More Guidance Needed on Partial-Payment Agreements, TIGTA Says

The Administration of Partial Payment Installment Agreements Needs Improvement

March 16, 2022

This report has cleared the Treasury Inspector General for Tax Administration disclosure review process and information determined to be restricted from public release has been redacted from this document.

HIGHLIGHTS

Final Audit Report issued on March 16, 2022

What TIGTA Found

TIGTA found that the IRS has not provided taxpayers with adequate information on PPIAs on its public website or with the instructions pertaining to the form used to request an installment agreement, nor has the IRS created an effective means for taxpayers to request PPIAs or appeal rejected PPIAs as required by law.

PPIAs generally accounted for less than 2 percent of the new installment agreements established from Fiscal Years 2016 through 2020, while streamlined installment agreements accounted for 56 percent. Also, TIGTA found that PPIAs were established without evidence of a complete financial analysis of the taxpayers' ability to pay. From a judgmental sample of 30 PPIAs, TIGTA determined that the taxpayers' financial statement had been deleted from IRS files for 11 PPIAs because more than one year had elapsed since the PPIA was established. With no financial statement in the file, TIGTA could not determine whether the IRS had properly computed the maximum monthly payment amount the taxpayers had the ability to pay.

Collection default data indicate that the IRS is also establishing PPIAs for amounts that taxpayers cannot afford. The default rate for PPIAs is higher (23 percent) than all other types of installment agreements (9 percent), and in some years, the amount defaulted was greater than the amount placed into PPIAs. Contributing to the higher default rate, TIGTA found 1,007 taxpayers defaulted on their PPIA, with an original PPIA balance over $197 million, when they failed to comply with an essential term of their agreement. From Fiscal Year 2016 to Fiscal Year 2020, the IRS established PPIAs for nearly $19.7 billion, while taxpayers defaulted on PPIAs totaling $17.6 billion.

Lastly, TIGTA found that the IRS procedures to close cases as currently not collectible should be enhanced with a PPIA option. The decision process for determining a currently not collectible case are similar to the steps taken by the IRS prior to granting a PPIA. TIGTA reviewed a random sample of 51 taxpayer accounts closed as uncollectible during Fiscal Year 2020 and determined that the IRS should have offered four of the taxpayers a PPIA instead of closing the case as currently not collectible. If PPIAs were established for these four taxpayers, TIGTA estimates that they could have paid over $79,724 before their respective collection statutes expired. Based on our random sample, TIGTA projects that the 16,026 taxpayers who had tax liabilities closed as uncollectible could have entered PPIAs and paid a total of over $319 million before their respective collection statutes expired.

What TIGTA Recommended

TIGTA made six recommendations to help the IRS improve administration of PPIAs. IRS management agreed to inform taxpayers of the availability of PPIAs and provide outreach; explore and consider additional changes to the instructions for Form 9465; extend AMS history note retention requirements; remind Collection employees to conduct and document a financial analysis; and request a change to Computer Paragraph 522. IRS management partially agreed to revise CNC procedures.

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March 16, 2022

MEMORANDUM FOR:
COMMISSIONER OF INTERNAL REVENUE

FROM:
Michael E. McKenney
Deputy Inspector General for Audit

SUBJECT:
Final Audit Report — The Administration of Partial Payment Installment Agreements Needs Improvement (Audit # 202030013)

This report presents the results of our review to assess the controls and effectiveness of the Partial Payment Installment Agreement program. This review was part of our Fiscal Year 2021 Annual Audit Plan and addresses the major management challenges of Improving Tax Reporting and Payment Compliance.

Management's complete response to the draft report is included as Appendix V.

Copies of this report are also being sent to the Internal Revenue Service managers affected by the report recommendations. If you have any questions, please contact me Matthew A. Weir, Assistant Inspector General for Audit (Compliance and Enforcement Operations).

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Table of Contents

Background

Results of Review

Appendices

Appendix I — Detailed Objective, Scope, and Methodology

Appendix II — Outcome Measures

Appendix III — Types of Installment Agreements Offered by the IRS (Field Collection)

Appendix IV — Partial Payment Installment Agreement Activity From Fiscal Year 2016 to Fiscal Year 2020

Appendix V — Management's Response to the Draft Report

Appendix VI — Glossary of Terms

Appendix VII — Abbreviations

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Background

All taxpayers are expected to immediately pay delinquent tax liabilities in full. When this is not possible, taxpayers may be allowed to pay their liabilities over a prescribed period of time. Taxpayers who cannot immediately fully pay their tax liabilities can enter into installment agreements (IA) with the Internal Revenue Service (IRS) to pay their tax liabilities within the Collection Statute Expiration Date (CSED).¹ A taxpayer who cannot fully pay could also request an offer in compromise (OIC) to pay a portion of the tax liability.² A Partial Payment Installment Agreement (PPIA) is an alternative that allows taxpayers who cannot afford to fully pay their tax liability within the CSED to pay a portion of their obligations over a prescribed period of time. When full payment cannot be achieved by the CSED and taxpayers have some ability to pay, the IRS can enter a taxpayer into a PPIA.

PPIAs were enacted by the American Jobs Creation Act of 2004.³ In a PPIA, the taxpayer makes regular monthly payments to the IRS, but the payments do not pay off the tax liability in full. After the terms of the PPIA are fulfilled, the IRS is prohibited from collecting the remainder of the tax debt because the collection statute will have expired. PPIAs provide taxpayers with another alternative to settle their tax obligations. As shown in Figure 1, the number of IAs established annually has trended down from 3.1 million IAs in Fiscal Year (FY) 2016 to 2.8 million in FY 2019, a decrease of 9 percent. From FY 2019 to FY 2020, the number of IAs established dropped significantly to 1.8 million, a decrease of 35 percent (or a decrease of 41 percent compared with FY 2016).

Figure 1: PPIAs and Total IAs Established From FY 2016 to FY 2020

FY	New PPIAs Established	Total Amount (PPIA)	New IAs Established4	Total Amount (All IAs)
2016	48,854	$4,481,275,462	3,115,404	$25,351,456,573
2017	39,888	$4,091,175,624	2,924,780	$24,803,320,776
2018	35,516	$4,327,329,033	2,883,035	$24,395,480,132
2019	36,733	$3,840,133,479	2,821,134	$24,404,769,504
2020	21,501	$2,939,772,574	1,825,378	$17,778,827,629
Totals	182,492	$19,679,686,172	13,569,731	$116,733,854,614
Source: Collection Activity Reports for FYs 2016 - 2020.

During the same period, the number of PPIAs established annually also trended down, from 48,854 PPIAs in FY 2016 to 36,733 PPIAs in FY 2019, a decrease of 25 percent. From FY 2019 to FY 2020, the number of PPIAs established dropped significantly to 21,501, a decrease of 41 percent (or a decrease of 56 percent compared with FY 2016). On average, PPIAs accounted for less than 2 percent of the new IAs established during this period. During the same period, the delinquent tax liability pertaining to new PPIAs decreased by 34 percent, totaling nearly $3 billion in FY 2020. The lower number of total IAs and PPIAs established during FY 2020 was likely due to the suspension of collection activity from April 2020 to July 2020 due to the Coronavirus Disease 2019 pandemic.

Similar to other IAs, the taxpayers must make their monthly payments on time and remain compliant with all of their tax obligations during the term of the PPIA. If a taxpayer misses two monthly payments, the IRS sends the taxpayer a letter instructing them to contact the IRS. If the taxpayer contacts the IRS, the IRS must attempt to get the taxpayer back on track. If the taxpayer does not contact the IRS or does not make another payment, the taxpayer defaults on the PPIA and the PPIA is terminated.

A default notice is sent to the taxpayer explaining the reasons for terminating the PPIA and the corrective actions the taxpayer can take. Figure 2 shows the default rates for PPIAs and total IAs from FY 2016 to FY 2020. As Figure 2 illustrates, the default rate for PPIAs nearly mirrored the pattern of total IAs over the five-year period; however, the PPIA default rate was, on average, 16 percentage points higher than total IAs.

Unlike other IAs, the American Jobs Creation Act of 2004 requires the IRS to assess the financial condition of taxpayers with a PPIA every two years. To comply with this requirement, the IRS performs an automated review process on PPIAs at the two-year mark. At the two-year mark, the automated review process uses * * * 2 * * * The manual review requires the taxpayer to submit updated financial information and the IRS to perform an updated complete financial analysis. The purpose of the manual review is to determine whether the taxpayer can afford to increase their monthly installment amount, have it reduced, or keep it the same.

Results of Review

The IRS Does Not Adequately Inform Taxpayers About Partial Payment Installment Agreements or Protect Taxpayers' Rights in This Process

Congress added the PPIAs provision in Internal Revenue Code (I.R.C.) § 6159(a) so that taxpayers with some ability to pay can make payments in installments that will facilitate partial collection of their tax liability. Unlike streamlined IAs or guaranteed IAs, the IRS has more discretion to approve or disapprove PPIAs.⁵ As previously stated, PPIAs generally accounted for less than 2 percent of the new IAs established from FYs 2016 through 2020.⁶ At the end of FY 2020, PPIAs made up 1.7 percent of all IAs in the IRS inventory, while streamlined IAs accounted for 56 percent.

The small number of PPIAs may be due to the lack of information provided to taxpayers or outreach efforts aimed at increasing awareness of PPIAs. For instance, the IRS public website (www.IRS.gov) does not contain information on the PPIA or how to request a PPIA. The topic

ribbon on the IRS public website home page has a link directly to payment options (Pay). However, none of the subsequent IA links provide information on PPIAs. The information on IAs does not mention the possibility of partially paying a balance due:

By approving your request, we agree to let you pay the tax you owe in monthly installments instead of immediately paying the amount in full.

The IRS tax topics and tips researchable through the IRS public website provide taxpayers with a wide range of tax information, including assistance with the filing of their tax returns, responding to IRS notices, and tax payment options. At the time of our review, the IRS tax topics did not promote the benefits of a PPIA. Specifically, our search for “partial payment installment agreement,” “partial pay,” and “installment agreement” did not return any results pertaining to PPIAs.

Further, Form 9465, Installment Agreement Request, and its instructions do not mention the PPIA. When we discussed with IRS management, the IRS confirmed that there is no separate IRS form to request a PPIA because taxpayers can use Form 9465 to propose an agreement to pay less than the full amount of the liability within the CSED.⁷

In contrast, the IRS provides in-depth information on OICs on the IRS public website with a FAQs [Frequently Asked Questions] page and a video on how to complete an OIC application as well as Form 656-B, Form 656 Booklet, Offer in Compromise.⁸ In regards to the OIC, the IRS can accept partial satisfaction of the taxpayer's tax liability over time using periodic payments.⁹ Unlike PPIAs, the IRS also has an online OIC qualifier tool so that taxpayers can see for themselves if they qualify for an OIC.

Taxpayers who have tax liabilities are sent IRS collection notices that do not refer to the PPIA. Despite the intent of Congress, taxpayers will not likely be granted a PPIA unless proposed by the IRS. Unless revenue officers or Automated Collection System employees make the decision whether to place taxpayers accounts into Currently Not Collectible (CNC) status or place taxpayers on a PPIA, taxpayers may be unaware the PPIA is a collection option available with the IRS. Under the Taxpayer Bill of Rights, taxpayers have the right to be informed, and this should include the right to request PPIA agreements to address delinquent tax accounts with the IRS.¹⁰ Taxpayers are also statutorily entitled to an independent review of any IA request, including a PPIA, that is denied as well as to a hearing before the Office of Appeals for a rejected IA.¹¹ However, because there is no clearly established mechanism for a taxpayer to request a PPIA and information about PPIAs is very limited, taxpayers appear to be effectively denied these rights. When we asked the IRS how taxpayers are supposed to ask for a PPIA when there is no designated IRS form or mechanism to request one, IRS officials indicated that IRS employees will assess whether a PPIA is appropriate when the taxpayer's response to line 11a on Form 9465 is provided in response to the instruction “Enter the amount you can pay.” However, a taxpayer completing line 11a will have received no information from the IRS on the form or the instructions that this is the method by which IRS employees will evaluate whether a PPIA is warranted.

Providing adequate information about PPIAs, providing a specific mechanism on Form 9465 to request PPIAs, and ensuring that taxpayers' rights to administrative review and appeal are protected will improve the availability of PPIAs. The IRS Burden Reduction program (housed in the Small Business/Self-Employed (SB/SE) Division), whose mission it is to reduce taxpayer burden, highlighted on the IRS Internet website changes to IRS Form 9465 making it easier for taxpayers to request an IA, yet the SB/SE Division Collection function has to date been unwilling to place any information about PPIAs on the Form 9465 or the form's instructions. While the IRS offered various rationales during this audit for being reluctant to add specific information about PPIAs on Form 9465, at the close of the audit, IRS officials stated that the main reasons for not being willing to provide any information about PPIAs on the Form 9465 is that: (1) A change is not necessary because the form already allows the taxpayer to propose any amount to pay monthly; (2) IRS employees would be inundated with PPIA requests if taxpayers were made aware of PPIAs on the form; and (3) rejected PPIAs would cause taxpayers to flood the Office of Appeals while pursuing their statutory rights to appeal. This would lead to an avoidable and inefficient expenditure of resources to address PPIA proposals for taxpayers that do not qualify as well as an undesirable customer experience for the taxpayer. The same argument could be made for denying taxpayers information on other statutorily provided collection alternatives, such as OICs, and we believe that this is not a sound basis to provide no information about PPIAs or an effective means for taxpayers to request PPIAs.

Partial Payment Installment Agreements Were Established Without Evidence That Financial Analysis of the Taxpayer's Ability to Pay Was Completed

To enter into a PPIA, the taxpayer must agree to pay the monthly installment amount determined by a complete financial analysis. A complete financial analysis includes a monthly income and expenses comparison and verification of the taxpayer's income and assets. Taxpayers are required to submit a financial statement in order to provide the IRS with current financial information necessary for determining how they can satisfy an outstanding tax liability.¹² The Collection employee performing the analysis verifies the taxpayer's income and assets using the Integrated Data Retrieval System via specific command codes. These command codes provide access to information on the IRS Master File pertaining to information documents submitted by a third party, e.g., wage statements and investment income, and tax return information. Also, equity in assets must be addressed and, if appropriate, be used to make a payment. The financial analysis determines the maximum monthly payment amount the taxpayer has the ability to pay.

To determine whether the IRS conducted a complete financial analysis prior to granting a PPIA, we reviewed a judgmental sample of 30 cases from a total population of 11,453 PPIAs cases established during FYs 2017 and 2018.¹³ Given the date these PPIAs were established, they would have undergone the required two-year PPIA review.

We determined that 11 of these PPIAs were established without evidence that a financial statement was completed and submitted by the taxpayer. The IRS advised us that the financial statement was deleted from the electronic case file before we reviewed the file. In addition, the electronic case files * * * 1 * * *

When a PPIA is established without a complete financial analysis, there is a higher risk that the taxpayers are not paying the maximum amount they can afford. There is also a higher risk that the taxpayer cannot afford the payments in the agreement. The lack of documentation for these cases prevented us from determining whether the taxpayer had the ability to pay more. However, even if the taxpayers make all payments required by the terms of these PPIAs, the delinquent tax liability that the taxpayers will still owe would be nearly $1,287,582 (an average of $117,053).

A default on a PPIA could be an indication that the taxpayer may not be in a financial position to continue making the payments over a sustained period of time. The taxpayers in six of 11 sampled PPIAs without a complete financial analysis defaulted on their PPIAs. As a result of each PPIA default, the taxpayer must pay an additional user fee, and the IRS has to expend additional resources to reinstate the agreement.¹⁴

The IRS quality and program reviews of accuracy results for financial analyses on IAs and PPIAs have indicated similar findings. The IRS uses the National Quality Review System as its primary quality measurement system. This system is an important control component because it identifies managerial, technical, and procedural problems and provides a basis for corrective actions. The IRS uses the system to assess the quality of its overall IA program. We reviewed the system's Field Collection quality attribute Verifying/Analyzing Ability to Pay as it pertains to IAs. This attribute involves the verification that taxpayer financial information is secured so that the IRS is able to make an accurate IA payment determination. From FY 2016 to FY 2019, results show that Field Collection was only successful in 43 percent to 51 percent of the cases reviewed. Also, in 2016, the Taxpayer Advocate Service reported in its annual report that the IRS is failing to properly evaluate taxpayers' living expenses and is placing taxpayers in IAs they cannot afford.¹⁵

Financial analysis documentation is not maintained in IRS systems for PPIAs

Internal Revenue Manual (IRM) guidance states that all case histories require documentation on the Accounts Management System (AMS) explaining the basis for the decision to proceed with or deny a PPIA.¹⁶ If the PPIA was established in the field, Collection personnel are required to document the actions taken on the case, including IAs, in the IRS's Integrated Collection System. Regarding the lack of financial statements and history notes, the IRS advised us that, since FY 2009, its one-year business retention procedures call for financial statements maintained in AMS to be current (completed and provided within the last year) when a Collection employee is working with a taxpayer to resolve an issue. As a result, the IRS discards Forms 433-F, Collection Information Statement, older than one year. According to IRS officials, the one-year retention period ordinarily meets the business needs for revenue officers and Automated Collection System employees because their guidelines require a new Collection Information Statement (CIS) if the current CIS is more than 12 months old. However, IRS officials acknowledge that their internal controls can benefit from an increased retention period and are working to extend the retention period.

Concerning the lack of AMS history notes for selected PPIA cases, IRS officials also explained that AMS history notes would have dropped off if there was no subsequent AMS account access for two years. We disagree that this meets the business needs of the PPIA process. When a systemic two-year review results in a manual review, financial information from the initial review is critical to determine if there was any improvement in the financial condition of the taxpayer (specifically, whether the financial condition of the taxpayer improved * * * 2 * * *.¹⁷

Further, the IRS needs to preserve documentation that complies with established guidance and supports its collection actions. By not maintaining the case history, there will be no written basis available to explain crucial decisions and actions IRS employees take on taxpayer cases. For situations in which taxpayers appeal collection and administrative decisions, a complete case history will provide the IRS with detailed historical information that can be used to uphold decisions and mitigate challenges.

Collection default data indicate that the IRS is establishing PPIAs for amounts that taxpayers cannot afford

Since the IRS started granting PPIAs in January 2005, they have had a higher default rate than other types of IAs. For FY 2020, the default rates were:

• 9.03 percent for all IAs combined.

• 9.53 percent for streamlined IAs.

• 23.34 percent for PPIAs.

Not only are defaulted PPIAs higher than all other types of IAs, the amount defaulted on PPIAs was, in some years, greater than the amount placed into PPIAs. Figure 3 shows that, in FYs 2017 and FY 2019, the amount for defaulted PPIAs was greater than the amounts for PPIAs that were established. During the five-year period ending FY 2020, the IRS established PPIAs for nearly $19.7 billion, while taxpayers defaulted on PPIAs totaling $17.6 billion.

The amounts associated with the PPIAs that taxpayers defaulted on were, on average, more than eight times the amounts that the IRS collected on for PPIAs, as shown in Figure 4. In FY 2019, taxpayers defaulted on PPIAs valued at 946 percent of the amounts the IRS collected from PPIAs.

Further, from FY 2016 to FY 2020, the IRS established 182,492 PPIAs, while taxpayers defaulted on 173,268 PPIAs. The IRS collected over $2 billion from PPIAs in the five-year period ending in FY 2020, and 18,684 PPIAs were fully paid (approximately 10 percent of established PPIAs).

Several IRS functions can grant taxpayers IAs, such as Compliance Services Collection Operations, Automated Collection System (including Special Compliance Personnel and Automated Collection System Support), Field Assistance, Collection Field function, Centralized Case Processing, and Appeals. IAs granted by the Automated Collection System accounted for over 63 percent of the PPIAs defaulted in FY 2016 to FY 2020.

In our judgmental sample of 30 taxpayers with established original PPIA amounts exceeding $4.9 million from a population of 11,453 taxpayers, 13 taxpayers actively remitted payments that, to date, totaled $243,332 (average of $18,718).¹⁸ Three taxpayers fully paid the PPIAs for one or more tax years, and * * * 1 * * *. However, the remaining 13 taxpayers (43 percent) had defaulted at the time of our review. Specifically:

• Eight taxpayers (27 percent) defaulted before the two-year review was scheduled to occur. Six taxpayers defaulted because of new tax liabilities, * * * 1 * * *

• Three taxpayers * * * 1 * * * defaulted as a result of the two-year review by not complying with the IRS request for an updated CIS. Before the review, * * * 1 * * * Altogether, these three taxpayers have paid $56,060 (average $18,687) towards their outstanding tax debts since establishing the PPIAs.¹⁹

• * * * 1 * * *.

• * * * 1 * * *

Because eight of the 13 taxpayers (62 percent) who defaulted on their PPIAs did so before the two-year review was due to be performed, we are concerned that their financial conditions were not adequately evaluated to help ensure that they have the financial wherewithal to make the calculated payments in order to promote compliance. We were unable to determine if this was potentially the case for * * * 1 * * * who defaulted on their PPIAs before the two-year review occurred because the IRS also did not maintain written evidence in its systems that these taxpayers' PPIAs were properly established.

Taxpayers defaulted on their PPIAs when updated financial information statements were not submitted

As previously stated, * * * 1 * * * of the 13 defaulted taxpayers were making payments towards their outstanding tax debts since the IRS established the PPIAs, but they defaulted as a result of the two-year review by not complying with the IRS's request for an updated CIS. Although taxpayers may contact the IRS to request additional time to provide current financial information, we determined that, aside from sending IA payment reminders, the IRS did not follow up with the * * * 1 * * * to acknowledge the payments received or determine their current financial status when the taxpayer did not timely comply with the IRS's request for an updated CIS. Instead, the IRS defaulted these taxpayers.²⁰ Further, the notice sent to taxpayers requesting updated financial information does not advise taxpayers that their information could result in a payment reduction.²¹ We believe taxpayers whose financial condition indeed worsened would respond to these notices if they were aware that their response could reduce their monthly installment amount.

From our population of 11,453 taxpayers with PPIAs, we found that 1,007 (nearly 9 percent) taxpayers with an original PPIA balance of over $197 million defaulted because they did not timely comply with an IRS request to provide an updated CIS, which may have contributed to the higher default rate.²² For taxpayers like these 1,007 taxpayers, along with those like the three taxpayers from our sample whose PPIAs defaulted because they did not timely provide an updated CIS, we are concerned that the IRS does not perform a targeted follow-up before initiating its automatic default procedures.²³ In addition, this default status creates a burden for taxpayers with an established PPIA to appeal, reinstate their agreement, or institute another arrangement with the IRS to address the outstanding balance. We believe additional follow-up with taxpayers would lower the PPIA default rate, stimulate uninterrupted payments, and increase voluntary tax compliance.

Systemic two-year reviews have limitations

Section 6159(d) requires the IRS to review PPIAs every two years. The primary purpose of the review is to determine whether the financial condition of the taxpayer has significantly changed so as to warrant an increase in the value of the monthly installment payments. However, a taxpayer's financial condition may warrant a decrease, instead of an increase, in the amount of payments being made. The first part of the two-year review involves an automatic check using IRS data systems to determine whether a taxpayer's financial condition improved. If the automatic check identifies a substantial improvement, the IRS performs a manual review of the taxpayer's financial condition, which requires taxpayers to submit current financial information. As a result, not every two-year review results in a request for updated financial information from the taxpayer to support that their financial condition has worsened in order to request lower PPIA payments.

Our review of the same 30 cases identified * * * 1 * * * Based on our review of AMS notes and information obtained from the IRS, the IRS performed the two-year review for 12 of the 30 cases. For the remaining 17 cases, the IRS had valid reasons for not completing the two-year review, such as default, suspension, or revision of the IA prior to the scheduled date of the two-year review; that the outstanding balance was paid prior to the scheduled date of the two-year review; and the IRS's inability to complete the review because of print site work interruptions and the People First Initiative, which affected normal operations through July 15, 2020.

Currently Not Collectible Procedures Should Be Enhanced With Partial Payment Installment Agreement Options

According to IA procedures, if analysis of the taxpayer's financial condition shows a liability cannot be collected in full through an IA, the IRS employee is to discuss the possibility of a PPIA, an OIC, or a CNC status determination with the taxpayer.²⁴

The IRS has the authority to determine that some accounts are CNC and suspend collection activity by removing taxpayer accounts from the active Collection inventory. Before closing a taxpayer's account as CNC, certain basic requirements must be met. As shown in Figure 5, the decision process for determining a CNC are similar to the steps taken by the IRS prior to granting a PPIA.

Prior to both a CNC and PPIA determination, a financial statement is required to be obtained from the taxpayer to verify their financial condition. For the CNC, it is to confirm that the taxpayer has no ability to pay towards fully paying off their liabilities, and for the PPIA, it is to confirm that the taxpayer has some ability to pay towards the liabilities, but not to fully pay them. Given these similarities, we believe the IRS should include a step to consider offering the taxpayer a PPIA before determining to place the taxpayer in a CNC status. Currently, the IRS collects refund offsets from CNC inventory. By offering a PPIA, the IRS would have the potential to collect some of the amount owed beyond any offsets collected.

We selected a random sample of 51 taxpayer accounts with an assessed balance of $705,241 (average $13,828) closed as CNC during FY 2020 from a population of 204,333 with an assessed balance of $2.6 billion (average $12,918).²⁵ We determined if each account was properly closed as CNC during FY 2020. Similar to our review of PPIA cases, we identified 24 accounts (47 percent) for which the financial statement was not maintained in AMS for viewing.

Overall, we determined that 41 cases adequately supported the IRS's actions based on the applicable IRS guidance. The remaining 10 cases (nearly 20 percent) had one or more instances in which the history case notes did not fully support the CNC action or a PPIA should have been considered prior to the case being closed as CNC.²⁶ * * * 1 * * * we found that the detailed history notes and information maintained in IRS systems did not fully support the CNC action. Specifically, there was no evidence that a determination of the taxpayers' ability to pay was made. Because the IRS systems maintained inadequate documentation supporting the CNC action, and based on the results of our sample, we estimate that the IRS may have improperly suspended collection activity on 32,052 taxpayer accounts totaling over $368 million.²⁷

In four of the 10 cases, we determined that the IRS should have offered the taxpayers a PPIA instead of closing the case as CNC. For example:

• * * * 1 * * *

• * * * 1 * * *

• * * * 1 * * *

• * * * 1 * * *

Overall, the assessed tax liability, penalty, and interest totaled $159,018 for the four cases. The IRS advised us that, for three cases, PPIAs were not offered because taxpayers did not specifically request a PPIA. * * * 1 * * * If PPIAs were established for these four taxpayers, we estimate that they could have paid over $79,724 before their respective CSEDs. Based on our random sample, we project that the 16,026 taxpayers who had a tax liability closed as CNC could have entered PPIAs and paid a total of over $319 million before their respective CSEDs.²⁸ Although each taxpayer's financial condition is unique, the IRS is losing the opportunity to expand its use of PPIAs to collect some of the delinquent taxes owed by taxpayers in CNC status.

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Appendix I

Detailed Objective, Scope, and Methodology

Our overall objective was to assess the controls and effectiveness of the PPIA program. To accomplish the objective, we:

• Evaluated IRS policies, procedures, goals, and monitoring of the PPIA program. We reviewed current I.R.C. sections, IRMs, and other guidance developed by the IRS. We interviewed SB/SE Division personnel responsible for initiating PPIAs, other IAs, and other collection action activities. We also met and corresponded with SB/SE Division management and other personnel from various offices regarding the IRS's process for initiating PPIAs and CNCs.

• Reviewed prior audits, documents, and management responses to evaluate whether the corrective actions were timely and effectively implemented. We also reviewed program review results and quality review reports conducted from FYs 2016 through 2019 to identify trends of quality issues pertaining to IAs, including PPIAs.

• Evaluated the IRS's process for submitting IA requests as well as accepting and rejecting IA requests.

• Analyzed and compared PPIA statistics with other IAs and discussed the expanded use of PPIAs for taxpayers with SB/SE employees and managers involved in the process of initiating PPIAs.

• Determined if the IRS properly established PPIAs and performed the two-year financial PPIA reviews. From a universe of 11,453 taxpayers with PPIAs established duringFYs 2017 and 2018, we reviewed a judgmental sample of 30 taxpayer accounts based on the taxpayer's eligibility date for the required two-year financial review.¹ Using the same universe, we also identified the population of 1,007 taxpayer accounts that were automatically defaulted on PPIAs for not providing updated financial statements. We analyzed information from SB/SE Division Headquarters Collections personnel, the Integrated Data Retrieval System, and AMS.

• Determined if the IRS followed its established CNC procedures and if a PPIA would have been a more appropriate collection tool based on the taxpayer's financial condition. From a universe of 204,333 taxpayer accounts closed as CNC during FY 2020, we reviewed a random sample of 51 taxpayer accounts to determine if IRS employees properly established the CNC and if management reviewed and approved the determination. We analyzed information from SB/SE Headquarters Collections personnel, the Integrated Data Retrieval System, and AMS. TIGTA's contracted statistician advised us on our sampling plan, including the possible error rates and sample sizes, and also assisted with developing sample projections based on the exceptions identified during the audit.

Performance of This Review

This review was performed with information obtained from the SB/SE Division during the period of August 2020 through July 2021. We conducted this performance audit in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objective. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objective.

Major contributors to the report were Matthew A. Weir, Assistant Inspector General for Audit (Compliance and Enforcement Operations); Christina Dreyer, Director; Tim Greiner, Audit Manager; Meaghan Tocco, Acting Audit Manager; and Jamelle Pruden, Lead Auditor.

Validity and Reliability of Data From Computer-Based Systems

During this review, we obtained Master File data directly from the IRS's Information Technology organization reflecting the population of PPIA cases established during FYs 2017 and 2018. We compared selected data elements to the relevant Integrated Data Retrieval System data for 15 cases. We also obtained CNC data from the Master File data on the TIGTA Data Center Warehouse. We compared CNC data, including Taxpayer Identification Number, Tax Period, Master File Tax, CSED, assessed tax, assessed penalty, and closing code to the relevant Integrated Data Retrieval System data for 10 cases. We found no significant issues and thus determined that the data are sufficient and reliable for purposes of this report.

Internal Controls Methodology

Internal controls relate to management's plans, methods, and procedures used to meet their mission, goals, and objectives. Internal controls include the processes and procedures for planning, organizing, directing, and controlling program operations. They include the systems for measuring, reporting, and monitoring program performance. We determined that the following internal controls were relevant to our audit objective: the IRS's policies, procedures, and practices related to the establishment of PPIAs; PPIA two-year reviews; and the process for closing taxpayers' accounts as CNC. We evaluated these controls by interviewing management, reviewing IRS forms and letters along with IRM guidance provided to managers and employees, reviewing reports, and analyzing closed case data.

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Appendix II

Outcome Measures

This appendix presents detailed information on the measurable impact that our recommended corrective actions will have on tax administration. These benefits will be incorporated into our Semiannual Report to Congress.

Type and Value of Outcome Measure:

• Reliability of Information — Potential; 10 taxpayer PPIA electronic case files did not contain evidence that there was a financial analysis completed or the evidence was insufficient to support the IRS's decision to grant the PPIA (see Recommendations 3 and 4).

Methodology Used to Measure the Reported Benefit:

We selected a judgmental sample of 30 taxpayers with PPIAs established during FYs 2017 and 2018 from the population of 11,453 taxpayers.¹ We reviewed the AMS and Integrated Collection System history notes and Integrated Data Retrieval System account data to determine if proper financial analyses were performed to support the granting of the PPIAs.

Type and Value of Outcome Measure:

• Reliability of Information — Potential; eight taxpayer accounts closed as CNC had one or more instances in which the detailed history notes and information maintained in IRS systems did not fully support the CNC action (see Recommendation 6).

Methodology Used to Measure the Reported Benefit:

We selected a statistically valid sample of 51 taxpayer accounts from the population of 204,333 taxpayer accounts closed as CNC during FY 2020 with a special closing code identifying that the taxpayer was unable to pay.² For eight of the 51 taxpayer accounts, we found that the detailed history notes and information maintained in IRS systems did not fully support the CNC action. Specifically, there was no evidence that a determination of the taxpayers' ability to pay was made.

Type and Value of Outcome Measure:

• Increased Revenue — Potential; over $35 million paid by 16,026 taxpayers who should have been granted PPIAs instead of having their tax accounts closed as CNC (see Recommendation 6).

Methodology Used to Measure the Reported Benefit:

We selected a statistically valid sample of 51 taxpayer accounts from the population of 204,333 accounts closed as CNC with a special closing code identifying that the taxpayer was unable to pay.³ Through a review of IRS systems, including AMS, we determined that the financial condition of four taxpayers supported that they could have entered into a PPIA instead of their cases being closed as CNC. Specifically, * * * 1 * * *. Based on the date of the CNC and the CSED, we calculated the number of months remaining on the CSED for each case. We multiplied the potential monthly installment amount by the number of months. See the table below for details.

Taxpayer	Alternative to CNC	PPIA Monthly Installment (Potential)	Total Months Remaining on CSED	Total Amount Paid (Potential)
1	Taxpayer offered to pay	$541	114	$61,674
2	Taxpayer offered to pay	$150	58	$8,700
3	TIGTA assumption	$50	107	$5,350
4	TIGTA assumption	$50	80	$4,000
				$79,724

Based on the results of our sample and the assistance of our contract statistician, we estimate that a total of $319,416,551 could have been paid by 16,026 taxpayers who should have been offered a PPIA instead of having their tax accounts closed as CNC.⁴

We worked with the IRS to update our methodology to account for reasonable default rates. Based on the observed default rates and IRS data about the length of historical PPIAs, only 9 percent of PPIAs reach the CSED while still making payments. The SB/SE Division Research Study determined that 11 percent of revenue was recovered (as a percentage of total balance due) between 2016 and 2021 for PPIAs established in FY 2016. We applied the 11 percent to the $319,416,551 to estimate the five-year recovery on the 16,026 taxpayers that we believed should have been offered a PPIA:

• $319,416,551.00 X 11 percent = $35,135,821

Type and Value of Outcome Measure:

• Taxpayer Burden — Potential; 1,007 taxpayers with established PPIAs who defaulted because they did not provide the IRS with current financial statements as requested (see Recommendation 5).

Methodology Used to Measure the Reported Benefit:

From our population of 11,453 taxpayers with PPIAs established in FYs 2017 and 2018 who were eligible for the required two-year financial review, we isolated 1,007 taxpayer accounts that had PPIAs automatically defaulted because the taxpayer did not timely comply with an IRS request to provide an updated CIS. Specifically, we isolated taxpayers with a suspension default reason code along with an IA action code identifying that the agreements defaulted because the taxpayer did not timely comply with an IRS request to provide an updated CIS.

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Appendix III

Types of Installment Agreements Offered by the IRS (Field Collection)

	PPIA	Guaranteed Individual Master File (IMF) only	Streamlined	Streamlined	Routine
Delinquent Tax Amount	Any amount	$10,000 or less	$25,000 or less	$25,001 to $50,000	Any amount
Type of Tax	Any type	IMF income tax only	IMF, Business Master File (BMF) income, out of business BMF	IMF, out of business sole proprietor	IMF, BMF, income, out of business BMF
Payment Terms	None	Full pay in three years including accruals	Greater of unpaid balance of assessment divided by 72 or full pay by the CSED	Greater of unpaid balance of assessment divided by 72 or full pay by the CSED	Full pay by the CSED
CIS Required	Yes (financial review every two years)	No	No	No*	Yes
Lien Determination Required	Yes	No	No	No	Yes
Can CSED Be Extended	Yes, if appropriate	No	No	No	No
Must View Assets	Yes	No	No	No	Yes
Managerial Approval	Yes	No	No	No	Yes
Source: TIGTA's review of IRS's IA Table.1

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Appendix IV

Partial Payment Installment Agreement Activity From Fiscal Year 2016 to Fiscal Year 2020

IRS Collection Activity Reports extract data from the Integrated Data Retrieval System and produce management information reports to field and Headquarters Office Collection officials. The reports reflect activity associated with Taxpayer Delinquent Account and Taxpayer Delinquency Investigation issuances and IAs, including issuances, dispositions, and inventories as well as collection-related payments. We analyzed the Collection Activity Reports pertaining to PPIAs and created the following two tables.

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Appendix V

Management's Response to the Draft Report