Resources Impedes Unrepresented Taxpayers From Reaching a Pre-Trial Settlement and Achieving a Favorable Outcome . . . . . . . . . . . . . . . . . . . . . 125
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Introduction IRS and TAS Responses
INTRODUCTION¶
Honorable Members of Congress:
Internal Revenue Code (IRC) § 7803(c)(2)(B)(ii)(III) requires the National Taxpayer Advocate to prepare an Annual Report to Congress that, among other things, contains a summary of the Most Serious Problems encountered by taxpayers. For 2018, the National Taxpayer Advocate identified, analyzed, and offered recommendations to assist the IRS and Congress in resolving 20 such problems. 1
In this volume, we are publishing the IRS’s responses to our recommendations.
By way of background, IRC § 7803(c)(2)(B)(iii) requires the National Taxpayer Advocate to submit her reports “directly” to the House Committee on Ways and Means and the Senate Committee on Finance “without any prior review or comment from the Commissioner, the Secretary of the Treasury, the Oversight Board, any other officer or employee of the Department of the Treasury, or the Office of Management and Budget. ” This provision protects the independence of the National Taxpayer Advocate’s perspective. For that reason, the Office of the Taxpayer Advocate does not share its recommendations to address identified problems before its reports are submitted to the tax-writing committees.
However, we believe it is important that Members of Congress and the taxpaying public have an opportunity to read and assess the IRS’s perspective on these issues. IRC § 7803(c)(3) provides that when the National Taxpayer Advocate submits recommendations to the Commissioner, “[t]he Commissioner shall establish procedures requiring a formal response … within 3 months. ” I submitted all recommendations in the “Most Serious Problems” section of the National Taxpayer Advocate’s report to the Commissioner shortly after publication, and the Commissioner has fulfilled his statutory responsibility by providing written responses to these recommendations.
In this volume, we present the problems, recommendations, and responses in the following format:
■■ A problem statement for each Most Serious Problem from the 2018 Annual Report;
■■ A summary analysis of the problem; 2
■■ The National Taxpayer Advocate’s recommendations to address the problem;
■■ The IRS’s narrative response;
■■ The National Taxpayer Advocate’s comments on the IRS’s narrative response; and
■■ A table showing the IRS’s responses and actions relating to each recommendation along with the
National Taxpayer Advocate’s response.
1 See National Taxpayer Advocate 2018 Annual Report to Congress, https://taxpayeradvocate.irs.gov/2018annualreport. 2 The complete analysis of the problem is available in the full text of the 2018 Annual Report to Congress, posted at http://www.irs.gov/Advocate/Reports-to-Congress.
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I hope you find these additional perspectives useful in understanding the major problems taxpayers encounter in their dealings with the IRS and in fulfilling your oversight responsibilities.
Respectfully submitted,
Nina E. Olson National Taxpayer Advocate July 31, 2019
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TAX LAW QUESTIONS: The IRS’s Failure to Answer the Right Tax Law Questions at the…¶
PROBLEM
In 2014, the IRS implemented a policy to only answer tax law questions during the filing season, roughly from January through mid-April of any year. It justified this abrupt change in policy as a costsavings effort in a time of budget constraints. This change does not comport with an agency charged with administering the tax law and focused on the customer experience.
Taxpayers have ever-changing tax situations year-round. People move, open a business, close a business, get married, get divorced, have children, and experience many other life changes that affect their tax obligations. Forcing taxpayers into a 3.5-month window to ask questions or making it necessary for them to seek advice from a third-party source can be frustrating and costly to the taxpayer and result in eroded trust and confidence in the IRS.
ANALYSIS
The IRS designates certain tax law topics as out-of-scope, meaning it does not provide answers to taxpayers who call or visit the IRS inquiring about those issues. The IRS does not track what taxpayers ask about if the topic is out-of-scope. Failing to do so limits the ability of the IRS to determine if there is sufficient demand for information about a topic to consider declaring the topic in-scope. Providing taxpayers timely and accurate answers to their tax law questions is crucial to helping taxpayers understand and meet their tax obligations and is fundamental to the right to be informed. If a taxpayer cannot find answers from the IRS, it undermines all taxpayer rights. Testing by TAS in spring and fall of 2018 revealed inconsistent service by the IRS in answering tax law questions on the phone. Despite assurances from the IRS that it would answer Tax Cuts and Jobs Act questions year-round, TAS test calls revealed that employees were not able to answer even basic questions about the new tax law. The IRS has many tools available to meet the needs of taxpayers and ensure that taxpayers can find the assistance they need promptly. By meeting taxpayers where they are, whether on the phone or online, more taxpayers will be able to get answers to their tax law questions.
TAS RECOMMENDATIONS
[1-1] Answer in-scope tax law questions year-round.
[1-2] Deem all questions related to the new tax law as in-scope for a reasonable period of at least two
years and evaluate taxpayer demand prior to declaring topics out of scope.
[1-3] Track calls and contacts about out-of-scope topics and develop Interactive Tax Law Assistant
(ITLA) scripts for frequently asked questions or consider declaring topics in-scope.
[1-4] Develop a method to respond to uncommon or complex questions ( i.e ., those that are out-of scope for the phones and TACs) via email or call back to the taxpayer, such as utilizing artificial intelligence and pattern recognition.
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IRS RESPONSE
Currently, the IRS provides tax law guidance year-round to taxpayers through a variety of applications and tools on IRS.gov. Taxpayers can find tax law information 24 hours a day, 7 days a week, at IRS. gov. Through IRS.gov, taxpayers have access to numerous Publications, Tax Topics, Frequently Asked Questions, and Tax Trails. Many taxpayers are also able to find answers to common tax law questions while using guided tax software when self-preparing their return.
One of the self-service options on IRS.gov is the Interactive Tax Assistant (ITA) application, in which taxpayers can easily work through a series of questions to obtain responses to their tax law questions. Currently, there are over 40 ITA topics available. Annually we assess whether the existing ITA topics are still relevant to current tax law and whether additional topics should be added.
In March 2018, with the implementation of the Tax Cuts and Job Act (TCJA), we began answering tax law questions on our toll-free telephone line and at the Taxpayer Assistance Centers (TACs) for those taxpayers who had questions regarding the tax law changes. Since the TCJA legislation is the most sweeping change regarding tax law in over 30 years, representatives trained in tax law will continue to answer in-scope tax reform inquiries through the end of calendar year 2019. We are currently evaluating our future in-scope TCJA tax law service delivery. Additionally, we will monitor and analyze data and feedback on this service to improve the overall taxpayer experience.
In addition to the IRS.gov online services and the telephone and TAC services mentioned above, the IRS provides tax law assistance on the telephone year-round for several subject areas, including Affordable Care Act, International, TaxExempt/Government Entities, Business Master File (Employment Tax), and Special Services (Disaster, Combat Zone, etc.).
Beginning with the filing season for tax year 2018 returns, taxpayers may refer to the new Publication 5307, Tax Reform Basics for Individuals and Families, and Publication 5318, Tax Reform What’s New for Your Business, for all tax reform changes. These documents provide an overall summary of the new tax law and provide information to assist taxpayers with filing concerns and questions. These documents are readily available for download on IRS.gov.
TAXPAYER ADVOCATE SERVICE COMMENTS ON IRS RESPONSE
Meeting the needs of taxpayers requires continually reviewing and revising strategies for answering taxpayer questions. The National Taxpayer Advocate is pleased the IRS has agreed to implement or study the feasibility of most of the recommendations from this Most Serious Problem.
However, the National Taxpayer Advocate is concerned that the IRS has only committed to answering in-scope tax reform inquiries through the end of this calendar year. The National Taxpayer Advocate strongly encourages the IRS to answer all questions related to tax reform at least through the end of calendar year 2020, thereby allowing taxpayers two full years to receive live, year-round assistance with tax reform questions.
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TRANSPARENCY OF THE OFFICE OF CHIEF COUNSEL: Counsel Is Keeping More of Its Analysis…¶
PROBLEM
The IRS Office of Chief Counsel (OCC) provides advice to headquarters employees called Program Manager Technical Advice (PMTA). PMTAs must be disclosed to the public pursuant to a settlement with Tax Analysts. Due to the Tax Cuts and Jobs Act (TCJA), taxpayers need prompt guidance now more than ever. Notwithstanding their increased need for guidance, the OCC: (1) has been disclosing fewer PMTAs; (2) allows its attorneys to avoid disclosure by issuing advice as an email, rather than a memo; (3) has not issued written guidance to its attorneys describing what must be disclosed as PMTA; and (4) has no systems to ensure all PMTAs are timely identified, processed as PMTAs, and disclosed.
ANALYSIS
The right to be informed is the first right listed in the Taxpayer Bill of Rights for good reason. If taxpayers do not know the rules and why the IRS has adopted them, they cannot determine if they should exercise their other rights ( e.g., the right to challenge the IRS’s position and be heard or the right to appeal an IRS decision in an independent forum ). Information about how the OCC interprets the law also helps them avoid taking positions that would incur penalties or ensnare them in audits or litigation. In its formal response to TAS, however, the OCC does not acknowledge that a function of its advice is “to inform taxpayers or practitioners about how it interprets the law,” and says its failure to do so “is not a problem that taxpayers have” and “is not a serious problem encountered by taxpayers.” Accordingly, it has declined to specify in writing what advice must be disclosed as PMTA, except to say that documents other than memoranda ( e.g ., email) need not be disclosed. It also has no procedures to ensure PMTAs are timely identified. The results are predictable. Although it released 68 PMTA following tax law changes in 1998, it has released only 11 in 2018. Only one of these related to the TCJA, and it was released only because of a request by the IRS, not because of the settlement with Tax Analysts.
TAS RECOMMENDATIONS
[2-1] Develop clear written guidance that defines when advice constitutes PMTA that must be
disclosed.
[2-2] Require disclosure of any advice that is, in substance, PMTA. For example, the OCC’s guidance
should not permit attorneys to withhold advice because of its form or mode of transmission ( e.g ., email), because of the title of the recipient, or because a business unit does not want the advice to be disclosed.
[2-3] Establish a written process to monitor whether advice that should be disclosed as PMTA is
being identified and disclosed to the public in a timely manner. For example, consider aiming to disclose PMTAs no later than when the IRS issues guidance ( e.g ., FAQs, Publications, News Releases, IRMs, etc.) that reveals the agency’s position.
[2-4] Incorporate the new PMTA guidance and monitoring procedures into the Chief Council
Directives Manual, distribute it at PMTA training classes, and release it to the public.
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IRS and TAS Responses Introduction
IRS RESPONSE
The Office of Chief Counsel (Counsel) provides formal written legal advice to program managers when, in the exercise of professional judgment, it is appropriate to the issues being considered, the context of the request for advice, and the need of the office to set out a full, comprehensive analysis of an issue. Counsel agrees that it would be helpful to clarify the standards that should be considered in deciding whether legal advice should be issued in a formal memorandum and will revise the Chief Counsel Directives Manual (CCDM) to reflect those standards.
Counsel fully complies with the Tax Analysts settlement when it releases formal written memorandum issued to program managers. Counsel attorneys do not provide formal advice to program managers by email to avoid the release of legal advice to the public.
One of the examples cited by the National Taxpayer Advocate concerns legal advice on an issue that arose out of the Tax Cuts and Jobs Act. The suggestion that the advice was not timely released is incorrect. The advice was deliberative in nature and a final decision about how to address the issue was made in conjunction with the decision to issue Program Manager Technical Advice (PMTA). After that decision was made, the PMTA was issued and immediately released.
Taxpayers’ right to be informed is satisfied when the IRS provides guidance on how to comply with the Code that is based on a correct and impartial interpretation of the law provided to those who are charged with tax administration. Counsel is committed to serving taxpayers fairly and with integrity, and it accomplishes that goal in part by providing timely, accurate, and impartial legal advice to the IRS.
TAXPAYER ADVOCATE SERVICE COMMENTS ON IRS RESPONSE
The National Taxpayer Advocate is pleased that Counsel has agreed to revise the CCDM to clarify the standards that should be considered in deciding whether legal advice should be issued in a formal memorandum that will be released as PMTA. She is puzzled, however, about why the IRS has asserted that “Counsel attorneys do not provide formal advice to program managers by email to avoid the release of legal advice to the public.” There are hundreds of National Office attorneys, and Counsel management cannot read minds to ascertain why each of its attorneys choose to provide advice in a particular form in individual situations. Counsel has a long history of resisting public disclosure of its legal advice, and attorneys often prefer to avoid public examination—and potential criticism—of their legal conclusions. For these reasons, we think it is far more likely that many attorneys do issue advice by email to avoid disclosure. When the National Taxpayer Advocate asks for advice, she generally receives an email unless she asks for a memo. Thus, it seems likely that Counsel attorneys often issue memos (rather than emails) only upon request.
More importantly, the IRS’s assertion that it “fully complies with the Tax Analysts settlement when it releases formal written memorandum issued to program managers,” seems wrong. As explained in our report, the IRS settled with Tax Analysts in July 2007, agreeing to disclose PMTA dated or prepared after 1994 “on the basis of the standards announced by” the U.S. Court of Appeals for the District of Columbia Circuit in its June 14, 2002, opinion in Tax Analysts v. IRS, “as applied by the district court” in its February 7, 2007, opinion. 1
1 Tax Analysts v. IRS, 294 F.3d 71 (D.C. Cir. 2002), remanded, 483 F. Supp. 2d 8 (D.D.C. 2007).
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These cases generally permit Counsel to withhold deliberative and pre-decisional communications, but not its final legal positions. The Court of Appeals explained: “It is not necessary that the TAs [advice] reflect the final programmatic decisions of the program officers who request them. It is enough that they represent OCC’s [the Office of Chief Counsel’s] final legal position....” 2 Once Counsel sends its legal analysis to the program manager, it is presumably sending its final legal position, a position the program manager is likely to act upon. 3
The cases that the IRS agreed to follow make no distinction based on the form of the advice. Indeed, any such distinction seems absurd. It would be like concluding that Counsel only must disclose memos written with blue ink, but not those written with black ink. Moreover, the IRS has never previously made any distinction based on the form of its advice. In 2007, it posted at least three PMTA that were issued as e-mails. 4 The formalistic distinction between emails and memos makes even less sense than the IRS’s former two-hour rule—the rule that the IRS would withhold Counsel advice issued after less than two hours of legal work—which the U.S. Court of Appeals for the D.C. Circuit found lacked any legal basis. 5 Further, the IRS’s formal response to the MSP lacks transparency because it does not explain its conclusions, such as the conclusion that the IRS can withhold advice based on its form.
Another mostly unexplained conclusion in the response is the IRS’s assertion that the PMTA addressing the new transition tax under Section 965 was timely released. 6 Under Internal Revenue Code (IRC) § 965(h), taxpayers could pay the transition tax in installments without interest. The IRS’s response suggests that its conclusion about why extra transition tax payments could not be refunded was not final before the PMTA was released. The PMTA was issued and posted on August 2, 2018, but the IRS had posted the PMTA’s conclusion on its website as an FAQ on April 13, 2018. The FAQ said that any excess payments could not be refunded. Thus, the legal basis for the decision must have been finalized before April 13.
Ideally, the PMTA would have been posted before or at the same time as the FAQ. Had the PMTA’s legal reasoning been posted sooner, at least some of the controversy and confusion could have been avoided. 7 More taxpayers would have been aware of the IRS’s position before making extra payments and fewer would have assumed the FAQ was legally incorrect and asked TAS to intervene. This was not a victimless problem. According to the Treasury Inspector General for Tax Administration (TIGTA), a lack of timely guidance led 115 taxpayers to make $2.8 billion in payments on their Section 965
2 Tax Analysts v. IRS, 294 F.3d at 81. 3 The IRS has not taken the position that IRS program managers work with Counsel on legal advice. If the IRS were to take that position, then there would be a risk that unlicensed program managers would be engaged in the unauthorized practice of law. For program managers who were licensed as attorneys, there would be a risk that they were in violation of Treasury Order 107-04 (Jan. 16, 2009) and Treasury General Counsel Directive No. 2 (July 8, 2015). Those authorities generally require attorneys whose duties include providing legal advice to report to the IRS Chief Counsel. 4 See, e.g ., PMTA 2008-01567 (Sept. 28, 2007); PMTA 2007-01190 (Aug. 14, 2007); PMTA 2007-01186 (June 11, 2007). 5 See Tax Analysts v. IRS, 495 F.3d 676, 681 (D.C. Cir. 2007) ([the Internal Revenue Code (IRC) § 6110 disclosure provision] “requires no particular form or formality. Nor does it distinguish between advice a lawyer renders in less than two hours and advice that takes longer than two hours to prepare. Thus, given the broad definition of “Chief Counsel advice” in section 6110(i)(1)(A), we believe that the temporal distinction the IRS draws in its two-hour disclosure rule is contrary to the unequivocal statutory directive…”). 6 Although the IRS response contains no detail or footnotes, we assume it is referencing PMTA 2018-16 (Aug. 2, 2018), https://www.irs.gov/pub/lanoa/pmta_2018_16.pdf. 7 Moreover, neither this memo nor any other legal analysis posted by the IRS addressed whether the IRS could grant applications on Form 4466, Corporation Application for Quick Refund of Overpayment of Estimated Tax, for refunds of excess estimated tax payments pursuant to IRC § 6425, before any tax had been assessed for 2017. We understand that the IRS does not believe it can pay such “quickie” refunds, however, this lack of transparency led taxpayers to ask TAS for assistance in obtaining such refunds.
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IRS and TAS Responses Introduction
liabilities that they did not intend to make and could not recover. 8 The IRS should change the PMTA disclosure process to help prevent a similar situation from happening again.
Finally, the IRS response says a “taxpayers’ right to be informed is satisfied when the IRS provides guidance … to those who are charged with tax administration.” However, taxpayers need to receive information to be informed. When the IRS provides guidance to itself, it is bizarre to suggest that it has satisfied the taxpayer’s right to be informed . [Emphasis added.]
8 Treasury Inspector General for Tax Administration (TIGTA), Rep. No. 2019-34-033, Implementation of the Tax Cuts and Jobs Act Deemed Repatriation Tax Presented Significant Challenges 12 (May 22, 2019), https://www.treasury.gov/tigta/ auditreports/2019reports/201934033fr.pdf.
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FREE FILE: The IRS’s Free File Offerings Are Underutilized, and the IRS Has Failed to…¶
PROBLEM
To fulfill its statutory duty to increase electronic filing (e-filing), the IRS partners with Free File, Inc. (FFI), a group of 12 private-sector tax return preparation software providers. This group offers two services—Free File software, which provides free options for online software to guide taxpayers with adjusted gross income of less than $66,000 through return preparation, and Free File Fillable Forms, a tool available for all taxpayers to enter their income tax forms digitally. Use of the Free File program has steadily declined, and only about 2.5 million people filed returns using Free File software in fiscal year (FY) 2018. The IRS is devoting minimal resources to oversight and testing of this program to understand why taxpayers aren’t using it and how the services offered could be improved. When the services provided by FFI fail to meet the needs and preferences of taxpayers, particularly in underserved communities, it reflects poorly on the IRS and can further erode taxpayers’ trust in fair tax administration.
ANALYSIS
Electronic filing has increased greatly since 2002, but the goals of the Free File program have stagnated and use of the program has steadily declined. In tax year 2016, only 2.3 percent of eligible taxpayers used Free File software, and only 0.20 percent of eligible taxpayers used Free File Fillable Forms. The IRS currently has no marketing budget for the Free File program. It has not conducted effective evaluation of the program to understand the experience of taxpayers who do use the program or even if the terms of the agreement with FFI are being met. For example, the IRS no longer conducts Free File satisfaction surveys, which it claims is due to budget constraints, even though the Free File Memorandum of Understanding from 2018 specifically assigns the members of FFI the responsibility to “provide the necessary support to accomplish a customer satisfaction survey.”
Age restrictions sharply curtail the number of FFI options available to elderly taxpayers, as only three of the 12 FFI providers offer services to taxpayers of all ages and five have age limitations that start before the age of 60. In filing season 2018, no Free File options were available for English as a Second Language (ESL) taxpayers. Testing by TAS shows several software providers have limitations in their navigational features and ability to help taxpayers correctly complete their returns, resulting in poor service quality. Furthermore, cross-marketing and advertising of other services on Free File software platforms can confuse taxpayers, and gives the impression of IRS endorsement of for-fee services. Because of these shortcomings, the services provided by FFI do not meet the needs and preferences of eligible taxpayers, undermining taxpayers’ rights to quality service and to pay no more than the correct amount of tax .
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TAS RECOMMENDATIONS
[4-1] Develop actionable goals for the Free File program, including targeted-use percentages, prior to
entering into a new agreement with Free File, Inc.
[4-2] Work with TAS to create measures evaluating taxpayer satisfaction with the Free File program
and test each return preparation software’s ability to complete various forms, schedules, and deductions.
[4-3] Provide Free File Fillable Forms and Software options for English as a Second Language
taxpayers.
[4-4] Prepare an advertising and outreach plan to make taxpayers, particularly in underserved
communities, aware of the services available through the Free File program.
[4-5] Allow Free File members to provide services to all taxpayers as a part of its next operating
agreement instead of capping the percentage of eligible taxpayers each software provider can cover.
[4-6] Redesign the Free File Software Lookup Tool to better direct taxpayers to software providers that
best meet their circumstances.
[4-7] Improve the capabilities offered to taxpayers through Free File Fillable Forms, including:
a) Linking from IRS form instructions to related IRS publications;
b) Providing increased guidance for common areas of taxpayer confusion;
c) Ensuring taxpayer’s abilities to download, save, and print all forms with troubleshooting
assistance; and
d) Creating a dedicated email where taxpayers can get help when experiencing technology
glitches.
[4-8] If the above recommendations are not substantially adopted, discontinue the Free File Program
and create an improved electronic free fillable forms program including the features described in Recommendation 7.
IRS RESPONSE
The IRS continues to support the growth of the Free File program. Because of our efforts, more taxpayers are using the improved IRS Free File program to prepare and electronically file their returns than in the past two years. Through March 15, 2019, more than 1.54 million taxpayers chose Free File to file their returns, a five percent increase over last year. This is in addition to gains in 2018 over 2017 volumes. This public-private partnership represents an additional choice for taxpayers in the overall tax ecosystem, which also includes paid preparers, Volunteer Income Tax Assistance services, and do-ityourself options. We appreciate your acknowledgement that the new agreement signed with Free File, Inc. (FFI) broadens the scope of eligibility for the program as well as heightening privacy and security requirements.
Free File objectives. While serving low-income and disadvantaged taxpayers remains the primary focus since founding the program, we recognize the need to evaluate new objectives as well. When Free File
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launched in 2003, it was one of the few free do-it yourself options for low-income taxpayers, and far less than 80 percent of all returns were filed electronically. Today there are many free do-it-yourself choices for taxpayers. Most major software providers, in addition to participating in Free File, also offer some form of free tax preparation software and e-filing outside of this public-private partnership. And we are proud to note that, while Free File was originally envisioned as a free federal tax return method, the program has grown to include many free state options as well. This year, four participating Free File members offer free state returns in the 41 states (plus the District of Columbia) with an income tax.
Eligible taxpayers. We continue to work with Free File providers and have made improvements to meet taxpayer needs in underserved populations such as the elderly, low-income taxpayers, and taxpayers for whom English is a second language. Now 33 percent of FFI providers offer Free File software to taxpayers of any age, and there is at least one free federal and state return option for all taxpayers of any age who have an income of $66,000 or less. Using the Free File software look-up tool on irs.gov will easily generate these results for any taxpayer. Elderly taxpayers whose income exceeds $66,000 may also use Free File Fillable Forms that are available to taxpayers regardless of age, income, or any other criteria.
The FFI members previously offered free file software in Spanish, but this was discontinued due to extremely low usage of annually accepted returns dropping below 1,000. However, we recognize the need to raise this important issue with our FFI partners, and we appreciate the NTA’s perspective that the program is helpful enough to expand the program to non-English speaking taxpayers. We will continue to partner with FFI to see if even more options can be made available.
TAXPAYER ADVOCATE SERVICE COMMENTS ON IRS RESPONSE
The National Taxpayer Advocate appreciates that the IRS values the Free File program and continues to work to promote its growth. However, as the National Taxpayer Advocate discussed in her report, taxpayer use of Free File software has generally declined since it was first implemented. Recent gains, while positive, have been relatively minimal, especially when considering that only a few percent of the over 100 million taxpayers eligible for Free File software use it. Additionally, fewer than half a million taxpayers have used Free Fillable Forms in recent years, despite its availability to all taxpayers.
The National Taxpayer Advocate appreciates that the IRS’s budget is limited, but to improve the Free File program, it will have to make a greater commitment to publicizing the program and improving its usability. It must also take steps to ensure qualifying taxpayers can easily locate and use a Free File product, without the risk they will be led to purchase a paid version of the same product or other ancillary products. Because the linkage to private Free File products from IRS.gov gives the appearance of IRS endorsement, the National Taxpayer Advocate continues to recommend the IRS establish more rigorous standards and periodically test the software to ensure it meets those standards. If the IRS cannot allocate the necessary resources to offer an adequate Free File program, the National Taxpayer Advocate recommends the IRS eliminate it and strengthen its Free Fillable Forms product instead.
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FALSE POSITIVE RATES: The IRS’s Fraud Detection Systems Are Marred by High False…¶
PROBLEM
IRS fraud detection systems generate high false positive rates (FPRs) and long processing times, which increase taxpayer burden, generate phone calls to the IRS, and create TAS cases. Several IRS policies affect the ability of taxpayers to timely receive legitimate refunds, including the IRS’s failure to capture necessary information to evaluate the accuracy and efficiency of its non-identity theft (IDT) and IDT refund fraud programs; its past failure to check for third-party information on a daily, versus weekly, basis; and its failure to implement systemic verification capabilities in its fraud detection systems. Simple adjustments such as these could very well prevent taxpayers from being selected into the prerefund wage verification process or could expedite the release of the return if selected, allowing the IRS to better use its resources to verify returns where there is a substantial potential for fraud.
ANALYSIS
Although IRS fraud detection systems protected about $7.6 billion in revenue between January 1 and October 3, 2018, they also delayed the processing of almost $20 billion in legitimate refunds. Between January 1 and September 30, 2018, the FPR for non-IDT refund fraud filters was 81 percent, while the FPR for IDT refund fraud filters was 63 percent. Further, of the returns remaining in the non-IDT refund fraud program in 2018 after the two-week screening period and two-week review period, 64 percent were legitimate. The IRS refers to this 64 percent figure as the “operational performance rate” (OPR). The high FPR and long delays resulted in a 287 percent increase in TAS Pre-Refund Wage Verification Cases between January 1 and September 30, 2018, when compared to the same time period in the prior year, and in nearly half of the cases closed between January 15 and June 30, 2018, taxpayers ultimately received the refunds originally claimed on their returns.
TAS RECOMMENDATIONS
[5-1] Calculate an “Operational FPR” in addition to the FPR and OPR for non-IDT accounts.
[5-2] Develop criteria to be used in measuring OPR for IDT accounts.
[5-3] Conduct a study to determine why it takes some taxpayers longer to authenticate their identities
and what barriers they may encounter when attempting to do so.
[5-4] Design the refund fraud system to consider if applying the third-party information to the
return would actually result in a larger refund when there is a mismatch between third-party information and the information on a taxpayer’s return.
[5-5] Request from outside vendors information on ways to improve the FPR, along with proposals to
determine the factors that are contributing to high FPRs.
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[5-6] Establish a maximum acceptable FPR goal within industry accepted standards and an actionable
timeline to achieve that goal, based on the information and proposals received from outside vendors.
IRS RESPONSE
We appreciate your support of the IRS goal of detecting and mitigating refund fraud. We also understand concerns regarding the False Positive Rate (FPR), which IRS refers to as the False Detection Rate (FDR), and its impact on taxpayers. The IRS processes over 150 million returns every year and IRS fraud filter selections have protected about $12 billion per year over the last three years. We review the results of programming and processes implemented over the course of each filing season.
We agree more information should be captured to better evaluate non-identity theft and identity theft (IDT) refund fraud programs. The metrics you propose will help in this effort. Also, current metrics focus on the selected population. Metrics such as the FDR provide insight on the performance of filters, but they do not show the impact to taxpayers. Our FDR for 2018 was calculated on about two million refund returns that initially triggered the fraud filters and were held for additional review, of which over half were subsequently released after receiving valid third-party data or upon authentication of the actual taxpayer. Going forward, the IRS has added new metrics to track the effect of refund fraud programs on the broader taxpayer population. Adding these new metrics will help the IRS evaluate the efficiency and accuracy of refund fraud filters and their impact on taxpayers.
We agree with the majority of the recommendations and have implemented, or started implementing, many of them. The IRS has started tracking data that will be used to calculate “Operational FDR” for non-IDT selections. The IRS is also tracking the time it takes the taxpayer to authenticate for use in developing Operational Performance Rate (OPR) criteria for IDT selections. The IRS will undertake a study to understand why authentication timeframes are inconsistent among taxpayers. We agree that outside perspective can benefit our approach to false positives among fraud selections. The IRS is currently working with consultants to adapt fraud detection programs to new schemes and approaches while attempting to limit the effect on legitimate taxpayers.
The number of taxpayers requesting IDT victim assistance is declining. In 2015, 677,000 taxpayers reported being victims of identity theft. That number fell to 242,000 in 2017 and decreased again to 199,000 in 2018. Also, the amount of undetected IDT has decreased from $2.8 billion in 2015 to under $1 billion in 2017. Still, there will always be a need to adapt and improve the selection process. The IRS will continue working to improve the refund fraud program and the taxpayer experience.
TAXPAYER ADVOCATE SERVICE COMMENTS ON IRS RESPONSE
The National Taxpayer Advocate acknowledges the immense challenge of detecting and preventing both identity theft and non-IDT refund fraud. The IRS has done an admirable job in preventing fraudulent refunds from being issued, while striving to minimize burden on taxpayers who filed legitimate returns. In fact, in filing season (FS) 2019, the IRS made significant strides in improving its refund fraud processes, such as identifying more refunds for release shortly after they have been selected for further analysis. The IRS’s response here and its agreement to the majority of TAS recommendations demonstrates that it is committed to moving the program forward in a way that protects revenue while minimizing the impact on taxpayers who filed legitimate returns.
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The IRS’s agreement to begin tracking an Operational FPR for its non-IDT refund fraud program and to establish an OPR for its IDT refund fraud program illustrates the IRS’s commitment toward collecting as much useful data as possible to evaluate the effectiveness of these programs and how they impact taxpayers. Additionally, the National Taxpayer Advocate is pleased that the IRS has agreed to collaborate on an important study that will analyze why some taxpayers delayed responding to an IRS notice asking them to authenticate their identity, and what barriers taxpayers may encounter when attempting this authentication. The results of this study will provide insight into these issues and will assist in identifying possible ways the authentication process can be improved.
Despite these important areas of agreement, the IRS’s responses to the recommendations regarding the high FPRs, which reached 82 percent for calendar year (CY) 2018 for the non-IDT refund fraud program, were either too vague or too dismissive to be useful. The IRS states it is working with internal and external stakeholders on a number of issues facing the refund fraud program including the FPR, yet its response lacks specific details or information on what stakeholders it is working with, and what it is working with them on. The National Taxpayer Advocate does not doubt the veracity of this vague statement but is unable to meaningfully evaluate if these discussions are addressing the high FPRs. Additionally, the IRS’s refusal to adopt a target FPR illustrates that the IRS views a high FPR as an unavoidable consequence of protecting revenue. Although establishing a target FPR is not the only step that can be taken to improve the effectiveness and accuracy of the refund fraud program, it is an important objective that should be established alongside other critical objectives, such as dollars protected.
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IMPROPER EARNED INCOME TAX CREDIT PAYMENTS: Measures the IRS Takes to Reduce Improper…¶
PROBLEM
When the IRS allows a taxpayer’s erroneous claim of the Earned Income Tax Credit (EITC), it makes an “improper payment.” The IRS estimates that 25 percent of the EITC credits it allowed in fiscal year (FY) 2018 were improper payments (23.4 percent, when considering improper payments the IRS recovered). A principal cause of the EITC improper payment rate is the complexity of the rules for claiming EITC, yet the IRS does not provide a dedicated telephone help line available year-round for taxpayers to call with questions about EITC. Recent measures Congress adopted to reduce the improper payment rate ( e.g., legislation requiring submission of third-party income reports by January 31 and delaying EITC refunds until February 15) may be effective, but will not be reflected in the IRS’s estimate for years. In the meantime, in attempting to address improper payments, the IRS may unnecessarily burden taxpayers by seeking expanded math error authority and imposing bans on claiming the credit.
ANALYSIS
The improper payment estimate does not reflect the fact that for every dollar of EITC improper payments, 40 cents of EITC went unclaimed by taxpayers who appear to be eligible for the credit. EITC misreporting accounts for only about six percent of the gross tax gap, and compared to non-tax payment or benefit programs, the cost of administering the EITC program (around one percent of benefits delivered) is relatively low, while the EITC participation rate (79 percent) is relatively high. TAS studies show that sending tailored communications to those who appear to have claimed the credit in error may avert future erroneous claims.
TAS RECOMMENDATIONS
[6-1] Seek a permanent exemption from the requirement that the IRS include recovered EITC
payments in the EITC improper payment estimate.
[6-2] Collaborate with TAS to identify a method of identifying taxpayers who do not claim EITC but
are eligible for the childless worker EITC, and automatically award the childless worker credit to those taxpayers.
[6-3] Collaborate with TAS to identify the changes to Form 1040 that would be needed, and the data
gathering techniques that could be employed, to award EITC to taxpayers who are eligible for EITC with respect to a qualifying child but do not claim it on their returns.
[6-4] Collaborate with TAS Research in designing and conducting the planned study to compare prior
EITC audit results to audit results of taxpayers who used affidavits to establish that they met the residency requirement.
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[6-5] Revise soft notices that are sent to taxpayers advising them they may have claimed EITC in
error to explain the error the taxpayer appears to have made ( e.g ., not meeting the residency requirement or the relationship requirement, misreporting income or deductions).
[6-6] Establish a dedicated, year-round toll-free “help line” staffed by IRS personnel trained to respond
to EITC and Child Tax Credit questions.
[6-7] In soft notices to taxpayers advising them that they may have claimed EITC in error, include the
dedicated telephone “help line.”
IRS RESPONSE
Thank you for recognizing the importance of reducing improper payments and for outlining recommendations to improve our efforts in doing so without increasing taxpayer burden. As you are aware, we face a significant challenge in administering refundable credits such as the Earned Income Tax Credit (EITC). The refundability attracts fraud and other less egregious noncompliance, and the complexity of the eligibility criteria often leads to unintentional errors, both of which may result in improper payments.
In administering the EITC, we have two goals: increasing participation for the eligible population and reducing errors that lead to improper payments. As you mentioned in your report, the participation rate is high (roughly 80 percent, or four out of five people eligible for the EITC claim it), and the administrative costs are low (less than 1 percent of the credit paid). This is largely due to the reliance on taxpayers’ self-assessment of eligibility for EITC as part of our voluntary tax system, which often makes it difficult to prevent improper payments.
We continue to administer refundable credits through a balanced program which includes education, outreach, and compliance efforts. We employ several EITC educational tools. The EITC Assistant on IRS.gov is an interactive online tool that helps taxpayers determine if they’ve met the eligibility requirements for the EITC. The Form 886-H Toolkit is an online tool that helps taxpayers determine the correct documents needed if selected for an EITC audit. Our annual EITC Awareness Day promotes increased participation, decreased erroneous payments, and improved accuracy of filed returns through various media sources. Since resources are limited, we use a variety of treatments to address noncompliance. For example, when we identify a discrepancy between information provided by a taxpayer and existing third-party information, we may send an educational notice to allow the taxpayer to correct their information prior to any compliance activity. We appreciate TAS collaboration through the Audit Improvement Team to identify improvements to reduce errors, protect taxpayer rights, and reduce taxpayer burden. Additionally, since return preparers file more than half of all returns claiming the EITC, we have a robust return preparer strategy to identify and address preparer noncompliance through a progressive suite of treatments. By treating one preparer we are able to positively impact hundreds of taxpayers.
We will continue our research as part of our focus on underserved populations to address segments of non-claimants and identify potential actions that can be taken. We will continue to collaborate with TAS, as we share the same goal to provide the EITC to all who are eligible.
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TAXPAYER ADVOCATE SERVICE COMMENTS ON IRS RESPONSE
The National Taxpayer Advocate commends the IRS for recognizing that complexity of the law is a primary driver of erroneous EITC claims and for developing, sometimes with collaboration from TAS, online tools that help taxpayers determine whether they are eligible for the credit. However, as discussed below, correspondence with taxpayers would be more effective if it were more tailored: IRS letters should explain with greater specificity why the IRS believes a taxpayer claimed EITC in error. Moreover, as a TAS study shows, providing a telephone help line that allows taxpayers to speak to a live assistor improves compliance.
The National Taxpayer Advocate appreciates that measuring the improper payment rate presents some challenges that are difficult for the IRS to address, such as the lag time between the estimate and the earlier audits on which the estimate is based. However, the IRS could seek renewal of the exemption from the requirement that it exclude recovered amounts in the estimate. Excluding recovered amounts may be generally appropriate in calculating other agencies’ improper payment estimates, but is less suitable for the IRS, where the application for the benefit is made on a tax return and significant compliance activity occurs after issuance of refunds.
The National Taxpayer Advocate is encouraged that the IRS is willing to consider how to reach nonclaimants. It is unfortunate that IRS databases so easily identify taxpayers who appear ineligible to claim EITC, yet those same databases do not reliably identify non-claimants who are eligible for the credit. The IRS should explore using other techniques or databases to obtain enough information that would allow it to systemically identify these taxpayers and automatically award the credit, especially the childless worker credit.
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1 See Treasury Inspector General for Tax Administration (TlGTA), The Internal Revenue Service Should Consider Modifying the Form 1040 to Increase Earned Income Tax Credit Participation By Eligible Tax Filers, Ref. No. 2018-lE-R004 (April 2, 2018).
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RETURN PREPARER OVERSIGHT: The IRS Lacks a Coordinated Approach to Its Oversight of…¶
PROBLEM
In 2018, more than half of the tax returns submitted by return preparers were from individuals who are unregulated by the IRS. It is a necessary part of the IRS’s duties to ensure that preparers are competent and accountable, since return preparers play such a critical role in tax administration and in promoting tax compliance. The public needs a way to differentiate between professional, competent, and experienced preparers and their incompetent or unscrupulous counterparts.
ANALYSIS
The IRS had started to implement a program to impose minimum competency requirements on the unenrolled tax preparation profession. However, in 2013, the District Court for the District of Columbia enjoined the IRS from regulating tax return preparers via testing and continuing education requirements. Although the IRS cannot mandate return preparers pass competency tests or undergo continuing education, there is still a need for the IRS to provide a certain level of oversight. Rather than designating one centralized Commissioner-level office to coordinate oversight of return preparers, the IRS has spread this responsibility across several organizations, including (1) the Return Preparer Office to oversee registration of preparers, (2) the Office of Professional Responsibility to interpret and apply Circular 230, (3) Wage and Investment’s Return Integrity and Compliance Services function to develop a Refundable Credits Return Preparer Strategy, (4) Small Business/Self-Employed’s Return Preparer Program, and (5) Criminal Investigation’s Abusive Return Preparer Program.
In May 2018, the IRS convened a cross-functional team tasked with developing a coordinated servicewide return preparer strategy. (Representatives from TAS were not invited to this team.) The IRS to date has not delivered a comprehensive, coordinated strategy. Moreover, with respect to penalties, it has a no change rate of about 15 percent, and the IRS collects only about 15 percent of the penalties it assesses. Beyond preparer audits, the IRS does not have a strategic plan for using letters and soft notices to drive future preparer compliance, and where it does use such letters, it does not routinely measure the future compliance impact.
TAS RECOMMENDATIONS
[7-1] Invite representatives from TAS to the cross-functional team that was established to develop a
coordinated strategy to provide effective oversight of return preparers.
[7-2] Develop a comprehensive plan to communicate the coordinated return preparer strategy to
Circular 230 preparers and unenrolled preparers.
[7-3] Develop a community-based, grassroots communication strategy for educating vulnerable
taxpayer populations about how to select a competent return preparer and the risk of return preparer fraud.
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[7-4] Conduct analysis on the impact of penalty assessments and no change audits on preparers’
behavior in subsequent years, and publish the findings.
[7-5] Revise letters and notices (including Appeals Letter 3808) that reference the Directory of Federal
Tax Return Preparers to ensure that appropriate caveats are clearly articulated.
IRS RESPONSE
Our goal at the IRS is to address preparer noncompliance as quickly as possible and in the most efficient and effective manner. We employ a multi-faceted and multi-functional approach to both support and provide oversight to preparers to ensure the accuracy of the returns they prepare. This includes, but is not limited to, preparer visits conducted before, during, and after filing season; correspondence outreach; preparer compliance examinations; and criminal investigations and injunctions.
We established a cross-functional team to develop a Service-wide approach to the return preparer strategy. The team includes representatives from the Wage & Investment Division (W&I), the Large Business & International Division (LB&I), Appeals, Counsel, Research, Criminal Investigation (Cl), the Return Preparer Office, and the Taxpayer Advocate Service (TAS).
The team’s focus is on improving program effectiveness through:
Improving, leveraging, and centralizing compliance activities;
Reducing opportunities for preparer misconduct and non-compliance;
Making a multi-year commitment to preparer-related research;
Continuing improvements in information technology and information sharing; and
Coordinating with external partners and stakeholder groups to establish a Service-wide communication and outreach strategy to engage both our internal and external partners.
This collaboration will include a comprehensive analysis of the current activity within each compliance organization to identify gaps and develop a unified Service-wide strategy. This strategy will allow us to leverage our limited resources and coordinate a full range of educational, civil, and criminal enforcement actions across all IRS functions. We will also establish program goals to support the Service-wide return preparer strategy and measures to track progress towards those goals.
TAXPAYER ADVOCATE SERVICE COMMENTS ON IRS RESPONSE
The National Taxpayer Advocate is encouraged by the IRS’s response that it takes its responsibility to oversee return preparers seriously. IRS management seems to be in agreement that there is much it can do, in spite of the judicial rulings, to effect positive change in how return preparers are trained and how the taxpaying public perceives them. With the vast majority of taxpayers relying on paid preparers, it is important that taxpayers be able to have confidence in the competence and integrity of their tax professionals.
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CORRESPONDENCE EXAMINATION: The IRS’s Correspondence Examination Procedures Burden…¶
PROBLEM
IRS correspondence audits may involve complicated rules and procedures, or complicated fact situations, or both as in the case of the Earned Income Tax Credit (EITC). Taxpayers in correspondence exams may suffer greater burden because of the difficulty of sending and receiving correspondence (including having it considered at the right time); the lack of clarity in IRS correspondence; and the lack of a single employee assigned to the taxpayer’s case. Correspondence examiners do not receive sufficient training on complex issues, and IRS correspondence exam measures do not adequately consider taxpayer needs and preferences. These problems are exacerbated when the audited taxpayer is low income or has limited English proficiency, or when there are other impediments that hinder communication during the audit.
ANALYSIS
In fiscal year (FY) 2017, the IRS audited almost 1.1 million tax returns (including business and individual returns), approximately 0.5 percent of all returns received that year. During FY 2017, the IRS conducted approximately 71 percent of all audits (business and individual) by correspondence. For FY 2018 correspondence audits, the IRS took more than 65 days to respond to the majority of taxpayer replies in refundable credit cases. During FY 2018, Small Business/Self-Employed (SB/SE) division exam employees answered the exam phone only about 35 percent of the time. An examination is primarily an education vehicle, so the taxpayer learns the rules, corrects mistakes, and can comply in the future. In fact, the IRS gains about twice as much from the long-term effects of an audit than it does from the actual audit itself. Yet, a significant number of correspondence audits—about 42 percent— were closed with no personal contact in FY 2018. IRS correspondence and forms are inadequate to inform and educate taxpayers, and they fail to include contact information for the employee who reviewed the taxpayer’s reply. The measures for correspondence exams are inadequate to determine whether the IRS is choosing the best cases to audit, educating the taxpayer, and increasing future compliance.
TAS RECOMMENDATIONS
[8-1] Require at least one personal contact between an IRS employee and the taxpayer (this can be
satisfied by an outgoing or incoming phone call) before closing a correspondence examination.
[8-2] Measure taxpayers’ filing compliance (including filing a return, making an error on a return, and
underreporting taxes on a return) following correspondence examinations and apply this data to guide audit selection based on the resulting impact on compliance.
[8-3] Continue to assign a single employee for a correspondence examination when the IRS receives
a response from the taxpayer either by phone or correspondence, and expand on this right by retaining this employee as the single point of contact throughout the remainder of the exam.
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[8-4] Per RRA 98 § 3705(a), place on outgoing taxpayer correspondence the name and telephone
number of the tax examiner who reviewed the taxpayer’s correspondence where a tax examiner has reviewed and made a determination regarding that specific documentation.
[8-5] Conduct surveys of taxpayers following correspondence examinations to gauge their
understanding of the examination process and their resulting attitudes towards the IRS and towards filing and paying taxes.
[8-6] Collect data regarding which forms of documentation taxpayers sent in a correspondence
examination that were deemed insufficient and revise existing correspondence examination letters to better explain documentation requirements.
[8-7] End the practice of using the combination letter and provide taxpayers with an initial contact
prior to issuing the preliminary audit report.
IRS RESPONSE
Correspondence Examination is a critical part of IRS’ overall compliance approach to fair and balanced tax administration. We designed Correspondence Examination to work single-issue (non-complex) and single-year cases that can easily be resolved via documentation. Examinations are conducted by corresponding with the taxpayer, a taxpayer contact that is typically less burdensome on the taxpayer, rather than having a face-to-face meeting. This approach allows for broader geographic coverage and addresses noncompliance across a broad spectrum of the population.
Balanced coverage, which is improved through the correspondence examination program, is one way that we can better achieve fairness in treatment of taxpayers. In addition, the program focuses on implementing the IRS’ strategy of reducing audit cycle time and improving audit coverage and strives to select case inventory that would produce a low no-change rate.
Examiners educate taxpayers on the tax law, recordkeeping requirements, and documentation necessary to substantiate what is claimed on the return. We continuously evaluate our Correspondence Examination processes and procedures, including our communications with taxpayers. We analyze data to help identify improvement opportunities with an eye toward enhancing the taxpayer’s experience, promoting better and more productive interactions and exchanges of information, and decreasing case processing time. In December 2016, we launched a pilot in the Correspondence Examination program that uses an online suite of web-based secure communication tools that allow the IRS and the taxpayer to correspond digitally.
TAXPAYER ADVOCATE SERVICE COMMENTS ON IRS RESPONSE
The National Taxpayer Advocate recognizes that correspondence examinations play a role in the IRS’s overall examination strategy; however, the Most Serious Problem details how the IRS’s use of correspondence exams does not lead to balanced coverage or fairness in treatment among taxpayers. Specifically, the Most Serious Problem demonstrates how correspondence examinations disproportionately burden low income taxpayers, noting that 72 percent of the approximately 461,000 correspondence exams closed in fiscal year (FY) 2018 by the Wage and Investment Division involved the Earned Income Tax Credit (EITC). The IRS response conflates “single issue” with “non-complex,” ignoring the inherent complexity in certain single issues such as the EITC. Further, the Most Serious Problem notes that the IRS is increasingly using correspondence exams for Schedule C (Form 1040),
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Profit or Loss From Business (Sole Proprietorship), exams and could potentially use correspondence exams for the new Internal Revenue Code (IRC) § 199A deduction. By focusing primarily on cycle time and no change rates, the IRS is ignoring other key metrics such as response rates, agreement rates, and subsequent compliance, which would allow the IRS to see whether a taxpayer was educated because of the audit. As explained in the Most Serious Problem, an examination is primarily an education vehicle.
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FIELD EXAMINATION: The IRS’s Field Examination Program Burdens Taxpayers and Yields…¶
PROBLEM
The primary objective in identifying tax returns for examination is to promote the highest degree of voluntary compliance. Yet the IRS does not know whether its field exams are promoting voluntary compliance because it does not have a measure to track future filing compliance post-audit. Instead, the IRS focuses primarily on the bottom line and the direct effects of a specific audit—measuring closures, cycle time, employee satisfaction, and quality scores. The IRS may also be selecting the wrong taxpayers and cases for field audit, given declining resources. High no change rates for field audits show that the IRS may be wasting resources and failing to drive future voluntary compliance. From a taxpayer’s perspective, the field examination process is not working as intended because some taxpayers may not have access to all IRS employees making decisions about their issues, or do not know how to elevate an issue or a complaint. Others experience difficulty understanding the scope of the audit due to a lack of transparency or overly broad document requests. These shortcomings impair taxpayers’ rights to be informed and to quality service .
ANALYSIS
The IRS has conducted fewer field exams in recent years, with approximately 272,000 field exams in fiscal year (FY) 2010 and only about 156,000 field exams in FY 2018. Both operating divisions conducting field audits, Small Business/Self-Employed (SB/SE) and Large Business and International (LB&I), in FY 2018 employed only about 60 percent of the Revenue Agents they had in FY 2010, reflecting the IRS may need to be more discriminating in choosing cases. Yet SB/SE selects over half of its field audits based on a related-year audit, meaning instead of auditing a new taxpayer, it opens an audit on another tax year for a taxpayer already under audit. Although LB&I created the campaign program to be more nimble in identifying trends, currently campaigns only comprise about six percent of its audit work. Both SB/SE and LB&I track audit reconsiderations, but neither tracks how many of these reconsiderations are eventually appealed by the taxpayer. Thus, the IRS does not know when an examiner gets the answer wrong or when there are hazards of litigation, both of which should inform audit selection. Research shows that audits proposing no additional tax (“no change” audits) result in greater future noncompliance; yet field exams have unacceptably high no change rates—averaging 23 percent for SB/SE field audits and 32 percent for LB&I field audits from FY 2010 to FY 2018. No change audits negatively affect voluntary compliance: a recent study found Schedule C taxpayers reduced their reported income in the three years after a no change audit by about 37 percent. Finally, the field exam programs do not have a formal centralized system to track taxpayer complaints and requests to speak to a manager, so the IRS cannot track and analyze taxpayer concerns about the conduct of an audit.
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TAS RECOMMENDATIONS
[9-1] Periodically survey taxpayers after field exams to determine the impact of the exam on the
taxpayers’ understanding of the audit process and audit adjustments, and attitudes towards the IRS and filing and paying taxes.
[9-2] Periodically study taxpayers’ filing behavior following field exams to determine whether the
exams had an impact on whether the taxpayer filed, how much income the taxpayer reported, and whether the taxpayer repeated a mistake made on a previous return.
[9-3] Require SB/SE to provide an examination plan similar to what LB&I requires for all audited
taxpayers for all field examinations.
[9-4] Notify taxpayers during an audit of any consultations with specialists and provide an opportunity
for taxpayers to discuss with the specialist any technical conclusions that result from these consultations.
[9-5] Track and report on the number of field examinations (including audit reconsiderations) that go
to Appeals and the resulting adjustments.
IRS RESPONSE
Revenue Agents within the Large Business and International (LB&I) Division serve corporations, subchapter S corporations, and partnerships with assets greater than $10 million. These businesses typically employ large numbers of employees, deal with complicated issues involving tax law and accounting principles, and conduct business in an expanding global environment. Revenue Agents within the Small Business/Self-Employed (SB/SE) Division serve business taxpayers with assets of $10 million and below, including sole proprietors filing a Schedule C with their individual returns, as well as other high-income individual returns.
The Field Examination program has responsibility for the taxpayer population with the most complex federal tax return issues. This requires a high level of skill by the examiner and warrants a field visit to the taxpayer’s business to fully understand their operations. Field Examination employees assist taxpayers with meeting their tax responsibilities through education and enforcement when necessary.
We continue to focus on areas of known non-compliance in Field Examination. We have developed cross-functional teams for issues that require a Service-wide strategy for case selection and issue resolution. In SB/SE, we have created consolidated groups containing examiners with the experience and technical expertise to work these types of examinations.
As part of our normal examination process, our examiners educate taxpayers on the tax law, recordkeeping requirements, and documentation necessary to substantiate what is claimed on the return. Our procedures, letters, and document requests are tailored to the type of taxpayer we are interacting with, which is why there are differences between how Field Examination in LB&I and SB/SE conduct their business.
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TAXPAYER ADVOCATE SERVICE COMMENTS ON IRS RESPONSE
The Most Serious Problem points out numerous concerns with how the IRS conducts its field exam program, such as the high no change rate, the refusal to share an individual exam plan with all taxpayers, the lack of a mechanism for taxpayers to raise complaints, and the IRS’s failure to track complaints. The IRS narrative only loosely addresses these problems, without providing any details as to what the IRS is doing to mitigate them or why the IRS believes they have addressed them. Without changing how the IRS chooses taxpayers for field exams and the way in which it conducts the exams and interacts with taxpayers, these problems will persist.
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OFFICE EXAMINATION: The IRS Does Not Know Whether Its Office Examination Program…¶
PROBLEM
Promoting voluntary compliance should be an underlying goal of the IRS examination process; however, failure to appropriately measure the outcomes of examinations and the scope of the office examination program may limit its effectiveness. Office exams typically examine a limited scope of issues, which provides a structure to the exam and helps the taxpayer focus specifically on how to better comply in the future. The IRS employee has an opportunity to educate the taxpayer in-person and ensure the taxpayer understands the law going forward. The face-to-face experience benefits both the taxpayer and the IRS—the taxpayer can, in real time, ask questions and explain his or her position to the IRS, and the IRS employee can immediately see if the taxpayer understands the current examination, next steps to be taken, and how to comply in the future. Compare this with the correspondence examination process where a taxpayer with limited understanding of the law may never speak to an IRS employee during the entire process.
ANALYSIS
Office exams are generally scheduled at the office closest to the taxpayer’s residence, if the office has the appropriate examination personnel on site. This constraint immediately limits which taxpayers may ever be selected for office exam. Selecting taxpayers for office exam based on where Tax Compliance Officers (TCOs) are located introduces selection bias into the office exam process and impacts the right to quality service and the right to a fair and just tax system . The employees who conduct office exams have declined precipitously. In fiscal year (FY) 2011, the IRS had 1,256 employees conducting office exams and in FY 2018, only 639, a decrease of 49 percent in only seven years. Since office exams have a higher agreed to rate than correspondence exams, they can serve as a more effective means to get to the right answer for the taxpayer as well as educating him or her about future compliance. If the IRS’s goal is to promote voluntary compliance through the examination process, it needs to measure how taxpayers who undergo audits comply in future years. Currently the IRS relies on typical measures of cycle time, closure rates, quality scores, and employee satisfaction in evaluating the examination process. None of these measures address the impact of audits on voluntary compliance, whether the taxpayer understood why his or her tax was adjusted, or whether the examination concluded in the right result for the taxpayer— i.e., what happens when a taxpayer appeals the results of the exam?
TAS RECOMMENDATIONS
[10-1] Develop measures to track the downstream compliance of audited taxpayers by type of exam.
[10-2] Track results of audits that are appealed by the taxpayer by type of exam.
[10-3] Add educating the taxpayer on future compliance to the quality attributes of an exam for field
and office exam.
[10-4] Increase the number of TCOs and put them in more locations throughout the United States.
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[10-5] Expand the issues covered by office exam, develop pilot programs for office exams for issues such
as charitable contributions, and track the customer satisfaction for these pilots versus taxpayers audited via correspondence exam for the same issues.
IRS RESPONSE
Office Examination is an important piece of our compliance approach, along with the Correspondence Examination program and the Field Examination program. The Office Examination program has evolved over the years, although dwindling resources have created some challenges in executing the program’s goals.
The purpose of Office Examination is to examine returns with more than one issue, and possibly multiple years, that require more documentation and analysis to substantiate items on the return than issues that can be addressed in a correspondence audit. This requires a higher level of skill by Tax Compliance Officer (TCO) examiners and warrants a face-to-face interaction with the taxpayer, but not necessarily at the taxpayer’s place of business. Examiners are required to follow IRM 4.10.1.3, Communication, and IRM 4.10.7.5, Proposing Adjustments to the Taxpayer and/or Representative, which entails educating the taxpayer on the tax law, recordkeeping requirements, and documentation necessary to substantiate what is claimed on the return.
We continually evaluate all of our examination workstreams (i.e., Correspondence Examination, Office Examination, and Field Examination), to ensure we are utilizing our resources as efficiently and effectively as possible. We are currently reviewing the accounting education requirements for the TCO position in addition to evaluating the workload of the program and identifying areas where additional training is necessary.
We are always looking for ways to improve the taxpayer experience. In fiscal year 2018, we launched a pilot in the Office Examination program that uses an online suite of web-based secure communication tools and includes secure messaging. Secure messaging is not standard email, but a message box within a secure portal allowing the IRS and the taxpayer to correspond digitally. This provides an alternative for taxpayers who prefer to use these online options.
TAXPAYER ADVOCATE SERVICE COMMENTS ON IRS RESPONSE
The National Taxpayer Advocate agrees that Office Examination is an important part of the IRS Examination Program and would like to see the IRS use it effectively to bring taxpayers back into compliance and keep them in compliance going forward. A crucial step to keeping taxpayers in compliance in the future is ensuring that the taxpayer understands any errors that were made and how to avoid those errors in the future. After reviewing the Internal Revenue Manuals (IRMs) cited by the IRS above, while the National Taxpayer Advocate agrees that effective, continuous, courteous, and open communication is important, she does not see any components of the referenced IRMs specifically requiring the examiners to educate the taxpayer. While IRM 4.10.7.5, Proposing Adjustments to the Taxpayer and/or Representative, requires the examiner to discuss issues with the taxpayer, the National Taxpayer Advocate believes that explicitly adding an education of the taxpayer component to the exam process will help clarify and ensure taxpayers understand what to do going forward. In other words, you get what you measure.
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MATH ERROR NOTICES: Although the IRS Has Made Some Improvements, Math Error Notices…¶
PROBLEM
Math error authority allows the IRS to summarily resolve mathematical ( e.g ., 2 + 2 = 5) and clerical ( e.g ., writing 12 for an entry on the return instead of 21, or leaving an entry blank) errors with taxpayers’ tax returns that are obvious just by looking at the face of the return. However, the range of issues that fall under these definitions has steadily expanded and the IRS is using math error authority to summarily resolve more complex issues. Concerned with protecting taxpayer rights, Congress directed the IRS to provide taxpayers with an explanation when it makes an adjustment to taxpayers’ returns. The IRS does this by sending taxpayers a math error notice. The explanation of the adjustment in the math error notice is critical to taxpayers’ ability to challenge the adjustment and preserve their right to petition the U.S. Tax Court, before paying the tax, by timely requesting abatement. Despite the congressional directive, many math error notices remain confusing and lack clarity. This makes it difficult for taxpayers to determine what, specifically, the IRS corrected on their return and whether they should accept the adjustment or request a correction, as well as the consequences of inaction.
ANALYSIS
While using math error authority is cheaper and faster than normal deficiency procedures, it does not afford taxpayers the same protections they would otherwise have. For example, math error notices do not give taxpayers the right to petition the U.S. Tax Court to challenge the IRS’s decision. Taxpayers must request the IRS abate the change within a shorter timeframe than normal deficiency procedures (60 days versus 90 days) to retain their right to petition the Tax Court before paying the tax. These lesser protections and shortened timeframes make the clarity of math error notices especially important. In calendar years 2015-2017, the IRS issued approximately two million math error notices each year. However, the IRS does not track the abatement rates of math errors. Many math error notices lack clarity, only giving taxpayers short, generic explanations of the purported errors, without adequately directing taxpayers to the exact issue with their return or all of the steps they must take. Additionally, math error notices are designed like bills, framed to emphasize payment by taxpayers, without first explaining the math error issues or the rights taxpayers have to challenge the IRS’s determination. The design of the notices deemphasizes, and in some cases omits, that taxpayers lose their right to make a prepayment petition to the Tax Court if they don’t request the IRS abate the tax within 60 days of receiving the notice. A TAS study found that in a sample of cases, the IRS summarily denied tax benefits to taxpayers that many of them were entitled to, which further demonstrates the need for clarity and explicit notice of taxpayers’ right to challenge the change to the return in case the IRS made a mistake. Instead of denying taxpayers benefits they are entitled to, the IRS should examine historical return data to summarily correct transposed digits or missing information, such as a dependent Taxpayer Identification Number, on the taxpayer’s return if it would benefit the taxpayer.
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TAS RECOMMENDATIONS
[12-1] Measure the abatement rates of its math errors and use the data to assess which math errors are
most problematic and which notices need to be revised for clarity.
[12-2] On all math error notices, cite to the actual line on the return that the IRS is changing, and
the reason why the IRS is making the change ( e.g., “you claimed 6 dependents on line x, but multiplied the dependency exemption by 7 on line y”).
[12-3] Emphasize the Taxpayer Bill of Rights, and specific taxpayer rights on math error notices
by including the taxpayer’s right to challenge the IRS and be heard, and the right to appeal, the specific deadline date the taxpayer must respond by, and the loss of their right to make a prepayment petition of the IRS’s change to their return to the Tax Court, if the taxpayer does not respond by the date in the notice.
[12-4] Further emphasize the steps that taxpayers may take (pay or file to petition) on the first page of
its math error notices, so that taxpayers are clear on what their options are in response to notices. The section heading that discusses appeal options should be similarly as big and bold as the section heading discussing payment.
[12-5] Place the explanation of the math error on the first page of the notice, not the third or fourth,
so that taxpayers see and read the explanation before they read about the numerous payment options, which nudges them to pay and not question the purported error or if they should appeal. Page one should also include the deadline date to appeal, and what taxpayers lose if they do not appeal, as well as information about the TBOR, TAS, and LITCs.
[12-6] Work directly with TAS on notice redesign to ensure notice clarity and adequate inclusion of
taxpayer rights on math error notices.
[12-7] Use internal data to make corrections to returns that benefit taxpayers, instead of burdening
taxpayers with unnecessary math error assessments that are later abated.
IRS RESPONSE
We continue to look for opportunities to simplify and improve the clarity of notices and other communications to taxpayers. The IRS has designed math error notices to ensure the taxpayer has all information needed to take appropriate actions regarding the adjustments made to their return. Although we cannot tailor all language to each individual taxpayer’s situation, we agree that notices should be clear and understandable to taxpayers.
The IRS issues many versions of math error notices to ensure taxpayers are informed of adjustments made to their returns. Additionally, we provide taxpayers with their rights as provided by law, including to administrative appeal and judicial review.
Thank you for acknowledging improvement to explanations on some math error notices. The IRS performs a yearly review of new notice explanation codes to ensure information is clearly communicated. We appreciate feedback from the Taxpayer Advocate Service (TAS) on all new and revised math error notices and explanation codes during development. Currently, the IRS is working with the Taxpayer Advocate Panel (TAP) to review math error notices CP10, CP11, CP13, and CP16. The TAP
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identified similar issues to those addressed by the National Taxpayer Advocate, and we will work them concurrently.
In June 2019, the IRS will host a Taxpayer Correspondence Summit to bring business operating division representatives together to create a shared vision for the future state of taxpayer correspondence, including notice revisions. We welcome the partnership with TAS to share perspectives and concerns about taxpayer correspondence. The Summit will be the starting point to engage participants from business organizations that produce correspondence, respond to correspondence, or provide support for correspondence development and implementation.
In addition, the IRS will continue to colloborate cross-functionally as we improve taxpayer correspondence. The IRS welcomes any additional specific data driven analysis and information TAS can provide for notices.
TAXPAYER ADVOCATE SERVICE COMMENTS ON IRS RESPONSE
The National Taxpayer Advocate appreciates the IRS’s continued efforts to improve its notices. The National Taxpayer Advocate additionally commends the IRS on hosting the Taxpayer Correspondence Summit, and looks forward to seeing further improvements to IRS notices that will arise from the progress made at the Summit. As discussed in volume one, TAS plans to develop sample math error notices in fiscal year (FY) 2020, that will incorporate the National Taxpayer Advocate’s recommendations and serve as an example to the IRS on how to implement them.
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STATUTORY NOTICES OF DEFICIENCY: The IRS Fails to Clearly Convey Critical Information…¶
PROBLEM
The statutory notice of deficiency (SNOD) notifies the taxpayer there is a proposed additional tax due, identifying the type of tax, and period involved, and that the taxpayer has the right to bring suit in the United States Tax Court before assessment and payment. If the taxpayer does not petition the Tax Court, after the 90 days (or 150 days if the taxpayer resides outside the United States) expires, the IRS will assess the tax, send the taxpayer a tax bill, and start collection. The SNOD is the taxpayer’s “ticket” to the Tax Court, the only pre-payment judicial forum where the taxpayer can appeal an IRS decision. However, data suggests that less than one percent of the taxpayers in 2017 who received a SNOD filed a petition with the Tax Court, not availing themselves of a fundamental taxpayer right—the right to appeal an IRS decision in an independent forum . These taxpayers may not be availing themselves of their rights, in part because of faulty design and poor presentation of information in the notices. The SNODs do not effectively communicate the information needed for taxpayers to understand their rights and the consequences for not exercising them, the relevant tax issues, or how to respond. Nor do notices sufficiently apply plain writing principles or incorporate behavioral research insights, as directed by the Plain Writing Act and Executive Order 13707. Additionally, the IRS continues to omit Local Taxpayer Advocate (LTA) information required by law on certain SNODs, thereby violating taxpayer rights.
ANALYSIS
The SNOD is critical to many low income and middle income taxpayers because generally without it they would be required to pay the tax first and go to refund fora, such as federal district courts or the United States Court of Federal Claims, in order to challenge the tax adjustment. Approximately 69 percent of cases in Tax Court are brought by unrepresented taxpayers, and that percentage increases to 91 percent among cases where the deficiency for a tax year is $50,000 or less and the taxpayer elects small tax case (S Case) procedures. In fiscal year (FY) 2017, the IRS issued more than 2.7 million of the four types of SNODs that are separately tracked (called the “3219 SNODs”). There were only about 27,000 docketed cases in Tax Court that year however, suggesting that less than one percent of taxpayers who received a SNOD filed a petition with the Tax Court. The IRS tracks the income level of taxpayers receiving three of the 3219 SNODS, excluding the SNODs issued to those who did not file a return. The majority of these three types of 3219 SNODs (called the Non-Automated Substitute for Return, or Non-ASFR SNODS) were issued to low income taxpayers. Nearly 59 percent of those receiving a Non-ASFR SNOD make less than $50,000 per year. Yet low income taxpayers, who may be eligible for representation through Low Income Taxpayer Clinics (LITCs), are less likely to petition the Tax Court. In FY 2018, the median total positive income for individuals who did not petition the Tax Court in response to a SNOD issued after an audit was about $24,000.
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TAS RECOMMENDATIONS
[13-1] Redesign the notices of deficiency, using plain language principles and behavioral science
methods, to clearly convey the taxpayer’s proposed tax increase, his or her right to challenge the IRS’s determination before the Tax Court, and his or her ability to obtain TAS or LITC assistance.
a) Collaborate with the TAS and stakeholders, especially the Taxpayer Advocacy Panel (TAP)
and LITCs, in designing the SNOD.
b) Conduct a pilot of several SNODs, including current notices and rights-based prototypes,
to measure: (1) the petition rate of each notice; (2) the TAS contact rate for each notice; (3) the IRS contact rate for each notice; and (4) the downstream consequences of each notice ( e.g., disposition of cases, such as whether the taxpayer settled, conceded, or prevailed in Tax Court and whether the taxpayer’s deficiency decreased or the taxpayer requested an audit reconsideration).
[13-2] Develop and train IRS employees in best practices for assisting taxpayers who call the IRS in
response to a SNOD, to include having IRS employees remind and guide taxpayers in filing Tax Court petitions.
[13-3] Facilitate the process for petitioning the Tax Court by including with the notice of deficiency the
Tax Court website and telephone number, as well as a copy of IRS Publication 4134, Low Income Taxpayer Clinic List .
[13-4] Include the Local Taxpayer Advocate’s contact information on the face of the notices, specifically
on Letters 3219-C, 1753, 531-A, and 531-B.
a) If the IRS is unable to update computer programming to provide the telephone number and
address information of LTAs pursuant to IRC § 6212(a) during the current year, include Notice 1214, 1 listing all LTA office contact information, when mailing letters 3219-C,1753, 531-A, and 531-B.
b) Develop a timeline to secure and allocate funding to implement the necessary IRS system
upgrades to allow for the programming of LTA addresses and contact information on the face of letters 3219-C, 1753, 531-A, and 531-B, as required by law.
IRS RESPONSE
The Statutory Notice of Deficiency (SNOD) is an important step in the IRS’ examination process and is authorized under Internal Revenue Code (Code) section 6212(a). As prescribed, such notices shall include a notice to the taxpayer of their right to contact a local office of the Taxpayer Advocate and the location and phone number of the appropriate office.
Over the years, the IRS has evaluated the notices to include plain language principles. We recently updated several SNOD letters with plain language, which clearly indicates the proposed tax increase, the taxpayer’s right to petition tax court, information on how to file a U.S. Tax Court petition, and information on how to obtain assistance from the Taxpayer Advocate Service (TAS). In addition, we’ve added information on the return preparer directory. In the event the taxpayer feels they need professional assistance, they can use the directory to identify and locate a return preparer.
1 Notice 1214, Helpful Contacts for your “Notice of Deficiency” (Jan. 2018).
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Some of the notices that were updated include the Automated Underreporter Program (AUR) SNOD, Notice 3219A; Correspondence Examination Program SNOD, Notice 3219; and the BMF Underreporter Program (BUR), Notice 3219B. In the process of updating these notices we collaborated with the IRS Office to Taxpayer Correspondence (OTC), Office of Chief Counsel (Counsel), and TAS.
The IRS continually seeks to improve taxpayer correspondence to ensure all correspondence complies with the Plain Writing Act of 2010. TAS provides feedback on all new and revised taxpayer correspondence products in development, including statutory notices of deficiency. Often, comments from TAS are incorporated into the final version. The IRS recently worked with TAS to include specific Local Taxpayer Advocate (LTA) contact information on many statutory notices. However, it was not possible to add customized LTA addresses for all letters due to programming issues. We appreciate the acknowledgement from the National Taxpayer Advocate and the alternate recommendations on this issue.
In 2019, the IRS will host a Taxpayer Correspondence Summit to bring business operating division representatives together to create a shared vision for the future state of taxpayer correspondence including notice revisions. We welcome the partnership with TAS to share perspectives and concerns about taxpayer correspondence. The Summit will be the starting point to engage participants from business organizations that produce correspondence, respond to correspondence, or provide support for correspondence development and implementation. In addition, the IRS will continue to collaborate cross-functionally as we improve taxpayer correspondence. The IRS welcomes any additional specific data driven analysis and information TAS can provide on problematic notices.
TAXPAYER ADVOCATE SERVICE COMMENTS ON IRS RESPONSE
The National Taxpayer Advocate appreciates the IRS’s efforts and commitment to continue to collaborate with our office and stakeholders to improve the content and design of statutory notices of deficiency. As detailed in the Annual Report, it’s critical that the IRS use plain language principles and behavioral science methods in redesigning notices of deficiency, to clearly convey the taxpayer’s proposed tax increase, as well as his or her right to challenge the IRS’s determination before the Tax Court and obtain TAS or LITC assistance in responding to the notice. Considering the statutory notice of deficiency is the taxpayer’s “ticket” to the Tax Court, which is the only pre-payment judicial forum where the taxpayer can appeal an IRS decision, it’s incumbent upon the IRS to ensure taxpayers avail themselves of this fundamental taxpayer right—the right to appeal an IRS decision in an independent forum .
The IRS has made significant strides in evaluating the notices with an eye towards including plain language principles. The National Taxpayer Advocate applauds the IRS for adding information on the return preparer directory and recently updating several SNOD letters with plain language, indicating the proposed tax increase, the taxpayer’s right to petition tax court, information on how to file a U.S. Tax Court petition, and information on how to obtain assistance from the Taxpayer Advocate Service (TAS).
We appreciate the IRS’s willingness to include specific Local Taxpayer Advocate (LTA) contact information on many statutory notices, despite the programming barriers in adding customized LTA addresses for all letters. TAS will continue to push the IRS to develop a timeline to secure and allocate funding to implement the necessary IRS system upgrades to allow for the programming of LTA addresses and contact information on the face of computer-generated letters, as required by law.
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The National Taxpayer Advocate is pleased the IRS will host a Taxpayer Correspondence Summit in 2019, bringing business operating division representatives together to create a shared vision for the future state of taxpayer correspondence, including notice revisions. We look forward to working with the IRS on this action.
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2 Notice 1214, Helpful Contacts for your “Notice of Deficiency” (Jan. 2018).
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COLLECTION DUE PROCESS NOTICES: Despite Recent Changes to Collection Due Process…¶
PROBLEM
Collection Due Process (CDP) rights provide taxpayers with an independent review by the IRS Office of Appeals of the decision to file a Notice of Federal Tax Lien (NFTL) or the IRS’s proposal to undertake a levy action, which can be appealed to Tax Court. The IRS communicates these important rights during two critical times. The IRS communicates the right to request a CDP administrative hearing with the intent to levy notice or the NFTL. Following the CDP hearing, the IRS communicates its determination to the taxpayer via a notice of determination. Perhaps because the notices provide confusing instructions regarding the due date to file a response, the response rate for CDP notices ranges from one percent to over ten percent, depending on income and type. Moreover, CDP notices emphasize collection actions and under-emphasize the statutory due process protections afforded by the hearings, leading unrepresented taxpayers to not avail themselves of important taxpayer rights.
ANALYSIS
The National Taxpayer Advocate and other stakeholders have highlighted specific problems with the way in which the CDP notices do not fully inform taxpayers. First, the design and wording in CDP notices underemphasize the importance of CDP rights. They do not explain what a hearing is, why a taxpayer would want to request one, and what an equivalent hearing is. Second, the notices do not clearly mention important information, such as a deadline by which to file a hearing request. Last, the notice of determination lacks a specific date by which to file a petition in Tax Court and does not explain why the notice is salient to taxpayers.
Applying principles of behavioral science help us understand how these notices should be improved. Taxpayers are more likely to read material if it is salient to them. Providing a full explanation on the importance of CDP rights and what they are losing if they do not request a hearing may prompt taxpayers to exercise their rights. Moreover, providing them with information about the availability of a Low Income Taxpayer Clinic (LITC) for representation may overcome the barrier posed by selfrepresentation. Last, plain language includes more than just simple wording. It includes structuring the notice so that it is easy to read and setting apart important information to guide the reader. This means that things such as a filing deadline should appear early in the notice and in bold font. With improved notices, perhaps the CDP response rates will increase.
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TAS RECOMMENDATIONS
[14-1] Include the exact date on the Notices of Determination by which the taxpayer must file a
petition in Tax Court.
[14-2] Work with TAS to redesign the CDP notices so that they reflect the principles of visual cognition
and processing of complex information. This will include changes such as:
a) Putting clear explanations about the importance of these hearings in terms relating to
taxpayer rights and protections;
b) Highlighting deadlines early in the notices and in bold font; and
c) Including references to TAS and the LITC program.
[14-3] Work with TAS to explore methods of more accurate notification of the due date for CDP
hearing requests with respect to lien filings.
IRS RESPONSE
In July 1998, Congress enacted Internal Revenue Code (Code) sections 6320 and 6330 to require the IRS to provide taxpayers with notice of, and an opportunity for, a Collection Due Process (CDP) hearing after a Notice of Federal Tax Lien (NFTL) is filed and before a notice of levy is issued. In January 1999, in accordance with the legislation, the IRS implemented letters to fulfill the new requirements—Letter 3172, the CDP notice of the NFTL filing, and Letter 1058 or Letter LT11, the CDP notice of the intent to levy.
From their implementation, the CDP notices have satisfied the statutory content requirements by including items such as the amount of the unpaid tax, the right of the taxpayer to a fair hearing, and the time frame for the taxpayer to request a CDP hearing. Through their 20 year history, the CDP notices have been revised several times with the concurrence of the Taxpayer Advocate Service (TAS) to enhance their clarity and incorporate modifications to the law. Similarly, we recently made changes to the Notice of Determination based on concerns raised by TAS.
The IRS strives to produce letters and notices that clearly inform taxpayers of their rights and responsibilities. To that end, the IRS is always receptive to suggestions for improvement. However, any changes must not detract from the purpose of the particular letter. The purpose of the CDP notices is to inform taxpayers of their CDP rights with regard to the potential levy or filed NFTL. Other information that may be included in collection letters, regardless of its inherent value, may obscure the importance of the CDP opportunity. To keep the taxpayer aware of other valuable information, instructional publications are included with the CDP notices.
The IRS is currently working with TAS and other stakeholders to evaluate the LT11 CDP notice and the most effective way to convey the letter’s information, particularly the placement of the response due date. Similar revisions are also under consideration for Letter 1058. The current version of Letter 3172, which was developed with the Office of Taxpayer Correspondence and approved by TAS prior to publication, indicates in bold the date for the taxpayer to exercise their rights and clearly sets forth the address for submitting the CDP request.
There are many significant factors that influence the CDP request rate. Most notably, the CDP notices are generally sent after numerous other notices and verbal warnings of the possible collection actions.
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Additionally, the issuance of CDP notices does not preclude taxpayers from other collection alternatives. The Code does not require the IRS to solicit CDP requests from taxpayers but rather to timely provide taxpayers the information necessary for them to exercise their rights. IRS policies and procedures promote consistency with the statutory requirements so that all taxpayers are treated the same and have equal opportunities.
TAXPAYER ADVOCATE SERVICE COMMENTS ON IRS RESPONSE
TAS agrees that the CDP notices, with the enclosed publications, meet legal requirements as spelled out in the tax code. However, the tax code does not stipulate how the information is to be communicated to taxpayers. That is up to the IRS to decide. The National Taxpayer Advocate, practitioners, taxpayers, and even the U.S. Tax Court, have expressed various concerns over the current content of these notices. If the notices are not salient to taxpayers or do not clearly communicate with the taxpayers, it is understandable that the response rate to CDP notices will continue to be low. TAS is not saying that the IRS should be soliciting CDP requests from taxpayers, but the CDP notices should be written with sufficient clarity to allow taxpayers to make truly informed decisions.
In general, the design and wording in the notices underemphasize the importance of CDP rights. The notices do inform the taxpayers of the right to request a CDP hearing. However, this information does not appear until the second page of Letter LT 11. Letter 1058 includes the information halfway down the first page. Moreover, the notices do not explain what a hearing is, why a taxpayer would want one, and what an equivalent hearing is. While this information is not required by the tax code, the importance of a CDP hearing makes little sense to a taxpayer without knowing more about the hearing or why he or she would want one. Last, the notice of determination lacks a specific date by which the taxpayer must file a petition in U.S. Tax Court.
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ECONOMIC HARDSHIP: The IRS Does Not Proactively Use Internal Data to Identify…¶
PROBLEM
Economic hardship, as defined in Treasury regulations and the Internal Revenue Manual, occurs when an individual is “unable to pay his or her reasonable basic living expenses.” Although Congress requires the IRS to halt some collection actions, like a levy, if a taxpayer is in economic hardship, the IRS is not proactive in identifying these taxpayers throughout the collection process. This means that the IRS does not have a method to alert collection employees that a taxpayer may be at risk of economic hardship and, when responding to taxpayer inquiries, to ask questions about the taxpayer’s finances to determine an appropriate collection action or alternative. As a result, taxpayers may be lured into entering installment agreements (IAs) they cannot afford, violating their right to be informed, right to quality service, and right to a fair and just tax system.
ANALYSIS
The IRS routinely undertakes collection treatments without performing the financial analysis required to make a hardship determination. For example, taxpayers need not submit any financial information to qualify for streamlined IAs and may enter into them online without interacting with an IRS employee. Many anxious or intimidated taxpayers seeking to resolve their liabilities as quickly as possible may be unaware the IRS is required to halt collection action if they are in economic hardship, and thus agree to make tax payments they cannot afford. Over the last six years, taxpayers whose cases were assigned to the IRS’s Automated Collection System (ACS) entered into nearly 4.3 million IAs. About 84 percent of those IAs were streamlined. TAS estimates that about 40 percent of taxpayers who entered into a streamlined IA within ACS in fiscal year (FY) 2018 had incomes at or below their Allowable Living Expenses (ALEs), the standards the IRS uses in determining ability to pay a tax liability. In other words, four out of every ten taxpayers who agreed to streamlined IAs in ACS could have been eligible for collection alternatives, such as offers in compromise (OICs) or “currently not collectible - hardship” (CNC-Hardship) status, if they had known or been asked to explain their financial circumstances. The default rate within ACS for streamlined IAs of taxpayers whose income was at or below their ALEs in FY 2018 was about 39 percent.
The TAS Research function has developed an automated algorithm that we believe can identify taxpayers with incomes below their ALEs with a high degree of accuracy. The IRS could apply this formula by automation to the accounts of all taxpayers who owe back taxes, and then place a marker on the accounts of taxpayers whom the screen identifies as having incomes below their ALEs. While this marker would not automatically close a case as CNC-Hardship, it could be used to create a warning for telephone assistors responding to taxpayers calls and for taxpayers entering into IAs online. The IRS could also use this algorithm to screen out these taxpayers from automated collection treatments such as the Federal Payment Levy Program, selection for referral to Private Collection Agencies (PCAs), or passport certification unless and until the IRS has made a direct personal contact with the taxpayer to verify the information.
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TAS RECOMMENDATIONS
[15-1] Develop and utilize an algorithm to compare a taxpayer’s financial information to ALEs during
Inventory Delivery System (IDS) case scoring and as a template made available to Revenue Officers and telephone assistors responding to taxpayer inquiries.
[15-2] Apply this algorithm before sending any cases to PCAs, and exclude any case involving a
taxpayer at risk of economic hardship from potentially collectible inventory.
[15-3] Route cases identified as at risk of economic hardship to a specific group within ACS and send
those taxpayers a specific written notification to educate them on collection alternatives and additional assistance available, including TAS and Low Income Taxpayer Clinics (LITCs).
[15-4] Create a new help line dedicated to responding to taxpayers at risk of economic hardship and
helping them determine the most appropriate collection alternative, including OICs.
[15-5] Partner with TAS and LITCs to develop issue-focused training for IRS employees who interact
with taxpayers at risk of economic hardship.
IRS RESPONSE
We have implemented a number of safeguards over the years to ensure that taxpayers who are experiencing economic hardship are appropriately addressed during the collection process, including through the use of allowable living expense standards to ensure consistent treatment and opportunities to challenge the appropriateness of a proposed collection action. The IRS Collection Operating Unit ensures its employees have the knowledge and tools to efficiently and effectively assist all taxpayers. Training and procedural guidelines in the Internal Revenue Manual (IRM) provide employees information on how to determine a taxpayer’s ability to pay, enabling appropriate decision making to resolve cases.
Economic hardship occurs when a taxpayer is unable to pay reasonable basic living expenses. Collection employees receive training to address situations where a taxpayer is experiencing economic hardship, and all Automated Collection System (ACS) and Field Collection employees are empowered to assist these taxpayers when contact is made. Routing cases involving economic hardship to a specific group of employees would create inefficiencies and delay the proper resolution of these cases.
The IRS cannot reliably determine economic hardship based solely on information available in IRS and third-party databases, which is often incomplete. An accurate determination of a taxpayer’s ability to pay generally requires the taxpayer to submit financial information along with supporting documentation. IRS’s financial analysis procedures vary based on case characteristics, but generally a Collection Information Statement (CIS) is secured from the taxpayer along with other documentation.
Each case is analyzed individually under guidelines that are applied uniformly. These guidelines provide a comprehensive structure for making an appropriate collection determination, balancing the needs of the taxpayer against their obligation to pay tax and, at the same time, fostering public confidence that all taxpayers are being held to the same standard of compliance. Any attempt to proactively identify taxpayers likely to be in economic hardship based on an incomplete set of facts would lead to flawed results.
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Prior to 2007, the published Allowable Living Expense (ALE) tables included the exact living expense figures, so the living expense amounts increased or decreased from year to year. In 2007, at the suggestion of the National Taxpayer Advocate and following the completion of a research study of the ALE standards, the IRS removed income-based ranges for the ALE standards and came to an agreement that the ALE tables would not show decreases in amounts from year to year. That change created higher allowances for most expenses for lower-income taxpayers, resulting in a Currently Not Collectible determination for most taxpayers who are below the poverty threshold. In 2014, there were concerns about the accuracy of the ALE figures. IRS agreed to look at this issue and work with TAS to address these concerns. In January 2016, SBSE Collection Policy and TAS came to an agreement that ALE standards could reflect some decreases in amounts from year to year when indicated. However, the amounts of any decreases are limited from one year to the next; even if the data reflects a significant decrease, the ALE standard is reduced by no more than 10% of the prior year published amount.
TAXPAYER ADVOCATE SERVICE COMMENTS ON IRS RESPONSE
The National Taxpayer Advocate commends the IRS on their past efforts on this issue and their willingness to work with the Taxpayer Advocate Service in trying to implement more safeguards for taxpayers who are experiencing economic hardship. While it is true that the IRS and TAS agreed to limit decreases to the ALE standards to ten percent, the IRS was also going to update their instructions to Collection personnel to consider allowing the non-decreased ALE amount, when appropriate. Unfortunately, the IRS subsequently decided not to update its ALE guidance to its employees, instead choosing to rely on other instructions regarding deviations from ALE standards. Nevertheless, the IRS has misunderstood our recommendations. In its response to our recommendations, the IRS stated that “[t]he IRS cannot reliably determine economic hardship based solely on information available in IRS and third-party databases, which is often incomplete.” It is true the IRS cannot conclusively reach a determination about whether a taxpayer faces economic hardship based on its internal data alone. But that is not what we are recommending. Rather, we are recommending that the IRS systemically place a marker on the accounts of all taxpayers whom its filter identifies as having incomes below their ALEs and no detectable assets. The marker would signal that a taxpayer is at risk of economic hardship and therefore additional information should be requested. Specifically, the marker would alert IRS assistors speaking with taxpayers over the phone that they should verify the taxpayer’s ability to pay before placing them in streamlined IAs. Under this approach, the IRS would be using data to proactively protect financially struggling taxpayers from further financial harm.
Similarly, the indicator could be used to warn taxpayers who are attempting to enter into streamlined IAs online about collection alternatives if they are able to substantiate financial hardship. Perhaps a pop-up message could suggest the taxpayer seeks an alternative collection option, such as Currently Not Collectible-Hardship (CNC-Hardship) or an OIC. Moreover, the indicator would alert IRS assistors speaking with taxpayers over the phone of the need to verify their ability to pay before placing them in streamlined IAs that are likely to default. In fact, the IRS could program its systems so when an assistor keys in the Social Security number of a taxpayer with an economic hardship risk indicator, a screen is generated with the income information, projected family size, and appropriate ALEs. This way, the assistor can engage with the taxpayers and simply run through some high-level information to verify its accuracy. This approach uses data to proactively protect the taxpayers’ rights to privacy and a fair and just tax system .
The IRS further states in its response that “[a]ny attempt to proactively identify taxpayers likely to be in economic hardship based on an incomplete set of facts would lead to flawed results.” However, we
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disagree and believe this further misses the point of the recommendation. An indicator would serve as a starting point to engage taxpayers and verify the financial status of taxpayers who may face economic hardship. The indicator would not constitute a final determination of the taxpayers’ financial status or ability to pay.
The National Taxpayer Advocate hopes that the IRS will reconsider and work with TAS on addressing these recommendations in the near future.
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FIELD COLLECTION: The IRS Has Not Appropriately Staffed and Trained Its Field…¶
PROBLEM
Field Collection works cases that have not been resolved through the notice stream or through the Automated Collection System (ACS). In general, to resolve cases, Revenue Officers can file a lien, issue a levy, seize assets, recommend suits to foreclose on a federal tax lien or reduce the tax debt to judgment. Notwithstanding their responsibility to collect tax, Revenue Officers must adhere to taxpayers’ right to privacy and right to a fair and just tax system, and they have the responsibility to educate the taxpayer in order to avert future noncompliance. The current state of Field Collection has impaired the ability of Revenue Officers to fulfill their mission in accord with the Taxpayer Bill of Rights. The National Taxpayer Advocate has the following concerns: (1) Revenue Officers are not as accessible to taxpayers, and are less able to assess economic conditions on the ground; (2) IRS procedures do not provide for early intervention by Revenue Officers; (3) Revenue Officers are not given the appropriate tools to effectively collect revenue; and (4) IRS metrics for evaluating the effectiveness of Field Collection are incomplete.
ANALYSIS
The Field Collection function is the final depot in the collection roadmap. The function relies on Revenue Officers to work all tax accounts that were not resolved in the notice stream and the ACS. Aspects of a Revenue Officer’s responsibilities include education, research and investigation, and appropriate enforcement. Because they are expected to engage in personal contact with taxpayers, it is important for Revenue Officers to maintain a geographic presence in the communities in which they serve. In recent conversations TAS held with stakeholder groups, practitioners voiced concern about the difficulty in not only arranging face-to-face meetings, but even in reaching Revenue Officers via phone or having them return calls.
By the time a Revenue Officer makes contact, taxpayers may be unable to pay the debt in full because the debt has grown so large as a result of accrued penalties and interest, or because the taxpayer’s financial condition has deteriorated over time. Thus, it is imperative that a Revenue Officer quickly receive delinquent accounts, so that face-to-face contact with the taxpayer can be made, assisting with a resolution of the liability before the liability grows significantly or additional liabilities accrue. The National Taxpayer Advocate has advocated for the benefits of early intervention; it is an effective measure in promoting tax compliance and closing the noncompliance gap on employment taxes.
The IRS has slashed three-quarters of its training budget from fiscal year (FY) 2010 to FY 2017, and is moving away from face-to-face training in favor of virtual learning. In FY 2018, there were at least eight times as many virtual training sessions as there were in-person training sessions.
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TAS RECOMMENDATIONS
[16-1] Formally evaluate the impact on taxpayers of hoteling Revenue Officers—for example, is there
any quantifiable harm to taxpayers due to the lag time in responding to taxpayer or practitioner calls or appointments, or in posting payments and tax returns, installment agreements, and offers in compromise (OICs)?
[16-2] Implement lessons from the “Fresh Inventory” pilot to modify its case selection and assignment
methodologies for Revenue Officers to focus on early intervention that educate taxpayers on compliance, resolve cases timely, and promote future voluntary compliance.
[16-3] Implement the Early Interaction Initiative to ensure business taxpayers are in compliance with
and educated on the federal tax deposit requirements for employment taxes.
[16-4] Issue a policy for a “Revenue Officer of the day” in all field offices, except offices with only
one Revenue Officer, so every taxpayer, wherever they are located in the country, receives the same quality service. Such a policy would help ensure that payments and tax returns are posted timely, correspondence and questions are responded to timely, and face-to-face meetings are available.
[16-5] Promote taxpayers’ future compliance by Revenue Officers conducting and participating in
outreach events that provide information on policy and procedures of Field Collection and the role of Revenue Officers in the collection of taxes and voluntary tax compliance.
[16-6] Establish a quality measurement system that measures (using a statistically valid sample) the
future voluntary compliance impact of Field Collection actions, including if those actions resulted in undue harm or burden to taxpayers.
[16-7] Grant Revenue Officers the authority to work OIC cases.
IRS RESPONSE
Field Collection is responsible for protecting the revenue and the interests of the government through direct collection and enforcement activity with taxpayers and/or their representatives and helping taxpayers understand and comply with all applicable tax laws. Revenue Officers working in Field Collection are assigned cases involving more complex financial circumstances that generally require working away from the office to uncover or view taxpayer assets and perform other investigative techniques.
Over the last several years, our Field Collection resources have dwindled due to budget constraints. The IRS recognizes the negative impact caused by these significant losses and fully supports the need for additional personnel as well as reducing burden throughout the collection process. We have received funding approval to hire 750 Revenue Officers in Fiscal Year (FY) 2019, which is our most significant hiring for this position in the past ten years.
Despite these challenges, Field Collection put meaningful and actionable focus on protecting the rights of taxpayers. More than half of Field Collection’s assigned cases involve businesses. Since 2015, we continue to place increased priority on early intervention with these important customers (who account for over 70% of the revenue secured by the IRS) through expansion of the Federal Tax Deposit Alert program. This program ensures business taxpayers understand the potential consequences of
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non-compliance before enforcement action is necessary. Data appear to show positive compliance impacts from this effort. In March 2019 our employees made Employer Educational Visits to over 100 business customers to further augment these proactive efforts. In FY 2019, Field Collection leaders and experts will participate in a number of National Tax Forums, practitioner events, and business industry conferences to further assist taxpayers and practitioners in understanding their federal tax responsibilities.
We deliver comprehensive training to new Revenue Officers as well as continuing professional education to seasoned Revenue Officers on topics such as taxpayer rights, how to conduct civil investigations, and how to take enforcement actions. Between November 2016 and December 2018, we delivered advanced technical training and formal workshops to enhance existing Revenue Officers’ skills. For new Revenue Officers, we delivered three classroom training sessions during their first year on the job that gradually introduced them to more and more complex topics and actions. Offers in Compromise are worked by specially-trained offer specialists and examiners to ensure consistency and efficiency in that program. We use a quality review process to ensure our employees are taking the right actions at the right time and use the results to uncover additional training needs.
Leadership communications and operational reviews place emphasis on the importance of helping taxpayers understand the collection process and how to remain compliant in the future. They stress keeping taxpayers informed of the status of their cases, avoiding unnecessary delays, and giving them “finality” when their case is resolved.
TAXPAYER ADVOCATE SERVICE COMMENTS ON IRS RESPONSE
The National Taxpayer Advocate appreciates the difficult challenges faced by Field Collection in an environment where their Revenue Officers staffing has declined significantly in recent years. It is encouraging that the IRS has approved funding to hire up to 750 additional Revenue Officers in FY 2019. This makes it even more critical that Field Collection develop the appropriate tools and content for the on-boarding and training of these new hires. The IRS has a tremendous opportunity this year to lay the groundwork in establishing a culture where cycle time and closures are not the central focus for its Revenue Officers—they should instead strive to deliver the right treatment at the right time, and be given the flexibility to do so.
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IRS’S AUTOMATED COLLECTION SYSTEM (ACS): ACS Lacks a Taxpayer-Centered Approach,…¶
PROBLEM
The Automated Collection System (ACS) is a major IRS automated collection inventory system used to send notices demanding payment, and to issue notices of federal tax lien (NFTLs) and levies. ACS employees also answer taxpayer telephone calls to resolve balance due accounts and delinquencies. In recent years, ACS has drifted away from its philosophy of understanding the cause of the tax debt, considering collection alternatives, and ensuring that these collection alternatives enable future voluntary compliance. Instead, ACS today primarily focuses on collecting the tax owed without securing or discussing the facts surrounding the taxpayer’s particular situation.
ANALYSIS
At the end of fiscal year (FY) 2018, ACS had about $47 billion placed in its inventory and it collected about $3.5 billion of that amount during the same time period, and about $4.3 billion was collected through installment agreements (IAs), for a total collection of nearly $8 billion. However, ACS transferred $13.6 billion to the queue, an electronic holding area for accounts that will not be worked immediately. Additionally, $3.2 billion was collected through refund offsets ( i.e., without any action by an ACS employee or any interaction with the taxpayer).
ACS is actively trying to avoid person-to-person interaction with taxpayers. For example, it stopped issuing a letter previously sent to taxpayers systemically, LT16: Request for Taxpayer to Contact ACS, in order to decrease the number of taxpayers calling ACS, which in turn would help improve the ACS level of service (LOS)—63 percent for filing season (FS) 2018. Moreover, ACS notices proposed in redesign studies omit the name and phone number of an individual ACS employee, and any focus on taxpayer rights.
ACS heavily relies on streamlined IAs: about $3.1 billion (71 percent) of the total $4.3 billion of its FY 2018 IA collections were collected pursuant to streamlined IAs. Streamlined IAs do not require financial analysis, and taxpayers often agree to payments they cannot afford. Taxpayers in ACS whose income did not exceed their ALEs defaulted on their streamlined IAs 39 percent of the time in FY 2018. ACS does not prioritize working defaulted IA cases, thereby missing an opportunity to quickly engage a taxpayer who has previously shown initiative to resolve their tax debt.
In 2009, the Tax Court held, in Vinatieri v. Commissioner, 1 that when the IRS sustains even a proposed levy on a taxpayer it knows is in economic hardship, it abuses its discretion. Ten years later, ACS employees continue to take action that is inconsistent with the Vinatieri decision.
1 Vinatieri v. Comm’r, 133 T.C. 392 (2009).
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TAS RECOMMENDATIONS
[17-1] Assign one ACS employee to a taxpayer’s case, provide this employee’s contact information on
each notice that is sent to the taxpayer, and assign the case to an ACS employee who is located in the same geographic region as the taxpayer.
[17-2] Send out monthly notice reminders to taxpayers regarding their tax liabilities and accrued
penalties and interest.
[17-3] Revise ACS notices using a Taxpayer Bill of Rights framework that conspicuously informs
taxpayers of the rights impacted by a given notice.
[17-4] Apply an indicator to cases in which the taxpayer is likely experiencing economic hardship and
route these cases to a separate Economic Hardship Shelter excluded from assignment to private collection agencies.
[17-5] Revise ACS’s Internal Revenue Manual and scripts to instruct employees when a taxpayer
has an economic hardship indicator placed on their account, to consider all possible avenues for resolution, including Partial Payment Installment Agreements, offers in compromise, or placement into Currently Not Collectible hardship status.
[17-6] Conduct a research study to determine if IRS’s modeling scores and collection potential
calculator are truly identifying the cases that are most likely to be resolved.
[17-7] Reorder ACS protocols to give high priority to cases where a taxpayer has defaulted on a prior
installment agreement.
IRS RESPONSE
The Automated Collection System (ACS) was created to provide taxpayers with the opportunity to resolve delinquent tax obligations with a single telephone contact. ACS provides employees with the capability to take a wide range of actions to resolve cases in an efficient and equitable manner that is in the best interest of both the taxpayer and the Service.
ACS is set up to assist taxpayers as quickly as possible by sending them to the first available Collection Representative (CR), no matter where the assister is located geographically in the country (as opposed to waiting for a particular assister to become available). This allows approximately 1,800 to 2,000 full time equivalents in ACS to answer 8 to 14 million taxpayer calls per year. If we were to assign a single employee to each case, we could not answer the same number of calls, further frustrating taxpayers with longer hold times and less responsive service.
Similarly, the inventory prioritization system used by ACS employs statistical models designed to identify the next best case to be worked. We conduct an annual review to determine if any updates to our inventory delivery system models are required.
In 2010, we updated our guidance to our employees on levies and economic hardship based on the judicial Vinatieri decision. We provided training to our ACS employees on this issue on several occasions, most recently in continuing professional education courses in 2015 and 2017. We will continue to remind our employees of these procedures.
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To improve service to taxpayers, we have begun to leverage technology to create alternative ways of providing services. Self-service options, such as the online payment agreement application and the offer-in-compromise prequalifier tool, are an alternative method for providing taxpayers with the quality services that they have a right to expect. Self-service options are often available outside of normal business hours, provide quicker resolutions than telephonic or mail options, and can be less intrusive for the taxpayer. For example, in certain situations, we offer streamlined installment agreements, allowing taxpayers to arrange a payment agreement online without providing financial documentation or talking with an IRS employee. Many taxpayers appreciate and want these self-service options. For those who cannot access or do not want self-service options, we continue to have ACS employees available.
TAXPAYER ADVOCATE SERVICE COMMENTS ON IRS RESPONSE
The National Taxpayer Advocate recognizes that ACS receives a voluminous number of calls from taxpayers each and every day, and agrees that part of good customer service is ensuring that a taxpayer can reach an ACS assistor quickly. However, good customer service is also providing taxpayers with a single point of contact when they call ACS who resides in the same geographic location as the taxpayer, thereby ensuring the assistor is familiar with the economic conditions and circumstances affecting the taxpayer’s particular region. Although this would undoubtedly have an effect on ACS case management and inventory balancing, it could also make these optional selections, rather than restructuring the entire ACS group. Some taxpayers will prefer to speak with one assistor throughout their communications with the IRS regarding their issue, while others will simply want to speak to the next available assistor. The option should be available, and the choice should be left up to the taxpayer.
Despite the IRS’s revision to their procedures in 2010 to reflect the holding in Vinatieri and subsequent training on these issues, ACS assistors still get the guidance wrong. The IRS’s statement that it will “continue to remind its employees of these procedures” is insufficient, especially in light of the fact that the IRS’s prior efforts to train their employees have, to a certain extent, been unsuccessful. Failing to inform taxpayers of the holding in Vinatieri and to abide by it compromises taxpayer’s right to be informed and right to a fair and just tax system .
In no way does the National Taxpayer Advocate imply that leveraging technology to offer self-service options is an inappropriate strategy to employ or doesn’t offer benefits when compared to more traditional modes of customer service. However, what the Most Serious Problem emphasizes is that it is inappropriate to highlight solely self-service options in notices or to bury the ACS toll-free number in the notice to essentially force taxpayers to move toward self-service options for the purpose of improving the level of service (LOS) on ACS’s toll-free lines. This leaves taxpayers who either aren’t able to use selfservice options or who prefer to call ACS struggling to track down ACS’s contact information.
Although the National Taxpayer Advocate understands the significant challenge facing ACS to respond to and assist millions of taxpayers every year, it is important that it seriously considers a variety of different approaches that may ultimately provide better service options to taxpayers while improving the efficiency of ACS. These options and strategies should always be constructed within the framework of the Taxpayer Bill of Rights, especially the right to quality service, to be informed, and to a fair and just tax system.
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2 National Taxpayer Advocate 2018 Annual Report to Congress 258 (Research Study: Further Analyses of “Federal Tax Liens and Letters: Effectiveness of the Notice of Federal Tax Liens and Alternative IRS Letters on Individual Tax Debt Resolution” ).
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3 Nina E. Olson, The IRS is Not Doing Enough to Protect Taxpayers Facing Economic Hardship, NTA Blog (May 24, 2019), https://taxpayeradvocate.irs.gov/news/nta-blog-the-irs-is-not-doing-enough-to-protect-taxpayers-facing-economic-hardship?category=Tax%20News. Approximately ten percent of this population could not be analyzed because these taxpayers did not file recent tax returns and therefore their adjusted gross income (AGI) could not be determined. 4 Internal Revenue Manual (IRM) 5.15.1.8 (6) , Allowable Expense Overview (Aug. 29, 2018). Allowable expenses include transportation expenses, which may consist of ownership expenses (loan or lease payments) and operating expenses (maintenance, repairs, insurance, fuel, registrations, licenses, inspections, parking, and tolls). The IRS may allow additional amounts for basic living expenses if the taxpayer substantiates the need to deviate from the standards. 5 For a more in depth discussion of what TAS analysis showed, see Nina E. Olson, The IRS Is Not Doing Enough to Protect Taxpayers Facing Economic Hardship, NTA Blog (May 24, 2019), https://taxpayeradvocate.irs.gov/news/nta-blog-the-irs-isnot-doing-enough-to-protect-taxpayers-facing-economic-hardship?category=Tax%20News. 6 See IRM 5.19.9.3.2.3, Low Income Filter (LIF) Exclusion (June 23, 2014). 7 See Taxpayer Bill of Rights (TBOR), www.TaxpayerAdvocate.irs.gov/taxpayer-rights.
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8 National Taxpayer Advocate 2018 Annual Report to Congress 256 (Most Serious Problem: IRS’s Automated Collection System (ACS): ACS Lacks a Taxpayer-Centered Approach, Resulting in a Challenging Taxpayer Experience and Generating Less Than Optimal Collection Outcomes for the IRS ).
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OFFER IN COMPROMISE: Policy Changes Made by the IRS to the Offer in Compromise Program…¶
PROBLEM
This year, the National Taxpayer Advocate studied business offers in compromise (OICs) out of concern that the IRS is not doing enough to help business taxpayers file successful OICs. Additionally, the IRS made changes that create barriers to all taxpayers from submitting successful OICs. First, not every state has an OIC Specialist, creating a situation where circumstances unique to a particular area are not always known by the employee reviewing the OIC. Also, the IRS now returns OICs as not processable when submitted by taxpayers who have not filed all necessary tax returns, instead of holding on to them for a period as leverage for the taxpayer to cure the filing defects. In conjunction, the IRS now keeps the payments sent with OICs it returns for lack of filing compliance. Taxpayers may face additional difficulties because OICs returned in error are no longer subject to the 24-month acceptance period in IRC § 7122(f) and, processing time is so long, some taxpayers lose two years of refunds as part of their OIC agreement. All of these obstacles could explain why the acceptance rate for individual OICs is at just 44 percent while business OICs have an even lower acceptance rate of 24 percent.
ANALYSIS
In 2018, TAS Research reviewed business OICs and determined that the IRS is losing revenue collection opportunities because of inflated reasonable collection potential (RCP) calculations. In about 40 percent of the business OICs that were not accepted, the OIC amounts offered were much higher than the amounts ultimately collected. Additionally, in fiscal year (FY) 2017, the IRS returned 2,767 individual OICs because of unfiled returns. Of those returned OICs, approximately 34 percent resubmitted an OIC. The IRS returned 561 business OICs because of unfiled returns in FY 2017. Of those returned OICs, approximately 47 percent resubmitted OICs. These numbers indicate that, if the IRS worked with taxpayers to perfect OICs prior to rejection, it might obtain even more returns and would not impose an additional Tax Increase Prevention and Reconciliation Act (TIPRA) payment on these taxpayers.
TAS RECOMMENDATIONS
[18-1] Have at least one OIC Specialist in each state to ensure a more even geographic presence for OIC
analysis.
[18-2] Change its policy for deeming OICs not processable if the taxpayer is not current with his or
her filing requirement and reinstate the requirement to retain the OIC and contact taxpayers to obtain missing returns within a specified period of time.
[18-3] Reconsider its determination that OICs returned or withdrawn in error are not subject to the
24-month deemed acceptance period in IRC § 7122(f).
[18-4] Limit the number of refunds that can be offset while an OIC is pending to one refund only.
[18-5] Conduct a study to analyze the OIC amount offered and collected amounts to understand why
the IRS is rejecting OICs that have an offered amount greater than the dollars collected. For
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instance, the IRS should look at how it is applying the Allowable Living Expense standards and where the taxpayer is obtaining the payment for the OIC.
IRS RESPONSE
We appreciate the National Taxpayer Advocate’s (NTA) acknowledgement of our efforts to make Offer in Compromise (OIC) a more visible collection tool. In addition to the outreach efforts mentioned in the NTA’s report, we made available a Frequently Asked Questions (FAQ) page and an online “prequalifier tool” at IRS.gov, which taxpayers and tax professionals can use to determine if an OIC is a viable option for them. There has been a 10-percentage point increase in the OIC acceptance rate from FY10 to FY18. 1
The OIC program reviews and revises procedures and policies on a regular basis. Revisions to the process have included requiring taxpayers to be in filing compliance when submitting an offer. The revised policy allows the Service to concentrate on the offer investigation and not delay the potential offer acceptance waiting for a tax return to post. It also allows the Service to focus our limited staff on offers from taxpayers who are in full filing compliance upon submission of their offer.
Under section 7122 of the Internal Revenue Code, taxpayers are required to include a user fee and a non-refundable initial payment as a condition of submitting an OIC application. This means that if a taxpayer files an OIC application before having filed all required tax returns, they will get their user fee back, but any required initial payment will not be returned. It will be applied to reduce their balance owed as required by law.
Reasonable collection potential is a complex and nuanced topic. It is the policy of the Service to accept an OIC when it is unlikely the tax liability can be collected in full and the amount offered reasonably reflects collection potential. We are reviewing the future collection results in cases where an OIC was rejected and we will consider changes to the program based on the findings.
OICs are worked by offer examiners and offer specialists, and not by revenue officers. The Service centralized the OIC process in 2001 to provide more control and consistency in processing OICs. Decentralizing the process would significantly increase training costs, decrease the effectiveness of specialized training, and generally increase the risk of inconsistencies in OIC processing.
For purposes of the two-year deemed acceptance rule, the IRS program does not distinguish between rejections, returns, and withdrawals. When the IRS returns an offer, or it is withdrawn, the deemed acceptance provisions no longer apply, even where the initial decision is later determined to have been in error.
TAXPAYER ADVOCATE SERVICE COMMENTS ON IRS RESPONSE
TAS appreciates that all of the decisions the IRS has made come from a standpoint of conserving resources and focusing on OICs that successfully enter the OIC program. However, the OIC program offers many benefits to both the IRS and taxpayers. It is in the best interest of the IRS to make the OIC program as user-friendly as possible. The policies highlighted in the Most Serious Problem (MSP) may be saving time or other resources at the expense of taxpayers who want to submit a successful OIC.
1 Acceptance rate as a percentage of processable dispositions.
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PRIVATE DEBT COLLECTION: The IRS’s Expanding Private Debt Collection Program Continues…¶
PROBLEM
The IRS implemented its current Private Debt Collection (PDC) initiative in April 2017. As of September 13, 2018, about $5.7 billion in debts of more than 600,000 taxpayers were in the hands of private collection agencies (PCAs). As of September 30, 2018, more than 400,000 taxpayers’ debts were in Private Collection Agency (PCA) inventory with no installment agreement (IA) or payment for more than three months after assignment, and had been in PCA inventory for 244 days on average. Thus, PCA inventory is fast becoming a substitute of the IRS collection queue.
PDC program revenues in fiscal year (FY) 2018 surpassed program costs, but this surplus was achieved, to a significant extent, by collecting from financially vulnerable taxpayers. According to IRS databases that contain information from tax returns filed by taxpayers and reports of income filed by third parties:
■■ 40 percent of taxpayers who entered into IAs while their debts were assigned to PCAs had
incomes at or below their allowable living expenses (ALEs);
■■ 44 percent of taxpayers who made payments while their debts were assigned to PCAs (a group
that includes recipients of Social Security Disability Insurance (SSDI) income) had incomes at or below 250 percent of the federal poverty level;
■■ 37 percent of taxpayers who entered into IAs while their debts were assigned to PCAs defaulted,
a frequency that rises to 44 percent when defaulted IAs that PCAs do not report to the IRS as required are taken into account, while the overall default rate for streamlined IAs for taxpayers whose debts are not assigned to PCAs is 19 percent; and
■■ 34 percent of the amount paid that was attributable to PCA activity was made by taxpayers whose
incomes were at or below their ALEs.
The PDC program revenues for fiscal year (FY) 2018, $75 million, are not at the level Congress expected for FY 2018 ($470 million) or even the level expected for FY 2017 ($374 million). Moreover, IRS collection activity with respect to taxpayers whose debts were assigned to PCAs actually generated more dollars for the public fisc in FY 2018 ($37.4 million) than did PCA activity ($25.8 million).
ANALYSIS
Internal Revenue Code § 7122(d) requires the IRS to develop ALE guidelines; if the ALE standards exceed a taxpayer’s income, the IRS believes the taxpayer is unable to pay his or her necessary living expenses. For taxpayers whose debts are assigned to PCAs, the congressionally-mandated ALE guidelines for analyzing their ability to pay and evaluating collection alternatives are disregarded because PCAs do not collect financial information from taxpayers. In addition to assigning the liabilities of taxpayers who did not dispute their liability, by the end of FY 2018, the IRS had assigned over 150,000 more complex cases, involving assessments: based on substitutes for returns; pursuant to the Automated Underreporter (AUR) computer matching system; or where the taxpayer did not respond, or stopped responding, to IRS inquiries pursuant to an audit. These types of cases are subject to reconsideration
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and have an increased risk that all or part of the liability may not be owed, so that abatement would be appropriate, including penalty abatement.
TAS RECOMMENDATIONS
[19-1] Exclude from assignment to PCAs the debts of taxpayers whose incomes are at or below their
allowable living expenses.
[19-2] Work with the Social Security Administration to identify recipients of Social Security Disability
Insurance and Supplemental Security Income and exclude those taxpayers’ debts from assignment to PCAs.
[19-3] Revise PDC procedures to require IRS review of all PCA cases in which the taxpayer made
more than one payment that did not fully pay the liability and was not made pursuant to an IA, to determine whether the PCA requested more than one payment from a taxpayer who can make payments, but cannot fully pay the liability within the Collection Statute Expiration Date (CSED) and if so:
a) Recall the case from the PCA;
b) Impose a penalty on the PCA for requesting more than one such payment without
returning the case to the IRS; and
c) Assign an IRS employee to work the case.
[19-4] Revise PDC procedures to:
a) Require PCAs to return to the IRS cases in which the taxpayer entered into an installment
agreement but made no payments for 120 days thereafter; and
b) Assign an IRS employee to work the case.
[19-5] Revise PDC procedures to require PCAs to return to the IRS cases in which the taxpayer did not
enter into an IA and did not make any payments within six months of assignment to the PCA.
IRS RESPONSE
The Fixing America’s Surface Transportation (FAST) Act, enacted in December 2015, requires the IRS to enter into qualified collection contracts for the collection of inactive tax receivables. The IRS has been actively assigning cases to private collection agencies (PCAs) since April 2017 to collect on tax debts that the IRS is not actively pursuing. Since that time (through December 13, 2018), the Private Debt Collection (PDC) program has assigned over 1.1 million cases to PCAs and recovered over $130 million in overdue tax debts for the government. The current PDC program has already proven itself to be significantly more effective in the first two years as compared to the prior iterations.
We agree with the National Taxpayer Advocate that the IRS must ensure the PDC program operates in accordance with the law and respects taxpayers’ rights. The law is very specific about the types of cases that are excluded from the program. Neither the statute nor the Conference Report accompanying its enactment contemplates the exclusion of taxpayers whose incomes are at or below allowable living expense levels. Accounts the IRS identifies as “currently not collectible” due to hardship circumstances are not assigned to Private Collection Agencies (PCAs). The PCAs offer payment arrangements to taxpayers in a manner consistent with IRS installment agreement procedures for similarly-situated
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taxpayers who call the IRS. As is the practice within the IRS, a taxpayer’s proposal to pay is accepted without questioning the ability to pay, if the case meets certain criteria.
Although the statute does not exclude taxpayers receiving Social Security Disability Income (SSDI) or Supplemental Security Income (SSI) from the program, the PCA will return any account to the IRS when, during discussion with the taxpayer, they give any indication of receipt of SSDI or SSI, or when the taxpayer, for any reason, states they are unable to pay. Additionally, the IRS has taken steps to systemically exclude SSDI recipients from PCA inventory by submitting a Unified Work Request through our Information Technology (IT) function in January 2019.
As the result of a Treasury Inspector General for Tax Administration (TIGTA) audit of the program, the IRS has agreed to revise its policy regarding PCA account retention. The new policy will include criteria as to when the PCAs should return cases and include a specific retention period when a taxpayer is not in a current payment arrangement. In addition, taxpayers will be allowed to make payments outside of a structured payment arrangement within the retention period, which will replace the current policy on making only one voluntary payment prior to returning the case to the IRS.
TAXPAYER ADVOCATE SERVICE COMMENTS ON IRS RESPONSE
The IRS asserts that the current PDC initiative is more effective than prior iterations, but even if that is true, the fact remains that more than a third of the payments attributable to PCA activity that ultimately make their way to the Treasury General Fund come from taxpayers who cannot pay their basic living expenses. IRS data demonstrates that taxpayers frequently make payments and enter into installment agreements they cannot afford. The National Taxpayer Advocate believes the effectiveness of the PDC program is undermined by the burden the program places on vulnerable taxpayers.
The National Taxpayer Advocate welcomes the IRS’s decision to impose some parameters on how PCAs retain unproductive or unresolved inventory. TAS will be very interested in the details of the new procedures, such as the length of the retention period and how the IRS will ensure the procedures are followed. The National Taxpayer Advocate is also pleased that the IRS will seek to systemically exclude SSDI recipients from the program. TAS is willing to assist the IRS in entering into a data sharing agreement with the Social Security Administration (SSA) that would allow the IRS to identify SSI recipients and exclude them from the PDC program as well.
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PRE-TRIAL SETTLEMENTS IN THE U.S. TAX COURT: Insufficient Access to Available Pro Bono…¶
PROBLEM
Taxpayers unable to afford representation to defend against a potential IRS assessment or collection action may believe there are only two courses of action: do nothing, or proceed unrepresented. When it comes to civil justice problems involving money or housing, poor households are twice as likely to do nothing than moderate-income households, according to legal scholars. For over 20 years, Tax Court judges have steadfastly supported programs to bring together unrepresented litigants and representatives offering pro bono assistance. Despite broad-based institutional support for these programs, and high rates of same-day resolution for attendees, taxpayer participation rates remain inconsistent. The National Taxpayer Advocate is concerned efforts to provide unrepresented petitioners access to free, competent advice are being undercut and underused because of ineffective outreach and lack of consistent guidance between the IRS Chief Counsel and pro bono representatives which undermine the taxpayers’ rights to be informed, to retain representation, and to a fair and just tax system, and increases the burden on the Tax Court.
ANALYSIS
The U.S. Tax Court is the only prepayment judicial forum for taxpayers to resolve their disputes with the IRS. More than 80 percent of cases in Tax Court are brought by unrepresented taxpayers, and that percentage increases to almost 94 percent among cases where the deficiency for a tax year is $50,000 or less and the taxpayer elects small tax case (S Case) procedures. We identified the following challenges affecting unrepresented taxpayers’ ability to consult with pro bono counsel and resolve cases pre-trial: confidentiality restrictions that limit communication with unrepresented taxpayers about Pro Bono Day and other pre-trial resolution events by local Low Income Taxpayer Clinics (LITCs) and TAS; limited availability of easily accessible but private meeting spaces for taxpayers experiencing difficulties with security and building access, and pro bono resolution events scheduled outside of regular business hours; insufficient staffing and unavailability of interpreter services at Pro Bono Days and other pretrial resolution events; and inadequate coordination of events reducing opportunities to offer one-stop resolution options for unrepresented petitioners. When unrepresented taxpayers have better access to pro bono assistance, it eases burden on the Tax Court and IRS Counsel, and can help taxpayers avoid procedural errors and achieve a better outcome in their case.
TAS RECOMMENDATIONS
[20-1] Adopt alternative methods for communicating with unrepresented Tax Court petitioners,
including working with the Tax Court to modify the petition form to allow taxpayers to consent to direct contacts from local LITCs and TAS.
[20-2] Hold more events to encourage pre-trial resolution in easily accessible but private locations and
schedule the events outside of regular business hours as necessary.
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[20-3] Provide staffing at Pro Bono Days and other pre-trial resolution events that can provide
interpreting services.
[20-4] Develop one-stop resolution options for pro se petitioners at Pro Bono Days and other pre-trial
resolution events to include representatives from Appeals, Collection, and TAS, along with inviting local LITC or Bar Association volunteers or staff and assigning counsel attorneys from the same locality.
IRS RESPONSE
This MSP highlights the need for early resolution of cases filed in the Tax Court by unrepresented taxpayers. The Office of Chief Counsel (Counsel) is committed to resolving appropriate cases quickly and without the need for a trial. Counsel has partnered with Low Income Tax Clinics (LITCs) and the American Bar Association (ABA) to provide representation to unrepresented Tax Court petitioners earlier in their litigation through Settlement/Pro Bono Days, and has held dozens of these events over the last few years. Counsel welcomes and encourages early involvement by LITCs and pro bono practitioners and will continue to work with them to make Settlement/Pro Bono Days even more successful.
TAXPAYER ADVOCATE SERVICE COMMENTS ON IRS RESPONSE
The National Taxpayer Advocate commends Counsel’s efforts to partner with LITCs and the ABA to provide opportunities for unrepresented Tax Court petitioners to benefit from the assistance of pro bono practitioners to encourage resolution of their issues without the need for a trial. The Tax Court’s recent rule change to allow limited scope representation demonstrates the Court’s commitment to making it easier for unrepresented petitioners to access pro bono assistance. Collaboration between IRS Counsel and TAS will provide critical support to that mission.
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www.TaxpayerAdvocate.irs.gov¶
Publication 4054C (Rev. 6-2019) Catalog Number 72693V Department of the Treasury Internal Revenue Service www.irs.gov