Taxpayer Advocate Report Calls on IRS to Reemphasize Taxpayer Services

 PREFACE: A Path to Strengthening Tax Administration and Improving

Honorable Members of Congress:

I respectfully submit for your consideration the National Taxpayer Advocate's 2013 Annual Report to Congress. Section 7803(c)(2)(B)(ii) of the Internal Revenue Code requires the National Taxpayer advocate to submit this report each year and in it, among other things, to identify at least 20 of the most serious problems encountered by taxpayers and to make administrative and legislative recommendations to mitigate those problems.

This report arrives at the close of a very difficult year for the IRS. It found itself mired in a scandal relating to tax-exempt organizations, resulting in the resignation or retirement of the acting Commissioner and other members of the IRS senior leadership.¹ It went through seven difficult months -- from May to December -- during which, under the leadership of a very able senior civil servant, it attempted to right both its operations and its reputation. During this time, it experienced a 16-day shutdown that has delayed the start of the 2014 filing season and exposed thousands of taxpayers to harm from enforcement actions initiated just before or during the shutdown.² In the midst of all this, it is a credit to the talent and professionalism of IRS employees that they managed to conduct the business of the agency as well as they have.

I submit that all of these short-term crises mask the major problem facing the IRS today -- unstable and chronic underfunding that puts at risk the IRS's ability to meet its current responsibilities, much less articulate and achieve the necessary transformation to an effective, modern tax agency.

Throughout the Most Serious Problems section of this report, we recount the ways in which chronic underfunding drives the agency to develop short-term solutions that merely patch over problems and impose unnecessary burden and even harm on taxpayers. These short-term solutions also create more work for the IRS in the end, thereby wasting precious resources. As the IRS spends its resources to ad-dress problems in this ad hoc manner -- to put fires out -- it is unable to direct attention and talent to the long-term challenges it faces as it attempts to modernize. Simply put, without a stable funding stream and adequate resources to invest in the future, the IRS will fall short of fulfilling its mission to serve the U.S. taxpayer and collect revenue.

A Vision for the IRS in the 21st Century

A 21st century tax administration would:

• Be founded on a Taxpayer Bill of Rights and use that document as an analytical tool for its operations and initiatives.³

• Be operated on the principle that voluntary compliance is the least expensive, most effective method of collecting tax revenue.

• Recognize that modern tax administration not only involves collecting revenue but also disbursing benefits (tax expenditures) to targeted populations, including low income and business taxpayers, and it would design its activities, staffing, and training around the specific characteristics and needs of those populations.

• Be built on the understanding that only two percent of the revenue it collects comes from direct enforcement actions and that the provision of taxpayer service, assistance, and education is one of the most influential factors for maintaining voluntary compliance, particularly for the self-employed.

• Be open to emerging research that its existing enforcement approach -- based on targeting large delinquencies ahead of recent delinquencies and focused on the use of liens and levies instead of timely, personal contact -- may be less effective than it believes.

• Use findings from its own and the international research community to develop approaches to voluntary compliance and enforcement that incorporate behavioral, psychological, and educational approaches.

• Develop localized compliance initiatives, building on the finding that one of the most significant influences of compliance behavior is a taxpayer's networks and norms, particularly local ones.⁴

• Educate its workforce about the foundational principles of tax administration and how those principles are applied in the different aspects of their work.⁵

• Be on the cutting edge of electronic tax administration, providing taxpayers with access to their electronic accounts so they can check on filing requirements, track receipt and processing of documents they have filed, identify problems with their accounts, and resolve those problems through submissions, explanations, etc.

• Provide taxpayers with online access to all third-party information reports received by the IRS, in time for them to download or populate their return preparation software -- whether government-provided, purchased from a commercial software provider or used by a commercial return preparer.⁶

• Provide taxpayers with face-to-face (including virtual face-to-face) and telephonic communication rather than relying solely on correspondence that generates confusion, low response rates, and re-work for the IRS.

• Develop a comprehensive suite of taxpayer service, compliance, and enforcement measures that can serve as a basis for funding decisions, while holding the IRS accountable for delivery of effective tax administration.⁷

• Lastly but most crucially, the IRS would receive the funding necessary to achieve the transformation into a 21st century tax administration and to sustain its operations at that level.⁸

I want to make clear that I believe the IRS can make that transformation. It has many, many talented people, who know what needs to be done and would love to be able to receive the education and funding necessary to utilize the most advanced approaches for their jobs. But as we have noted since the 2006 Annual Report to Congress,⁹ the IRS has been chronically underfunded for years now, at the same time it has been required to take on more and more work, including administering benefit programs for some of the most challenging populations. In such an environment, the IRS can only solve problems ad hoc; undertaking transformational approaches to tax administration has seemed, unfortunately, like a luxury it has not been able to afford.

What the IRS -- and by extension, U.S. taxpayers -- need is for Congress, the Administration, Treasury, and the Commissioner of Internal Revenue to work together to provide the funding, vision, direction, and accountability required to enable the IRS to become an agency that we are all proud of, that we find easy to navigate and work with, and that we trust and believe is fair. This is not a luxury. This is a necessity.

In the pages that immediately follow, I discuss two areas that are foundational for this transformation: taxpayer service and collection. Throughout the rest of the report's discussion of the Most Serious Problems of taxpayers, we identify other components of tax administration that must change and modernize to be effective, and we attempt to identify the consequences to taxpayers -- and the public fisc -- if we fail.

A central theme of this report is that without adequate funding, the IRS will fail at its mission. But additional funding alone will not bring the IRS into the 21st century. The funding must be accompanied by a commitment to rethinking its approach to tax administration and intense self-scrutiny about how it should best deploy those resources. The IRS must be open to new approaches and research, even if it shakes traditional assumptions. We offer this discussion, and the following report, in the hope that under new leadership and with the support of Congress, the IRS will again be able to undertake this challenge.

The Case for Taxpayer Service as One of the Most Significant Influences on Voluntary Compliance

The classic economic model of compliance -- that compliance depends upon the risk (or perception of risk) of being caught and the cost (punishment) if caught -- does not fully explain the high compliance rate in our tax system. Research shows that other factors, such as taxpayers' attitudes about government and their perception that they are being treated fairly by the tax system, also influence taxpayer compliance decisions. Many researchers refer to these factors collectively as "tax morale."¹⁰

In recent years, the Taxpayer Advocate Service (TAS) has explored the factors influencing taxpayer compliance decisions. In Volume 2 of this year's Annual Report, we discuss three studies that provide empirical evidence on several points:

Now, I am not suggesting that the IRS should not undertake enforcement actions. Such activity certainly has a direct effect (i.e., it corrects the specific taxpayer's noncompliant behavior for the period under review) and indirect effect (economists have estimated the indirect effect of an examination on voluntary compliance is between six and 12 times the amount of the proposed adjustment).¹⁶ But the IRS is very quick to pull out its hard core enforcement tools -- and our research shows that indiscriminate use of these tools does not bring about significant long-term voluntary compliance. The goal of any compliance action is that you don't have to address that taxpayer's noncompliance over and over again, resulting in an endless loop of enforcement action. For all but the most determinedly noncompliant taxpayers, the use of "softer" tools, like timely personal contacts (whether by phone or inperson), educational notices, installment agreements, and offers in compromise, make it more likely to bring that taxpayer into future compliance even as you address the current issue.¹⁷

IRS Taxpayer Service Delivery is Deteriorating to a Point That Will Impact Voluntary Compliance.

I believe that any attempt to develop a framework for IRS service delivery should begin with a discussion of the mission of the Internal Revenue Service and how taxpayer service relates to the mission. It is universally acknowledged that the IRS is the principal organization responsible for collecting the revenues necessary to fund the numerous and diverse functions performed by the federal government, i.e., that taxes are "the life blood" of government.¹⁸ As noted above, however, it should be clear that the mission of the IRS is broader than merely collecting tax revenue. In fact, with the expansion of refundable tax credits for individuals and businesses, the IRS today is a significant disburser of government payments.

There is also general agreement that the IRS is supposed to collect the correct amount of tax. This implies that the IRS's responsibility extends beyond ensuring that everyone pays the taxes they owe. We also have a responsibility to ensure that taxpayers do not pay more taxes than they owe. Further, there is general recognition that the IRS must weigh the burden it imposes on taxpayers against its mission to collect the taxes owed. For example, Congress has never funded the IRS to conduct extensive audits of every taxpayer every year. Besides being far too intrusive, this would place an unreasonable financial burden on the vast majority of honest taxpayers.

Our system is based on self-assessment, but the tax laws are so complicated (and become more so each year) that computing the correct amount of tax poses a daunting challenge for many of our citizens, and they frequently require assistance. While some can readily afford to pay for the assistance they need, tens of millions cannot. For these taxpayers, paying for tax assistance creates a significant financial burden.

Yet today, IRS-provided taxpayer service is increasingly and unacceptably limited. First, telephone calls and correspondence are the two main ways taxpayers communicate with the IRS. Yet the IRS is projecting it will answer only 61 percent of its calls this year from taxpayers seeking to speak to a live assistor. Waiting times are approaching 20 minutes for those lucky enough to get through. If you are a tax professional trying to resolve a problem for a client, you have a 20-minute wait on the line inaptly named "Practitioner Priority Service."¹⁹ Similarly, our ability to process correspondence has declined. Comparing the final week of FY 2004 with the final week of FY 2013, the backlog of taxpayer correspondence in the tax adjustments inventory jumped by 217 percent (from 348,000 to 1.1 million),²⁰ and the percentage of taxpayer correspondence in this inventory classified as "overage" increased by 361 percent (from 11.5 percent to 53.0 percent of correspondence).²¹ Correspondence generally is considered overage when it is 45 days old or older and the issue it addresses has not been resolved.²²

Second, the IRS has abandoned return preparation in its walk-in sites, which was already limited to the most vulnerable populations of taxpayers -- the elderly, the disabled, and the low income. It also has shut down tax law assistance on the phones after April 15, and has significantly limited the scope of questions it is willing to answer during the filing season. Thus, in the United States today, tax preparation and filing assistance is now, for the most part, privatized. That is, for a taxpayer to comply with his or her requirement to file a tax return, the taxpayer generally must pay for assistance, pay for software, and pay for advice. This is an unprecedented change in tax administration and it is not a good one. It is particularly devastating when one considers that over 50 percent of prepared individual returns are completed by unenrolled return preparers²³ -- the very preparers the IRS is now hamstrung over regulating because of pending litigation in the federal courts. So while we hash out this issue in the courts, millions of taxpayers are exposed to the risk of incompetent and even fraudulent return preparers.²⁴

In addition, millions of low and middle income taxpayers are "touched" annually by IRS programs that propose additional assessments, such as correspondence audits, math error, and automated under-reporter (AUR) programs. Other programs hold refunds that IRS filters have identified as questionable or potentially fraudulent.²⁵ These proposed additional assessments and refund holds are not always correct, and taxpayers frequently need help understanding IRS notices and other communications.²⁶

Low and middle income taxpayers generally cannot afford to pay practitioners to work with the IRS to resolve these kinds of issues. They rely on IRS assistance through our various channels, such as the toll-free line, correspondence, and walk-in sites. If, as I propose in the Taxpayer Bill of Rights, we accept that these taxpayers have a right to pay the correct amount of tax, i.e., that they should not pay taxes they do not actually owe, and should not be subjected to unreasonable financial (or other) burden, the IRS has an obligation to provide a reasonable level of service to help them do so. Similarly, practitioners who interface with the IRS on behalf of taxpayers require a reasonable level of service. I think we must acknowledge that service delivery is as integral to the IRS mission as collecting taxes and enforcing the tax laws, and fund it accordingly.

Automation Is Not a Complete Solution

To address ongoing budget pressures, the IRS is increasingly turning away from personal service toward automation, and it is clear that cost-effective innovations could yield improvements in taxpayer service. For example, the IRS allows taxpayers to conduct simple actions through IRS.gov. However, taxpayers cannot use the site for such tasks as:

• Correcting computational errors;

• Checking account status; or

• Obtaining prior year return information immediately.

While automated options are an important component of a comprehensive taxpayer service strategy, the IRS cannot rely solely on these options to close gaps. As the tax code grows more complex, taxpayer issues become increasingly difficult and harder to resolve through automation. Additionally, IRS research shows that taxpayers prefer personal service for some activities, and that certain segments of the taxpaying public are unable or unwilling to use automation. In a congressionally mandated update to a Taxpayer Assistance Blueprint, the IRS stated:

Unfortunately, many of the measures stakeholders routinely apply to the IRS do not acknowledge the importance of service delivery. Invariably, the focus is on reducing the tax gap through enforcement efforts, or improving efficiency as measured by return on investment (ROI). Each year, for example, the IRS publishes a document entitled "Enforcement and Service Results" on its website. The data is viewed with considerable interest by the tax administration community. At this writing, the FY 2012 results are the most recent posted. They contain seven pages of "Enforcement" data that show Enforcement Revenue Collected broken out by Examination, Collection, Appeals, and Document Matching; staffing for "key enforcement occupations"; audit rates for individuals overall and by income range; audit rates for various types of business entities; the number of levies, liens and seizures during the past year; and data on criminal investigations. At the end, there is just a single page of basic "Service" data. This heavy emphasis on enforcement measures relative to service delivery measures is indicative of IRS priorities, and suggests the need for a stronger commitment to providing high quality service to taxpayers.

The IRS's service activities compete with its enforcement programs for funding. While research shows that taxpayer service contributes to voluntary compliance, measuring the direct dollar impact of service on compliance (i.e., the ROI of IRS services) is at best very difficult. Thus, we recommend IRS funding be based on its obligation to deliver an acceptable level of service to the nation's taxpayers rather than a return on investment approach that emphasizes enforcement at the expense of service. In other words, if we acknowledge that quality taxpayer service is a fundamental taxpayer right and an integral component of the IRS's mission, then funding for IRS services should be based on service measures and set at a level that ensure the IRS will fulfill that right and achieve its mission.

IRS Needs Better Taxpayer Service Measures that Will Drive Better Funding and Resource Allocation Decisions

The IRS should develop and publish a comprehensive suite of service measures that can serve as the basis for funding decisions, while holding the IRS accountable for efficient and effective service delivery. Elsewhere, I have offered detailed guidelines for the creation of a portfolio of measures that would enable both the IRS and external stakeholders to evaluate the effectiveness of IRS service delivery.²⁸ These measures would also enable the IRS to identify performance gaps that could guide the creation of performance improvement goals. A principal feature of this proposed framework is the inclusion of the following types of measures for each of the IRS service delivery channels (telephone, face-to-face, electronic, correspondence):

• Access -- level of service, wait time (including, where applicable, time waiting for service, and time waiting for a response).

• Customer satisfaction.

• Accuracy.

• Issue resolution -- i.e., did the IRS completely resolve the taxpayer's problem(s)?

• Taxpayer awareness of the availability of the various service types by channel.

• Customer satisfaction with each service type by channel.

• Issue resolution for each service type by channel.

• Access for Limited English Proficiency and disabled taxpayers for each service type by channel.

• Number of returns prepared by Taxpayer Assistance Centers and Volunteer Income Taxpayer Assistance programs.

Taxpayer Service Is Not an Isolated Function But Must Be Incorporated Throughout All IRS Activities, Including Enforcement.

The goal of a comprehensive, modern taxpayer service plan should be to maintain and increase voluntary compliance. In order to achieve that goal, the IRS should stop approaching service and enforcement as separate tracks. The IRS enforcement functions, such as audit and collection, should not be excused from having to address the issue of taxpayer service. If a taxpayer makes a reporting error, for example, the enforcement functions should not only seek to assess and collect any underpayment of tax but should also educate the taxpayer to reduce the likelihood that the taxpayer will make the error again. In this way, the IRS can and should integrate service within its enforcement activities.

It is a truism that "you get what you measure." IRS enforcement functions are measured primarily by the tax dollars assessed and collected, and the audits closed, liens filed, and levies issued. These measures have the effect of telling IRS employees that enforcement activity is what counts, and taxpayer education, problem resolution, and long-term voluntary compliance do not.

To change this mindset and to bring IRS enforcement into alignment with the observation that taxpayer service is the most influential compliance factor, I provide a "report card" of measures at the end of this preface that, from the Taxpayer Advocate Service's perspective, would provide a good indication whether the IRS is treating U.S. taxpayers well and furthering voluntary compliance. Some of the measures are available today; others still need to be developed. Significantly, measures that show the impact IRS activities have on voluntary and future compliance and how effective the IRS has been in protecting taxpayer rights are missing from the IRS's current suite of measures. I encourage the IRS to work with TAS to develop these measures. In future reports, we will publish and track IRS performance on these measures.

In a budget-constrained environment, the IRS tends to fall back on automated enforcement activity instead of personal contacts, regardless of whether that automated activity is productive or detrimental to voluntary compliance. In many cases, the IRS ignores its own research findings and persists in unproductive and taxpayer-harmful activity. This pattern is no more obvious than in the area of IRS Collection activities, as I discuss in the following section.

15 Years After RRA 98, The IRS Collection Operation Is Entrenched in Unproductive Methods that Do Not Promote Voluntary Compliance.

Earlier this year, the Treasury Inspector General for Tax Administration (TIGTA) released a report on Trends in Compliance Activities Through Fiscal Year 2012.³⁰ The report discusses the challenges the IRS is currently facing with reductions in resources available for IRS enforcement activities, and what TIGTA identified as a significant decline in enforcement revenue. In regard to the IRS Collection function, the TIGTA report notes that "new Taxpayer Delinquent Account (TDA) receipts continue to outpace closures," and devotes a separate section to the decreases in the IRS's use of liens, levies, and seizures.³¹ While TIGTA does not directly link the decline in enforcement revenue to the reductions in liens, levies, and seizures, these collection actions are nevertheless highlighted in the discussion of Collection's "mixed results."

TIGTA's observations are strikingly similar to assessments made of the IRS Collection program shortly after the implementation of the IRS Restructuring and Reform Act of 1998 (RRA 98). For example, in its May 2002 report titled Impact of Compliance and Collection Program Declines on Taxpayers, the General Accounting Office (GAO, now the Government Accountability Office) reported that IRS Collection programs showed declines in business results and staffing, concluding that "declining staff and productivity, and an emphasis on taxpayer service contributed to compliance and collection declines."³² The GAO report also made specific mention of the IRS's decreasing use of enforcement sanctions, noting that the number of liens, levies, and seizures "dropped precipitously" between fiscal years (FY) 1996 and 2000.³³

A commonly held perception following the implementation of RRA 98 was that the reductions in liens, levies, and seizures reflected a general decline in IRS enforcement, particularly in respect to the IRS Collection operations, and that the IRS's new emphasis on taxpayer service was incompatible with a robust collection program. In fact, later discussions of collection program results commonly compared lien and levy activity with pre-RRA 98 levels, and increased activities in these enforcement areas were cited as improvements in IRS performance.³⁴

The IRS needs to embrace an expanded understanding of Collection "enforcement" actions.

This unfortunate focus on counting the wrong things -- to the detriment of measuring performance factors that truly are important in tax administration -- mitigated the positive impact that RRA 98 and the subsequent IRS restructuring efforts might have had on the IRS Collection program. For example, the GAO report noted that between fiscal years (FY) 1996 and 2001, "cases closed declined by 36 percent, re-flecting significant declines in both staff time and productivity."³⁵ However, the report later mentions that case closures resulting in full paid accounts or installment agreements did not change for field collections and actually increased for telephone collections.³⁶ In fact, IRS data reveal that the substantial reductions in liens and levies that the IRS experienced post-RRA 98 had no discernible impact on the collection of delinquent revenue during this period.³⁷ Unfortunately, the IRS's preoccupation with the volumes of lien and levy actions hampered efforts to identify the collection treatments that successfully delivered this revenue, with the aid of improved taxpayer service, e.g., timely personal contacts, and more flexibility in the use of payment options such as installment agreements and offers in compromise.

In FY 2013, we see a very similar situation developing with respect to the status of the Collection program. Severe budget cuts have contributed to reductions in Collection staffing, and significant changes in IRS collection policies implemented in FY 2011 and 2012 (i.e., the so-called IRS "Fresh Start Initiative") have placed greater emphasis on more flexible collection decisions, as opposed to increased use of traditional enforcement actions. Consequently, in FY 2013, lien filings by the IRS were 45 percent less frequent than in FY 2010, and levies have been reduced by 51 percent since FY 2011. Yet, these reductions do not appear to have had any negative impact on revenue collections. In fact, delinquent tax dollars collected on open TDA accounts, installment agreements, and offers in compromise have actually increased by 16.3 percent from FY 2010 through FY 2013.³⁸

 

Levies Issued, Liens Filed, and Dollars Collected

 

(TDAs, IAs, OICs)

 

 

 

Critical Success Factor #1 for IRS Collection Work: Focus on the use of timely personal contacts for taxpayers who do not self-correct during the collection notice process.

A critical component of any effective and efficient collection operation is a timely, meaningful contact with the debtor, which is designed to address the full scope of the delinquency problem and expeditiously implement a realistic payment solution. In fact, an IRS research study published in FY 2012 noted, "[T]he number one action leading to case closure [in the Automated Collection System or ACS] is a telephone call with the taxpayer."³⁹ Ironically, even though the IRS data presented in the study indicates that the majority of cases closed by ACS during the study period did not involve levy actions, and a relatively small number of levy issuances actually generated case closing actions, a key recommendation from the study was to issue more levies.⁴⁰

For the past several years, I have urged the IRS to review its practices involving the use of liens and levies, and rarely use these enforcement tools to initiate taxpayer contacts. These practices are not necessary, nor do they routinely generate productive taxpayer contacts. In fact, considering the high volume of cases not resolved by ACS, the IRS should be concerned that the reliance on "heavy-handed" enforcement may actually be discouraging taxpayers from coming forward to seek assistance from the IRS to resolve their tax debt problems. In this year's annual report, we address concerns with the IRS's over-reliance on automated levies as "calling cards."⁴¹

Critical Success Factor #2 for IRS Collection Work: Meet the needs of the taxpayer by expediting the assignment of collection cases to employees who are trained and empowered to resolve them.

TIGTA has reported that IRS enforcement revenue declined by nine percent from FY 2011 to 2012, and specifically noted that dollars collected by ACS in FY 2012 declined for the first time in four years. It is interesting to note, however, that Collection enforcement yield -- overall -- has actually increased by eight percent from FY 2010 to 2013. Moreover, although Collection yield did decline by almost three percent from FY 2011 to 2012, upon closer examination, the reductions were primarily in the collec-tion of business taxes.⁴² Remarkably, the IRS collected approximately $602 million less in delinquent taxes withheld by employers in FY 2012 -- the year the IRS opted to assign a greater percentage of these cases directly to ACS, rather than expedite their delivery to revenue officers in the field.⁴³ In fact, through FY 2013, the IRS has collected 12 percent less delinquent withholding taxes from business taxpayers than during the same period in FY 2011.⁴⁴ Conversely, collections on delinquent taxes related to individual income taxes have increased by 16 percent since the implementation of the "Fresh Start Initiative" in FY 2010, which involved policy changes primarily associated with income tax debts related to individuals.⁴⁵

In addition to timely interventions, another critical success factor for an effective collection operation is to ensure that cases are routinely assigned to employees who are trained and empowered to provide service that meets the specific needs of their customers. Since the implementation of RRA 98, the IRS Collection functions have strayed from this critically important concept. In this report, we discuss how IRS case assignment practices involving business-related tax delinquencies are neither efficient nor effective, and have resulted in billions of dollars of lost revenue.⁴⁶

Critical Success Factor #3 for IRS Collection Work: Provide reasonable payment solutions as early in the collecting process as possible.

Successful collection operations embrace the concept of contacting delinquent customers early, and quickly negotiating agreements for realistic payment solutions. In FY 2011, the IRS revised the collection policies governing the use of installment agreements (IA) and offers in compromise (OIC) to make it easier for more taxpayers to enter into "streamlined" payment agreements or qualify for OICs in appropriate situations. However, since the implementation of the new "streamlined" IA criteria, the number of IAs has actually declined by 11 percent,⁴⁷ while the IAs granted to business taxpayers have dropped by 17 percent since FY 2011.⁴⁸ The IRS collected approximately $11.1 billion with IAs in FY 2013 -- more than all other collection treatments on TDA accounts combined.⁴⁹ Yet, the IRS continues to struggle with the reality that flexible payment options represent the government's best option to collect much of its current inventory of delinquent tax debts.

At the conclusion of FY 2013, the IRS reported over 848,000 taxpayers with TDA accounts in the Collection Queue, representing $49.9 billion in delinquent taxes.⁵⁰ The inventory of TDA cases that the IRS reported as "shelved" stands at an all-time high of $14.4 billion, while the overall inventory of cases reported by the IRS as "currently not collectible" included a staggering $82.8 billion in September 2013.⁵¹ Realistically, without a more proactive approach to using IAs and OICs to resolve these accounts, the majority of this revenue will likely never be collected.

In this year's Annual Report, we identify and discuss how existing systemic and cultural issues serve as barriers for taxpayers attempting to negotiate fair, reasonable payment solutions for tax debt problems.⁵²

Critical Success Factor #4 for IRS Collection Work: Focus enforcement efforts on the most serious compliance problems in order to maximize the benefits of available Collection resources.

In a budget environment characterized by severe cuts and limited staffing, the IRS Collection operation needs to focus its resources on programs that maximize the benefits to the government in recovering lost revenue and improving voluntary compliance. However, the improvement of case-processing efficiencies in the application of IRS compliance programs must only be accomplished along with careful consideration of taxpayer rights and taxpayer service.

For several years, I have expressed concerns with the IRS's use of automated levies.⁵³ Of particular concern are levies on Social Security retirement income, which frequently result in economic hardship for low income taxpayers, who rely on these payments to meet their necessary living expenses. The IRS continues to issue millions of these levies each year through the Federal Payment Levy Program and has not yet adequately addressed my concerns about the impact of this program on some of the most vulnerable members of our society. As a result, many taxpayers, who are currently living on income at or near poverty levels, continue to suffer undue economic and emotional harm while dealing with the IRS to resolve these levies. Most recently, the Deputy Commissioner of Services and Enforcement rescinded my Taxpayer Advocate Directive (TAD) in which I directed the IRS to protect a subset of these taxpayers.⁵⁴ In rescinding the TAD, the IRS ignores both case law and a conclusive research study showing harm to these taxpayers. Thus, in this year's annual report, I again urge the IRS to implement more safeguards into the current practices used with automated levies to prevent harm for low income taxpayers, and provide timely relief to taxpayers who have already been harmed by these enforcement actions.⁵⁵

Conclusion

This year, TAS sponsored a series of focus groups with taxpayers to ascertain their reaction to a proposed Taxpayer Bill of Rights. In these discussions, the one right that taxpayers flat out did not find credible was the right to quality service. When we link this observation to a finding from our 2012 survey of noncompliant sole proprietors that they believed the IRS is more interested in collecting the tax than in getting the right answer, and this year's finding that taxpayer service and trust are the most influential factors for small business compliance, one can easily conclude that taxpayer service is one of, if not the, most significant determinant for voluntary compliance and keeping noncompliance from growing. It may not bring in the hardcore noncompliant taxpayers, but it is absolutely critical to many others.

Rather than generating all sorts of automated compliance touches -- including Automated Underreporter, Automated Substitute for Return, and math error notices that we later abate, which create work for ourselves and torments taxpayers unnecessarily -- the IRS should explore alternative approaches to engendering compliance. What if we came up with a strategy for underreporting and nonfiling that incorporated local compliance initiatives? Working through local networks like local trade and business groups, would we be more successful in promoting long-term voluntary compliance?⁵⁶ If we incorporated truly virtual face-to-face audit and collection appointments into our enforcement strategy -- where the taxpayer or representative could schedule a "virtual" appointment with the IRS and communicate face-to-face in a secure virtual environment, would we achieve higher response rates, better resolutions, and more education of the taxpayer? What would happen if we required local IRS managers and enforcement personnel to go out in the community and conduct outreach? They could learn about the specific challenges taxpayers face in trying to comply with the tax laws, which would be valuable information for developing future compliance and education initiatives.

None of these things is out of reach, and except for the virtual meetings, they could be done tomorrow -- for almost no expense (just a redeployment of the same resources). And the virtual technology is available -- many federal agencies, including the Social Security Administration, which has the same concerns about the privacy of its proceedings, are using this technology today.

My plea to Congress, then, is to fund taxpayer service, hold enforcement accountable for a more holistic approach, ensure taxpayer rights are the framework of analysis for all IRS initiatives, and provide the appropriate funding and oversight to bring the IRS into the 21st century, both in terms of technology and more importantly in terms of its understanding of taxpayer motivations and the factors influencing compliance behavior.

We are at a crossroads. We can continue to operate as we have in the past, where success is measured by the least productive aspect of our work (enforcement). Or we can be open to the possibility that enforcement dollars, levies, and liens may not be the optimal measures of the IRS's success in maximizing voluntary (and overall) tax compliance -- and engage in an open dialogue about alternative ways to most effectively accomplish the IRS's mission.

As we conclude a tumultuous year for the agency, I look forward to working with you to chart a better path forward, and I stand ready to assist you in any way that I can.

     National Taxpayer Advocate Report Card: Measuring the IRS's Protection

Internal Revenue Code (IRC) § 7803(c)(2)(B)(ii)(III) requires the National Taxpayer Advocate to prepare an Annual Report to Congress that contains a summary of at least 20 of the most serious problems encountered by taxpayers each year. For 2013, the National Taxpayer Advocate has identified, analyzed, and offered recommendations to assist the IRS and Congress in resolving 25 such problems.

This year, we have altered the format of the Most Serious Problem discussions in two important respects. First, we are not including an IRS response to our initial discussions and thus are no longer including the National Taxpayer Advocate's response to the IRS's comments. Second, we will be publishing the IRS formal response in conjunction with the National Taxpayer Advocate's report issued on June 30. In large part, this change was required so we could issue the Annual Report as close as possible to the December 31 statutory deadline given the 16-day government shutdown, which hit at a particularly crucial time in the report's editing and review schedule.

This change in approach, however, also brings us into conformity with the specific statutory language of IRC § 7803(c)(2)(B)(iii), which 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."

The issues described in the report are as follows:

The U.S. tax system is built on voluntary compliance. For the government, voluntary compliance is much cheaper than enforced compliance, because the government does not have to spend money to collect amounts that are voluntarily paid. Taxpayer rights are central to voluntary compliance. If taxpayers believe they are treated, or can be treated, in an arbitrary and capricious manner, they will mistrust the tax system and be less likely to comply with the laws voluntarily. If taxpayers have confidence in the fairness and integrity of the tax system, they will be more likely to comply.

There are dozens of discrete taxpayer rights scattered throughout the Internal Revenue Code, but they are not organized or presented in a coherent way. Similarly, Congress in the past has enacted several bills with the name "Taxpayer Bill of Rights," but they, too, create discrete rights and do not articulate broad principles. Not surprisingly, in response to a survey of U.S. taxpayers conducted for TAS in 2012, less than half said they believed they have rights before the IRS, and only 11 percent said they knew what those rights are.

ANALYSIS

Many countries and states have adopted a Taxpayer Bill of Rights. Just as the U.S. Constitution's Bill of Rights is organized and presented in a manner that U.S. citizens and the government itself can understand and respect, a Taxpayer Bill of Rights (TBOR) would serve the same function in the realm of taxation. A thematic, principle-based list of core taxpayer rights would serve as an organizing principle for tax administrators in establishing agency goals and performance measures, provide foundational principles to guide IRS employees in their dealings with taxpayers, and provide information to taxpayers to assist them in their dealings with the IRS.

The National Taxpayer Advocate views the tax system as an unwritten social contract between the government and its taxpayers; namely, taxpayers agree to report and pay the taxes they owe to enable their government to function, and the government agrees to provide the service and oversight necessary to ensure that taxpayers can and will do so. In recognition of this "two-way street," the report recommends that the IRS adopt a TBOR that contains ten taxpayer rights and five taxpayer responsibilities.

RECOMMENDATIONS

The National Taxpayer Advocate recommends that the IRS adopt a Taxpayer Bill of Rights along the lines detailed in the report; prominently display a link on the IRS.gov homepage to a taxpayer rights page; post taxpayer rights language on the business operating division pages of IRS.gov that refers to TAS, Low Income Taxpayer Clinics, and specific taxpayer rights and responsibilities and contains links to the U.S. Tax Court web page, where appropriate; require all public- and taxpayer-facing IRS sites and offices to display a poster and brochures about the Taxpayer Bill of Rights; and require all IRS operating divisions and functions when proposing initiatives, including budget initiatives, to include in their business case justifications an analysis of the proposed operation in terms of the Taxpayer Bill of Rights.

In fiscal terms, the mission of the IRS -- to "[p]rovide America's taxpayers top quality service by helping them understand and meet their tax responsibilities and by applying the tax law with integrity and fairness to all" -- trumps the missions of all other federal agencies. If the IRS lacks adequate funding to do its job effectively, the government will have fewer dollars to fund the military, social programs, and all other programs -- or simply to reduce the deficit. Since fiscal year (FY) 2010, the IRS budget has been cut by nearly eight percent while inflation has risen by about six percent. As a result, the IRS has been hampered in its ability to provide "top quality service" and maintain effective enforcement. In FY 2013, the IRS could only answer 61 percent of customer service calls, and respond timely to just 47 percent of taxpayers' letters about proposed tax adjustments. The IRS also slashed its overall training budget by a staggering 87 percent, which means the IRS not only has fewer employees than four years ago, but those who remain are less equipped to perform their jobs and to understand and respect taxpayer rights.

ANALYSIS

The combination of more work and less funding predictably has impaired the IRS's ability both to meet taxpayer needs and to improve tax compliance. The IRS is receiving significantly more individual and business tax returns today than ten years ago, which means it must answer more taxpayer phone calls, process the additional returns, conduct compliance checks, and sometimes conduct audits or take collection actions. The IRS is also receiving substantially more phone calls. In FY 2013, nearly 20 million calls to customer service representatives went unanswered because the IRS does not have enough employees to handle them. The IRS has also had to address a huge spike in tax-related identity theft and refund fraud. The IRS assigned more than 3,000 employees to work identity theft in 2013. Because of the harm identity theft victims suffer, we believe that was the right decision, but the reassignment of so many employees meant that other work in crucial taxpayer service and enforcement areas simply could not be done.

The requirement to pay taxes is generally the most significant burden a government imposes on its citizens. The National Taxpayer Advocate believes the government has a practical and a moral obligation to make tax compliance as simple and painless as possible. The recent funding cuts have increased the compliance burden for tens of millions of taxpayers seeking assistance from the IRS by phone, by mail, and in person.

It should also be noted that the IRS is the federal government's accounts receivable department and generates a substantially positive return on investment. In FY 2013, the IRS collected $255 for each dollar it received in appropriated funds. It is therefore self-defeating to treat the IRS like a pure spending program in which a dollar spent is simply a dollar spent. With the IRS, a dollar spent generates many dollars in additional revenue, thereby reducing the budget deficit.

RECOMMENDATIONS

The National Taxpayer Advocate reiterates her recommendations that Congress (1) revise the budget rules so that the IRS is "fenced off" from otherwise applicable spending ceilings and is viewed more like an accounts receivable department and (2) fund the agency at a level designed to maximize tax compliance, particularly voluntary compliance, with due regard for protecting taxpayer rights and minimizing taxpayer burden. Congress also should keep in mind in allocating IRS resources that tax compliance requires a combination of high quality taxpayer service, outreach and education, and effective tax law enforcement, and the IRS should continue to maintain a balanced approach toward that end. We are concerned that the "program integrity cap adjustment" procedures used in the past skew this important balance and should be avoided, but if cap adjustments continue to be used, we recommend they be written in a manner that applies to broadly defined compliance initiatives that include both taxpayer service (including outreach and education) and enforcement components.

To deal with a complex, constantly changing tax law and provide taxpayers with complete and accurate service, IRS employees must receive prompt and appropriate training and education. Since fiscal year (FY) 2009, budget cuts and sequestration have led the IRS to cut its training budget by over 85 percent. The IRS has reduced its training and education programs to a bare minimum without considering the types of training employees need to perform basic job functions, protect taxpayer rights, and prevent harm and undue burden for taxpayers. Lacking appropriate training and education, employees will be unable to fulfill their mission and taxpayer service will continue to erode. Delivering timely, appropriate education and training to employees is essential to the core function of the IRS.

ANALYSIS

The IRS drastically cut its training budget to meet its required overall reductions under the Budget Control Act of 2011. Even before the sequester, however, the IRS had sharply reduced the dollars it spent on training in response to a decrease in its total operating budget since FY 2010. In FY 2013, the IRS spent less than $250 per employee on training, as compared with $1,450 per employee in FY 2009, a decline of more than 83 percent. The IRS also created two review boards to review training requests for recommendation to the Deputy Commissioner (Operations Support), who declined to approve over 35 percent of proposed courses. Training hours delivered to employees in key job series have been reduced as much as 89 percent since FY 2009. In FY 2009, for example, Small Business/Self-Employed division revenue officers received over 700,000 total hours of training. In FY 2013, they were given just 76,000 hours -- a reduction of almost 90 percent.

RECOMMENDATIONS

The National Taxpayer Advocate recommends that the IRS propose and Congress appropriate sufficient funding for the IRS to train its employees through the most effective means (in person, conference call, self-study, outside courses, etc.) about the subject matter they handle and protecting taxpayer rights; prioritize funding for training employees in critical job skills; request Treasury Department authorization to approve training within the Office of Management and Budget's stated guidelines; and clearly define the review boards' criteria for approving training.

While the Internal Revenue Code guarantees certain rights to taxpayers, many taxpayers are unaware of their rights, and IRS employees do not always communicate them to taxpayers at the right times. The IRS should provide employees with an overarching, comprehensive education about taxpayer rights as well as training and guidance about how those rights apply in specific situations.

ANALYSIS

Training for many IRS employees contains only minimal instruction on taxpayer rights. For example, the 575-page training guide for newly hired tax examiners contains only six paragraphs that address discussing taxpayer rights and the audit process with taxpayers. The fiscal year 2013 continuing education schedule for the Office of Appeals includes ten Customer Satisfaction courses, nine of which are from an outside vendor and focused on customer relationships in the private sector, along with one internal course on Cultural Competence and Effective Communication. While the courses may encourage effective communication, they do not discuss taxpayer rights at all. The Internal Revenue Manual (IRM) sometimes instructs employees to ensure that they have taken a specific action to protect taxpayer rights. Often, however, the manual does not explain how an item or action, such as a statutory notice of deficiency in an audit, affects taxpayers' rights. In addition, the IRS does not adequately include taxpayer rights in its measures, such as critical job elements and case quality scores.

RECOMMENDATIONS

The National Taxpayer Advocate recommends that the IRS include a significant segment on taxpayer rights in all future updates of training modules; require all operating divisions to include taxpayer rights measures in their Business Performance Reviews and case quality scores; update all IRM sections identified by TAS with language provided by TAS to incorporate taxpayer rights into the IRM; and require employees to provide either Publication 1, Your Rights as a Taxpayer, or separate publications that explain the application of taxpayer rights in particular contexts, such as examination (Publication 1 E), collection (Publication 1-C), and appeals (Publication 1 A).

In tax year 2011, unregulated tax return preparers prepared over 42 million individual returns, or more than half of all the returns handled by preparers. As preparers play a critical role in tax administration, it is essential that the IRS ensure they are competent, visible, and accountable. The IRS had instituted a program to impose minimum competency requirements, but a U.S. District Court in Loving v. Internal Revenue Service enjoined the IRS from enforcing the testing and continuing education elements of the program. Unless this ruling is overturned on appeal, taxpayers will continue to find themselves without meaningful IRS oversight of preparers in a world where anyone can hang out a shingle as a "tax return preparer" with no knowledge or experience needed.

ANALYSIS

Since 2002, the National Taxpayer Advocate has recommended adoption of a system to regulate return preparers. TAS has witnessed widespread problems in the tax preparation industry. Problems with return accuracy and ethical standards were substantiated by "shopping visits" the Government Accountability Office and the Treasury Inspector General for Tax Administration conducted, where auditors posed as taxpayers and visited tax preparation businesses. The National Taxpayer Advocate believes minimum competency standards are essential to protect taxpayers and improve return accuracy. Filing a tax return is not merely a ministerial act. The taxpayer is taking a position before the federal government regarding items of income, expenses, and eligibility for government benefits that are administered by the IRS. Taxpayers pay preparers for their knowledge and skills because they are uncomfortable navigating the complexity of the tax laws by themselves. Taxpayers often suffer significant consequences when a preparer is incompetent or unethical.

RECOMMENDATIONS

Until the IRS can resume testing and requiring continuing education for preparers, the National Taxpayer Advocate recommends that the IRS develop a Service-wide Return Preparer Strategy that includes the following steps: (1) offer unenrolled preparers the opportunity to earn a voluntary examination and continuing education certificate; (2) restrict the ability of unenrolled preparers to represent taxpayers in audits of returns they prepared unless they earn the certificate; (3) restrict the ability to name an unenrolled preparer as a third-party designee on Form 1040, U.S. Individual Income Tax Return; (4) mount a consumer protection campaign to educate taxpayers about the need to select a preparer who can demonstrate competency; (5) develop a research-driven and service-wide preparer compliance strategy similar in nature to the Earned Income Tax Credit preparer compliance strategy; and (6) recommend that Congress revise 31 U.S.C.§ 330(a)(2) to make clear that the IRS has the authority to regulate unenrolled preparers.

In general, tax-related identity theft occurs when someone uses another individual's personal identifying information to file a false tax return to obtain an unauthorized refund. For the victims, the impact can be devastating and traumatic. The IRS takes much too long to fully unwind the harm suffered by victims and issue refunds to the legitimate taxpayers. Moreover, the IRS's specialized approach to resolving identity theft requires victims to interact with multiple IRS units.

ANALYSIS

Identity theft is a devastating crime that can have a traumatic emotional impact on the victim. A person's identity is core to his or her being -- when someone steals and uses your identity, it is an invasion of your person. The IRS's approach to assisting the victims ignores this important fact, and in many ways treats the victim as someone experiencing a minor inconvenience instead of a frightening personal disaster. Identity theft victims also will not receive the tax refunds they are entitled to receive until the IRS completes its handling of the case; thus, victims may suffer financial hardships when cases are not resolved quickly. The IRS should set up a centralized identity theft unit, similar to the centralized innocent spouse unit that assists taxpayers who may have been victims of domestic abuse. If the IRS believes the most efficient way to resolve identity theft issues is to involve more than 20 different units, this back-end process should be invisible to the taxpayer. As far as victims are concerned, there should be one IRS employee who interacts with the taxpayer. That one employee should maintain control of the taxpayer's case, including all peripheral issues stemming from the identity theft.

RECOMMENDATIONS

The National Taxpayer Advocate recommends that the IRS designate the Identity Protection Specialized Unit as the single point of contact for identity theft victims, and for that function to assign a single employee to work with the identity theft victim until all related issues are resolved; develop a method of tracking how long it takes from the perspective of the victim to resolve cases; implement "timeliness" measures to ensure identity theft cases do not languish; and develop an identity theft database or system accessible to all functions working on cases.

The IRS is required by law to release a levy that it knows is causing an economic hardship due to the financial condition of the taxpayer, and according to Vinatieri v. Commissioner, 133 T.C. 392 (2009), the fact that the taxpayer has unfiled returns does not justify proceeding with the levy . In 2011, despite Vinatieri, the IRS levied on the Social Security (SSA) and Railroad Retirement Board (RRB) benefits of nearly 67,000 taxpayers presumed to be experiencing economic hardship -- taxpayers whose incomes were less than 250 percent of the federal poverty level. The IRS declined to spare accounts of almost 41,000 of these taxpayers -- more than half -- from the automated levy program because the taxpayers had unfiled returns. The median income of taxpayers subject to levies on their SSA or RRB in 2011 was at most about $17,500. Thus, some of the 67,000 taxpayers whose benefits were levied upon almost surely were not merely considered low income but below the poverty line.

ANALYSIS

The IRS's own research shows that it levied on the Social Security payments of taxpayers it presumed were low income solely because they had unfiled returns. The IRS changed some Internal Revenue Manual (IRM) provisions that pertain to how employees handle cases involving unfiled returns, but training materials, job aids, and quality standards still need adjusting. The IRS can determine from its own and third-party databases whether a taxpayer is likely in economic hardship before it issues a levy.

RECOMMENDATIONS

The IRS should establish quality review procedures that measure whether employees identified and considered the possibility that a taxpayer was in economic hardship before levying, and whether in those cases the employee placed the account into "currently not collectible" status rather than levying. The IRS also should develop and publish IRM guidelines describing how collection employees, on the basis of information in IRS and third-party databases, should consider the possibility a taxpayer is in economic hardship before issuing a levy.

Unscrupulous preparers sometimes alter taxpayers' returns by inflating income, deductions, credits, or withholding without their clients' knowledge or consent, and pocket all or a portion of the inflated refund. Even though the taxpayer receives no financial gain from the fraudulent filing, he or she must still deal with the IRS in the aftermath. Return preparer misconduct is similar to identity theft, but the IRS treats victims of preparer fraud differently. When a taxpayer is victimized by identity theft, the IRS will "back out" the return filed by the perpetrator, process the true return, and pay out the refund claim. In preparer misconduct cases, the IRS has declined to provide full relief to victims, contending it would be inappropriate to issue a "second refund."

ANALYSIS

The IRS has developed interim procedures to deem a falsified return a nullity and to process the true return. However, this guidance falls short of instructing employees to issue refunds to victims of preparer fraud, which from the victim's perspective is likely the most important aspect of case resolution. Instead, the IRS tells employees to suspend action on such cases pending further guidance. The National Taxpayer Advocate believes the IRS has the legal authority to issue refunds to victims of preparer misconduct. The IRS should make these vulnerable taxpayers whole once it is established that they were not complicit in the crime, just as identity theft victims are not complicit.

RECOMMENDATIONS

The National Taxpayer Advocate recommends that the IRS develop comprehensive guidance providing full relief to victims of return preparer misconduct, including the issuance of a refund.

Section 32(k) of the tax code authorizes the IRS to ban a taxpayer from claiming the earned income tax credit (EITC) for two years if the IRS determines the taxpayer claimed the credit improperly due to reckless or intentional disregard of rules and regulations. This standard requires more than mere negligence on the part of the taxpayer and requires a determination of the taxpayer's state of mind. In 2011, the IRS imposed the ban on more than 5,000 taxpayers and did so contrary to IRS Chief Counsel guidance almost 40 percent of the time by banning taxpayers who simply did not respond to requests for substantiation of their claims. In a random sample of two-year ban cases, TAS found the IRS imposed the ban automatically 15 percent of the time, meaning no determination was made. The National Taxpayer Advocate does not support the Administration's proposal to permit the IRS to use math error authority in the context of these bans until the IRS improves its procedures to ensure its auditors impose the ban consistently with the statute. Moreover, Congress should clarify that the IRS bears the burden of proving the taxpayer acted intentionally or recklessly with respect to his or her EITC claim.

ANALYSIS

IRS auditors must explain and document in their work papers the reason for imposing the two-year ban, but in almost all of the cases in TAS' sample (90 percent), the work papers do not contain an adequate explanation. Managerial approval of the two-year ban is also required, but in more than two-thirds of the cases (69 percent), no managerial approval was obtained. In 62 cases in the sample (19 percent), the examiner imposed the ban solely because EITC had been disallowed in a previous year. In only ten percent of the cases were taxpayer-submitted documents clearly insufficient to prove eligibility, raising only the possibility that the taxpayer had the requisite state of mind to justify the two-year ban. The two-year ban is authorized only if the IRS determines the taxpayer's state of mind meets statutory criteria, but IRS procedures do not take into account the unique challenges low income taxpayers face in substantiating claimed EITC may be relevant to these taxpayers' state of mind. In fact, some Internal Revenue Manual (IRM) provisions result in the IRS punishing EITC taxpayers while they are learning these complex rules. Other IRM provisions lead to inappropriate imposition of the ban.

RECOMMENDATIONS

The IRS should immediately suspend the application of IRM provisions that permit automatic imposition of the two-year EITC ban. The IRS and Treasury should issue regulations that explain when the IRS should impose EITC bans. The IRS should work with TAS to rewrite the IRM provisions on the two-year ban to take into account what is reasonable to expect of taxpayers who claim the EITC. The National Taxpayer Advocate does not support the Treasury Department's proposal to permit the IRS to use math error authority in the context of these bans until the IRS improves its procedures to ensure auditors impose the ban consistently with the statute. Moreover, we recommend that Congress clarify that the IRS bears the burden of proving the taxpayer acted intentionally or recklessly with respect to his or her EITC claim.

In filing season 2013, the IRS wrongly flagged tax returns filed by Indian tribal members as fraudulent because they shared characteristics that the IRS has identified as indicators of fraud. Although the National Taxpayer Advocate's 2008 Annual Report to Congress applauded IRS outreach to Indian Nations as exemplary, it is unclear if all IRS functions are responsive to their needs. In certain cases, IRS operating divisions remain unaware of particular characteristics and needs of Indian taxpayers, which can lead to unnecessary contact with the IRS and unwarranted audits, tax assessments, or penalties.

ANALYSIS

Indian tribes have a unique status in federal tax law. Indian taxpayers may confront IRS misunderstandings and delays relating to issues such as:

• Improper treatment of tribal distributions;

• Presumed frivolous positions;

• Misunderstanding of Native American family structure;

• Ignorance of tribal sovereignty; and

• Delays in processing certain settlement awards.

Recommendations

The IRS should train all compliance employees about the culture and needs of Native American taxpayers, rendering assistance as required by this population, after consulting TAS; establish a cross-functional working group on issues facing Indian individuals, parallel to the IRS Indian Tribal Government (ITG) function that focuses on tribal entities; consult with the ITG function before implementing fraud filters or similar programs that could erroneously target Indian taxpayers; correct routine failure to comply with instructions from the ITG function concerning the needs of Indian taxpayers; and finalize guidance on tribal documentation of qualifying children, frivolous claim penalties, and other questions as they arise.

The Automated Collection System (ACS) is a computerized inventory system that manually and systemically sends notices to taxpayers, issues liens and levies, and answers calls in an effort to resolve balance due accounts. ACS collects tax largely by offsetting taxpayers' refunds and eliminates much of its inventory by passing cases to other parts of the IRS. ACS's failure to resolve cases can be attributed in part to its counterproductive approach to working cases and the types of cases it is assigned. Rather than applying the appropriate type of contact for each taxpayer, ACS generally relies on notices of intent to levy or systemically generated levies, which are often not effective. ACS should first attempt to talk to the taxpayer by making an outgoing call or sending a notice, and then consider a levy. This strategy would reduce the risk of placing the taxpayer in economic hardship, prevent the liability from becoming too big to be resolved, and reduce the need for more extreme collection measures.

ANALYSIS

In fiscal year (FY) 2013, ACS collected $5.4 billion on delinquent accounts, but about 47 percent of this came through automatic refund offsets, not from ACS employees' direct efforts. ACS transferred approximately three times what it collected -- $16.1 billion -- in unresolved tax liabilities to other IRS collection operations. Although ACS issued 46 percent fewer levies in FY 2013 than in FY 2012, its overall collections actually increased slightly. This result is not surprising based on a TAS review of ACS cases that found about 75 percent of levies were unproductive. In addition, an IRS study showed taxpayers' rate of response to a letter was nearly three times greater than the response to a levy. Further, some types of cases are more suitable to ACS treatment than others.

RECOMMENDATIONS

The National Taxpayer Advocate recommends that ACS better segment taxpayers, identifying which groups of taxpayers would respond best to which particular action; include a soft notice that would discuss payment options up front in its systemic procedures; send out a monthly (or no less than quarterly) notice to inform taxpayers of the tax they owe and payment options; create and properly train a core unit that can work and resolve small business cases when the field cannot take on more assignments; and require ACS assistors to present all collection alternatives to the taxpayer upfront in all cases.

The withholding and payment of trust fund taxes are vital components of the voluntary compliance system. Trust fund tax delinquencies can quickly become unmanageable for business taxpayers; yet the IRS provides inadequate attention and service for emerging trust fund collection cases. The IRS persists in assigning these cases to employees who are not fully equipped to resolve them. Consequently, important collection options (e.g., installment agreements and offers in compromise), are exceptionally rare and are frequently not available to business taxpayers until their debts become uncollectible. The National Taxpayer Advocate is troubled by the high percentage of business taxpayers who cannot resolve their tax problems in response to IRS collection notices or contacts with the Automated Collection System (ACS) and believes the IRS could resolve many of these accounts through a more proactive, service-oriented approach.

ANALYSIS

In fiscal year 2013, 85 percent of the employment-related trust fund taxes included in collection "final" notices were not resolved in the notice process, and 78 percent of the delinquent trust fund dollars that passed through the ACS left as unresolved cases. As a result, resolutions for these collection accounts are unnecessarily delayed, increasing the risk that these taxpayers may never pay what they owe or return to compliance. At the conclusion of FY 2013, 75 percent of the trust fund cases in the IRS's collection inventory involved more than one tax delinquency. From FY 2010 through FY 2013, the IRS has reported as uncollectible an average of $4.2 billion per year in trust fund tax debts -- or roughly 1 1/2 times the amount the IRS managed to collect on these accounts, including refund offsets and installment agreements.

RECOMMENDATIONS

The National Taxpayer Advocate recommends that the IRS reconcile assignment practices for business cases and only assign trust fund delinquencies to employees empowered to resolve them; develop and test a new "second" notice for business taxpayers, with an expanded focus on the availability of collection payment options; consider the use of "conditional" installment agreements for business taxpayers with trust fund tax debts and unfiled tax returns; issue regular collection notices to business taxpayers whose accounts have been assigned to the queue; and expand the use of existing tools to quickly address trust fund cases involving taxpayers with a history of delinquencies.

As of December 31, 2013, 2,371 taxpayers remain subject to IRS collection action because of waivers of the applicable statutory period for collection of tax liabilities, which violate the IRS policy limit of five years. On October 30, 1991, the IRS set a limit of five years on collection statute extensions entered in connection with installment agreements (IAs) that allowed taxpayers to pay their debts over time. Before January 1, 2000 (the effective date of the IRS Restructuring and Reform Act of 1998 (RRA 98)), however, IRS collection personnel commonly solicited extensions of any collection statute beyond five years when it did not appear the taxpayer could pay before the collection statute expiration date (CSED). In connection with a directive from the National Taxpayer Advocate, the IRS and TAS worked together to investigate these CSED extensions. The majority of these lengthy CSED cases burden taxpayers, who do not appear able to pay or resolve their debts through collection alternatives. The National Taxpayer Advocate's chief concern is the IRS's failure to cancel these unreasonable CSED extensions that do not comply with current policies. The IRS has already spent over four years trying to fix this problem, and no resolution is in sight.

ANALYSIS

RRA 98 restricted CSED waivers but did not apply to waivers entered in connection with IAs. The IRS does not plan to collect almost 82 percent of taxpayers' accounts (1,939 accounts) in which it inappropriately extended the CSED beyond five years, and has placed them in currently not collectible status or in the collection queue. TAS analysis of these accounts reveals that 309 taxpayers affected by these CSEDs are deceased. More than half of the taxpayers subject to these CSED extensions owe more than $50,000, of which almost 76 percent is attributable to accrued penalties and interest. Further, over 93 percent of these taxpayers likely defaulted on the IA entered in connection with his or her CSED waiver because the terms were unreasonable.

RECOMMENDATIONS

The National Taxpayer Advocate offers the following recommendations to provide a final resolution to all lengthy CSED accounts: by April 15, 2014, cease collection of payments on all accounts where the collection period was extended in violation of the IRS 1991 waiver policy; and by June 30, 2014, abate all such extended CSED accounts under the authority vested in the Commissioner under the Internal Revenue Code.

IRS procedures for Collection Due Process (CDP) hearings deprive taxpayers of a fair and independent review of IRS collection actions. A CDP Hearing Officer must verify that the IRS followed the law and administrative procedures, and consider whether the collection action balances the need for efficient tax collection with the taxpayer's concern that the action be no more intrusive than necessary. However, Hearing Officers may overlook this balancing test and rely too heavily on the determination made by the Collection function.

ANALYSIS

Taxpayers often do not have an opportunity to work with Collection prior to a CDP hearing. Neither the Automated Collection System (ACS) nor Field Collection tracks how often employees contact taxpayers by phone or mail prior to sending CDP notices. If taxpayers do work with Collection, they often must waive their rights to a CDP hearing when accepting collection alternatives such as installment agreements for payment. IRS Office of Appeals employees do not appear to understand the purpose of CDP, and there are legitimate concerns about Appeals' independence from Collection. Among other things, Appeals lacks its own Internal Revenue Manual (IRM) guidance for CDP cases and must use the Collection IRM to evaluate collection alternatives and conduct the balancing test unique to CDP cases. Appeals does not consider the hazards of litigation in CDP cases even though the rationale for judicial review of collection actions is to provide guidance regarding when IRS actions constitute abuse of discretion. If the IRS ignores that guidance, it will harm taxpayers.

RECOMMENDATIONS

The IRS should require Collection to attempt to contact the taxpayer, preferably by phone, before issuing a CDP notice and direct the taxpayer to send his or her CDP request to Appeals instead of Collection. The IRS should consider untimely CDP requests as requests for an equivalent hearing if they qualify. If a taxpayer reaches an agreement with Collection, the IRS should not ask the taxpayer to waive the right to a CDP hearing, and Appeals should retain jurisdiction of the CDP hearing and enter into the agreement with the taxpayer. Appeals should suspend a CDP hearing when a taxpayer raises a liability issue for a non-CDP year that would be included in collection alternatives covered by the CDP hearing and allow the taxpayer to resolve these related liability issues with the appropriate IRS function. The IRS should update the Appeals IRM with a significant section on CDP hearings to provide guidance on reviewing the collection action, conducting the balancing test, and considering collection alternatives. All Appeals Officers, Settlement Officers, and Appeals Account Resolution Specialists should be required to take updated training on conducting the balancing test and applying the hazards of litigation.

The IRS Exempt Organizations (EO) function receives about 60,000 applications for exempt status each year. In addition, EO receives applications for reinstatement from organizations whose exempt status was automatically revoked for failing to file returns or Form 990-N, Electronic Notice (e-Postcard) for Tax-Exempt EOs Not Required to File Form 990 or 990-EZ, for three consecutive years. Its inventory backlog now stands at about 66,000 cases, more than the number of routine applications it usually receives in an entire year, four times the 2010 level, and more than triple the 2011 level. EO also erroneously treated thousands of organizations as no longer exempt, and programming conditions will cause more erroneous revocations in the future. Organizations affected by delays in obtaining recognition of exempt status include those that deliver human services such as food and shelter. Of public charities that report to the IRS, there are more in this category than in any other. Increased need for their assistance coincides with reductions in the amount of government funds to meet the need, especially at the state and local levels.

ANALYSIS

Since 2009, EO has notified more than half a million organizations they are no longer exempt. About 9,000 of these revocations were erroneous. Some erroneous revocations were caused by IRS programming, which calculates the three-year non-filing period that triggers automatic revocation by reference to the date the organization obtained its Employer Identification Number (EIN), rather than by reference to the effective date of its exempt status. EO intends to retain the practice of measuring the nonfiling period with reference to the EIN date. It does not inform organizations how the practice may affect them or provide for administrative review of automatic revocations.

RECOMMENDATIONS

The National Taxpayer Advocate recommends that EO issue a letter informing organizations when the IRS proposes to treat them as having had exempt status automatically revoked and provide an opportunity to correct the condition that caused the proposed automatic revocation within 30 days; provide administrative review of organizations' concerns that the revocation would be in error; and inform organizations that EO calculates the three-year nonfiling period by reference to the date the organization obtained its EIN and advise them to contact EO if use of the EIN date will result in an erroneous revocation.

The National Taxpayer Advocate identified problems as early as 2005 with IRS return integrity programs, which detect and prevent civil fraud in tax returns before the IRS issues refunds to the taxpayers. Despite improvements, problems within the IRS's return integrity strategies persist and continue to harm taxpayers. The continued failure to address these problems burdens taxpayers who file legitimate returns and are wrongly ensnared by the myriad of fraud detection filters put in place by several IRS units. The failure of these units to coordinate may result in duplicate, over-inclusive, and unnecessary filters that are not routinely reviewed for accuracy or continued necessity. With the elimination of the IRS's return integrity steering committee, problems associated with fraud detection filters will not be discussed at a servicewide level and may create additional burden.

ANALYSIS

The return integrity process is complex and multifaceted. A tax return must travel a long path with many potential roadblocks before the IRS accepts it as filed. The main goal of Integrity Verification and Operation (IVO) is to stop fraudulent refunds before they are issued by identifying potentially false returns, usually via wages or withholding reported on the return. Returns are flagged as potentially fraudulent when a computer program automatically checks to see if the return "breaks" filters put in place by the IRS to attempt to identify activity often associated with fraud. These filters resulted in 308,868 refunds being delayed due to false positives for fraudulent activity in filing season 2013. TAS has seen a continued increase in cases involving taxpayers caught in fraud filters, with receipts of IVO cases increasing over 45 percent from fiscal year (FY) 2012 to FY 2013. Problems were compounded in FY 2012 when the IRS eliminated the Pre-Refund Program Executive Steering Committee, leaving no over-arching governance of the implementation or design of revenue protection strategies or filters, inhibiting an integrated approach, and resulting in potentially duplicative or over-inclusive filters. Additional IRS programs, such as the External Leads Program, which is responsible for receiving and processing informational leads and questionable funds returned by partner financial institutions and various other sources, leave taxpayers uninformed about the status of their refunds.

RECOMMENDATIONS

The National Taxpayer Advocate recommends that the IRS introduce an Integrated Data Retrieval System code to indicate that a refund is under investigation by the IRS under the bank leads program; reclassify the letters intended to inform taxpayers of the status of a refund caught by filters from "just destroy" to "perform further research" when they are returned as undeliverable; and reinstate the Pre-Refund Executive Steering Committee.

In 2012, in a reversal of prior advice, the IRS Office of Chief Counsel determined that the IRS was not legally authorized to impose the accuracy-related penalty under Internal Revenue Code (IRC) § 6662 against taxpayers who claimed refundable credits that it had frozen (i.e., not actually paid or accepted). The IRS abated almost $143 million in penalties that it imposed against 108,774 taxpayers after June 1, 2012. Yet it declined to abate more than $40 million in penalties that it imposed improperly against more than 46,000 taxpayers earlier, and it is still trying to collect over $20 million of these penalties from more than 23,000 taxpayers. The IRS's failure to abate inapplicable penalties signals disrespect for the law and a disregard for taxpayer rights.

ANALYSIS

The IRS's decision not to abate inapplicable penalties illustrates its resource-driven approach to them. As we have described in prior reports, the IRS too often proposes accuracy-related penalties automatically when they might potentially apply -- before performing a careful analysis of the relevant facts and circumstances -- and then burdens taxpayers by requiring them to prove the penalties do not apply. For example, as part of its automated underreporter (AUR) matching program, the IRS in 2012 sent over 93,000 letters (the CP 2000) that proposed nearly $100 million in accuracy-related penalties without first calling (or writing) the taxpayers to determine whether there was a reason for the apparent mismatches. Moreover, the IRS abated about 20 percent of the tax it assessed through AUR in FY 2012. The National Taxpayer Advocate is concerned the IRS may use the same approach to administer the new penalty applicable to erroneous claims for refund under IRC § 6676. Unlike many other penalties, this new penalty may apply even if a taxpayer has "reasonable cause" for the error. If the IRS automatically applies the new penalty to all refundable credit claims that might be erroneous (i.e., before investigating), it will place a disproportionate burden on unsophisticated taxpayers who have difficulty communicating with the IRS or do not understand the relevant facts and legal rules -- precisely those individuals to whom Congress frequently targets the benefits of refundable tax credits. Thus, IRC § 6676 could turn refundable credits into traps for the unwary.

RECOMMENDATIONS

The IRS should identify and abate all of the accuracy-related penalties that should not apply. It should minimize taxpayer burden when administering the IRC § 6676 penalty (e.g., by not proposing it automatically) and work with the Treasury Department to support a reasonable cause exception.

The IRS has a strategic goal of expanding electronic service options for its tax partners, including practitioners, who can interact with the IRS through an e-Services suite of web-based products. In early 2013, the IRS discontinued the Disclosure Authorization (DA) and Electronic Account Resolution (EAR) applications without discussing the matter with the practitioner community in advance. DA enabled practitioners to submit power of attorney and tax information authorization forms (Forms 2848 and 8821) electronically, while EAR allowed practitioners to work with the IRS electronically on account-related issues. The IRS cited low usage and increased operating costs as reasons for ending the programs. However, almost immediately after the IRS announced the decision, practitioners expressed significant concerns. The National Taxpayer Advocate believes the decision process lacked strategic planning and stakeholder engagement, and increased burden on taxpayers and their representatives.

ANALYSIS

The IRS discontinued the e-Services applications without providing practitioners with acceptable online options, despite practitioners' clear demand for more electronic services and the IRS Strategic Plan's objective to expand e-Services. Once the IRS retired the two programs, practitioners who used DA reverted to mailing or faxing their paper disclosure authorization forms to the Centralized Authorization File, which has a record of long processing times due its outdated systems. Those who used EAR must now contact the IRS through the Practitioner Priority Service (PPS). Practitioners who used PPS in fiscal year 2013 had to wait almost 20 minutes to reach a live assistor. It also is unclear whether the IRS considered the additional long-term costs of moving customers away from online services to paper and phone-based systems.

RECOMMENDATIONS

The National Taxpayer Advocate recommends that the IRS not retire practitioner applications without soliciting comments beforehand; establish a strategic plan to identify develop, and promote viable electronic alternatives to discontinued applications prior to discontinuance; and solicit comments from users on how to improve and better market applications experiencing low usage rates.

The classification of workers as employees or independent contractors has significant tax consequences for businesses and individuals, ranging from the allowance of expenses derived from a "trade or business" to eligibility for employee benefit or pension plans. The National Taxpayer Advocate has repeatedly called for the IRS to simplify its worker classification criteria and develop online self-help tools, but the IRS has taken little action. In addition, applicants who receive adverse classification determinations from the IRS may not automatically receive administrative appeal options, and those who do may not be afforded all the remedies offered in internal guidelines.

ANALYSIS

Firms and workers may file Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding, to ask the IRS whether a worker is an employee or an independent contractor. The SS-8 unit has been beset with a backlog of cases, with "overage" inventory reaching 80 percent and applicants having to wait for up to a year for a decision. The development of an electronic tool to determine classification would reduce inventory. The IRS has tried to address the backlog by streamlining procedures, but problems remain. The unit is using subjective case screening criteria that may lead to rejection of legitimate applications. And in contrast to applicants under audit, those who receive adverse SS-8 determinations may not automatically receive administrative appeal options, and those who do may not be afforded remedies like Alternative Dispute Resolution.

RECOMMENDATIONS

The National Taxpayer Advocate recommends that the IRS adopt her previous recommendation to develop electronic tools for employers or employees to determine worker classification; increase staffing to address the inventory backlog, reduce burdens on businesses and workers and provide effective, timely classifications; allow applicants the right to an independent review of adverse determinations; provide applicants an opportunity to respond before rejecting their applications; and transition the SS-8 program from a centralized campus operation to field offices more equipped to consider subjective criteria.

U.S. citizens or resident aliens are subject to tax on their worldwide incomes and have the same general tax reporting requirements whether they live in the United States or abroad. However, the tax requirements have become so confusing and the compliance burden so great that taxpayers are giving up their U.S. citizenship in record numbers. The IRS emphasizes service to international taxpayers via IRS.gov webpages, but taxpayers still call the IRS for assistance with account-related matters because online options remain limited. The IRS is planning improvements to online service delivery, but in view of the unique communication challenges international taxpayers encounter, the IRS needs to prioritize initiatives that affect this population.

ANALYSIS

The IRS focuses on improving online services rather than telephone service for taxpayers overseas, but the persistent lack of online options means taxpayers frequently call the international call site, a toll number. The customer service level of service for that number declined from 78 percent to 72 percent from fiscal year (FY) 2012 to FY 2013. The IRS.gov landing page for international taxpayers received about 300,000 unique visitors in FY 2013. There were over 100,000 unique visitors to the Individual Taxpayer Identification Number (ITIN) page on average each month. At the same time, several basic tax forms, including both the ITIN application and Form 1040NR, U.S. Nonresident Alien Income Tax Return, cannot be filed electronically. The International Individual Tax Assistance Team (IITA), created to develop international taxpayer service initiatives, has yet to be made permanent, which means there is still no on-going IRS commitment to improve service to international taxpayers. Important details about how U.S. taxpayers living abroad can meet their obligations under the Affordable Care Act remain undeveloped.

RECOMMENDATIONS

The National Taxpayer Advocate recommends that the IRS make IITA a permanent initiative with reporting responsibilities; prioritize the delivery of online services to international taxpayers by including initiatives affecting them in early pilot projects; make available free electronic filing of tax forms such as Form 1040NR and the ITIN application; improve the level of service for international taxpayers who call the international call site; and explore the use of voice-over-Internet-protocol and other alternative methods of telephone services that will allow the IRS to contact taxpayers, and taxpayers to contact the IRS, without paying international call rates.

In November 2012, the IRS announced permanent changes to its application procedures for Individual Taxpayer Identification Numbers (ITINs), which taxpayers who are ineligible for Social Security numbers must use to meet their filing obligations. Dependent ITIN applicants now face a substantial burden because they can no longer use a certifying acceptance agent (CAA) to certify their documents. Dependents must mail original documents or copies certified by the issuing agency, or have the documents certified at an IRS taxpayer assistance center (TAC) or at one of just four U.S. tax attaché offices overseas.

ANALYSIS

From January through October 2013, applicants filed only one million ITIN applications with returns, compared to nearly two million during the same period in 2012. During this period, ITIN applications and accompanying returns declined nearly 50 percent, while the percentage of applications rejected by the IRS soared to 50.2 percent. One explanation for these numbers is the burden caused by the new ITIN procedures. ITIN applicants report problems, including a lack of communication about why the IRS suspended or rejected an application, an inability to speak with IRS employees, a lack of notice about the status of the application, the rejection of applications with legitimate supporting documents, and lost original documents. The IRS's policy of generally accepting ITIN applications only during the filing season forces the IRS to process applications under short timelines and does not provide sufficient time to review them for potential fraud.

RECOMMENDATIONS

The National Taxpayer Advocate recommends that the IRS allow the filing of ITIN applications throughout the taxable year with proof of a filing requirement; allow CAAs to certify a dependent applicant's documentation and send copies instead of originals or copies certified by the issuing agency; allow TAC employees to certify all identity documents (beyond passports and national identity cards) that ITIN examiners accept for primary, secondary, and dependent applicants; and require notification to a taxpayer before an ITIN expires.

Since 2009, the IRS has generally required individuals who failed to report offshore income and file one or more related information returns (e.g., the Report of Foreign Bank and Financial Accounts (FBAR)) to enter into increasingly punitive offshore voluntary disclosure (OVD) settlement programs. It generally requires "benign actors" to apply to OVD and then "opt out" before it will consider a lesser penalty. Those who opt out are subjected to audits. Because those opting out face prolonged uncertainty and the risk of even more severe penalties, some agree to pay more than they should. Moreover, IRS resources devoted to auditing and disproportionately penalizing those who come forward to correct honest mistakes are not available to address noncompliance by others who do not come forward.

ANALYSIS

In the 2009 OVD program, the median offshore penalty paid by those with the smallest accounts ($87,145 or less) was nearly six times the tax on their unreported income. Among unrepresented taxpayers with small accounts it was nearly eight times the unpaid tax. The penalty was also disproportionately greater than the amount paid by those with the largest accounts (more than $4.2 million) who paid a median of about three times their unreported tax. When the IRS audited taxpayers who opted out (or were removed), on average, it assessed smaller, but still severe, penalties of nearly 70 percent of the unpaid tax and interest. Given the harsh treatment the IRS applied to benign actors, others have made quiet disclosures by correcting old returns or by complying in future years without subjecting themselves to the lengthy and seemingly-unfair OVD process. Still others have not addressed FBAR compliance problems, and the IRS has not done enough to help them comply. While the IRS initiated a less punitive "streamlined" program to encourage certain nonresidents to self-correct, no similar program is available to U.S. residents. Moreover, the IRS has imposed new duplicative reporting requirements.

RECOMMENDATIONS

The IRS should expand the self-correction and settlement options available to benign actors so that they are not pressured to opt out or pay more than they should; do more to educate persons with foreign accounts (e.g., recent immigrants) about the reporting requirements; consolidate and simplify guidance; and reduce duplicative reporting requirements.

The Foreign Account Tax Compliance Act (FATCA), which Congress enacted in 2010, fundamentally changes the reporting of foreign assets. FATCA tries to reduce revenue loss by imposing a broad range of additional reporting obligations, along with potential sanctions on U.S. taxpayers and residents, foreign entities, and withholding agents. One goal of FATCA is international data sharing with global information transparency. Questions remain, however, regarding whether such a course is advisable, whether the information being compiled is necessary and will be effectively used, whether the enforcement benefits of FATCA justify the compliance burdens and economic hardships it imposes, and whether the due process rights of taxpayers will be preserved in the process.

ANALYSIS

The IRS has not spelled out reasonable cause defenses or other relief procedures to distinguish between bad actors and benign non-filers. This lack of guidance exposes good faith non-filers to FATCA's severe penalties. Similarly, errors in collecting and reporting information on account holders by foreign financial institutions (FFIs) could cause significant difficulties for taxpayers unless the IRS develops a timely and effective mechanism for addressing such inaccurate information reporting. Additionally, although the IRS has been responsive to some comments and suggestions throughout the development of the FATCA regime, it has failed to act on advice from other well-informed stakeholders.

RECOMMENDATIONS

The National Taxpayer Advocate recommends the IRS issue FATCA-specific reasonable cause or similar guidance, which adopts a measured approach to the imposition of penalties with respect to benign non-filers; ensure that U.S. taxpayers and residents have a timely and effective mechanism for addressing information reporting errors of FFIs; act responsively and efficiently to implement the input of stakeholders, many of which have particular expertise that could contribute substantially to the effective implementation of FATCA; and reduce the duplicative reporting required on both Form 8938, Statement of Foreign Financial Assets, and the Report of Foreign Bank and Financial Accounts. The IRS should proceed with great caution as it moves forward with FATCA implementation. It should be careful to burden affected parties as little as possible, to gather only the information it will actually use, and to learn from its experiences with the Offshore Voluntary Disclosure Programs to more effectively preserve the due process rights of taxpayers.

The use of digital currencies, such as bitcoin, is growing. In the four months between July and December 2013, Bitcoin usage has increased by over 75 percent -- from about 1,700 transactions per hour to over 3,000. Over the same period, the market value of bitcoins in circulation increased more than ten-fold from about $1.1 billion to $12.6 billion. However, the IRS has yet to issue specific guidance addressing the tax treatment or reporting requirements applicable to digital currency transactions. People who are trying to comply with these rules have complained that they are unsure about them. Thus, IRS-issued guidance would promote tax compliance, particularly among those who want to report digital currency transactions properly, and it would reduce the risk that users of digital currencies will face tax consequences that they did not anticipate.

ANALYSIS

Following a 2008 recommendation by the National Taxpayer Advocate to issue guidance on the tax treatment of the transfer of "virtual" items and currency, the IRS created a webpage that suggests existing guidance covers these transactions. However, it did not explain when the transactions are sufficiently analogous to be covered by existing rules. Unanswered questions may include:

RECOMMENDATIONS

The IRS should issue guidance that addresses the tax treatment and information reporting required in connection with digital currency transactions, including answers to the basic questions listed above.

The recent Supreme Court case United States v. Windsor held unconstitutional the Defense of Marriage Act of 1996, which effectively had precluded federal recognition of same-sex marriage. Subsequent IRS guidance resolved certain questions for same-sex spouses anticipated by the National Taxpayer Advocate's 2012 Annual Report to Congress. While the decision and guidance resolve fundamental issues, various questions of implementation remain, while questions about the tax status of unmarried domestic or civil union partners persist.

ANALYSIS

Because of the difference between federal and state law, same-sex spouses may have to file tax returns as single at one level but as married at the other. Before Windsor, spouses whose state recognized their marriage would file singly for federal but jointly for state tax purposes. After Windsor, spouses whose state does not recognize their marriage need to file as married with the IRS while continuing to file singly with the state. IRS systems for processing amended and new returns hold potential for rejecting unusual but legitimate claims, putting them in the limbo of refund fraud processes. Meanwhile, same-sex partners in three states that ban same-sex marriage but allow domestic partnerships or civil unions still need answers to questions like the following. Is alimony after dissolution of a civil union includible by the recipient and deductible by the payer? Is community property created upon partnering with an individual of the same sex a taxable gift?

RECOMMENDATIONS

The IRS should issue formal and informal guidance for same-sex spouses to resolve questions that continue to arise, for same- and opposite-sex partners who have marital attributes under civil union or similar state law, and for IRS employees to promptly process the returns and related claims. The IRS also should review identity theft and revenue protection filters in light of common filing scenarios by same-sex spouses so the IRS does not freeze and delay refunds of legitimately married taxpayers.

The National Taxpayer Advocate places a high priority on working with the tax-writing committees and other interested parties to try to resolve problems encountered by taxpayers. In addition to submitting legislative proposals in each Annual Report, the National Taxpayer Advocate meets regularly with members of Congress and their staffs and testifies at hearings on the problems faced by taxpayers to ensure that Congress considers a taxpayer perspective.

The Alternative Minimum Tax (AMT) does not achieve its original goal -- to ensure that wealthy taxpayers pay at least some tax. By one projection, about 1,000 millionaires will pay no federal income tax in 2013. Those with the highest incomes are actually less likely to pay AMT than those just below them. The AMT penalizes middle income taxpayers for having children, getting married, or paying state and local taxes. The AMT is also unnecessarily complicated and burdensome, even for those who are not subject to it. Many taxpayers must fill out a lengthy form only to find they owe little or no AMT after all.

ANALYSIS

The AMT requires taxpayers to compute their taxes twice -- once under the regular tax rules and again under the AMT rules. If the "tentative minimum tax" exceeds the regular tax liability, the taxpayer pays the difference as AMT. If not, he or she does not pay the AMT, and the computation seems to the taxpayer like a complete waste of time. In addition, the complexity of the AMT reduces the transparency of the tax system, making it more difficult for people to know their marginal tax rate and predict what they will owe -- and when people owe more than anticipated, voluntary compliance may suffer. Even without any decline in voluntary compliance, the AMT is only projected to bring in $25.6 billion in 2013. Thus, tax simplicity, transparency, voluntary compliance, and taxpayers who live in high-tax states or have children have become collateral damage in a battle to prevent high-income people from reducing their taxes by applying the regular tax rules enacted by Congress. If Congress does not like those rules, it should change them rather than apply an AMT.

RECOMMENDATIONS

Permanently repeal the AMT.

In 1998, Congress amended Internal Revenue Code (IRC) § 6511 by adding IRC § 6511(h), which suspends the running of the period for filing a claim for refund where a taxpayer can show that he or she was financially disabled. However, the current, narrowly tailored provision fails to protect numerous taxpayers who lack the capacity to file a refund claim. The statute requires a qualifying taxpayer to have a "medically determinable" physical or mental impairment, preventing the IRS from relying on potentially more valuable determinations, including those from licensed psychologists or clinical social workers. It also requires that the taxpayer be "unable" to manage his or her financial affairs due to a physical or mental impairment. This forces the individual making the determination to provide a global, "all or nothing" statement about the effect of the impairments. These requirements have led the IRS to dismiss otherwise compelling evidence and deny relief to taxpayers.

ANALYSIS

Requiring the determination regarding the taxpayer's impairment to be a medical one does not always give the IRS the most accurate and useful information. A taxpayer receiving regular counseling and treatment from a licensed psychologist or a social worker could not submit a letter from either professional, even though they might be most familiar with the case, because it would not be considered a medical determination under the law. The current requirement that the taxpayer be "unable" to manage his or her financial affairs means the supporting letter must make an "all or nothing" determination. Requiring such a statement places a large burden on the individual providing the determination letter, and may unnecessarily deter professionals from doing so. Specifically, the professional may know or believe the taxpayer can manage simple, easy financial tasks, and therefore may feel barred from confidently stating that he or she was unable to manage financial affairs.

RECOMMENDATIONS

The National Taxpayer Advocate recommends that Congress amend IRC § 6511(h)(2)(A) to provide that an individual is financially disabled when he or she has a physical or mental impairment, determined by a licensed medical or mental health professional, which materially limits the individual's management of his or her financial affairs.

Internal Revenue Code (IRC) § 32(k) authorizes the IRS to ban a taxpayer from claiming the Earned Income Tax Credit (EITC) for two years if the IRS determines the taxpayer claimed the credit improperly due to reckless or intentional disregard of rules and regulations. The IRS often ignores the statutory requirements for imposing the ban, contravenes its own Chief Counsel guidance, and bypasses its own procedural safeguards to impose the ban. For the vulnerable population of low-income taxpayers who are otherwise eligible for EITC, inappropriately being deprived of the credit for two years is a serious burden that may be difficult to relieve. These taxpayers may be intimidated and fearful of protesting the IRS's treatment of them. They may not understand they have been wronged when the IRS imposes the ban without following the statutory requirements, and consequently they may not seek assistance they need, such as from Low Income Taxpayer Clinics. A taxpayer may petition the Tax Court for review of the IRS's determination to impose the two-year ban, but the taxpayer may have the burden of proving the IRS imposed the ban improperly.

ANALYSIS

When the IRS audits a taxpayer's return, disallows EITC, and imposes the two-year ban, it issues a statutory notice of deficiency that includes notice of the determination to impose the ban. The taxpayer may petition the Tax Court for review of the disallowed credit as well as the ban. Once in Tax Court, the taxpayer generally bears the burden of proof. Several Code provisions and Tax Court Rules shift the burden of proof to the IRS for various issues, but it is not clear which party has the burden of showing whether or not the ban was properly imposed. If the burden of proof does not shift to the IRS, the taxpayer contesting the ban must produce evidence to prove a negative (that he or she did not claim the credit due to reckless or intentional disregard of rules and regulations), a requirement that is considered unfair in certain unreported income cases.

RECOMMENDATION

Amend IRC § 32(k) to clarify that the IRS has the burden of proof when proposing to impose the two-year ban on claiming EITC. Consequently, the IRS would be required to produce evidence of the taxpayer's reckless or intentional disregard of rules and regulations and persuade the court that imposition of the ban would be appropriate.

Under a Treasury Regulation implementing the Affordable Care Act, an employee's family may be disqualified for the premium tax credit if the cost of self-only insurance would be affordable, even though he or she pay more for family coverage. This is because a 9.5-percent affordability threshold in the regulation refers to self-only cost -- even if the employee needs family coverage.

ANALYSIS

As a logical matter, the affordability threshold creates a disjunct between a stipulated amount and the actual cost of family coverage. This should be resolved. As a practical matter, disqualification from the premium tax credit may make it harder for families to obtain health insurance.

RECOMMENDATION

Clarify that the 9.5-percent affordability threshold pertains to the applicable type of insurance, whether self-only or family coverage. The recommendation would align the rule with economic affordability.

The tax code requires colleges and universities to file information reports with the IRS reflecting tuition from students. However, the law does not permit these eligible educational institutions to verify Taxpayer Identification Numbers (TINs) with the IRS prior to filing. Unlike others who file information reports and can perfect TINs once the IRS advises them of an error, colleges and universities must rely on student information while still facing up to $1.5 million in penalties for errors.

ANALYSIS

Existing law permits TIN matching by payors of income, who would have to do back-up withholding in the case of a payee with an inaccurate TIN. This would be inapplicable to colleges when they are not paying income to students. As a practical matter, colleges have a tuition information reporting requirement for which they need to verify TINs. A TIN may not match a student's name for various reasons, such as transposition errors or name changes.

RECOMMENDATION

To allow the IRS to alert colleges of mismatches to resolve with students prior to filing information reports, Congress should expand the TIN-matching statute for purposes of information reports on tuition.

SIGNIFICANT CASES

At the outset, we describe certain judicial decisions that generally do not involve any of the ten Most Litigated Issues, but nonetheless highlight important issues relevant to tax administration. This year, we discuss ten cases.

1. Accuracy-Related Penalty Under IRC §§ 6662(b)(1) and (2)

Internal Revenue Code (IRC) §§ 6662(b)(1) and (2) authorize the IRS to impose a penalty if a taxpayer's negligence or disregard of rules or regulations caused an underpayment of tax, or if an underpayment exceeded a computational threshold called a substantial understatement, respectively. IRC § 6662(b) also authorizes the IRS to impose five other accuracy-related penalties. We did not analyze these other accuracy-related penalties because during our review period of June 1, 2012, through May 31, 2013, taxpayers litigated these penalties less frequently than the negligence and substantial understatement penalties.

2. Trade or Business Expenses Under IRC § 162 and Related Sections

The deductibility of trade or business expenses has long been among the ten Most Litigated Issues in the Annual Report. We identified 134 cases involving a trade or business expense issue that were litigated between June 1, 2012, and May 31, 2013. The courts affirmed the IRS position in the vast majority (approximately 74 percent) of cases, while taxpayers fully prevailed only about two percent of the time. The remaining cases resulted in split decisions.

3. Gross Income Under IRC § 61 and Related Sections

When preparing tax returns, taxpayers must report gross income for the taxable year to determine the tax they must pay. The reporting of gross income has been among the most litigated issues in each of the National Taxpayer Advocate's Annual Report to Congress. For this report, we analyzed 117 cases decided between June 1, 2012, and May 31, 2013. The majority of cases this year involved taxpayers failing to report items of income, including some specifically mentioned in IRC § 61 such as wages, interest, dividends, and annuities.

4. Summons Enforcement Under IRC §§ 7602, 7604, and 7609

Pursuant to IRC § 7602, the IRS may examine any books, records, or other data relevant to an investigation of a civil or criminal tax liability. To obtain this information, the IRS may serve a summons directly on the subject of the investigation or any third party who may possess relevant information. If a person summoned under section 7602 neglects or refuses to obey the summons, produce books, papers, records, or other data, or give testimony, as required by the summons, the IRS may seek enforcement of the summons in a United States district court.

A person who has a summons served on him or her may contest its legality if the government petitions to enforce it. Thus, summons enforcement cases are different from many other cases described in other Most Litigated Issues because often the government, rather than the taxpayer, initiates the litigation pertaining to summons enforcement. If the IRS serves a summons on a third party, any person entitled to notice of the summons may challenge its legality by filing a motion to quash or by intervening in any proceeding regarding the summons. Generally, the burden on the taxpayer to establish the illegality of the summons is heavy.

We identified 117 federal cases decided between June 1, 2012, and May 31, 2013, that included issues of IRS summons enforcement. In 80 cases, the government initiated the litigation by filing a petition to enforce the summons. In 37 cases, the taxpayer or a third party initiated the litigation by filing a motion to quash the summons. Of the 117 cases, the parties contesting the summonses prevailed fully in four cases, with two other cases resulting in split decisions. The IRS prevailed in full in the remaining 111 decisions. Of the 117 cases, 56 included a discussion of the law and interaction between the taxpayer and the government. Of these 56 cases, the parties contesting the summonses prevailed fully in four cases, with two other cases resulting in split decisions. The IRS prevailed in the remaining 50 cases.

5. Appeals From Collection Due Process Hearings Under IRC §§ 6320 and 6330

Collection Due Process (CDP) hearings were created by the IRS Restructuring and Reform Act of 1998 (RRA 98). CDP hearings provide taxpayers with an independent review by the IRS Office of Appeals (Appeals) of the decision to file a Notice of Federal Tax Lien (NFTL) or the IRS's proposal to undertake a levy action. In other words, a CDP hearing gives taxpayers an opportunity for a meaningful hearing before the IRS issues its first levy or immediately after it files its first NFTL with respect to a particular tax liability. At the hearing, the taxpayer has the statutory right to raise any relevant issues related to the unpaid tax, the lien, or the proposed levy, including the appropriateness of the collection action, collection alternatives, spousal defenses, and under certain circumstances, the underlying tax liability. Taxpayers have the right to judicial review of Appeals' determinations if they timely request the CDP hearing and timely petition the United States Tax Court. Generally, the IRS suspends levy actions during a levy hearing and any judicial review that may follow.

Since 2003, CDP has been one of the federal tax issues most frequently litigated in the federal courts and analyzed in the National Taxpayer Advocate's Annual Reports to Congress. The trend continues this year, with our review of litigated issues finding 105 opinions on CDP cases during the review period of June 1, 2012, through May 31, 2013. Taxpayers prevailed in full in eight of these cases (nearly eight percent) and in part in nine others (nearly nine percent). Of the 17 opinions where taxpayers prevailed in whole or in part, seven taxpayers appeared pro se and ten were represented.

The cases discussed below demonstrate that CDP hearings serve an important function by providing taxpayers with a forum to raise legitimate issues before the IRS deprives them of property. Many of these decisions provide guidance on substantive issues. The Court imposed sanctions for inappropriate use of the CDP process in three of the 105 cases.

6. Failure to File Penalty Under IRC § 6651(a)(1), Failure to Pay an Amount Shown as Tax on Return Under IRC § 6651(a)(2), and Failure to Pay Estimated Tax Penalty Under IRC § 6654

We reviewed 86 decisions issued by federal courts from June 1, 2012, to May 31, 2013, regarding the additions to tax for:

• Failure to file a tax return by the due date under Internal Revenue Code (IRC) § 6651(a)(1);

• Failure to pay an amount shown as tax on a return under IRC § 6651(a)(2);

• Failure to pay estimated tax under IRC § 6654; or

• Some combination of the three.

The failure to file and failure to pay penalties are imposed unless the taxpayer can demonstrate that the failure is due to reasonable cause and not willful neglect. The estimated tax penalty is imposed unless the taxpayer can meet one of the statutory exceptions. In 71 out of the 86 cases, taxpayers were unable to avoid a penalty.

7. Charitable Deductions Under IRC § 170

Subject to certain limitations, taxpayers can take deductions from their adjusted gross incomes for contributions of cash or other property to or for the use of charitable organizations.⁵⁷ In order to take a charitable deduction, taxpayers must contribute to a qualifying organization⁵⁸ and must substantiate contributions of $250 or more. Litigation generally arises over one or more of these four issues:

• Whether the organization to which a donation is made is charitable;

• Whether contributed property qualifies as a charitable contribution;

• Whether the amount taken as a charitable deduction equals the fair market value of the property contributed; and

• Whether the taxpayer has substantiated the contribution.

8. Frivolous Issues Penalty Under IRC § 6673 and Related Appellate-Level Sanctions

From June 1, 2012, through May 31, 2013, the federal courts issued decisions in at least 34 cases involving the IRC § 6673 "frivolous issues" penalty and at least four cases involving an analogous penalty at the appellate level. These penalties may be imposed when a taxpayer maintains a case primarily for delay, raising frivolous arguments, unreasonably failing to pursue administrative remedies, or filing a frivolous appeal. In many of the cases we reviewed, taxpayers escaped liability for the penalty but were warned they could face sanctions for similar conduct in the future. Nonetheless, we include these cases in our analysis to illustrate what conduct will and will not be tolerated by the courts.

9. Civil Actions to Enforce Federal Tax Liens or to Subject Property to Payment of Tax Under IRC § 7403

IRC § 7403 authorizes the United States to file a civil action in U.S. District Court against a taxpayer who has refused or neglected to pay any tax, to enforce a federal tax lien, or subject any of the delinquent taxpayer's property to the payment of tax. We identified 33 opinions issued between June 1, 2012, and May 31, 2013, that involved civil actions to enforce liens under IRC § 7403. The IRS prevailed in 30 of these cases. The number of cases represents a 31 percent decrease from the previous year.

10. Relief from Joint and Several Liability Under IRC § 6015

Married couples may elect to file their federal income tax returns jointly or separately. Spouses filing joint returns are jointly and severally liable for any deficiency or tax due. Joint and several liability permits the IRS to collect the entire amount due from either taxpayer.

IRC § 6015 provides three avenues for relief from joint and several liability. Section 6015(b) provides "traditional" relief for deficiencies. Section 6015(c) also provides relief for deficiencies for certain spouses who are divorced, separated, widowed, or not living together, by allocating the liability between the spouses. Section 6015(f) provides "equitable" relief from both deficiencies and underpayments, but only applies if a taxpayer is not eligible for relief under IRC § 6015(b) or (c).

We reviewed 31 federal court opinions involving relief under IRC § 6015 that were issued between June 1, 2012, and May 31, 2013. The most significant issues the courts addressed this year are the Tax Court's scope and standard of review of claims for relief under IRC § 6015(f) and whether District Courts have jurisdiction to decide innocent spouse claims raised as a defense in a collection suit or in an interpleader suit. The Tax Court also noted how proposed guidance, if applicable, would have affected its analysis of claims for relief under IRC § 6015(f).

Accuracy-related penalties are intended to promote voluntary compliance. Congress has directed the IRS to develop better information concerning the effects of penalties on voluntary compliance, and it is the IRS's official policy to recommend changes when the Internal Revenue Code (IRC) or penalty administration does not effectively do so. The objective of this study was to estimate the effect of accuracy-related penalties on Schedule C filers (i.e., sole proprietors) whose examinations were closed in 2007. TAS compared their subsequent compliance to a group of otherwise similarly situated "matched pairs" of taxpayers who were not penalized. TAS used Discriminant Function (or "DIF") scores -- an IRS estimate of the likelihood that an audit of the taxpayer's return would produce an adjustment -- as a proxy for a taxpayer's subsequent compliance.

While all groups of Schedule C filers who were subject to an examination assessment improved their reporting compliance (as measured by reductions in their DIF scores), those subject to an accuracy-related penalty had no better subsequent reporting compliance than those who were not. Thus, accuracy-related penalties did not appear to improve reporting compliance among the Schedule C filers who were subject to them. Further, penalized taxpayers who were also subject to a default assessment or who appealed their assessment had smaller reductions in DIF scores, suggesting lower reporting compliance five years later as compared to similarly situated taxpayers who were not penalized. Similarly, those whose penalty was abated had smaller reductions in DIF scores, suggesting lower reporting compliance five years later as compared to taxpayers whose penalty was not abated.

Prior research suggests that a taxpayer's perception of the fairness of the tax law, the IRS and the government drive voluntary compliance decisions, and the findings of this study are consistent with that research. Taxpayers subject to default assessments may be more likely to feel the penalty assessment process was unfair, which may have caused lower levels of future compliance. Similarly, those who appeal may be more likely to feel that the actual result was unfair, which may have caused lower levels of future compliance. Finally, those subject to a penalty assessment that is later abated may also feel that the IRS initially sought to penalize them unfairly, potentially causing lower levels of future compliance.

These findings have a number of policy implications. First, the IRS should revise its procedures to ensure that it does not propose a penalty before exhausting efforts to communicate with a taxpayer to determine whether a penalty actually applies. By design, automated procedures -- those that presume a penalty applies unless a taxpayer explains and documents why it does not -- are likely to generate more default assessments and penalty abatements than other examination methods. As taxpayers who were penalized after default assessments or whose penalties were abated had smaller reductions in DIF scores, suggesting lower levels of voluntary compliance after five years than those who were not, these automated procedures may be inconsistent with the IRS's goal of promoting voluntary compliance.

Second, the IRS's Appeals function should consider doing more to objectively evaluate and then explain its determinations, particularly when it sustains a penalty. As taxpayers who were penalized after an appeal had smaller reductions in DIF scores, suggesting lower levels of compliance after five years than those who were not penalized, it is possible that they did not perceive Appeals as fairly evaluating whether the penalty should apply. Finally, in the case of penalties that taxpayers generally regard as unfair (e.g., where a reasonable cause exception does not apply or where it may be interpreted so narrowly as to, in effect, create a strict liability penalty), the IRS should consider applying a broader reasonable cause exception (or work with the Treasury Department to propose one) that is simple, fair, transparent, and easy to administer.

2. A COMPARISON OF REVENUE OFFICERS AND THE AUTOMATED COLLECTION SYSTEM IN ADDRESSING SIMILAR EMPLOYMENT TAX DELINQUENCIES

When a taxpayer does not pay his or her tax liability after receiving a stream of delinquency notices, the IRS may assign the collection case to a revenue officer (RO) in the Collection Field function (CFf), to a group of Automated Collection System (ACS) employees in centralized call sites, or to the queue to wait until collection resources become available to work the case. Thus, the IRS must decide which cases to assign to ROs, ACS, or the queue, and which to prioritize.

Direct comparisons between ACS employees and ROs present challenges, in part because ACS generally works "fresh" and comparatively low-dollar cases. Moreover, although the vast majority of all payments (including late payments) come in as a result of voluntary compliance, the IRS does not measure or compare the effect of CFf or ACS on the taxpayer's future compliance.

In an effort to address these knowledge gaps, TAS compared the IRS's performance in working similar types of collection cases initially assigned to an RO, ACS, or the queue. As employment tax delinquencies are a high priority for the IRS and can easily lead to future delinquencies, TAS focused on taxpayers with newly-delinquent employment tax deposit "modules" (i.e., those with three or fewer delinquent quarters) that were first assigned to ACS, the queue, or CFf during 2003-2004. In an apples-to-apples comparison, TAS found:

• The CFf collected more dollars and resolved delinquencies more quickly than ACS, regardless of the size of the delinquency.

• ACS transferred more tax modules, particularly medium- and high-dollar modules (over $1,500), to the queue and CFf, reducing the IRS's speed and effectiveness in addressing them.

• CFf collected more on high-dollar modules initially assigned to the queue when it received them quickly. Thus, the IRS should consider limiting its use of the queue as an inventory management tool, particularly for high-dollar modules, as previously recommended by the National Taxpayer Advocate.

• Taxpayers with low-dollar modules (i.e., $1,500 or less) reduced their delinquencies by more than those with higher-dollar modules while they were in the queue.

• Taxpayers initially assigned to the queue appeared somewhat responsive to the notices they received after the initial notice stream. Thus, the IRS should consider sending additional notices to taxpayers assigned to the queue, particularly notices that emphasize payment alternatives and the impact of late payment penalties and daily compounded interest, as previously recommended by the National Taxpayer Advocate.

• IRS data suggest the IRS's collection functions had very little success in promoting future compliance, regardless of the collection channel. It also suggests that collection employees closed about 24 percent of their cases while the taxpayers in question were falling behind on or about to fall behind on their taxes (or tax filings). Thus, both ACS and CFf should do more to resolve all compliance issues and ensure the taxpayer is able to comply in future periods before closing cases, and regularly measure and report on future compliance, as previously recommended by the National Taxpayer Advocate.

For example, ACS employees should be required to make more use of outbound calls, actively assist taxpayers in using collection alternatives (e.g., installment agreements and offers in compromise), and be expected to fully resolve certain types of cases (rather than pass them along to another employee or the queue). These changes would make ACS employees responsible for case outcomes. If this approach is adopted, taxpayers could work with one person who is familiar with their circumstances. However, such changes are unlikely to improve ACS's results unless ACS employees receive adequate training and authority and unless the IRS executives responsible for managing them are regularly required to measure and report on ACS's performance in these areas.

3. SMALL BUSINESS COMPLIANCE: FURTHER ANALYSIS OF INFLUENTIAL FACTORS

Problem

Because voluntary compliance by small businesses could significantly impact the tax gap, last year's Annual Report to Congress presented preliminary results from a survey of a national sample and selected community populations of sole proprietors concerning tax compliance and related socioeconomic attitudes. Reporting that trust in the government and IRS was an influential factor, the 2012 report identified correlations between questionnaire responses and tax compliance as measured for purposes of the survey. This year's report presents further analysis of the national survey.

The report also anticipated further analysis of the community survey with respect to characteristics of compliant or low-compliant populations. Responses to a set of questions in the community survey tended to link low compliance levels with social affiliations or networks associated especially with volunteering, voting, and congregations (i.e., houses of worship of any denomination). This year's report explores whether low-compliance sites are located in regions where those social networks are prevalent. The report contains new analyses focusing on one state containing low-compliance sites among other sites not so classified.

Analysis

The Taxpayer Advocate Service (TAS) identified the factors underlying the survey responses, then determined whether the factors identified appear to influence taxpayer compliance behavior. We used factor analysis to identify these underlying factors. Factor analysis orders the factors it identifies based on the extent to which empirical data supports their existence. Factor analysis identified taxpayer service, which contributes to trust in government, as the highest-ranking factor. At the same time, factor analysis identified fairness and tax policy as separate factors related to trust. These findings are consistent with the 2012 report's emphasis on trust.

Factor analysis ranked norms as the second most important factor in accounting for various survey responses. Tax morale, preparers, and complexity are also important factors. Although the 2012 report could not confirm the influence of deterrence, this analysis also identifies economics, or motivations that may counter deterrence, as a distinct factor.

We used logistic regression to evaluate whether the identified factors influenced compliance behavior. The results of the logistic regressions show that norms and trust in government (specifically the taxpayer service and fairness components of trust in government) appear to have the most influence on taxpayer compliance behavior. The preparer and tax morale factors also appear to influence the compliance behavior of the subcategory of taxpayers who use preparers.

Analysis of the prevalence of social networks in low-compliant communities yielded mixed results. The region containing a concentration of low-compliant communities had some expected characteristics related to social networks. However, another area turned out to be more charitable.

The "social" nature of norms should be observable even beyond the responses to our community survey, potentially by observing characteristics of the high- and low-compliance communities or regions. Future research could build upon the survey results by investigating social noncompliance and compliance in sites where they occur. Further investigation would relate to tax administration vis-à-vis regional traditions.

Recommendation

Our analysis confirms the importance of trust in government as reported in the preliminary results, while specifying that taxpayer service is the principal component of the trust factor. This finding lends support to the suggestion in the 2012 report that improvements in taxpayer service could increase voluntary compliance by small business proprietors.

4. THE SERVICE PRIORITIES PROJECT: DEVELOPING A METHODOLOGY FOR OPTIMIZING THE DELIVERY OF TAXPAYER SERVICES

The objective of this report is to present a set of recommendations that will guide the development and implementation of the Service Priorities Project ranking methodology. The goal of the methodology is to identify, from both the government perspective and the taxpayer perspective, the value of each taxpayer service offered by the IRS. The IRS will be able to use this ranking methodology to make resource allocation decisions that will optimize the delivery of taxpayer service activities given resource constraints. Congress will be able to use the results of this methodology to determine whether it is adequately funding core taxpayer service activities. The implementation of this approach is particularly urgent in light of today's funding environment for taxpayer service.

5. FUNDAMENTAL CHANGES TO RETURN FILING AND PROCESSING WILL ASSIST TAXPAYERS IN RETURN PREPARATION AND DECREASE IMPROPER PAYMENTS

The National Taxpayer Advocate has repeatedly written about the need to develop an accelerated information reporting system to enable the IRS to match third-party reports to return data before issuing refunds. The proposed system would benefit tax administration by protecting revenue. The government would avoid issuing erroneous funds and then chasing down the dollars through future enforcement actions. Taxpayers would benefit by avoiding enforcement and collection actions months or even years after filing the returns. Both tax administration and taxpayers would further benefit if the IRS provides taxpayers and their representatives with electronic access to their third-party data before the return filing deadline to assist in tax preparation.

The IRS acknowledged the need to develop an accelerated information reporting system in 2011 through the creation of the IRS Real Time Tax System Initiative. As part of the initiative, the IRS held two public meetings and solicited comments from a variety of impacted stakeholders, all of whom indicated general support for the proposed system. Further, the IRS promised to include the Taxpayer Advocate Service in any further development of the initiative. However, the National Taxpayer Advocate has not seen any progress since.

In this study, we evaluate various options to achieve upfront matching and enable taxpayers to access and download their third-party information into commercial tax preparation software. The evaluations consider the benefits and risks of each option and try to strike a balance to benefit all impacted stakeholders: taxpayers, the IRS, preparers, third-party report issuers, and software companies.

Ultimately, we recognize that changes to return filing and processing of this magnitude require a great deal of forethought, analysis, and stakeholder engagement. To date, the IRS has not made meaningful progress, which only delays the significant benefits we outlined above and throughout this report. Thus, we reiterate our 2009 legislative recommendation that Congress require the IRS and the Department of Treasury to prepare a report, in consultation with the National Taxpayer Advocate, which provides a plan and timeline to achieve an accelerated third-party information reporting system. In furtherance of this issue, the National Taxpayer Advocate offers the following preliminary recommendations to develop an accelerated third-party reporting system:

In 2004, Congress passed the American Jobs Creation Act, which granted the IRS the authority to contract out collection of past due taxes to private collection agencies (PCAs). The original intent of the program was to address the buildup of potentially collectible inventory that was not being worked by the IRS. The PCAs would help collect the aging receivables in exchange for commissions based on the amounts collected.

In September 2006, the IRS began assigning taxpayer accounts to PCAs, but the PCAs' authority to work these cases was limited, given that certain actions are considered inherently governmental and therefore could not be delegated to private entities. For instance, PCAs could not determine or negotiate the amount of a taxpayer's liabilities, and the only cases PCAs could resolve were those in which the amount was not in dispute. The IRS assigned PCAs the following types of cases:

• Cases that involved an individual taxpayer with a balance due for only one tax period and $25,000 or less due from September to December 2006; and

• Cases that involved an individual taxpayer with a balance due for one or more tax periods and $100,000 or less due from January 2007 to February 2009.

TAS compared the results for the IRS and PCAs while these entities worked the PCA Inventory. For this analysis, the IRS provided a list of all taxpayers whose accounts were assigned to a PCA, including the dates the cases were assigned to the agency and returned to the IRS. TAS used this list to determine when cases were under PCA control and when they were under IRS control.

TAS used the IRS Accounts Receivable Dollar Inventory (ARDI) to pull data on the balance owed at the time of case assignment, at six-month intervals after assignment, and at resolution for both the PCAs and the IRS. We used the IRS collection status code history file to determine when cases were resolved and what their status was when they returned to the IRS. Finally, we used the IRS Master File transaction history to determine the type and timing of payments received on the account, both while under PCA and IRS control. We broke out offset payments separately, rather than crediting them to the PCAs or IRS, since they happen automatically, rather than as a direct result of PCA or IRS collection efforts.

Because IRS worked the PCA inventory after recall, our analysis comparing IRS and PCA results while working the PCA inventory places the IRS at a significant disadvantage to the PCAs. The liabilities were older on return to the IRS and the PCAs had already had an opportunity to close the easy cases. Thus, outcomes showing superior IRS performance are conservative.

TAS used data supplied by the IRS to identify the tax modules worked by the PCAs and subsequently recalled by the IRS. The analysis does not include the tax modules for several hundred invalid taxpayer identification numbers (TINs) we found in the IRS files. In total, TAS identified 349,586 valid tax modules with tax liabilities totaling about $1.6 billion; these are the modules included in the analysis. As discussed above, this contrasts with the $1.8 billion (357,449 tax modules) of outstanding tax liabilities the IRS reported it placed with the PCAs for collection.

We compared PCA and IRS collections during four consecutive six-month intervals following case receipt. The IRS collected about 62 percent more than the PCAs during these two years ($139.4 million compared to $86.2 million collected by the PCAs).

The amount the PCAs collected fell precipitously after the first period, especially in comparison to IRS collections. This is consistent with our observation that the PCAs worked all the cases before the IRS, and had an opportunity to close the "easy" cases, i.e., liabilities owed by taxpayers who responded quickly to telephone contact. The above analysis suggests that the PCAs had little success after working the easy cases. In contrast, the IRS continued to collect significant amounts throughout the two-year study period.

It is also noteworthy that the IRS collects significant amounts of money from refund offsets. We calculated that during the two-year periods under study, the IRS collected $237,694,764 through offsets. This is more than the combined total the PCAs and IRS collected through their collection activities.

TAS study results show that the IRS was significantly more effective than the PCAs in collecting tax liabilities, collecting about 62 percent more than the PCAs during the periods under study. These results likely understate the difference in IRS and PCA effectiveness, since our analysis placed the IRS at a significant disadvantage:

• All of the cases were older when the IRS got them, and the majority were more than two years older.

• The PCAs worked the cases first and collected the easy dollars, while the IRS only got cases the PCAs had already handled.

• The total available to collect over all periods under study was higher for the PCAs.

² For example, during the shutdown period, the IRS issued 3,902 levies on Social Security recipients. IRS Compliance Data Warehouse, Individual Master File (Processing Year 2013).

³See Most Serious Problem: Taxpayer Rights: The IRS Should Adopt a Taxpayer Bill of Rights as a Framework for Effective Tax Administration, infra.

⁴See Volume 2: Small Business Compliance: Further Analysis of Influential Factors, infra, and National Taxpayer Advocate 2012 Annual Report to Congress, vol. 2, 1-70 (Factors Influencing Voluntary Compliance by Small Businesses: Preliminary Survey Results).

⁵See Most Serious Problem: Taxpayer Rights: Insufficient Education and Training About Taxpayer Rights Impairs IRS Employees' Ability to Assist Taxpayers and Protect Their Rights, infra.

⁶See Volume 2: Fundamental Changes to Return Filing and Processing Will Assist Taxpayers in Return Preparation and Decrease Improper Payments, infra.

⁷See Volume 2: The Service Priorities Project: Developing a Methodology for Optimizing the Delivery of Taxpayer Services, infra.

⁸See Most Serious Problem: IRS Budget: The IRS Desperately Needs More Funding to Serve Taxpayers and Increase Voluntary Compliance, infra.

⁹See National Taxpayer Advocate 2006 Annual Report 442-457 (Legislative Recommendation: Revising Congressional Budget Procedures to Improve IRS Funding Decisions).

¹⁰ For an introduction to the concept of tax morale, see National Taxpayer Advocate 2007 Annual Report to Congress vol. 2, 138-182 (Normative and Cognitive Aspects of Tax Compliance: Literature Review and Recommendations for the IRS Regarding Individual Taxpayers).

¹¹See Volume 2: Small Business Compliance: Further Analysis of Influential Factors, infra.

¹²See Volume 2: Do Accuracy-Related Penalties Improve Future Reporting Compliance by Schedule C Filers?, infra.

¹³See Volume 2: A Comparison of Revenue Officers and the Automated Collection System in Addressing Similar Employment Tax Delinquencies, infra.

¹⁴See National Taxpayer Advocate 2012 Annual Report to Congress, vol. 2, 1-70 (Factors Influencing Voluntary Compliance by Small Businesses: Preliminary Survey Results).

¹⁵See Volume 2: Small Business Compliance: Further Analysis of Influential Factors, infra. Economic deterrence, while a factor, is counterbalanced by other economic concerns, including the taxpayer's ability to stay in business.

¹⁶ Alan H. Plumley, The Determinants of Individual Income Tax Compliance: Estimating The Impacts of Tax Policy, Enforcement, and IRS Responsiveness, Publication 1916 (Rev. 11-96), Washington, DC, 35-36; Jeffrey A. Dubin, Michael J. Graetz and Louis L. Wilde, The Effect of Audit Rates on the Federal Individual Income Tax, 1977-1986, 43 NAT. TAX J., 395, 396, 405 (1990).

¹⁷See Leslie Book, The Poor and Tax Compliance: One Size Does Not Fit All, 5 Kans. L. Rev. 1, 23-33 (2003). See also Her Majesty's Revenue and Customs (HMRC), HMRC Hidden Economy Strategy and Customer Segmentation (Nov. 2013). For a fascinating report on the results of a campaign applying this methodology to increasing compliance among electricians, see Her Majesty's Revenue and Customs, HMRC Electricians Tax Safe Plan Research Report 260, TNS-BMRB (April 2013).

¹⁸Bull v. U.S., 295 U.S. 247, 259 (1935).

¹⁹ IRS, Joint Operations Center, Snapshot Reports: Product Line Detail -- PPS (week ending Sept. 30, 2013) (showing that the hold for FY 2013 on the Practitioner Priority Service telephone line was 1,183 seconds). Even worse, the hold time for the final quarter of the fiscal year was 2,221 seconds, or 37 minutes.

²⁰ IRS, Joint Operations Center, Weekly Enterprise Adjustments Inventory Report (week ending Sept. 30, 2004) and Weekly Enterprise Adjustments Inventory Report (week ending Sept. 28, 2013).

²¹ IRS, Joint Operations Center, Adjustments Inventory Reports: July -- September Fiscal Year Comparison (FY 2004 Through FY 2013).

²² Wage and Investment Division (W&I) FY 2012 Account Management Program Letter and Operating Guidelines (Dec. 12, 2011). In some instances, the definition of overage varies based on factors such as the type of work, the program, the site, and inventory levels. TAS conversation with Joint Operations Center Paper Inventory Analyst (Dec. 13, 2011).

²³ IRS Compliance Data Warehouse, Individual Returns Transaction File and Return Preparers and Providers Database (Tax Year 2011).

²⁴Loving v. IRS, 917 F. Supp. 2d 67 (D.D.C. Jan. 18, 2013), motion to suspend injunction pending appeal denied but injunction modified by 920F. Supp. 2d 108 (D.D.C. Feb. 1, 2013), appeal docketed, No. 13-5061 (D.C. Cir. Feb. 22, 2013), motion for stay pending appeal denied, 111 A.F.T.R.2d (RIA) 1384 (D.D.C. Mar. 27, 2013), oral argument, No. 13-5061 (D.C. Cir. Sept. 24, 2013). See Most Serious Problem: Regulation of Return Preparers: Taxpayers and Tax Administration Remain Vulnerable to Incompetent and Unscrupulous Return Preparers While the IRS Is Enjoined from Continuing its Efforts to Effectively Regulate Return Preparers, infra. See generally, Nina E. Olson, More Than a "Mere" Preparer: Loving and Return Preparation, 2013 TNT 92-13 , Tax Notes Today (May 13, 2013).

²⁵See Most Serious Problem: Revenue Protection: Ongoing Problems with IRS Refund Fraud Programs Harm Taxpayers by Delaying Valid Refunds, infra.

²⁶ For example, in tax year 2009, nearly 300,000 returns contained errors with dependent taxpayer identification numbers (TINs). During math error processing, the IRS disallowed over $200 million of credits claimed on these returns, but subsequently reversed at least part of its dependent TIN math errors on 55 percent of them. Ultimately about 150,000 taxpayers had their refunds restored. On average, the IRS allowed nearly $2,000 per return after the initial disallowance, with a delay of nearly three months. The total restored to taxpayers was about $292 million. This amount exceeds the amount of credits that were initially disallowed, because it includes both restored credits and related tax reductions (e.g., taxpayers got the benefit of exemptions that were initially disallowed when the credits were disallowed). Furthermore, analysis of a sample of taxpayers who did not contest these assessments showed that about 40,000 taxpayers were denied refunds they were probably entitled to receive. See National Taxpayer Advocate 2011 Annual Report to Congress vol. 2, 116-120 (Math Errors Committed on Individual Tax Returns -- A Review of Math Errors Issued on Claimed Dependents).

²⁷See IRS, Annual Report to Congress: Progress on the Implementation of The Taxpayer Assistance Blueprint Five-Year Progress Report: FY 2008-FY 2012 7-8 (Apr. 22, 2013).

²⁸See IRS, Annual Report to Congress: Progress on the Implementation of the Taxpayer Assistance Blueprint (April 2009 to September 2010) 54-57(May 2011).

²⁹See Volume 2: The Service Priorities Project: Developing a Methodology for Optimizing the Delivery of Taxpayer Services, infra.

³⁰ TIGTA, Ref. No. 2013-30-078, Trends in Compliance Activities Through Fiscal Year 2012 (Aug. 23, 2013). This review of nationwide compliance statistics for the IRS's Collection and Examination function activities has been conducted annually by TIGTA since FY 2000.

³¹Id.

³² GAO, GAO-02-674, Impact of Compliance and Collection Program Declines on Taxpayers 11 (May 2002).

³³Id. at 12 (May 2002).

³⁴ IRS, Statement by IRS Commissioner Mark W. Everson, IRS Improves Enforcement and Services in 2005 (Nov. 2005). This press release noted that "In our collection activities, levies and liens have recovered to pre-RRA '98 levels." (Emphasis added) IRS, Statement by IRS Commissioner Mark W. Everson, Fiscal Year 2006 Enforcement and Service Results (Nov. 2006). The press release noted, "Overall, some of our most common enforcement tools at the IRS also showed increases. In our collection activities, levies and liens continue to top their 1998 levels." (Emphasis added)

³⁵ GAO, GAO-02-674, Impact of Compliance and Collection Program Declines on Taxpayers 12 (May 2002).

³⁶Id.

³⁷ IRS Data Book 1996 to 2001. In FY 1997, the IRS reported a total yield from taxpayer delinquent accounts of $29,913,365, while also reporting the issuance of 3,659,000 levies and the filing of 544,000 liens. In FY 2000, levy issuances had dropped to 220,000 and lien filings totaled 288,000. However, total collection yield for FY 2000 was reported as $29,935,564 -- slightly more than FY 1997. In FY 2001, after several years of reduced lien and levy activity, the IRS reported total collection yield of $32,186,839 -- an eight percent increase over FY 1997, even though the approximately 674,000 levies issued remained at only 18 percent of the FY 1997 level.

³⁸ IRS, Collection Activity Reports, NO-5000-2, Taxpayer Delinquent Accounts Report; NO-5000-6, Installment Agreement Report; NO-5000-108, Report of Offer in Compromise Activity (FY 2010 to 2013).

³⁹ IRS, SB/SE Research, Project DEN0181, Automated Collection System (ACS) Closed Case Actions 35 (Aug. 2012).

⁴⁰Id. For more details on this research study, see Most Serious Problem: Collection Strategy: The Automated Collection System's Case Selection and Processes Result in Low Collection Yields and Poor Case Resolution, Thereby Harming Taxpayers and the Public Fisc, infra.

⁴¹See Most Serious Problem: Collection Strategy: The Automated Collection System's Case Selection and Processes Result in Low Collection Yields And Poor Case Resolution, Thereby Harming Taxpayers and the Public Fisc, infra.

⁴² IRS, Total Enforcement Revenue Collected (TERC) database, available at http://cdw.web.irs.gov/EnforcementRevenueSummary.aspx (last visited Dec. 23, 2013).

⁴³Id. In FY 2012, the IRS reported collecting $4.371 billion in delinquent withholding taxes. In FY 2011, the IRS reported collecting $4.973 billionin delinquent withholding taxes.

⁴⁴Id. In FY 2013, the IRS reported collecting $4.366 billion in delinquent withholding taxes.

⁴⁵ IRS, Total Enforcement Revenue Collected (TERC) database, available at http://cdw.web.irs.gov/EnforcementRevenueSummary.aspx (last visited Dec. 23, 2013). In FY 2013, the IRS reported collecting $23.575 billion on individual income tax delinquencies -- a 16 percent increase over the $20.344 billion collected in FY 2010.

⁴⁶See Most Serious Problem: Collection Process: IRS Collection Procedures Harm Business Taxpayers and Contribute to Substantial Amounts of Lost Revenue, infra. See also Volume 2: TAS Research Study: A Comparison of Revenue Officers and The Automated Collection System In Addressing Similar Employment Tax Delinquencies, infra.

⁴⁷ IRS, Collection Activity Report NO-5000-6, Installment Agreement Report (FY 2011 to 2013).

⁴⁸Id.

⁴⁹Id.

⁵⁰ IRS, Collection Activity Report NO-5000-2, Taxpayer Delinquent Accounts Report (Sept. 2013). The Collection Queue is an inventory of TDA accounts that are active, but unassigned to the ACS or CFf functions. See IRM 5.1.20.2 (May 27, 2008).

⁵¹ IRS, Collection Activity Report NO-5000-149, Recap of Accounts Currently Not Collectible Report (Sept. 2013).

⁵²See Most Serious Problem: Collection Process: IRS Collection Procedures Harm Business Taxpayers and Contribute to Substantial Amounts of Lost Revenue, infra.

⁵³ National Taxpayer Advocate 2011 Annual Report to Congress (Most Serious Problem: The New Income Filter for the Federal Payment Levy Program Does Not Fully Protect Low Income Taxpayers from Levies on Social Security Benefits 350-365).

⁵⁴ Taxpayer Advocate Directive (TAD) 2012-2 (Taxpayers Whose Incomes Are Below 250 percent of the Federal Poverty Level Set by the Department of Health and Human Services and who receive Social Security or Railroad Retirement Board Benefits Should Be Screened Out of the Federal Payment Levy Program (FPLP) regardless of unfiled returns or outstanding business debts) (Jan. 12, 2012). See also Memorandum from John M. Dalrymple,IRS Deputy Commissioner, Services and Enforcement to Nina E. Olson, National Taxpayer Advocate, TAD 2012-2, Low Income Filter in the Federal Payment Levy Program (Dec. 20, 2013).

⁵⁵See Most Serious Problem: Hardship Levies: Four Years After the Tax Court's Holding in Vinatieri v. Commissioner, the IRS Continues to Levy on Taxpayers it Acknowledges Are in Economic Hardship and Then Fails to Release the Levies, infra.

⁵⁶ Her Majesty's Revenue and Customs (HMRC) has undertaken just such an initiative to address the "hidden economy." See Her Majesty's Revenue and Customs (HMRC), HMRC Hidden Economy Strategy and Customer Segmentation (Nov. 2013).

⁵⁷ Internal Revenue Code (IRC) § 170.

⁵⁸ To claim a charitable contribution deduction, a taxpayer must establish that a gift was made to a qualified entity organized and operated exclusively for an exempt purpose, no part of the net earnings of which inures to the benefit of any private shareholder or individual. IRC § 170(c)(2).

As in earlier years, this report discusses at least 20 of the most serious problems encountered by taxpayers -- but not necessarily the top 20 most serious problems. That is by design. Since there is no objective way to select the 20 most serious problems, we consider a variety of factors when making this determination. Moreover, while we carefully rank each year's problems under the same methodology (described immediately below), the list remains inherently subjective in many respects.

To simply report on the top 20 problems would limit our effectiveness in focusing congressional, IRS, and public attention on critical issues. It would require us to repeat much of the same data and propose many of the same solutions year to year. Thus, the statute gives the National Taxpayer Advocate flexibility in selecting both the subject matter and the number of topics to be discussed and to use the report to put forth actionable and specific solutions instead of mere criticism and complaints.

Changes in Approach from Prior Years' Reports

This year, we have altered the format of the Most Serious Problem discussions in two important respects. First, we are not including an IRS response to our initial discussions and thus are no longer including the National Taxpayer Advocate's response to the IRS's comments. Second, we will be publishing the IRS formal response in conjunction with the National Taxpayer Advocate's report issued on June 30.¹ In large part, this change was necessary so that we could issue the Annual Report as close as possible to the December 31 statutory deadline, given the 16-day government shutdown, which hit at a particularly crucial time in the report's editing and review schedule.²

This change in approach, however, also brings us into conformity with the specific statutory language of IRC § 7803(c)(2)(B)(iii), which 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."³

This statutory directive was designed to enhance and protect the independence of the National Taxpayer Advocate's observations and comments.⁴ It reflects a radical change from prior law, which required the Taxpayer Ombudsman to co-author the report to Congress with the IRS Assistant Commissioner (Taxpayer Services).⁵ Congress provided for the IRS's ability to comment and respond to the National Taxpayer Advocate's recommendations (both in the Annual Reports and elsewhere) by requiring the Commissioner to "establish procedures requiring a formal response to all recommendations submitted to the Commissioner by the National Taxpayer Advocate within 3 months after submission to the Commissioner."⁶

In past years, as noted above, the National Taxpayer Advocate submitted her initial analyses with preliminary recommendations to the IRS responsible officials prior to publication and delivery to Congress. We allowed the IRS 30 days to respond to our preliminary recommendations. Included in that 30-day period was a seven-day timeframe within which the IRS could identify any factual errors we may have made in the analyses. We asked the IRS to respond specifically to our preliminary recommendations in the hope we could reach agreement and thus not include them in the final recommendations. Regrettably, as discussed below, the IRS agreed to very few preliminary recommendations.

The historic approach to the Annual Report to Congress, which appears to have been carried over from at least 2000, is very difficult to square with the direct and explicit statutory language. The IRS Commissioner and his officers and employees are specifically prohibited from "prior review or comment" with respect to the Annual Report. And yet, as many as 500 pages each year were reviewed and commented on by IRS officers and employees prior to direct delivery to Congress.⁷

In past years, following publication of the Annual Report, the National Taxpayer Advocate forwarded to the Commissioner of Internal Revenue a memorandum including all of the recommendations contained in the report, which formally triggers the 90-day period for providing the Commissioner's response to those recommendations. Upon receipt of the Commissioner's formal response to her recommendations, the National Taxpayer Advocate and her staff discuss any concerns and ultimately post the IRS response and the National Taxpayer Advocate's position on the IRS website.⁸

Over the years, we have found the 90-day process to be much more meaningful than the responses we receive from the IRS as a result of the (statutorily prohibited) 30-day review. For example, in the 2012 Annual Report to Congress, the National Taxpayer Advocate made preliminary recommendations for 17 Most Serious Problems. As a result of the IRS's 30-day comments, the number of final recommendations remained the same for 11 Most Serious Problems, the number increased for three Most Serious Problems, and the number decreased for three Most Serious Problems. Overall, the IRS agreed to only 17.6 percent of our preliminary recommendations. Yet, as a result of the 90-day process for formally reviewing and responding to the National Taxpayer Advocate's recommendations, the IRS agreed to over 46 percent of the final recommendations.⁹

Thus, this year we decided to adhere closely to the statutory language. We have dispensed with the step of sharing the initial analyses with the IRS for its comment. Instead, we have provided the IRS with all of the IRS-sourced data we cite in the Most Serious Problems along with any underlying assumptions that relate to data interpretation. We have provided the IRS ten days in which to identify any factual inaccuracies. Following submission of the report to the tax-writing committees of Congress, the National Taxpayer Advocate will submit the report to the IRS Commissioner. At the same time, she will provide the formal listing of recommendations which will trigger the 90-day period for IRS response.

We plan to publish the IRS responses and our own response on the Internet, and use those responses to identify the "objectives of the Office of the Taxpayer Advocate" in our Objectives Report for the next fiscal year, published in June of each year.¹⁰ In this way, we will retain full transparency regarding the IRS's perspective on our recommendations to address the Most Serious Problems while still complying with the statutory protections. At the same time, we will link the IRS's responses to the Most Serious Problems with the Taxpayer Advocate Service's objectives for the upcoming fiscal year.

Methodology of the Most Serious Problem List

The National Taxpayer Advocate considers a number of factors in identifying, evaluating, and ranking the most serious problems encountered by taxpayers. The 25 issues were ranked according to the following criteria:

• Impact on taxpayer rights;

• Number of taxpayers affected;

• Interest, sensitivity, and visibility to the National Taxpayer Advocate, Congress, and other external stakeholders;

• Barriers these problems present to tax law compliance, including cost, time, and burden;

• The revenue impact of noncompliance; and

• Taxpayer Advocate Management Information System (TAMIS) and Systemic Advocacy Management System (SAMS) data.

Taxpayer Advocate Management Information System List

The identification of the Most Serious Problems reflects not only the mandates of Congress and the IRC, but TAS's integrated approach to advocacy -- using individual cases as a means for detecting trends and identifying systemic problems in IRS policy and procedures or the Code. TAS tracks individual taxpayer cases on TAMIS. The top 25 case issues, listed in Appendix 1, reflect TAMIS receipts based on taxpayer contacts in fiscal year 2013, a period spanning October 1, 2012, through September 30, 2013.

Use of Examples

The examples presented in this report illustrate issues raised in cases handled by TAS. To comply with IRC § 6103, which generally requires the IRS to keep taxpayers' returns and return information confidential, the details of the fact patterns have been changed. In some instances, the taxpayer has provided a written consent for the National Taxpayer Advocate to use facts specific to that taxpayer's case. These exceptions are noted in footnotes to the examples.

² IRC 7803(c)(2)(B)(ii) requires the National Taxpayer Advocate to submit an "activities" report to the tax-writing committees of Congress not later than December 31 of each calendar year.

³ IRC § 7803(c)(2)(B)(iii).

⁴ The stated objective of these reports is "for Congress to receive an unfiltered and candid report of the problems taxpayers are experiencing and what can be done to address them. The reports by the Taxpayer Advocate are not official legislative recommendations of the Administration; providing official legislative recommendations remains the responsibility of the Department of Treasury." Joint Committee on Taxation, General Explanation of Tax Legislation Enacted in the 104th Congress, JCS 12-96, 21 (Dec. 18, 1996).

⁵ Technical and Miscellaneous Revenue Act of 1988 (TAMRA), Pub. L. No. 100-647, Title VI, Sec. 6235, 102 Stat. 3342, 3737 (Nov. 10, 1988). The Taxpayer Bill of Rights 2 (TBOR 2) amended IRC § 7802 (the predecessor of the IRC § 7803) by replacing the Office of the Taxpayer Ombudsman with the Office of the Taxpayer Advocate and replacing the joint Assistant Commissioner/Taxpayer Advocate Report to Congress with two annual reports to Congress issued directly and independently by the Taxpayer Advocate. Pub. L. No. 104-168, Sec. 101, 110 Stat. 1452, 1453 (July 30, 1996). However, post-TBOR 2, the reports continued to include IRS comments.

⁶ IRC § 7803(c)(3).

⁷ We note that the statutory authority for the Treasury Inspector General for Tax Administration (TIGTA) contains no express prohibition as to sharing or including reports with IRS officers or employees or including the IRS's comments. See The Inspector General Act of 1978, Pub. L. No. 95-452, as amended by Pub. L. No. 105-206, § 1103, 112 Stat. 685, 705 (July 22, 1998). Likewise, IRC § 7803(d), which details additional duties of TIGTA, contains no prohibition on review or comment by the IRS on TIGTA's reports. We speculate that is because the Inspector General and his employees do not report to the Commissioner of Internal Revenue and therefore his independence does not require the extra safeguard of providing the National Taxpayer Advocate and her employees protection from censorship or undue pressure.

⁸ 2012 Annual Report to Congress Report Card, at http://www.irs.gov/Advocate/Annual-Report-to-Congress-Report-Cards.

⁹ 2012 Annual Report to Congress Report Card, at http://www.irs.gov/Advocate/Annual-Report-to-Congress-Report-Cards. This percentage includes ARC recommendations adopted in full or in part in MSPs where the NTA offered preliminary recommendations.

¹⁰ IRC § 7803(c)(2)(B)(i).

John Koskinen, Commissioner of Internal Revenue

DEFINITION OF PROBLEM

The U.S. tax system is built on voluntary compliance. The IRS estimates that it collects 85.5 percent of all tax owed.¹ Of that amount, 98 percent is paid timely and voluntarily. Only two percent derives from late and enforced collection actions.²

For the government, voluntary compliance is much cheaper than enforced compliance, because the government does not have to spend money to collect amounts that are voluntarily paid. Thus, the IRS's overriding goal is to maximize voluntary compliance.³

Taxpayer rights are central to voluntary compliance. If taxpayers believe they are treated, or can be treated, in an arbitrary and capricious manner, they will mistrust the tax system and be less likely to comply with the laws voluntarily. If taxpayers have confidence in the fairness and integrity of the system, they will be more likely to comply.

The Internal Revenue Code (IRC) provides dozens of real, substantive taxpayer rights. However, these rights are scattered throughout the Code and are not presented in a coherent way. Consequently, most taxpayers have no idea what their rights are and therefore often cannot take advantage of them.

Not surprisingly, in response to a survey of U.S. taxpayers conducted for the Taxpayer Advocate Service (TAS) in 2012, less than half said they believed they have rights before the IRS, and only 11 percent said they knew what those rights are.⁴

We can and must do a better job of making taxpayers aware of their rights and enabling them to assert these rights. Since 2007, the National Taxpayer Advocate has repeatedly recommended adoption of a Taxpayer Bill of Rights (TBOR) that takes the multiple existing rights embedded in the code and groups them into ten broad categories, modeled on the U.S. Constitution's Bill of Rights.⁵ A thematic, principle-based list of core taxpayer rights would provide a foundational framework for taxpayers and IRS employees alike that would promote effective tax administration.

Simply put, labels and presentation matter. Almost all Americans know we have a Bill of Rights, and many can name specific ones. The First Amendment right to free speech, for example, is widely known. When one digs deeper, it becomes clear that the right is not absolute (e.g., the First Amendment does not protect an individual's right to falsely scream "Fire!" in a crowded theater), and there are dozens of Supreme Court decisions that delineate the scope of the right. But the simplicity and clarity of a thematic Bill of Rights help Americans understand their rights in general terms, and this knowledge empowers them to assert their rights and learn the nuances when the need arises.

A thematic Taxpayer Bill of Rights would serve the same purpose and its value can scarcely be overstated. A Taxpayer Bill of Rights would serve as an organizing principle for tax administrators in establishing agency goals and performance measures, provide foundational principles to guide IRS employees in their dealings with taxpayers, and provide information to taxpayers to assist them in their dealings with the IRS.

At the same time, the tax system will work best if we provide transparency, not only about taxpayer rights but also about taxpayer responsibilities. The National Taxpayer Advocate views the relationship between the government and its taxpayers as a social contract of sorts -- the U.S. government requires its tax collector to treat taxpayers with courtesy and respect and asks taxpayers to cooperate with the tax collector. In recognition of this two-way relationship, we recommend the Taxpayer Bill of Rights also contain a section outlining taxpayer responsibilities.⁶ Overall, the document would lay out in general but very clear terms what taxpayers must do to comply with the tax laws and what rights taxpayers possess in that process. The document would serve to heighten awareness of these rights and responsibilities among taxpayers and IRS employees alike.

Thus, the National Taxpayer Advocate recommends that the IRS adopt and promote a Taxpayer Bill of Rights, and actively apply its principles to all IRS strategic planning, compliance and taxpayer service activities, and to outreach and education.⁷ Doing so will ensure taxpayers know their rights, enable them to avail themselves of those rights, and restore trust in the tax system.⁸ A TBOR provides organizing principles -- a framework -- for effective tax administration.

ANALYSIS OF PROBLEM

I. TAXPAYER BILL OF RIGHTS SERVES AS AN ESSENTIAL FRAMEWORK FOR EFFECTIVE TAX ADMINISTRATION

The Internal Revenue Code includes specific provisions that are crafted to ensure a fair and just tax system and protect all taxpayers from potential IRS abuse. However, the Code contains no organizing principles or formal acknowledgement of the fundamental taxpayer rights from which these statutory rights derive.¹³ The National Taxpayer Advocate has recommended numerous times that a statement of taxpayer rights, a Taxpayer Bill of Rights, be formally codified.¹⁴ While codifying a TBOR would require Congressional action, the IRS can articulate these rights by adopting a TBOR on its own.¹⁵ Internally, the National Taxpayer Advocate has had several discussions with senior IRS officials over the last few months about publishing a Taxpayer Bill of Rights, and she is hopeful the IRS will decide to do so in the near future if Congress does not act first.

Congress has passed multiple pieces of legislation with the title of "Taxpayer Bill of Rights," but none of these laws provides a foundational, general description of taxpayer rights. Taxpayers need a TBOR to enable them to understand their basic rights without having to consult a multitude of Code sections that apply in specific circumstances. The U.S. Bill of Rights provides taxpayers with a clear statement of general rights so taxpayers understand they have a right to free speech, even if they do not know the court decisions that define and limit its scope. A TBOR would operate the same way. For example, a taxpayer needs to know he or she has a basic right to appeal when facing a collection action such as a levy, even if the taxpayer does not know the specific information in the Code regarding Collection Due Process hearings.

The National Taxpayer Advocate's recommendation that Congress codify a thematic, principle-based Taxpayer Bill of Rights has attracted considerable bipartisan support. This summer, the House of Representatives by voice vote passed an earlier version of the proposal, which is now pending in the Senate.¹⁶ At the same time, we have heard very few concerns about the proposal. That is because it does not aim to create new rights or remedies -- only to group existing rights into categories that are easier for taxpayers and IRS employees to understand and remember.

In response to allegations that the IRS used inappropriate criteria to screen applications for tax-exempt status,¹⁷ the Principal Deputy Commissioner issued a "30-day report" providing an initial assessment of the allegations and describing actions the IRS planned to undertake to address underlying causes.¹⁸ Among other things, the Principal Deputy Commissioner asked the National Taxpayer Advocate to provide him with recommendations to:

A. OECD and Other Countries Provide Models for a Taxpayer Bill of Rights

In 1988, the Organisation for Economic Co-operation and Development (OECD) sent a questionnaire to its member countries, asking about their systems of taxpayer rights and obligations. OECD published the results of the survey in 1990.²¹ The survey found that although most countries did not have an explicit charter or bill of rights, there were certain basic rights present in all tax systems that responded:

• The right to be informed, assisted, and heard;

• The right of appeal;

• The right to pay no more than the correct amount of tax;

• The right to certainty;

• The right to privacy; and

• The right to confidentiality and secrecy.²²

• The obligation to be honest;

• The obligation to be cooperative;

• The obligation to provide accurate information and documents on time;

• The obligation to keep records; and

• The obligation to pay taxes on time.²³

The Canada Revenue Agency (CRA) has adopted and published a TBOR as well as a Commitment to Small Business.²⁶ Canada's TBOR consists of 16 provisions, including:

• The right to have the law applied consistently;

• The right to expect CRA to be accountable;

• The right to be treated professionally, courteously, and fairly; and

• The right to expect CRA to warn you about questionable tax schemes in a timely manner.²⁷

The Australian Taxation Office (ATO) also has created and adopted a Taxpayer Charter, which outlines not only a taxpayer's rights and obligations, but also what the taxpayer can expect from the ATO and what a taxpayer can do if he or she is not satisfied.²⁹ The United Kingdom has a taxpayer charter that outlines what taxpayers can expect from Her Majesty's Revenue and Customs (HMRC), including the expectation to be treated as honest and with respect.³⁰ The United Kingdom charter, which includes three taxpayer obligations, also commits HMRC to do everything it can to keep the cost of dealing with HMRC as low as possible.³¹

Several states, including New York,³² Pennsylvania,³³ Indiana,³⁴ Kentucky,³⁵ Montana,³⁶ and Nebraska,³⁷ have adopted a Taxpayer Bill of Rights. While these charters vary in scope -- Montana's is statutory, Nebraska's provides its taxpayers with "Freedom from Red Tape" -- all contain most of the fundamental components identified by the OECD, and several outline taxpayer obligations in addition to rights. New York State also has a Consumer Bill of Rights Regarding Tax Preparers, which aims to protect taxpayers that use tax return preparers from unfair treatment.³⁸

B. It Is Essential that the IRS Adopt a Taxpayer Bill of Rights

A formal acknowledgement of taxpayer rights is vital to restoring and maintaining taxpayers' confidence in the IRS to fairly and impartially administer the tax laws. In a recent lecture, the National Taxpayer Advocate stated:

The National Taxpayer Advocate has used OECD's guidance to develop a list of taxpayer rights and responsibilities to be included in the TBOR.⁴⁰ Taxpayer rights apply to taxpayers in all situations, regardless of whether they have met their obligations, such as filing a tax return on time. That is, taxpayer rights are not conditioned on taxpayers' compliance. Still, including taxpayer responsibilities in the TBOR reinforces the social contract between taxpayers and the IRS. The following make up the TBOR proposed by the National Taxpayer Advocate:

Ten Taxpayer Rights

C. Recognition of Taxpayer Rights Requires Adequate Funding for the IRS

Throughout this report are examples of actions the IRS can take to implement the TBOR. However, taxpayer rights may be impaired if the IRS is not adequately funded. If there is agreement that taxpayers have certain basic rights, then Congress and the Executive Branch have a responsibility to ensure the IRS has sufficient resources to deliver these rights. For example, if taxpayers have the right to quality service, then the IRS must be funded so that it has the capability to provide quality service. A TBOR will be limited in its effectiveness without an adequate budget for the IRS to take actions to protect and fulfill taxpayer rights.

II. TAXPAYER AWARENESS OF TAXPAYER BILL OF RIGHTS

As noted above, the Internal Revenue Code includes a number of statutory taxpayer rights that are specific to certain situations, but it contains no organizing principles or formal acknowledgement of the fundamental taxpayer rights from which these statutory protections derive. Thus, taxpayers may not realize they have rights or know what they are. TAS research shows that many taxpayers are not aware they have rights. The results of a recent nationwide survey of taxpayers found that fewer than half of U.S. taxpayers believed they have rights before the IRS, and only 11 percent said they knew what those rights were.⁴¹

 

FIGURE 1.1.1, Taxpayers' Knowledge of Taxpayer Rights

 

Most Taxpayers Are Not ware They Have Rights Before the IRS

 

 

 

 

FIGURE 1.1.2, "How would you like to learn

 

about your rights?"⁴²

 

How Would You Like to Learn About Your Rights?

 

 

 

Recent TAS Focus Groups Confirm that Taxpayers Would Like to Know About Their Rights

In November 2013, a contractor for TAS conducted eight focus groups with taxpayers and tax preparers to evaluate the level of taxpayers' knowledge and understanding of their rights and responsibilities relating to federal taxes.⁴³ Specifically, the focus groups were designed to qualitatively assess:

• The extent of taxpayers' and preparers' knowledge (and desire to know) of taxpayer rights and responsibilities;

• How they would like to learn about their rights and responsibilities;

• From whom, when, where, and in what form would they like to receive this information;

• Their reaction to TAS's proposed TBOR;

• Their reaction to Publication 1 (both original version and a revised version developed by TAS);⁴⁴ and

• How they would change or improve this publication.

Overall, the taxpayers felt most of the responsibilities were "a given" and obvious.⁵¹ Taxpayers had a negative reaction to two of the responsibilities, to be honest⁵² and to be courteous.⁵³ The National Taxpayer Advocate will use these observations, as well as those from future focus groups, to revise our proposed explanations of rights and responsibilities.⁵⁴

CONCLUSION

The Taxpayer Bill of Rights would reassure taxpayers that they have rights that the IRS must respect, reinforcing the social contract between taxpayers and the IRS. With the adoption of a TBOR, taxpayers may be more likely to perceive the IRS as fair and just, which may increase voluntary compliance. The IRS can make great strides toward protecting taxpayer rights through the adoption of a TBOR and making it the foundation for effective tax administration.

RECOMMENDATIONS

The National Taxpayer Advocate recommends that the IRS:

FIGURE 1.1.3, Updated Draft Version of Publication 1

 

 

 

 

 

 

FOOTNOTES TO MSP #1

 

²Id. Enforcement and Late Payments percentage is computed by dividing enforcement and late payments of $65 billion by total tax liabilities of $2,660 billion.

³See IRS Strategic Plan 2009-2013 ("Goal 1: Improve service to make voluntary compliance easier").

⁴ Forrester Research Inc., The TAS Omnibus Analysis, from North American Technographics Omnibus Mail Survey, Q2/Q3 2012 19-20 (Sept. 2012).

⁵ Congress has passed several pieces of legislation with "Taxpayer Bill of Rights" in the title. See Technical and Miscellaneous Revenue Act, Pub. L. No. 100-647, § 6226, 102 Stat. 3342, 3730 (1988) (containing the "Omnibus Taxpayer Bill of Rights," also known as TBOR 1); Taxpayer Bill of Rights 2, Pub. L. No. 104-168, 110 Stat. 1452 (1996) (also known as TBOR 2); Internal Revenue Service Restructuring and Reform Act, Pub. L. No. 105-206, 112 Stat. 685 (1998) (Title III is known as "Taxpayer Bill of Rights III" or TBOR 3). These laws create specific rights in certain instances, but they do not create a thematic, principled-based list of overarching taxpayer rights.

⁶ While the National Taxpayer Advocate believes a statement of taxpayer responsibilities would promote effective tax administration by providing taxpayers with greater clarity about what is expected of them, the IRS's obligation to respect taxpayer rights should not be contingent on whether a taxpayer has fulfilled these responsibilities. For example, a taxpayer who did not keep all records or did not pay all tax timely does not forfeit his right to retain a representative to assist him in dealing with the IRS.

⁷ In her preface to the Fiscal Year 2014 Objectives Report to Congress, the National Taxpayer Advocate analyzed the IRS's processing of applications for tax-exempt status and showed that the IRS had violated eight of the ten rights she has proposed. Had there been a published Taxpayer Bill of Rights, organizations applying for tax-exempt status, IRS employees processing their applications, IRS executives overseeing the program, and Congressional offices receiving complaints likely would have flagged the inconsistencies between the applicants' rights and the IRS's actions more quickly. There is no guarantee that would have happened, of course, but the existence and broad awareness of a Taxpayer Bill of Rights would have substantially increased the odds that the problems would have surfaced and been addressed sooner.

⁸ For a comprehensive analysis of the role taxpayer rights play in effective tax administration, see National Taxpayer Advocate, Toward a More Perfect Tax System: A Taxpayer Bill of Rights as a Framework for Effective Tax Administration (Recommendations to Raise Taxpayer and Employee Awareness of Taxpayer Rights) (Nov. 4, 2013), available at www.TaxpayerAdvocate.irs.gov/2013AnnualReport.

⁹ Thomas Jefferson to James Madison, 1787. ME 6:388, Papers 12:440.

¹⁰See U.S. Const. amends. I, IV.

¹¹ The 16th Amendment to the U.S. Constitution provides Congress with the authority to tax. The Internal Revenue Code, which provides the legal basis for our tax system, is codified in Title 26 of the U.S. Code.

¹²See National Taxpayer Advocate 2012 Annual Report to Congress, vol. 2, at 13 (Research Study: Factors Influencing Voluntary Compliance by Small Businesses: Preliminary Survey Results).

¹³ For example, the right of a taxpayer to be informed is included in a number of different IRC provisions. IRC § 6213(a) requires the IRS to provide a notice of deficiency giving the taxpayer 90 days (150 days if the notice is addressed to a person outside of the United States) to petition Tax Court and, as required by IRC 7522(a), it should provide the basis for and the amount of tax, interest, and penalties due. IRC § 6330 requires the IRS to notify taxpayers at least 30 days before a notice of intent to levy and provide the amount of unpaid tax, the IRS's proposed action, the IRC provisions relating to levy, the procedures available to the IRS, the administrative appeals available to the taxpayer, and the alternatives available to prevent the levy. IRC § 6320(a) requires the IRS to notify a taxpayer of the notice of federal tax lien within five days of when the lien is filed.

¹⁴See National Taxpayer Advocate 2011 Annual Report to Congress 493-518 (Legislative Recommendation: Enact the Recommendations of the National Taxpayer Advocate to Protect Taxpayer Rights); National Taxpayer Advocate 2007 Annual Report to Congress 478-489 (Legislative Recommendation: Taxpayer Bill of Rights and De Minimis "Apology" Payments).

¹⁵ There is ample precedent for the IRS to adopt a TBOR administratively before Congress enacts legislation. In 1977, for example, the IRS established a problem resolution program nationwide to help taxpayers when regular contacts with the IRS failed. In 1979, the IRS created the Office of the Taxpayer Ombudsman to serve as the primary advocate within the IRS for taxpayers, with responsibility for managing the problem resolution program. Yet the first reference to the Taxpayer Ombudsman did not appear in the IRC until 1988. See Pub. L. No. 100-647, § 6235, 102 Stat. 3342, 3737 (Nov. 10, 1988). Similarly, in March 1988, then Commissioner Gibbs announced a new initiative authorizing problem resolution officers to issue "taxpayer assistance actions" to suspend enforcement actions or expedite procedures in certain cases. These "taxpayer assistance actions" were the precursor to "taxpayer assistance orders" created by Congress in 1988 with the enactment of IRC § 7811. See Pub. L. No. 100-647, § 6230, 102 Stat. 3342, 3733 (Nov. 10, 1988).

¹⁶ Taxpayer Bill of Rights Act of 2013, H.R. 2768, 113th Cong. (as passed by House, July 31, 2013).

¹⁷See Treasury Inspector General for Tax Administration (TIGTA), Ref. No. 2013-10-053, Inappropriate Criteria Were Used to Identify Tax-Exempt Applications for Review (May 14, 2013).

¹⁸See Principal Deputy Commissioner, Charting a Path Forward at the IRS: Initial Assessment and Plan of Action (June 24, 2013).

¹⁹Available at www.TaxpayerAdvocate.irs.gov/2013AnnualReport.

²⁰Id.

²¹ OECD, Committee of Fiscal Affairs, Taxpayers' Rights and Obligations -- a Survey of the Legal Situation in OECD Countries (Apr. 27, 1990).

²²Id.

²³Id.

²⁴ OECD, Centre for Tax Policy and Administration, Taxpayers' Rights and Obligations -- Practice Note 3-4, (Aug. 2003).

²⁵ OECD, Centre for Tax Policy and Administration, Taxpayers' Rights and Obligations -- Practice Note 6 (Aug. 2003).

²⁶ The CRA Commitment to Small Business is a "a five-part statement through which the CRA pledges to support the competitiveness of the Canadian business community by ensuring that interactions with the CRA are as effective and efficient as possible." See http://www.cra-arc.gc.ca/gncy/txpyrbllrghts/tbrfq-eng.html (last visited Sept. 15, 2013).

²⁷ CRA, Taxpayer Bill of Rights, available at http://www.cra-arc.gc.ca/gncy/txpyrbllrghts/menu-eng.html (last visited Sept. 15, 2013).

²⁸ Office of the Taxpayers' Ombudsman, Perspectives; Issue 3 (Aug. 2013), available at http://www.oto-boc.gc.ca/rprts/nslt3-eng.html.

²⁹See ATO, Taxpayer's Charter: What You Need to Know (2011), available at http://www.ato.gov.au/About-ATO/About-us/In-detail/Taxpayers-charter/Taxpayers-charter-what-you-need-to-know.

³⁰ HMRC, Your Charter, available at https://www.gov.uk/government/publications/your-charter (last visited Sept. 24, 2013).

³¹Id.

³² N.Y. Tax Law § 3000. See http://www.tax.ny.gov/tra/rights.htm (last visited Sept. 15, 2013).

³³ 72 Pa. Stat. Ann. § 3310-101 (1996); see Taxpayer Bill of Rights, available at http://www.portal.state.pa.us/portal/server.pt/community/taxpayers'_rights_advocate/13152 (last visited Sept. 24, 2013).

³⁴See Indiana Department of Revenue, The Taxpayer Bill of Rights, available at http://www.in.gov/dor/3660.htm (last visited Sept. 15, 2013).

³⁵ Kentucky Revised Statements Annotated 131.041-131.081, Taxpayer Bill of Rights; see also Your Rights as a Kentucky Taxpayer, available at http://www.revenue.ky.gov/nr/rdonlyres/c343eebb-2975-4f0b-82a6-855c9d15cdd2/0/10f100713.pdf (last visited Sept. 24, 2013).

³⁶ Montana Codes Annotated 15-1-222; see http://revenue.mt.gov/tax_appeal_process/taxpayer_bill_rights.mcpx (last visited Sept. 15, 2013).

³⁷See http://www.revenue.ne.gov/rights.html (last visited Sept. 15, 2013).

³⁸See State of New York, Department of Taxation and Revenue, Publ. 135, Bill of Rights Regarding Tax Preparers (Aug. 2011), available at http://www.tax.ny.gov/pdf/publications/income/pub135.pdf.

³⁹ Nina E. Olson, A Brave New World: The Taxpayer Experience in a Post-Sequester IRS (the Laurence Neal Woodworth Memorial Lecture), Tax Notes Today 106-118 (June 3, 2013).

⁴⁰ The National Taxpayer Advocate has shared this TBOR with the IRS Office of Chief Counsel and the Chief of Communications and Liaison, and has adopted several of their suggestions.

⁴¹ Forrester Research Inc., The TAS Omnibus Analysis, from North American Technographics Omnibus Mail Survey, Q2/Q3 2012, 19-20 (Sept. 17, 2012).

⁴² Forrester Research Inc., The TAS Omnibus Analysis, from North American Technographics Omnibus Mail Survey, Q2/Q3 2012, 21 (Sept. 17, 2012). "TAS underserved" refers to taxpayers who qualify for but do not seek TAS help with their tax problems. This survey was conducted only in English; TAS is seeking to administer it to Spanish-speaking taxpayers. See National Taxpayer Advocate, Toward a More Perfect Tax System: A Taxpayer Bill of Rights as a Framework for Effective Tax Administration (Recommendations to Raise Taxpayer and Employee Awareness of Taxpayer Rights) 12-16 (Nov. 4, 2013), available at www.TaxpayerAdvocate.irs.gov/2013AnnualReport.

⁴³ The focus groups were conducted between November 18, 2013 and November 21, 2013 in four sites: East Rutherford, New Jersey; Chicago, Illinois; Dallas, Texas; and Los Angeles, California. At each site, the contractor conducted one focus group of taxpayers and one focus group of preparers. The taxpayers participating in the focus groups had filed taxes for the past three years, which included a mix of preparer-, professional, and self-prepared returns. Russell Research, Final Report from a Focus Group Study of Taxpayer Rights & Responsibilities (Dec. 6, 2013).

⁴⁴ In the first Taxpayer Bill of Rights legislation (TBOR 1), Congress required the IRS to prepare a statement of taxpayer rights and IRS obligations and distribute it to taxpayers when contacting them regarding the determination of tax or collection of tax. Technical and Miscellaneous Revenue Act of 1988, Pub L. No. 100-67, § 6227, 102 Stat. 3342, 3730-31 (Nov. 10, 1988). Currently, the IRS outlines these rights for taxpayers in Publication 1, Your Rights as a Taxpayer.

⁴⁵Id. at 14.

⁴⁶ "I've had some experience with the IRS . . . Like the right to appeal and be heard . . . There were some issues that I had challenged, and the IRS was overturned and I received full restitution." (Chicago taxpayer). Id. at 11.

⁴⁷ "The one I like best is the right to appeal an IRS decision in an independent forum. I've been through that, so I know how important that was. I think all these are actually very important." (Los Angeles taxpayer). Id.

⁴⁸ "The right to retain representation [is the most important right to me] . . . In theory they could call you in and have you and them (representation) there and that is basically that." (New Jersey taxpayer). Id.

⁴⁹ "To me, I kind of like it. It looks like they're making an attempt [to be less intimidating]. Maybe they will be a little more fair." (Los Angeles taxpayer). Id.

⁵⁰ "Seriously, if you don't have money to pay an accountant, do they provide quality service that you can go somewhere and have them do your taxes for you?" (New Jersey taxpayer). Id. at 10.

⁵¹ "I can't imagine that you wouldn't think you were responsible to provide accurate honest information . . . To me, that's a no-brainer." (Dallas taxpayer). Id. at 13.

⁵² "Obviously if you are not honest you are going to get audited or you could get audited." (New Jersey taxpayer). Id.

⁵³ "Well then that shouldn't even be on there. It's common sense to be courteous." (Chicago taxpayer); "You better believe it. If there's anybody I'm going to be courteous, it's, you know, the IRS." (Chicago taxpayer); "That, I would definitely take out . . . every individual in this room as a professional working adult is professional and courteous." (Dallas taxpayer). Id.

⁵⁴ For an in-depth discussion of the Taxpayer Advocate Service's revised Publication 1 initiative, see National Taxpayer Advocate, Toward a More Perfect Tax System: A Taxpayer Bill of Rights as a Framework for Effective Tax Administration 18 (Nov. 4, 2013), available at www.TaxpayerAdvocate.irs.gov/2013AnnualReport.

In fiscal terms, to be blunt, the mission of the IRS trumps the missions of all other federal agencies. The IRS's stated mission is to "[p]rovide America's taxpayers top quality service by helping them understand and meet their tax responsibilities and by applying the tax law with integrity and fairness to all."¹ If the IRS lacks adequate funding to do its job effectively, the government will have fewer dollars available to fund all federal programs, including national defense, Social Security, Medicare, Veterans' benefits, medical research, and disaster relief -- or simply to reduce the deficit.

Since fiscal year (FY) 2010, the IRS budget has been cut by nearly eight percent.² Over the same period, inflation has risen by about six percent, further eroding the IRS's resources.³ Because of these budget reductions, the IRS has been significantly hampered in its ability to provide "top quality service" and maintain effective enforcement programs that minimize noncompliance.

Consider that in FY 2013:

• The IRS received about 109 million telephone calls. Only 61 percent of calls seeking to reach a customer service representative got through, and those callers had to wait an average of 17.6 minutes on hold.⁴

• The IRS received about 8.4 million letters from taxpayers responding to proposed adjustments to their tax accounts.⁵ At the end of the fiscal year, 53 percent of the correspondence in open inventory had not been answered within the timeframes the IRS itself has established.⁶

• The IRS is continuing a trend of reducing and in some cases eliminating services to taxpayers who visit any of its nearly 400 walk-in sites. Ten years ago, it answered more than 1.4 million tax-law questions at its walk-in sites. In FY 2014, the IRS will answer only "basic" tax law questions during the filing season (January through April), and it will not answer any tax law questions at all (even basic ones) beyond April, including questions from the millions of taxpayers who obtain filing extensions and prepare their returns later in the year.⁷ This new policy applies to taxpayers who seek assistance with tax law questions by phone as well. In addition, the IRS will discontinue its longstanding practice of preparing tax returns for low income, elderly, and disabled taxpayers who seek help.⁸

• The IRS workforce has been reduced from nearly 95,000 full-time-equivalent employees in FY 2010 to about 87,000 in FY 2013, a decrease of eight percent.⁹

• The IRS training budget has been slashed from about $172 million in FY 2010 to about $22 million, a staggering 87 percent reduction.¹⁰ Thus, the IRS not only has fewer employees than four years ago, but those who remain are less equipped to perform their jobs.¹¹

• First, the requirement to pay taxes is generally the most significant burden a government imposes on its citizens. The National Taxpayer Advocate believes the government has a practical and a moral obligation to make compliance as simple and painless as possible. It is not acceptable that taxpayers seeking help cannot get through to the IRS nearly two-fifths of the time, and then when they do get through, they have to wait on hold for extended periods. The taxpaying public deserves better treatment.

• Second, each dollar appropriated for the IRS generates substantially more than one dollar in federal revenue. In FY 2013, the IRS collected about $2.86 trillion¹² on an appropriated budget of about $11.2 billion.¹³ That translates to an average return-on-investment (ROI) of 255:1. The marginal ROI of additional funding will not be nearly so large, but virtually everyone who has studied the IRS budget has concluded that it is positive.

The main reason the IRS is underfunded is because the congressional budget rules were written with classic spending programs in mind -- namely, a dollar spent is treated as increasing the budget deficit by one dollar. As the government's revenue collector, the IRS is the only significant exception to that rule -- a dollar spent generates substantially more than one dollar in additional revenue and thus reduces the deficit.

To address this anomaly, the National Taxpayer Advocate recommended seven years ago that Congress adopt new procedures to set the IRS's budget.¹⁷ Because any change to the budget rules would require study and ultimately concurrence by the House and Senate budget committees, appropriations committees, potentially tax-writing committees, and other key players, making such a change will require a concerted effort.

The effects of applying across-the-board budget reductions to the IRS over the past three years underscore the importance of making this concerted effort. If the government continues to under serve its taxpayers, it risks further undermining public confidence in the fairness and integrity of the tax system, and thereby reducing tax compliance.

ANALYSIS OF PROBLEM

Over the past ten years, the workload of the IRS has increased significantly. The upward trend has continued during the last three years. Since FY 2010, however, IRS funding has declined. The combination of more work and less funding predictably has impaired the IRS's ability both to meet taxpayer needs and to collect tax.

A. Taxpayer Services: More Work and Less Funding Means Taxpayer Needs Are Not Being Met.

For individual income tax returns, the number rose from about 131.3 million in FY 2004 to about 146.0 million in FY 2013, an increase of 11 percent. About one-third of that increase has occurred since FY 2010, when about 141.2 million returns were filed.¹⁸

 

FIGURE 1.2.1

 

Individual Income Tax Returns (in millions)

 

 

 

 

FIGURE 1.2.2

 

Business Entity Income Tax Returns (in millions)

 

 

 

(As these charts and others in this section show, the increase in the IRS's workload has followed a fairly consistent path, with the notable exception of FY 2008, when the IRS was charged with administering the Economic Stimulus Act and was deluged with an unprecedented number of tax returns and phone calls.²⁰)

Another indicator of the workload increase is the number of phone calls the IRS receives, which has grown substantially.

 

FIGURE 1.2.3

 

Call Attempts to IRS Customer Service

 

 

 

Answering taxpayer telephone calls effectively is labor-intensive. While some callers can be assisted through automation, tens of millions of taxpayers want to speak with an IRS customer service representa-tive (CSR) each year. In FY 2013, CSRs handled some 30 million calls on the Accounts Management lines and another nine million phone calls in other parts of the agency.²² Nearly 20 million calls to CSRs went unanswered because the IRS does not have enough employees to handle them. There is simply no way for the IRS to deal with this large and increasing volume of work without the funding to hire more CSRs.

During the last few years, the IRS has also had to address a huge spike in tax-related identity theft and refund fraud. In FY 2013, the IRS assigned more than 3,000 employees to work on identity theft cases.²³ Because of the harm identity theft victims suffer, that was the right call to make.²⁴ But for an overworked agency absorbing budget cuts, the reassignment of so many employees has meant other work in crucial taxpayer service and enforcement areas could not be done.²⁵

 

FIGURE 1.2.4

 

Total IRS Appropriation

 

 

 

 

FIGURE 1.2.5

 

Number of IRS Employees

 

 

 

 

FIGURE 1.2.6

 

IRS Training Dollars

 

 

 

The stakes for taxpayers are simply too high to allow the IRS workforce to be undertrained.²⁹ In most years, workforce attrition exceeds five percent.³⁰ When employees leave, the IRS must identify existing employees or find new ones to pick up the slack -- sometimes through internal promotions, sometimes with limited new hires. In addition, the IRS employed more than 11,000 seasonal employees during the last filing season and for other limited tasks throughout the year.³¹ Even employees who do not change jobs face constant changes in the nature of their workloads. For example, as the problem of tax-related identity theft increased, the IRS trained at least 37,000 employees on various aspects of victim assistance.³²

The IRS has tried to train employees at lower cost by replacing in-person training with remote or virtual instruction.³³ That is a constructive approach -- to a point. Some virtual training can be effective. But other types of training, such as teaching taxpayer-facing employees how to interview taxpayers and working through case studies, do not lend themselves well to a remote setting. In addition, employees of many IRS functions are spread around the country, and it is difficult for managers to do their jobs properly if they cannot meet periodically -- face to face -- with the employees they supervise.

 

FIGURE 1.2.7

 

IRS Telephone Service

 

 

 

To try to improve its LOS, the IRS recently announced several "service changes" for FY 2014. During the filing season (January through April), it will answer only "basic" tax law questions; it will not answer "more detailed" questions. After April, it will not answer any tax law questions (even basic ones), including from the millions of taxpayers who obtain filing extensions and prepare their returns later in the year.³⁵ At the risk of vast understatement, it is a sad state of affairs when the government writes tax laws as complex as ours -- and then is unable to answer any questions beyond "basic" ones from baffled citizens who are doing their best to comply.

As a corollary, the number of pending pieces of adjustments correspondence in open inventory increased as well. At the end of FY 2004, open inventory stood at about 348,000 letters.³⁸ At the end of FY 2013, it consisted of about 1.1 million letters.³⁹

 

FIGURE 1.2.8

 

Open Adjustments Inventory at Fiscal Year End

 

 

 

We noted above that the IRS has adopted a new policy of declining to answer many tax-law questions -- notably, any questions beyond "basic" ones -- on its toll-free telephone lines. The same policy applies to the TACs.⁴² This continues an unfortunate trend of service reductions for taxpayers who either do not have Internet access or otherwise require or prefer in-person assistance. According to data compiled by the GAO, the number of tax-law questions answered in the TACs over the last ten years during the filing season has declined by 86 percent -- from about 795,000 questions to 110,000.⁴³

 

FIGURE 1.2.9

 

Tax Law Questions Answered at Taxpayer Assistance Centers

 

During Filing Season

 

 

 

Historically, the TACs have also prepared tax returns for taxpayers seeking assistance, particularly low income, elderly, and disabled taxpayers. According to the GAO filing season reports, the number of returns prepared during the filing season over the past decade has declined by 59 percent.⁴⁵

 

FIGURE 1.2.10

 

Returns Prepared at Taxpayer Assistance Centers

 

During Filing Season

 

 

 

 

FIGURE 1.2.11

 

Revenue Agents and Revenue Officers

 

 

 

We find the sharp reduction in local enforcement personnel concerning. While no taxpayer wants to be audited or face collection action, it is important that taxpayers who find themselves in that position have the option of talking with an IRS employee face-to-face. On audit, a taxpayer may have documentation that is difficult to mail in and requires a conversation to explain. In collection, a taxpayer may have special circumstances or face hardships that are obvious in person but difficult to convey by email or over the phone.

A local presence is also important because economic conditions and types of noncompliance vary from community to community. A Revenue Officer (RO) who lives in a community typically is better equipped than employees in a centralized site to determine how to work with a delinquent taxpayer claiming financial hardship. The RO may, for example, know that a large local employer has just laid off workers or that a payroll service provider who kept payrolls for small businesses was just arrested for misappropriating funds. In Volume 2 of this report, we publish a study showing that ROs generally are more effective than the Automated Collection System in resolving employment tax delinquencies.⁵⁰

The bottom line is that reduced funding has left the IRS substantially less able to assist taxpayers across all service platforms other than the Internet -- by phone, by mail, and in person.⁵¹

B. Revenue Collection: Reduced Funding Means Reduced Revenue Collection and a Larger Budget Deficit.

The reduction in the IRS's budget since FY 2013 has generally been made pursuant to government-wide cuts designed to reduce the imbalance between federal spending and federal revenue. However, the logic behind budget cuts simply does not apply to the funding of the IRS. The IRS collects more than 90 percent of federal revenue.⁵² As noted above, the IRS in FY 2013 took in about $2.86 trillion⁵³ on an appropriated budget of about $11.2 billion,⁵⁴ which translates to an average return-on-investment of 255:1. While the marginal ROI of additional funding will not be nearly so large, virtually everyone who has studied the IRS budget has concluded that the ROI of additional funding is positive. This includes the most recent four IRS commissioners (two appointed by Democratic Presidents and two appointed by Republican Presidents).

At his confirmation hearing in December, IRS Commissioner John Koskinen said:

As we have noted in prior reports, this procedure makes little sense when applied to the IRS. For virtually every other spending program, a dollar spent is just that -- it increases the budget deficit by one dollar. But a dollar spent on the IRS generates substantially more than one dollar in return -- it reduces the budget deficit.

If the Chief Executive Officer of a Fortune 500 company were told that each dollar allocated to his company's Accounts Receivable Department would generate multiple dollars in return, it is difficult to see how the CEO would keep his job if he chose not to provide the department with the funding it needed. Yet that is essentially what has been happening with respect to IRS funding for years, and as Commissioner Koskinen indicated, there has been some discussion but little effort to fix this obvious problem.

In the National Taxpayer Advocate's 2006 Annual Report to Congress, we discussed the IRS funding challenge in detail and recommended, among other things, that Congress consider revising its budget rules in a manner that allows the relevant congressional committees simply to set IRS funding at whatever level they believe will maximize tax compliance, particularly voluntary compliance, with due regard for protecting taxpayer rights and minimizing taxpayer burden.⁵⁷

In the course of developing and presenting that recommendation, the National Taxpayer Advocate or her senior advisor met with 14 separate congressional staffs -- the House and Senate majority and minority staffs of the appropriations committees, budget committees, and tax-writing committees as well as tax counsel for the House and Senate majority leaders. In our discussions, there appeared to be no disagreement with the premise that the IRS generates a positive return on investment and is underfunded. However, we were repeatedly told that creating a new set of rules to establish IRS funding levels would be a "heavy lift" and would raise jurisdictional issues that have to be worked through.

In light of the IRS's increasing inability to meet the needs of the taxpaying public, we submit that the time for the "heavy lift" is now. Not only are cuts to the IRS budget harmful from a taxpayer service perspective, but to the extent they are designed to reduce the budget deficit, they are self-defeating.

C. The "Program Integrity Cap Adjustment" Mechanism Has Significant Drawbacks.

In a partial attempt to provide the IRS with additional funding within the existing budget rules, several Appropriations acts in recent years have given the IRS more funding by using a mechanism known as a "program integrity cap adjustment." Under this mechanism, new funding appropriated for IRS enforcement programs generally does not count against otherwise applicable spending ceilings provided:

Creating a mechanism that allows more funding for enforcement actions, while excluding taxpayer service activities like outreach and education, would be a mistake for two reasons. First, common sense tells us that taxpayer services are a significant driver of tax compliance and generate a very high ROI. Publishing tax forms and instructions, conducting outreach and education, assisting taxpayers, tax preparers, and tax-software manufacturers, and otherwise administering the tax filing season are absolute prerequisites for tax compliance. In general, the ROI of these service activities is probably greater than the ROI of enforcement actions.

Three TAS research studies published in Volume 2 of this report illustrate the value of taxpayer service and the limitations of enforcement measures to improve tax compliance:

• A study regarding tax compliance by sole proprietors found that taxpayer service and social norms were the two most influential factors affecting compliance behavior. Contrary to expectation, it found that traditional deterrence theory did not play a significant role in promoting compliance, possibly because the taxpayers were motivated by short-term cash flow needs.⁵⁹

• A study regarding the impact of penalties on tax compliance analyzed the future compliance behavior of two groups of sole proprietors who were audited and whose examinations were closed in 2007. One group faced tax adjustments and was subject to penalties. The other group faced similar tax adjustments but was not subject to penalties. The study found that the future compliance behavior of the penalized group was no better than the future compliance behavior of the group that was not penalized.⁶⁰

• A study regarding the relative effectiveness of Revenue Officers and the Automated Collection System in addressing delinquent employment tax liabilities found that neither ROs nor ACS affected future compliance.⁶¹ That is a significant finding that should guide IRS strategic and resource-allocation decisions, because long-term revenue collection is much greater where IRS actions improve future voluntary compliance.

Second, an enforcement-only cap adjustment will inherently push the IRS to become more of a hard-core enforcement agency. It should be emphasized that in FY 2013, direct enforcement revenue amounted to only $53.3 billion,⁶² or two percent of total IRS tax collection of $2.86 trillion.⁶³ The remaining 98 percent resulted from voluntary front-end tax compliance.

 

FIGURE 1.2.12

 

Tax Revenue from Voluntary Compliance vs. Enforcement Actions

 

 

 

For that reason, if program integrity cap adjustments are used, we recommend that compliance initiatives be defined more broadly so they include both an enforcement component and a service component (e.g., better outreach, education, and assistance for small businesses). Because the projected ROI of many enforcement programs is high, a more broadly constructed initiative could still produce a demonstrable ROI of greater than 1:1 even if it contained service components with ROIs that are unquantifiable.⁶⁵

CONCLUSION

Because the IRS is the federal government's accounts receivable department and generates a substantially positive return on investment, it is self-defeating to treat the agency like a pure spending program. With most spending programs, a dollar spent is simply a dollar spent from a budget perspective. With the IRS, a dollar spent generates many dollars in additional revenue, and conversely, a dollar unspent translates to a greater decrease in revenue collection, thereby adding to the budget deficit. Recent cuts in the IRS budget have also limited the IRS's ability to meet the basic service needs of the taxpaying public, which erodes public confidence and trust in the tax system and may also lead to greater noncompliance. For these reasons, we believe the time has come for Congress to "fence off" decisions about IRS funding from the otherwise applicable spending ceilings that apply to discretionary appropriations under the budget rules.

RECOMMENDATIONS

The National Taxpayer Advocate reiterates her recommendations that Congress consider the following actions:

² IRS Chief Financial Officer, Corporate Budget.

³See Office of Management and Budget, Fiscal Year 2014 Budget of the U.S. Government, Historical Tables, Table 10.1, at 215 (showing Gross Domestic Product and year-to-year increases in the GDP (Chained) Price Index). Data has been re-based from FY 2005 to FY 2010.

⁴ IRS, Joint Operations Center, Snapshot Reports: Enterprise Snapshot (week ending Sept. 30, 2013). The Accounts Management phones lines (previously known as the Customer Account Services phone lines) receive the significant majority of taxpayer calls and are used by the IRS to compute its "Level of Service." In this discussion, all phone data pertains to the Accounts Management lines, except where otherwise noted. Calls to compliance phone lines and certain other categories of calls are excluded from this total.

⁵ IRS, Joint Operations Center, Adjustments Inventory Reports: FY13 July-September Fiscal Year Comparison.

⁶ IRS, Joint Operations Center, Weekly Enterprise Adjustments Inventory Report (week ending Sept. 28, 2013).

⁷ IRS, e-News for Tax Professionals -- Issue Number 2013-49, Item 4, Some IRS Assistance and Taxpayer Services Shift to Automated Resources (Dec. 20, 2013), at http://www.irs.gov/uac/Some-IRS-Assistance-and-Taxpayer-Services-Shift-to-Automated-Resources.

⁸ IRS, e-News for Tax Professionals -- Issue Number 2013-49, Item 4, Some IRS Assistance and Taxpayer Services Shift to Automated Resources (Dec. 20, 2013), at http://www.irs.gov/uac/Some-IRS-Assistance-and-Taxpayer-Services-Shift-to-Automated-Resources.

⁹ IRS Chief Financial Officer, Corporate Budget. Some calculations in this section are affected by rounding. Percentage changes were computed using actual numbers rather than rounded numbers.

¹⁰ IRS Chief Financial Officer, Corporate Budget. For a discussion about the impact of training reductions, see Most Serious Problem: Employee Training: The Drastic Reduction in IRS Employee Training Impacts the Ability of the IRS to Assist Taxpayers and Fulfill Its Mission, infra.

¹¹ For a discussion about the importance of taxpayer rights training, see Most Serious Problem: Taxpayer Rights: Insufficient Education and Training About Taxpayer Rights Impairs IRS Employees' Ability to Assist Taxpayers and Protect Their Rights, infra; see also National Taxpayer Advocate Report to the Acting Commissioner of Internal Revenue, Toward a More Perfect Tax System: A Taxpayer Bill of Rights as a Framework for Effective Tax Administration: Recommendations to Raise Taxpayer and Employee Awareness of Taxpayer Rights (Nov. 4, 2013).

¹² Government Accountability Office (GAO), GAO-14-169, Financial Audit: IRS's Fiscal Years 2013 and 2012 Financial Statements 76 (Dec. 2013), available at http://www.gao.gov/products/GAO-14-169.

¹³ IRS Chief Financial Officer, Corporate Budget.

¹⁴ In FY 2013, the IRS collected about $2.86 trillion in revenue. GAO, GAO-14-169, Financial Audit: IRS's Fiscal Years 2013 and 2012 Financial Statements 76 (Dec. 2013). Of that total, enforcement revenue accounted for $53.3 billion. Id. at 24.

¹⁵ See IRS Strategic Plan 2009-2013 ("Goal 1: Improve service to make voluntary compliance easier").

¹⁶See Volume 2: Research Study: Small Business Compliance: Further Analysis of Influential Factors, infra; Research Study: Do Accuracy-Related Penalties Improve Future Reporting Compliance by Schedule C Filers?, infra.

¹⁷See National Taxpayer Advocate 2006 Annual Report to Congress 442-457 (Legislative Recommendation: Revising Congressional Budget Procedures to Improve IRS Funding Decisions).

¹⁸ IRS Data Books, Table 2, for FY 2004 through FY 2012. Data for FY 2013 was provided by the IRS Office of Research, Analysis, and Statistics.

¹⁹ IRS Data Books, Table 2, for FY 2004 through FY 2012. Data for FY 2013 was provided by the IRS Office of Research, Analysis, and Statistics.

²⁰ The Economic Stimulus Act of 2008 required the IRS to make one-time payments to nearly 119 million taxpayers. See IRS News Release, IR-2009-10, IRS Offers Tips to Avoid Recovery Rebate Credit Confusion (Jan. 30, 2009), at http://www.irs.gov/uac/IRS-Offers-Tips-to-Avoid-Recovery-Rebate-Credit-Confusion. The procedures for claiming these "stimulus payments" required millions of individuals otherwise without a filing obligation to file a tax return. The stimulus payments were paid out over several months, and and taxpayers who did not receive their payments early in the process inundated the IRS with telephone calls. As a result, many IRS measures reflect the effects of this one-time event. The number of calls the IRS received on its Accounts Management telephone lines more than doubled, from FY 2007 to FY 2008 (from 66 million to 151 million), and the number of Form 1040-series returns jumped from 139 million to 154 million -- the highest annual totals in the past ten years and probably ever.

²¹ IRS, Joint Operations Center, Snapshot Reports: Enterprise Snapshot (final week of each fiscal year for FY 2004 through FY 2013).

²²Id.

²³Fiscal Year 2014 Treasury and IRS Budget: Hearing Before the Subcomm. on Financial Services and General Government of the S. Comm. on Appropriations, 113th Cong. (2013) (statement of Steven T. Miller, Acting Commissioner of Internal Revenue).

²⁴ For a discussion about tax-related identity theft, see Most Serious Problem: Identity Theft: The IRS Should Adopt a New Approach to Identity Theft Victim Assistance that Minimizes Burden and Anxiety for Such Taxpayers, infra.

²⁵See Danny Werfel, Acting Commissioner of Internal Revenue, Address at the American Institute of Certified Public Accountants 2013 National Tax Conference (Nov. 5, 2013).

²⁶ IRS Chief Financial Officer, Corporate Budget.

²⁷See Office of Management and Budget, Fiscal Year 2014 Budget of the U.S. Government, Historical Tables, Table 10.1, at 215 (showing GrossDomestic Product and year-to-year increases in the GDP (Chained) Price Index). Data has been re-based from FY 2005 to FY 2010. Because of the federal pay freeze, it is likely that the IRS's costs have risen by less than the amount of inflation. However, many employees continued to receive within-grade step increases each year (which translate to increases in pay), the costs of non-salary benefits continued to rise, and non-employee costs continued to rise as well. Thus, inflation since FY 2010 has had a significant impact on the IRS budget beyond the eight percent reduction in nominal dollars shown in the chart above.

²⁸ IRS Chief Financial Officer, Corporate Budget. This total includes seasonal employees apportioned on a full-time-equivalent basis.

²⁹ For a discussion about the impact of training reductions, see Most Serious Problem: Employee Training: The Drastic Reduction in IRS Employee Training Impacts the Ability of the IRS to Assist Taxpayers and Fulfill Its Mission, infra; Most Serious Problem: Taxpayer Rights: Insufficient Education and Training About Taxpayer Rights Impairs IRS Employees' Ability to Assist Taxpayers and Protect Their Rights, infra.

³⁰See, e.g., Partnership for Public Service, Beneath the Surface: Understanding Attrition at Your Agency and Why It Matters 3 (Nov. 2010) (finding that attrition in the federal government, although "relatively low," was 7.6 percent in FY 2008 and 5.85 percent in FY 2009).

³¹See data compiled for IRS 2013 Data Book, Table 30 (not yet published). This total reflects seasonal employees placed on a full-time-equivalent basis. The actual number of employees was higher.

³²Fiscal Year 2014 Treasury and IRS Budget: Hearing Before the Subcomm. on Financial Services and General Government of the S. Comm. on Appropriations, 113th Cong. (2013) (statement of Steven T. Miller, Acting Commissioner of Internal Revenue) (stating that the IRS has assigned3,000 employees to work on identity theft and has trained 37,000 employees who work with taxpayers to recognize identity theft and assist victims).

³³See Danny Werfel, Acting Commissioner of Internal Revenue, Address at the American Institute of Certified Public Accountants 2013 National Tax Conference (Nov. 5, 2013) (stating that the IRS has "expanded the use of alternative delivery methods for in-person meetings, training, conferences, and operational travel").

³⁴ IRS, Joint Operations Center, Snapshot Reports: Enterprise Snapshot (final week of each fiscal year for FY 2004 through FY 2013).

³⁵ IRS, e-News for Tax Professionals -- Issue Number 2013-49, Item 4, Some IRS Assistance and Taxpayer Services Shift to Automated Resources (Dec. 20, 2013), at http://www.irs.gov/uac/Some-IRS-Assistance-and-Taxpayer-Services-Shift-to-Automated-Resources.

³⁶ IRS, Joint Operations Center, Adjustments Inventory Reports: July-September Fiscal Year Comparison (FY 2004 through FY 2013). In FY 2013, receipts in the Adjustments Inventory were about 8.4 million, as compared with 10.4 million in FY 2012. We are not certain why the number declined. The Adjustments Inventory is one component of the Accounts Management function's overall Paper Inventory. In FY 2013, receipts in the Paper Inventory were about 20.8 million, and the percentage classified as overage at year-end was 47 percent. IRS, Joint Operations Center, Account Management Information Report (AMIR) -- National Summary (week ending Sept. 28, 2013).

³⁷ IRS, Joint Operations Center, Weekly Enterprise Adjustments Inventory Report (week ending Sept. 28, 2013).

³⁸ IRS, Joint Operations Center, Weekly Enterprise Adjustments Inventory Report (week ending Sept. 30, 2004).

³⁹ IRS, Joint Operations Center, Weekly Enterprise Adjustments Inventory Report (week ending Sept. 28, 2013).

⁴⁰ IRS, Joint Operations Center, Weekly Enterprise Adjustments Inventory Report (week ending Oct. 2, 2010); IRS, Joint Operations Center, Weekly Enterprise Adjustments Inventory Report (week ending Sept. 28, 2013).

⁴¹ For more detail, see National Taxpayer Advocate FY 2014 Objectives Report to Congress at 59.

⁴² IRS, e-News for Tax Professionals -- Issue Number 2013-49, Item 4, Some IRS Assistance and Taxpayer Services Shift to Automated Resources (Dec. 20, 2013), at http://www.irs.gov/uac/Some-IRS-Assistance-and-Taxpayer-Services-Shift-to-Automated-Resources.

⁴³ GAO, GAO-14-133, 2013 Tax Filing Season: IRS Needs to Do More to Address the Growing Imbalance between the Demand for Services and Resources 26 (Dec. 2013); GAO, GAO-11-111, 2010 Tax Filing Season: IRS's Performance Improved in Some Key Areas, but Efficiency Gains Are Possible in Others 45 (Dec. 2010); GAO, GAO-08-38, Tax Administration: 2007 Filing Season Continues Trend of Improvement, but Opportunities to Reduce Costs and Increase Tax Compliance Should be Evaluated 27-28 (Nov. 2007); GAO, GAO-07-27, Tax Administration: Most Filing Season Services Continue to Improve, but Opportunities Exist for Additional Savings 29 (Nov. 2006) (supplemented with more precise IRS data provided to TAS by the IRS Wage & Investment Division for 2004 through 2006). TAS does not have data for 2007.

⁴⁴ This data was provided to TAS by the IRS Wage & Investment Division in connection with the National Taxpayer Advocate 2007 Annual Report to Congress 162-182 (Most Serious Problem: Service at Taxpayer Assistance Centers). TAS does not have data on tax-law questions asked outside the filing season for more recent years.

⁴⁵ GAO, GAO-14-133, 2013 Tax Filing Season: IRS Needs to Do More to Address the Growing Imbalance between the Demand for Services and Resources 26 (Dec. 2013); GAO, GAO-11-111, 2010 Tax Filing Season: IRS's Performance Improved in Some Key Areas, but Efficiency Gains Are Possible in Others 45 (Dec. 2010); GAO, GAO-08-38, Tax Administration: 2007 Filing Season Continues Trend of Improvement, but Opportunities to Reduce Costs and Increase Tax Compliance Should be Evaluated 27-28 (Nov. 2007); GAO, GAO-07-27, Tax Administration: Most Filing Season Services Continue to Improve, but Opportunities Exist for Additional Savings 29 (Nov. 2006) (supplemented with more precise IRS data provided to TAS by the IRS Wage & Investment Division for 2004 through 2006); GAO, GAO-05-67, Tax Administration: IRS Improved Performance in the 2004 Filing Season, But Better Data on the Quality of Some Services Are Needed 18 (Nov. 2004). The GAO filing season reports do not provide a total for 2007. However, the report on the 2007 filing season said the number of TAC-prepared returns was almost 74 percent less than the number of TAC-prepared returns in 2001, and the report on the 2004 filing season said the number of TAC-prepared returns in 2001 was about 790,000. We therefore have provided an approximate total for 2007 in the chart above.

⁴⁶ This data was provided to TAS by the IRS Wage & Investment Division in connection with the National Taxpayer Advocate 2007 Annual Report to Congress 162-182 (Most Serious Problem: Service at Taxpayer Assistance Centers).

⁴⁷ IRS, e-News for Tax Professionals -- Issue Number 2013-49, Item 4, Some IRS Assistance and Taxpayer Services Shift to Automated Resources (Dec. 20, 2013), at http://www.irs.gov/uac/Some-IRS-Assistance-and-Taxpayer-Services-Shift-to-Automated-Resources.

⁴⁸ IRS Data Books, Table 30.

⁴⁹ IRS, Discovery Directory (searched on Dec. 30, 2013). Alaska, Arkansas, Delaware, Idaho, Kansas, Montana, North Dakota, Rhode Island, South Dakota, Vermont, Wyoming, and Puerto Rico are not listed as having either an Appeals Officer or a Settlement Officer. Settlement Officers hold Collection Due Process hearings under IRC §§ 6320 and 6330, and hear appeals of installment agreement denials and offer in compromise rejections under IRC § 7122(e). The IRS Restructuring and Reform Act of 1998 directed, among other things, that the Office of Appeals ensure that an Appeals Officer is regularly available within each state. See RRA 98 §§ 1001(a)(4); 3465(b). In recent years, the Office of Appeals has eliminated offices in some states and substituted a system of traveling Appeals Officers. Under this system, visits may not be sufficiently frequent or sufficiently spread throughout the state to make meetings accessible to taxpayers.

⁵⁰See Volume 2: Research Study: A Comparison of Revenue Officers and the Automated Collection System in Addressing Similar Employment Tax Delinquencies, infra.

⁵¹ In an effort to reduce costs, the IRS has been trying for years to persuade taxpayers to make greater use of the Internet in the hope it can reduce taxpayer demand for more costly telephone and walk-in services. While Internet usage has indeed increased, the 54 percent increase in telephone calls from taxpayers seeking to reach a CSR over the past decade demonstrates that the need for personal contact, far from decreasing, has risen substantially at the same time.

⁵²See GAO, GAO-14-169, Financial Audit: IRS's Fiscal Years 2013 and 2012 Financial Statements 26 (Dec. 2013).

⁵³Id. at 76.

⁵⁴ IRS Chief Financial Officer, Corporate Budget.

⁵⁵Hearing to Consider the Nomination of John Andrew Koskinen to Be Commissioner of Internal Revenue, Hearing Before the S. Comm. on Finance,113th Cong. (Dec. 10-11, 2013) (citing Treasury Inspector General for Tax Administration, Ref. No. 2013-30-078, Trends in Compliance Activities Through Fiscal Year 2012 (Aug. 2013)). See also Charles O. Rossotti, Many Unhappy Returns: One Man's Quest to Turn Around the Most Unpopular Organization in America 278 (2005) ("When I talked to business friends about my job at the IRS, they were always surprised when I said that the most intractable part of the job, by far, was dealing with the IRS budget. The reaction was usually 'Why should that be a problem? If you need a little money to bring in a lot of money, why wouldn't you be able to get it?'").

⁵⁶See Congressional Budget and Impoundment Control Act, Pub. L. No. 93-344, § 302(b)(1), 88 Stat. 297, 308 (1974) (providing that the Appropriations Committee of each House shall subdivide its allocation of funding under the annual budget resolution among its subcommittees). The "program integrity cap adjustment" mechanism, which we discuss in the text below, is a limited but in our view flawed exception to this rule.

⁵⁷See National Taxpayer Advocate 2006 Annual Report to Congress 442-457 (Legislative Recommendation: Revising Congressional Budget Procedures to Improve IRS Funding Decisions).

⁵⁸See Department of the Treasury, General Explanations of the Administration's Fiscal Year 2014 Revenue Proposals 187 (Apr. 2013).

⁵⁹See Volume 2: Research Study: Small Business Compliance: Further Analysis of Influential Factors, infra.

⁶⁰See id.

⁶¹See Volume 2: Research Study: A Comparison of Revenue Officers and the Automated Collection System in Addressing Similar Employment Tax Delinquencies, infra.

⁶² GAO, GAO-14-169, Financial Audit: IRS's Fiscal Years 2013 and 2012 Financial Statements 24 (Dec. 2013).

⁶³Id. at 76.

⁶⁴ Budget of the United States Government: Analytical Perspectives, Supplemental Materials, Fiscal Year 2014: Table 32-1, Federal Programs by Agency and Account, at 304-305, available at http://www.whitehouse.gov/sites/default/files/omb/budget/fy2014/assets/32_1.pdf. Taxpayer service spending is shown on the top line, which is labeled "Taxpayer Services: Appropriations, discretionary . . . 803." Enforcement spending is the sum of the line labeled "Federal law enforcement activities: Appropriations, discretionary . . . 751" and the line labeled "Central fiscal operations: Appropriations, discretionary . . . 803." Over the FY 2014 through FY 2023 period, these projections show that Taxpayer Services spending would rise by 23 percent, while Enforcement spending would increase by 54 percent.

⁶⁵ In our past annual reports, we have written about local compliance initiatives the IRS has undertaken that include integrated enforcement and outreach and education components. See, e.g., National Taxpayer Advocate 2008 Annual Report to Congress 176-192 (Most Serious Problem: Local Compliance Initiatives Have Great Potential but Face Significant Challenges). One example: In the early 1990s, the IRS launched an initiative designed to address noncompliance by fishermen in Alaska that resulted from confusion as well as community norms and attitudes. The IRS combined stepped-up enforcement activities with an extensive outreach and education campaign in remote fishing villages and on fishing vessels that included assisting with tax return preparation and training local volunteers to assist taxpayers. By the end of the initiative, the number of nonfilers among the target population declined by 30 percent. Id. at 177-178.

John Koskinen, Commissioner of Internal Revenue

DEFINITION OF PROBLEM

The IRS mission is to "provide America's taxpayers top-quality service by helping them understand and meet their tax responsibilities and enforce the law with integrity and fairness to all."¹ With a complex and constantly changing tax law, it is essential that IRS employees receive prompt and appropriate training and education in order to provide taxpayers with complete and accurate service. However, budget cuts and sequestration have led the IRS to reduce its training budget by over 85 percent since fiscal year (FY) 2009.² Most of the IRS operating divisions that interact directly with taxpayers fared worse than the agency as a whole. Lacking appropriate training and education, IRS employees will be unable to fulfill their mission, and service to taxpayers will continue to erode.³

• In FY 2013, the IRS spent less than $250 per employee on training compared to $1,450 per employee in FY 2009, a reduction of over 83 percent.⁴

• The IRS created two review boards, the Training Review Board and the Video Review Board, in FY 2013 to review training requests for recommendation to the Deputy Commissioner for Operations Support.

• The Deputy Commissioner for Operations Support declined approval for over 35 percent of proposed courses between April and June of 2013.⁵

• Training hours delivered to employees in key job series have been reduced by as much as 89 percent since FY 2009.⁶

ANALYSIS OF PROBLEM

The IRS has drastically reduced spending on employee training.

 

FIGURE 1.3.1, IRS Training Budget, FY 2009-2013¹⁰

 

IRS Employee Training Budget

 

 

 

• The Tax Exempt and Government Entities division slashed its training budget by almost 96 percent, or approximately $7 million;¹⁴

• The Small Business/Self-Employed division training budget declined by 93 percent;

• The Large Business and International division training budget fell by about 92 percent;

• The Taxpayer Advocate Service decreased its training budget by almost 78 percent; and

• Wage and Investment fared the best, weathering a nearly 74 percent decrease.¹⁵

• The IRS is providing less training to employees.

• Investigating and interviewing taxpayers (and those associated with their businesses);

• Fact finding;

• Examining business records to determine if tax liabilities have been accurately reported;

• Researching precedential court decisions; and

• Communicating complex audit findings to taxpayers and their representatives, including the RO's interpretation of the tax laws and regulations.¹⁸

 

FIGURE 1.3.2, Courses Offered In Person to TE/GE Tax Examiners

 

in FY 2009²³

 

 

 

 

FIGURE 1.3.3, Courses offered in person to TE/GE Tax Examiners

 

in FY 2013²⁴

 

 

 

• Accurately and promptly determine assessment statute dates;

• Respond to complex statute-related questions from reviewers and management; and

• Determine if statute expiration dates could interfere with tax accounts.²⁶

Of even greater concern are the courses that the operating divisions have substituted for substantive training on interviewing skills, interpretation of the law, and research. In FY 2013, Tax Examiners in Appeals were offered courses in topics such as furlough time-keeping, preparing for Windows 7 and Microsoft Office 2010, resume writing, and organizational change.²⁸ Courses offered to Tax Examiners in FY 2009, but eliminated in FY 2013, include Fundamental Tax Law, Processing Resolutions and Closing Collection Due Process Cases, and Communications Skills, all core functions of the Tax Examiner job series.²⁹ If the IRS fails to train employees in the substantive knowledge and skills they need to perform their jobs successfully, taxpayers cannot expect to receive assistance from employees with the knowledge and skills to help them.

• The authority to approve conferences with a total cost of under $3,000 remains with the agency;

• For the IRS, the Commissioner may approve costs of $3,000-$24,999;

• Spending of $25,000-$99,999 must be approved by the Assistant Secretary for Management of Treasury;

• Spending of $100,000-$249,999 requires the approval of the Deputy Treasury Secretary; and

• All amounts above $250,000 must be approved by the Treasury Secretary.³²

Following the directive, the IRS in July granted the authority to approve conference amounts of under $3,000 to the heads of the business divisions, such as the National Taxpayer Advocate, the Chief of Appeals, or the Commissioner of W&I.³³ However, the IRS added the requirement that any training event, even if it falls under the $3,000 threshold, must be recommended for approval by the IRS Training Review Board (TRB).³⁴ While final approval on any training lies with the Commissioner, the new TRB uses the following criteria to make recommendations to the Commissioner:³⁵

• Is the training event mission critical?

• Can costs be reduced or eliminated, including travel, course materials, development costs, and/or vendor costs by use of alternative training methods?

• Can a less costly venue be used?

• Can the training event be conducted in a location where the majority of students are located or travel can be minimized?

• Can the training event be effectively converted to online learning and delivered virtually?

• Can participation in a vendor-taught event be maximized and thus reduce the number of classes?

• Can the number of attendees recommended be justified?

While the IRS needs to ensure that appropriate training is provided to employees, punishing an entire organization and the millions of taxpayers it serves as a result of the misguided actions of one IRS business unit is neither wise nor effective.³⁶ From April through June 2013, the operating divisions proposed over $15 million in spending for training.³⁷ The Deputy Commissioner for Operations Support recommended approval of only 25 percent of those dollars.³⁸ Courses not recommend for approval include:

• Training in Basic Offers In Compromise (OIC) for new Appeals Settlement Officers who had not previously been trained or had any experience in working OIC cases;

• An in-person training for LB&I International Examiner new hires covering penalties, allocation and apportionment, branch profits tax, corporate mergers, and acquisitions in a case study and group discussion format;

• Basic employment tax training for new SB/SE Revenue Agents (auditors); and

• Core filing season training in basic tax law for new W&I Field Assistance employees.³⁹

Failure to Train Employees will Harm Taxpayers

Taxpayers seeking assistance and relief from the IRS will find a workforce lacking the knowledge and ability to provide assistance if the IRS continues to meet budgetary obligations by simply not training its employees. While the National Taxpayer Advocate is well aware of the budgetary constraints, and is subject to a similar inability to provide certain core training to TAS employees, she believes the IRS cannot continue denying basic and essential training to employees. An untrained workforce is one that does not understand basic taxpayer rights, a problem underscored by an already limited training in that area.⁴¹

Beyond being ill-prepared to protect taxpayer rights, an employee untrained in the core functions of his or her job may provide limited assistance, reach the wrong conclusion for the taxpayer, or be unable to provide any assistance at all. The IRS is charged with administering the tax law -- an ever-expanding, complex set of rules and requirements -- which its employees cannot possibly do without adequate training. If taxpayers cannot turn to the IRS for assistance, they may have no option but to pay a tax professional or attempt to research a confusing law on their own. Some may simply choose to give up, causing even more problems for themselves and the IRS. Consequences to the taxpayers for non-compliance or errors in interpretation of the tax law include liens on homes, levies on paychecks or bank accounts, and destruction of credit records.⁴²

The IRS says that it recognizes the need for and importance of training its employees. The then-Principal Deputy Commissioner wrote in his initial assessment of the IRS:

• The IRS limited employee travel and training to mission-critical projects beginning in FY 2011. Training travel alone has been reduced by $83 million from FY 2010 to FY 2012.

• The IRS has expanded the use of alternative delivery methods for in-person meetings, training, conferences, and operational travel. The IRS estimates that, by the end of FY 2013, training costs will have been reduced by about 83 percent and training-related travel costs by 87 percent when compared to FY 2010 levels.⁴⁴

CONCLUSION

IRS employees administer a complicated, ever-changing set of tax laws that are difficult to interpret and apply. A workforce lacking proper (or any) training in how to perform core job functions will be unable to provide service to taxpayers. Taxpayers will be harmed when they cannot contact the IRS and be assured that they will receive a prompt and correct answer to their inquiries or proper resolution of their account issues. The IRS cannot continue to meet budgetary obligations at the expense of training employees.

RECOMMENDATIONS

The National Taxpayer Advocate recommends that the IRS:

² IRS response to TAS research request (Nov. 22, 2013). In fiscal year (FY) 2009, the IRS spent $153,155,686 on training versus $22,574,539 in FY 2013, a reduction of 85.26 percent. The IRS training budget includes both training and conferences.

³ The IRS's training effort was determined as follows. In a research request, TAS asked the IRS to provide the training budget by operating division from FY 2009 through FY 2013. TAS identified 15 key taxpayer-facing job series in the five main IRS operating divisions (Wage & Investment (W&I), Small Business/Self-Employed (SB/SE), Tax Exempt and Government Entities (TE/GE), Appeals, and Large Business and International (LB&I)). We asked the IRS to provide, by job series, the training titles, number of students in each session, and number of hours per course for FYs 2009 and 2013. TAS also requested that the IRS break training hours down into two categories: in-person training (in person is defined as coached self-study, instructor-led classroom, on-the-job training and paper-based self-study) and virtual training (virtual training is defined as online, computer-based, CD or DVD, Electronic Knowledge Product, interactive video tele-training (IVT) studio produced). TAS acknowledges that the IRS may provide training in individual offices on an ad hoc basis that is not recorded in a formal manner in IRS training databases. This type of training has always occurred and we are treating it as a constant. In this piece, we have focused on formal training provided across the IRS.

⁴ IRS, Human Resources Reporting Center, available at https://persinfo.web.irs.gov/ (last visited Oct. 22, 2013). The IRS had 105,783 employees as of the last week of FY 2009 and spent $153,155,686 on training. In the last week of FY 2013, the IRS had 94,378 employees and spent $22,574,539 on training. Per employee, the IRS spent $1,447.83 in FY 2009 and only $239.19 in FY 2013. The IRS spent 83.48 percent less per employee on training in FY 2013 compared to FY 2009. IRS response to TAS Research Request (Nov. 22, 2013).

⁵ IRS response to TAS research request (Sept. 16, 2013). Training was proposed between April and June 2013.

⁶ IRS response to TAS research request (Nov. 22, 2013). For example, total training hours provided to Small Business/Self-Employed Revenue Officers in FY 2013 decreased by 89.29 percent, Large Business International Revenue Agents received 68.45 percent fewer hours of training in FY 2013, Tax Exempt Government Entity Tax Examiners received 80.63 percent fewer hours of training in FY 2013.

⁷ For a complete discussion of the National Taxpayer Advocate's concerns regarding IRS employee training in taxpayer rights, see Most Serious Problem: Insufficient Education and Training About Taxpayer Rights Impairs IRS Employees' Ability to Assist Taxpayers and Protect Their Rights, infra/supra. For a further discussion of the National Taxpayer Advocate's concerns about the impact of the failure to properly train IRS employees,see Most Serious Problem: The Automated Collection System's Flawed Approach to Working Cases and the Types of Cases it Works Results in Low Collection Yields and Harms Taxpayers, infra/supra; and Most Serious Problem: Indian Tribal Taxpayers: Inadequate Consideration of Their Unique Needs Causes Burdens, infra/supra.

⁸ Budget Control Act of 2011, Pub. L. No. 112-25.

⁹See Department of the Treasury, FY 2014 Budget in Brief, available at http://www.treasury.gov/about/budget-performance/budget-in-brief/Pages/index_14.aspx (last visited Sept. 26, 2013) and Department of the Treasury, FY 2012 Budget in Brief, available at http://www.treasury.gov/about/budget-performance/budget-in-brief/Pages/index_12.aspx (last visited Sept. 26, 2013).

¹⁰ IRS response to TAS research request (Nov. 22, 2013).

¹¹ IRS response to TAS research request (Sept. 16, 2013). In FY 2009, the IRS spent $153,155,686 on training versus $22,574,539 in FY 2013, a reduction of 85.26 percent.

¹² IRS, Human Resources Reporting Center, available at https://persinfo.web.irs.gov/ (last visited Oct. 22, 2013).

¹³ IRS response to TAS research request (Nov. 22, 2013). The Appeals division spent $5,803,332 on training in FY 2009 compared to $250,408 in FY 2013, a 95.68 percent decrease.

¹⁴Id. TE/GE's training budget was reduced from $7,121,332 in FY 2009 to $316,263 in FY 2013, a 95.56 percent decrease.

¹⁵ IRS response to TAS research request (Nov. 22, 2013). SB/SE spent $52,391,207 in FY 2009 compared to $3,582,641 in FY 2013, a 93.16 percent decrease. LB&I's budget decreased from $11,738,428 in FY 2009 to $975,278, a 91.69 percent reduction. TAS spent $4,929,483 in FY 2009 and $1,091,310 in FY 2013, a 77.86 percent decrease. W&I spent $15,310,478 in FY 2009 compared to $3,987,023 in FY 2013, a 73.96 percent decrease.

¹⁶ IRS response to TAS research request (Nov. 22, 2013). TAS requested information from the IRS on 15 key taxpayer facing job series across the five main IRS operating divisions. In all but two job series examined, training hours delivered to employees decreased significantly since FY 2009. The W&I 0592 (Tax Examiner) and W&I 0962 (Contact Representative) job series employees received substantially similar hours of training in FY 2009 and FY 2013.

¹⁷Id. In FY 2009, SB/SE provided 713,935 hours of training to its Revenue Officers, compared to 76,448 hours in FY 2013, an 89.29 percent decrease.

¹⁸ IRS, Standard Position Description GS-1169-12.

¹⁹ For a complete discussion of the National Taxpayer Advocate's concerns regarding IRS employee training in taxpayer rights, see Most Serious Problem: Insufficient Education and Training About Taxpayer Rights Impairs IRS Employees' Ability to Assist Taxpayers and Protect Their Rights, infra/supra. For a further discussion of the National Taxpayer Advocate's concerns about the impact of the failure to properly train IRS employees,see Most Serious Problem: The Automated Collection System's Flawed Approach to Working Cases and the Types of Cases It Works Results in Low Collection Yields and Harms Taxpayers, infra/supra; Most Serious Problem: Indian Tribal Taxpayers: Inadequate Consideration of Their Unique Needs Causes Burdens, infra/supra; and National Taxpayer Advocate's Report to the Acting Commissioner, Toward a More Perfect Tax System: A Taxpayer Bill of Rights as a Framework for Effective Tax Administration (Nov. 4, 2013).

²⁰ IRS response to TAS research request (Nov. 22, 2013). In FY 2009, SB/SE offered 2,263 courses to employees in the Revenue Officer 1169 job series compared to 925 course offerings in FY 2013, a 59.12 percent reduction in course offerings.

²¹Id.

²²Id.

²³ IRS response to TAS research request (Nov. 22, 2013). In FY 2009, SB/SE offered 2,263 courses to employees in the Revenue Officer 1169 job series compared to 925 course offerings in FY 2013, a 59.12 percent reduction in course offerings.

²⁴ IRS response to TAS research request (Sept. 16, 2013).

²⁵ IRS, Standard Position Description GS-0592-072.

²⁶Id.

²⁷ IRS response to TAS research request (Sept. 16, 2013). TE/GE Tax Examiners received 5,711 hours of training total in FY 2009 compared to 1,106 hours in FY 2013, an 80.63 percent reduction.

²⁸ IRS response to TAS research request (Nov. 22, 2013).

²⁹Id.

³⁰ Office of Management and Budget, Memorandum to the Heads of Executive Departments, and Agencies (May 11, 2012).

³¹ Department of Treasury, Treasury Directive 12-70 (May 6, 2013), available at http://www.treasury.gov/about/role-of-treasury/orders-directives/Pages/td12-70.aspx (last visited Sept. 30, 2013).

³² Department of Treasury, Treasury Directive 12-70 (May 6, 2013), available at http://www.treasury.gov/about/role-of-treasury/orders-directives/Pages/td12-70.aspx (last visited Sept. 30, 2013).

³³ IRS, Interim Guidance Memorandum Interim Guidance on the Approval Process for Event Related Spending CFO-01-0713-05 (July 29, 2013).

³⁴ IRS, Treasury Directive 12-70 -- FAQs (June 24, 2013), available at http://hco.web.irs.gov/devtrain/PROGADMIN/TrDir12-70/TRDirFAQ.html (last visited Sept. 30, 2013).

³⁵ IRS response to TAS research request (Sept. 16, 2013).

³⁶ Treasury Inspector General for Tax Administration, Ref. No. 2013-10-037, Review of the August 2010 Small Business/Self-Employed Division's Conference in Anaheim, California (May 13, 2013). See also the concerns raised by the National Taxpayer Advocate in the National Taxpayer Advocate Fiscal Year 2014 Objectives Report to Congress regarding the potential impact to all IRS training in light of the actions of employees at one conference.

³⁷ IRS response to TAS research request (Sept. 16, 2013). The operating divisions proposed $15,407,690 in training from April through June 2013.

³⁸Id. The Deputy Commissioner for Operations Support recommended approval of $3,884,099.

³⁹ IRS response to TAS research request (Sept. 16, 2013).

⁴⁰Id. The operating divisions proposed 767 courses between April 2013 and June 2013 and the Deputy Commissioner for Operations Support declined to approve 275 courses, a reduction of 35.85 percent.

⁴¹ For a full discussion of the National Taxpayer Advocate's concerns regarding the lack of training in taxpayer rights, see National Taxpayer Advocate's Report to the Acting Commissioner, Toward a More Perfect Tax System: A Taxpayer Bill of Rights as a Framework for Effective Tax Administration (Nov. 4, 2013) and Most Serious Problem: Insufficient Education and Training about Taxpayer Rights Impairs IRS Employees' Ability to Assist Taxpayers and Protect their Rights, infra.

⁴² For further discussion of the effects of noncompliance on taxpayers, see, e.g., Most Serious Problem: The Automated Collection System's Case Selection and Processes Result in Low Collection Yields and Poor Case Resolution, Thereby Harming Taxpayers and the Public Fisc, infra., and Most Serious Problem: Accuracy Related Penalties: The IRS Assessed Penalties Improperly, Refused to Abate Them, and Still Continues to Assess Them Automatically, infra.

⁴³ IRS, Charting a Path Forward at the IRS: Initial Assessment and Plan of Action (June 24, 2013) at 41.

⁴⁴Id.

While the Internal Revenue Code (IRC) guarantees certain rights to taxpayers, IRS employees do not always clearly communicate these rights to taxpayers at appropriate times. A recent nationwide survey found only 46 percent of U.S. taxpayers believed they have rights before the IRS, and only 11 percent knew what those rights were.¹ When employees inform taxpayers of their rights, they rely on Publication 1, Your Rights as a Taxpayer.² However, TAS focus groups indicate that taxpayers often do not read the publication.³

This lack of awareness of taxpayer rights is further compounded when IRS employees themselves do not sufficiently understand taxpayer rights. Only some employees receive initial training about taxpayer rights, and this information is not regularly reinforced during later periodic training, such as Continuing Professional Education (CPE). Information about taxpayer rights is scattered throughout the Internal Revenue Manual (IRM) and pertains to narrow circumstances or specific phases of taxpayers' dealings with the IRS. The IRS should provide employees with an overarching, comprehensive education about taxpayer rights, supplemented by training and guidance about how those rights adhere in specific situations.

ANALYSIS OF PROBLEM

The National Taxpayer Advocate has recommended that a Taxpayer Bill of Rights (TBOR), a list of fundamental taxpayer rights and obligations, modeled after the United States Constitution's Bill of Rights, be formally codified.⁵ However, the IRS does not have to wait for legislative action. As recommended in this year's Annual Report to Congress, the IRS could follow the lead of other countries by adopting a TBOR through a taxpayer charter or other administrative statement of agency policy.⁶ The TBOR would be a formal declaration of taxpayer rights and responsibilities written in plain language.⁷ It would not provide additional rights not already statutorily or administratively granted. A TBOR is an essential platform for employee training, for taxpayer education, and, ultimately, for enabling taxpayers and employees to reach just and fair resolutions of tax liabilities."⁸

• References to taxpayer rights;

• Guidance for employees to refer a taxpayer to a Low Income Taxpayer Clinic (LITC); and

• Instructions to provide Publication 1 where it is not currently required.

•  

  Examination¹¹

• The Core Competency Training for newly hired Revenue Agents (i.e., auditors or examiners) includes a 575-page participant guide, but only six paragraphs mention discussing taxpayer rights and the audit process with taxpayers.¹²

• For compliance employees¹³ working examination cases, taxpayer rights are covered as parts of various processes, for example, review of installment agreements; but the actual rights are not explicitly explained. The IRS's response to TAS's information request includes six Automated Underreporter courses that discuss representation. However, the response merely states, "Tax examiners are trained when and how to accept 3rd party representation."¹⁴ Issues relating to representation go beyond when and how to accept a power of attorney. The course should discuss informing taxpayers of their right to retain representation, as well as information on access to representation, including through Low Income Taxpayer Clinics that provide low to no-cost tax assistance.

• The Examination Toll-Free Telephone Assistor Training covers only selected taxpayer rights topics, such as taxpayer authentication and power of attorney.¹⁵ While the scripts used in the training touch on a taxpayer's right to appeal by discussing Tax Court deadlines, they lack comprehensive information explaining taxpayers' appeal rights, the significance of the Tax Court as a pre-payment judicial forum, and the consequences of failing to act.

• The fiscal year (FY) 2013 CPE schedule for Revenue Agents has six required and ten optional courses that focus primarily on technical topics, with no mention of taxpayer rights in the descriptions.¹⁶

• Tax Exempt/Government Entities (TE/GE) Division

• TE/GE has multiple courses for Revenue Agents that cover taxpayer rights. Chapter 1 of the Employee Plans Examination Phase II course includes an entire section on taxpayer rights.¹⁷ This training surpasses merely mentioning taxpayer rights. One section states: "Publication 1(EP) is mailed with the initial appointment letter and explains these rights and the examination process. This, however, is merely the first step."¹⁸ The course details how the employee must continue communicating taxpayer rights during the process. The Exempt Organizations Basic Law Course includes a roleplaying session where employees discuss Publication 1 with taxpayers and representatives.¹⁹

• Conversely, the TE/GE response showed Tax Examiners receive only one course on taxpayer rights, which is only for new hires and does not mention Publication 1. Taxpayer rights material includes two ten-minute mock interviews conducted by the instructors.²⁰

• Collection²¹

• The training module for newly hired Revenue Officers (ROs) provides a comprehensive introduction to taxpayer rights with two hours of lessons focusing on all aspects of rights related to collection.²²

• Automated Collection System (ACS) employees, who work the majority of IRS lien and levy cases,²³ have two lessons on taxpayer rights as part of the ACS Basic New Hire Course.²⁴ One lesson explains communicating with the taxpayer about appeal rights, and the other provides training on appeal rights after an installment agreement is denied. Unlike the RO training, there is no stand-alone course that emphasizes overall rights.²⁵

• ACS's e-guide is lacking when it comes to explaining and educating taxpayers on their rights as they go through the collection process.²⁶ For example, the "Refusal to Pay Situations" section of the e-guide advises the employee to tell the taxpayer that if he or she cannot pay, the IRS will take enforcement action.²⁷ There is no emphasis on explaining rights, specifically appeal rights or collection due process hearings.

• Office of Appeals

• The Appeals Basic Training Course for new hires contains numerous references to appeal rights, including advising employees to explain these rights to the taxpayer at different points in the process. However, most of the course deals with procedures without emphasizing the taxpayer rights underlying those procedures. For example, the mediation training contains information about how a taxpayer can request mediation, the modification of ex-parte rules in mediation, and impartiality; but the course is mainly focused on how to conduct a mediation and reach a mutually acceptable agreement rather than on explaining and preserving foundational taxpayer rights in the process.

• The FY 2013 Appeals CPE schedule includes ten Customer Satisfaction courses, nine of which are from an outside vendor and focused on customer relationships in the private sector, along with one internal course on Cultural Competence and Effective Communication.²⁸ While the courses may encourage effective communication, they do not discuss taxpayer rights at all.

• The Internal Revenue Manual (IRM) frequently lacks comprehensive information about taxpayer rights and their importance for due process and fair tax administration.

Another example of the IRM failing to properly educate employees is the section regarding transferring taxpayer examinations to a field office.³¹ The IRM cites Treas. Reg. 301.7605-1(e)(2), which provides that requests for transferring an exam are generally granted. However, the IRM fails to explain this procedure as an aspect of the taxpayer's right to be heard. Instead the IRM instructs employees to rely on a decision tree (If/Then) chart, which, in turn, directs the examiner to "provide assurance that the issue can be resolved at the campus" when a taxpayer requests a transfer to an area office.³² Employees may simply rely on the chart without understanding how a taxpayer's request for a local transfer may be vital to that taxpayer being able to present his case in the format most conducive to his concerns being heard. If the request is viewed as simply an inventory and work assignment problem rather than the realization of a fundamental taxpayer right, the employee may discourage or improperly dissuade a taxpayer from making a legitimate request.

IRM sections sometimes instruct employees to take a specific action as a part of a process or procedure without explaining the underlying taxpayer right. In examination cases where the IRS issues a statutory notice of deficiency and the taxpayer requests additional time to respond, the IRM advises employees to inform the taxpayer that any extension to submit documents will not extend the time to petition the Tax Court.³³ However, employees may not understand why this is important for taxpayers, i.e., if the taxpayer does not petition the Tax Court within a certain number of days, he or she will lose the ability to challenge the liability in Tax Court, which is the only federal judicial forum available to litigate a tax liability before paying the tax first.³⁴

As these examples demonstrate, the lack of comprehensive information about taxpayer rights may be detrimental to employees' ability to assist taxpayers and protect their rights. The IRS could improve employees' understanding of fundamental taxpayer rights by incorporating the TBOR in the IRM and including examples of potential impact in key enforcement sections such as Lien and Levy actions in Collection, and Statutory Notices of Deficiency in Exam.

What the IRS needs is an improved Publication 1, and additional documents that explain the application of these rights in particular contexts, such as examination (Publication 1-E), collection (Publication 1-C), and appeals (Publication 1-A). This multi-step approach would enable taxpayers to:

The majority of taxpayers with compliance issues, whose cases are worked by ACS or correspondence exam, will never receive a phone or in-person contact, and thus will never receive an explanation of their rights. Many of these taxpayers are unrepresented and thus unlikely to know their rights. Providing employees with expanded versions of Publication 1 that contain more detailed information about taxpayer rights would give employees a tool to use in explaining these rights to taxpayers and ensuring they understand them.

• "This one looked just like another balance due notice."

• The new notice is "[b]ordering on deceptive and coercive for the less sophisticated."

• "I did a double take because it looked just like a collection notice. The previous client had the normal notice of deficiency. What a stark contrast!"⁴²

• Educate the taxpayer on his or her rights throughout the collection process;

• Ensure the taxpayer's rights are observed and protected throughout the process;

• Protect the confidentiality of taxpayer return and case-related information; and

• Accurately explain the collection process throughout the case progression.⁴⁶

In addition, case quality scores do not include taxpayer rights measurements, other than ascertaining whether the employee provided the taxpayer with the required written notice or Publication 1. For example, the Office of Appeals Case Quality standards include "Did Appeals Provide Appropriate Taxpayer Customer Service and Respect Taxpayer's Rights?"⁴⁹ To meet the standard of informing the taxpayer, employees only have to provide the Uniform Acknowledgement Letter timely (within 30 days of case receipt in Appeals) and communicate the status of the case within a reasonable time (generally every 90 days) until Appeals completes processing. Employees can demonstrate that the taxpayer was informed of his or her rights, including appeal rights, by providing the taxpayer with notices and publications. In contrast, TAS includes in its case quality attributes a measure for whether the employee educated the taxpayer and explained preventive actions to taxpayers. The IRS should adopt similar measures.

CONCLUSION

Many taxpayers have no knowledge of their rights, including specific rights that arise in certain situations or their fundamental rights as taxpayers. When employees also lack comprehensive knowledge of these rights, they may end up taking actions or establishing polices that violate these rights and harm taxpayers. At a time when the IRS budget is forcing difficult decisions across the agency, protecting taxpayer rights is more important than ever.

RECOMMENDATIONS

The National Taxpayer Advocate recommends the IRS:

² The Technical and Miscellaneous Revenue Act of 1988 requires the IRS to distribute to taxpayers a statement of their rights and the obligations of the IRS during an audit when the IRS contacts the taxpayer regarding the determination or collection of tax. See Pub. L. No. 100-647, 102 Stat 3342 (1988). The IRS generally satisfies this requirement by providing taxpayers with Publication 1.

³ 2011 IRS Nationwide Tax Forums TAS Focus Group Report,

⁴ For example, the right of a taxpayer to be informed is included in a number of different IRC provisions. IRC § 6213(a) requires the IRS to provide a notice of deficiency at least 90 days (150 days for taxpayers residing abroad) before it can take collection action. This notice informs taxpayers of the right to petition Tax Court and, as required by IRC § 7522(a), and must describe the basis for and the amount of tax, interest, and penalties due. IRC § 6330 requires the IRS to notify taxpayers 30 days before a levy and provide the amount of unpaid tax, the IRS's proposed action, the IRC provisions relating to levy, the procedures available to the IRS, the administrative appeals available to the taxpayer, and the alternatives available to prevent the levy. IRC § 6320(a) requires the IRS to notify a taxpayer of federal tax lien within five days of when the lien is filed.

⁵See National Taxpayer Advocate 2011 Annual Report to Congress 493-518; National Taxpayer Advocate 2007 Annual Report to Congress 478-89.

⁶See OECD Committee of Fiscal Affairs Forum on Tax Administration, Centre for Tax Policy and Administration, GAP002, Taxpayers' Rights and Obligations 3 (2003), available at http://www.oecd.org/ctp/taxadministration/14990856.pdf (analyzing survey results published in 1990).

⁷See OECD Committee of Fiscal Affairs Forum on Tax Administration, Centre for Tax Policy and Administration, GAP002, Taxpayers' Rights and Obligations 6 (2003), available at http://www.oecd.org/ctp/taxadministration/14990856.pdf (analyzing survey results published in 1990).

⁸See Most Serious Problem: Taxpayer Rights: The IRS Should Adopt a Taxpayer Bill of Rights as a Framework for Effective Tax Administration, supra. See also National Taxpayer Advocate's Report to the Acting Commissioner, Toward a More Perfect Tax System: A Taxpayer Bill of Rights as a Framework for Effective Tax Administration (Nov. 4, 2013).

⁹See IRS, Charting a Path Forward at the IRS: Initial Assessment and Plan of Action 34 (June 24, 2013), available at http://www.irs.gov/uac/Newsroom/IRS-Charts-a-Path-Forward-with-Immediate-Actions.

¹⁰ National Taxpayer Advocate's Report to the Acting Commissioner, Toward a More Perfect Tax System: A Taxpayer Bill of Rights as a Framework for Effective Tax Administration (Nov. 4, 2013), available at (insert link). See Most Serious Problem: Taxpayer Rights: The IRS Should Adopt a Taxpayer Bill of Rights as a Framework for Effective Tax Administration, supra.

¹¹ This section pertains to examination employees in the Small Business/Self-Employed (SB/SE) Operating Division and the Wage and Investment (W&I) Operating Division.

¹² SB/SE Core Competency Training 29689-102 (May 2011).

¹³ Compliance employees include examination and collection employees, primarily in centralized locations.

¹⁴ IRS response to TAS information request (Oct. 22, 2013).

¹⁵ Exam Toll-Free Telephone Assistor Training Course 12256-102 (Rev. June 2013).

¹⁶ IRS, FY 13 Exam CPE, Mandatory Lessons (June 28, 2013); FY 13 Exam CPE, Optional Lessons (July 18, 2013).

¹⁷See IRS response to TAS information request (Sept. 19, 2013).

¹⁸ Employee Plans Examinations -- Phase II course, Chapter 1 Pre-Contact Analysis/Pre-Audit, 11313-002, 1-37 (course delivered Jan. 31, 2013).

¹⁹See IRS response to TAS information request (Sept. 19, 2013).

²⁰See id.

²¹ This section pertains to employees in Field Collection, part of the SB/SE Division and employees in the Automated Collection System, part of the Wage and Investment (W&I) Division.

²² IRS, Revenue Officer Training Unit 1, Module I Introduction to Taxpayer Rights Overview (Apr. 2012).

²³ In fiscal year (FY) 2013, there were: 638,793 field levies versus 1,216,302 ACS levies; 63,944 field installment agreements versus 699,200 ACS installment agreements; and 228,318 currently not collectible field cases versus 346,576 currently not collectible ACS cases. Collection Activity Reports No. 5000-24 (Oct. 29, 2013), No. 5000-6 (Oct. 29, 2013), No. 5000-149 (Oct. 29, 2013). Currently not collectible numbers are hardship only.

²⁴See IRS response to TAS information request (Oct. 17, 2013) (discussing the ACS Basic-Taxpayer Appeal Rights and the ACS Basic-Independent Review).

²⁵Id.

²⁶ The e-guide provides employees with an ongoing reference and source of education while on the job. See IRM 5.19.16.3.1 (Oct. 25, 2011).

²⁷ ACS E-guide, Refusal to Pay (July 23, 2013).

²⁸ FY13CPE_TopicSchedule.xls posted on the IRS Office of Appeals internal website (last modified July 1, 2013).

²⁹ IRM 5.19.8.4.1 (Aug. 27, 2010).

³⁰ IRC § 6330(c)(3). Congress created CDP hearings not merely to ascertain whether the collection action was warranted, but, inter alia, to verify that the IRS had followed proper procedures in filing the lien or notice of levy and whether collection alternatives had been considered.

³¹ IRM 4.19.13.14.1 (Aug. 1, 2012).

³² IRM 4.19.13.14.1 (Aug. 1, 2012).

³³ IRM 4.19.13.9.6 (Apr. 9, 2012).

³⁴See IRC § 6213(a).

³⁵See IRS, Charting a Path Forward at the IRS: Initial Assessment and Plan of Action 34 (June 24, 2013), available at http://www.irs.gov/file_source/PUP/newsroom/Initial%20Assessment%20and%20Plan%20of%20Action.pdf. The Technical and Miscellaneous Revenue Act of 1988 requires the IRS to distribute to taxpayers a statement of their rights and the obligations of the IRS during an audit when the IRS contacts the taxpayer regarding the determination or collection of tax. Pub. L. No. 100-647, § 6227, 102 Stat 3342, 3731 (1988).

³⁶ An example is the Revenue Agent's classroom training, which teaches that employees can accomplish the task of informing taxpayers of their rights by providing Publication 1 and Privacy Act Notice 609. Revenue Agent Basic Classroom 1 Training, Trng. 31828-102, 9-20.

³⁷See, e.g., IRM 4.23.3.7.5 (July 19, 2013) (requiring examination employees to provide Publication 1 to taxpayers with initial contact letters regarding an employment tax exam); IRM 4.81.5.6.1 (Oct. 1, 2009) (requiring tax exempt bonds examination employees to include Publication 1 with all examination letters pursuant to IRC § 7521(b)(1)(A)).

³⁸ As part of the initial contact, field collection employees must determine whether the taxpayer received Publication, ask the taxpayer if he or she has any questions about Publication 1, and answer those questions. IRM 5.1.10.3.2 (Oct. 28, 2011). Exam employees who make initial contact by phone or in person must explain the taxpayer's rights as outlined in Publication 1 and answer any questions the taxpayer may have. This generally only applies to field examiners because correspondence examiners generally contact the taxpayer by letter. IRM 4.10.2.7.3 (Aug. 1, 2007).

³⁹ In fiscal year 2013, there were: 638,793 field levies versus 1,216,302 ACS levies; 63,944 field installment agreements versus 699,200 ACS installment agreements; and 228,318 currently not collectible field cases versus 346,576 currently not collectible ACS cases. Collection Activity Reports No. 5000-24 (Oct. 29, 2013), No. 5000-6 (Oct. 29, 2013), No. 5000-149 (Oct. 29, 2013). Currently not collectible numbers are hardship only.

⁴⁰ IRS Data Book, Fiscal Year 2012, Table 9a, Examination Coverage: Recommended and Average Recommended Additional Tax After Examination, by Type and Size of Return. There were 1,122,216 correspondence exams in FY 2012 out of 1,481,966 total examinations.

⁴¹See IRS, Understanding Your CP3219A Notice, http://www.irs.gov/Individuals/Understanding-Your-CP3219A-Notice for a sample CP 3219A notice (page last updated or reviewed Nov. 1, 2013).

⁴² Comments from ABA-Tax Low Income Taxpayer Clinic Discussion (Oct. 10, 2013).

⁴³ IRS, Guidelines for Developing Critical Job Element (CJE) Performance Plans.

⁴⁴Id.

⁴⁵See Performance Plan for Revenue Officer Advisor/Reviewer and Revenue Officer/Independent Administrative Reviewer GS-1169 (Mar. 2006).

⁴⁶Id.

⁴⁷See Performance Plan for Customer Service Representative GS-0962 (Dec. 2004).

⁴⁸ In fiscal year 2013, there were: 638,793 field levies versus 1,216,302 ACS levies; 63,944 field installment agreements versus 699,200 ACS installment agreements; and 228,318 currently not collectible field cases versus 346,576 currently not collectible ACS cases. Collection Activity Reports No. 5000-24 (Oct. 29, 2013), No. 5000-6 (Oct. 29, 2013), No. 5000-149 (Oct. 29, 2013). Currently not collectible numbers are hardship only.

⁴⁹ Appeals Quality Measurement System Reviewer's Guide for Non-Collection Cases Standard 1, Did Appeals Provide Appropriate Customer Service and Respect Taxpayers' Rights? 29-63 (Revised Oct. 1, 2012).

John Koskinen, Commissioner of Internal Revenue

DEFINITION OF PROBLEM

The IRS collects more than 90 percent of all federal revenue ($2.52 trillion in fiscal year 2012), with the largest portion coming from the individual income tax.¹ For tax year (TY) 2011, taxpayers filed about 142 million 1040-series individual returns,² with nearly 79 million taxpayers using paid preparers.³ More than half (over 42 million) of these returns were prepared by preparers who are unregulated by the IRS.⁴

As preparers play a critical role in tax administration, it is essential that the IRS ensure that they are competent, visible, and accountable. In fact, the IRS was recently implementing a program to impose minimum competency requirements on the tax preparation profession. However, in Loving v. Internal Revenue Service,, the District Court for the District of Columbia enjoined the IRS from further enforcing the testing and continuing education components of the program.⁵ Thus, unless the District Court's ruling is overturned on appeal, U.S. taxpayers will continue to find themselves without meaningful IRS oversight of preparers, where anyone can hang out a shingle as a "tax return preparer" with no knowledge or experience required.

The case for IRS oversight over the return preparation industry is clear. Problems with return accuracy and ethical standards were substantiated by a series of "shopping visits" the Government Accountability Office (GAO) and the Treasury Inspector General for Tax Administration (TIGTA) conducted, where auditors posed as taxpayers and visited tax return preparation businesses.⁶ Accordingly, the National Taxpayer Advocate continues to recommend that the IRS establish minimum standards for return preparers as an essential consumer protection measure. Minimum standards would also improve professionalism and reduce preparer-facilitated noncompliance.⁷

While the question of regulatory authority is ultimately up to the courts to decide, the IRS has the responsibility to protect taxpayers by pursuing education and enforcement options that are undeniably within its purview. In the event that the courts decide that the IRS does not have authority to impose testing and continuing education requirements on preparers, the National Taxpayer Advocate urges the IRS to implement the following six-part strategy to protect taxpayers from preparer incompetence and misconduct:

Tax Year 2011 Returns Filed by Preparer Type*

 

 

 

The National Taxpayer Advocate's recommendations to regulate the return preparer profession received widespread support. Most organizations representing established preparers supported her call for minimum industry standards. For example, in 2005 the House Ways and Means Subcommittee on Oversight held a hearing at which representatives of five outside organizations testified in support of regulating return preparers.⁹ Preparer oversight has received similarly broad support from members of Congress. The Senate Finance Committee has twice approved legislation to regulate federal tax return preparers (once under Democratic and once under Republican control).¹⁰ The full Senate also once approved similar legislation.¹¹ However, the House of Representatives never took up companion measures. More recently, several bills included proposals to regulate preparers -- S.1219, the Taxpayer Protection and Assistance Act of 2007; H.R. 5716, the Taxpayer Bill of Rights Act of 2008; and S. 3215, the Taxpayer Bill of Rights of 2010.¹² All of these bills would have required preparers to have the knowledge and skills to prepare accurate returns.¹³

Under Chevron, the court must first ask if Congress's intent in enacting the statute giving rise to the challenged government action -- here, the regulation -- is clear. If so, the court must give full effect to this expressed intent of Congress. Pursuant to 31 U.S.C. § 330(a)(1), Congress granted the Secretary of the Treasury authority to "regulate the practice of representatives of persons before the Department of the Treasury." The Chevron analysis turns on how "practice of representatives" is defined in the context of tax return preparation.

In Loving, the District Court reasoned that the statute equates "practice of representatives" to the presentation of a case before the IRS, and held that the mere preparation of a return for submission to the IRS does not amount to "practicing" before the IRS.²⁰ Thus, the District Court held that the statute unambiguously limits the IRS's authority to regulate the "practice of representatives." Therefore, under a Chevron analysis, 31 U.S.C. § 330(a)(1) does not authorize the Secretary of Treasury to regulate the practice of representatives who prepare federal tax returns on behalf of other persons for filing with, and review by, the IRS.²¹ The Justice Department has appealed the District Court's decision.²²

Tax return filing is almost always "presenting a case" and return preparers are representatives before the IRS when they advise and assist taxpayers in making their claims to the IRS and Treasury.²⁶ More than 80 percent of individual income tax returns are actually claims for refund under IRC § 6402, and nearly 80 percent of those refund returns are prepared by preparers.²⁷

In addition, IRC § 6695(g) imposes due diligence requirements for paid preparers of individual income tax returns claiming the EITC and a penalty of $500 for each failure to comply with the requirements. The regulations thereunder require the preparer to complete and submit Form 8867, Paid Preparer's Earned Income Credit Checklist, which includes a series of questions to determine the taxpayer's eligibility as well as the preparer's affirmative acknowledgement that he or she complied with the due diligence requirements. The preparer must also complete an EITC worksheet, and comply with recordkeeping and knowledge requirements.²⁸

The due diligence requirements result in the preparer anticipating and preparing for an IRS challenge to the taxpayer's eligibility for EITC by answering certain questions, verifying to the IRS that the preparer asked certain questions and retained documentation probative of eligibility. In TY 2012, over 76 percent of preparers who prepared returns claiming EITC were unenrolled.²⁹ The chart below provides further information on EITC claims and the use of preparers in tax years 2010 through 2012:

      TABLE 1.5.1, The Preparation of EITC Claims by Unenrolled Preparers

       TABLE 1.5.2, Taxpayers Claiming Refundable Credits, Claim Amounts,

The IRS sought to remedy this issue by imposing examination and continuing education requirements on preparers with no previously recognized credentials -- unenrolled return preparers. Those preparers could satisfy the IRS's requirements and obtain the designation "registered tax return preparer" if they satisfied the program requirements. However, the current injunction imposed on the IRS by Loving prohibits the IRS from administering the testing and education components of the program. Therefore, after Loving, once again, anyone can hang up a shingle and be a return preparer.

Without any regulation, we will continue to see a proliferation of return preparers showing up at check-cashing places, pawnshops, used car dealerships, furniture stores, etc. Anyone who doubts we have devolved into the Wild Wild West of tax return preparation should view two videos. The first is an advertisement for some type of services related to tax returns.³⁶ The second is a slideshow of photographs taken by Local Taxpayer Advocates in 2010 showing the variety of businesses touting tax preparation services.³⁷ In addition, the amicus brief of the National Consumer Law Center and the National Community Tax Coalition in Loving contains many examples of the virtual absence of professionalism and competency.³⁸

Finally, over the past several years, the need for regulation of these preparers has become even more apparent at the Taxpayer Advocate Service. We recently have seen many misconduct cases in which the return preparers have altered return information without their clients' knowledge or consent in an attempt to obtain improperly inflated refunds or divert refunds for their personal benefit.³⁹

At the time when Treasury granted unenrolled preparers this limited practice authority, the role of a tax preparer required skill and knowledge of tax laws. Revenue Procedure 81-38 provides that the preparer of the return under audit could assist in the exam by explaining the positions taken.⁴² However, as noted above, the advent of commercial preparation and filing software has radically changed the profession by enabling anyone to prepare a return without any training in the tax law. Thus, return preparation by an untrained individual with commercial software does not position that individual to competently assist the taxpayer in the examination.

Representing a taxpayer before Examination requires a certain level of knowledge, competence and skill, the absence of which can have a significant economic impact on the taxpayer. If the courts decide return preparation is not "presenting a case" before the IRS because it is mere preparation, it is in the best interest of taxpayers to restrict the authority granted to unenrolled return preparers to conduct limited practice before the IRS. Unenrolled preparers may not possess the requisite skill and knowledge to represent taxpayers at any level before the IRS.

To ensure that taxpayers have knowledgeable and skilled representation, the IRS should condition the authority for an unenrolled preparer to represent his or her preparation-clients in audits on his or her passing a competency test and satisfying annual continuing education requirements. This approach does not impinge on a preparer's ability to prepare a return. Even the plaintiffs in Loving raised no objection to the IRS regulating practitioners who wish to represent taxpayers during an examination.⁴³ If, as the Loving plaintiffs state, these unenrolled preparers are "merely" preparing returns -- being scriveners -- then, absent passing a test and satisfying continuing education requirements to demonstrate competency, they clearly should not be permitted to represent taxpayers in audits of returns.

Therefore, the National Taxpayer Advocate recommends revising all guidance to ensure that only competent unenrolled preparers have the authority to represent taxpayers under exam with respect to returns they have prepared. Accordingly, revisions are necessary to the current guidance provided by:

• Revenue Procedure 81-38;

• Circular 230⁴⁴ (any references relating to the authorization for unenrolled preparers to represent taxpayers in audits of returns they have prepared and signed); and

• 26 C.F.R. § 601.502(b)(5)(iii)).

• Restrict the Ability to Name an Unenrolled Preparer as a Third Party Designee on Form 1040.

OPR is considering excepting from such prohibition those preparers who are licensed by the IRS or a state licensing body.⁴⁷ The National Taxpayer Advocate believes OPR's position merits further investigation.

In addition, it is unclear whether restricting third party designees on Form 1040 would impact the authorization granted to an appointee in Form 8821, Tax Information Authorization. If the taxpayer appoints a preparer on Form 8821, the taxpayer does not authorize the appointee to advocate a position with respect to federal tax laws; to execute waivers, consents, or closing agreements; or to otherwise represent the taxpayer before the IRS.⁴⁸ In contrast to the Form 8821 designee, the Third Party Designee authorization on the Form 1040 authorizes the designee to both provide information and receive information, which is one step closer to acting as the taxpayer's agent. This issue requires further analysis.

Another cost-effective way to reach the unenrolled preparer population is through webinars, podcasts and other social media channels to deliver messages impacting vulnerable taxpayers, such as the EITC due diligence requirements in IRC § 6695(g).⁵⁵ The IRS currently focuses preparer education on EITC and other refundable credits. However, it has not changed its overall outreach and education strategy for preparers in response to Loving.⁵⁶

In addition to education and outreach, the IRS has a wide array of enforcement tools to encourage compliance among return preparers. The IRS can assess Title 26 penalties as well as impose sanctions under Circular 230 (under Title 31), which is generally enforced by the Office of Professional Responsibility.⁵⁷ However, the IRS has not altered its compliance strategies in response to the Loving opinion.⁵⁸ While the National Taxpayer Advocate believes prevention in the form of taxpayer and preparer education and outreach is the most effective way to protect taxpayers, the IRS must enhance its compliance initiatives if it can no longer mandate minimum competency standards.

SB/SE Examination conducts preparer outreach visits as directed by the IRS Return Preparer Office (RPO) and W&I's return preparer offices. Total outreach visits decreased by 10.5 percent from FY 2012 to FY 2013. In addition, visits conducted as part of the Return Preparer Visitation Program (RPVP), to address PTIN requirements, e-file requirements, and Schedule C preparation, declined from FY 2012 to FY 2013, by approximately 10.7 percent.⁵⁹

 

FIGURE 1.5.3, SB/SE Exam Visits

 

SB/SE Examination Visits FY 2012-FY 2013

 

 

 

The National Taxpayer Advocate encourages the IRS to develop a Servicewide Return Preparer Strategy similar in nature to the FY 2014 EITC Return Preparer Strategy. The IRS developed this strategy over several years and based it on findings from a three-year EITC Real Time Return Preparer Test. The IRS has completed two years of the test during 2012 and 2013 and evaluated the effectiveness of several treatment streams both pre-filing season and post filing season, including various letters, phone calls, due diligence visits, knock-and-talk visits, and audits. According to the IRS, evaluation of the results showed that the test protected nearly $600 million in revenue during the 2013 filing season.⁶² The IRS used the findings of the first two years of the test to design the FY 2014 Return Preparer Strategy, which utilizes improved and research-driven selection techniques and assigns progressive treatments based on the preparer's risk of segment.⁶³ The National Taxpayer Advocate believes that the IRS should build on the experience of this strategy to develop a servicewide return preparer compliance strategy.

CONCLUSION

Until the IRS is allowed to resume the implementation of the testing and continuing education components of the return preparer program, taxpayers are vulnerable to incompetent and unscrupulous preparers. The IRS and the Taxpayer Advocate Service can assist taxpayers by educating them about the various precautions they can take to prevent becoming a victim. Without the ability to impose minimum standards on unenrolled return preparers, the IRS's only avenue to address competency issues is through targeted outreach and education to this population. However, the IRS is actually decreasing the amount of resources allocated to the tax forums, which has historically been an effective way to reach unenrolled return preparers. It has also significantly decreased preparer outreach visits. Finally, the IRS has not taken steps to enhance its return preparer compliance strategy in response to the Loving decision.

RECOMMENDATIONS

Until the IRS is able to continue implementing the testing and continuing education requirements of the return preparer program, the National Taxpayer Advocate recommends that the IRS develop a six-part servicewide return preparer strategy with the following components:

² The TY 2011 returns were prepared in 2012. For TY 2011, the IRS received 142,424,022 individual income tax returns. IRS Compliance Data Warehouse, Individual Returns Transaction File, TY 2011 (filed through Mar. 2013).

³ IRS Compliance Data Warehouse, Individual Returns Transaction File and Return Preparers and Providers Database, TY 2011 (filed through Mar. 2013).

⁴ For a more detailed discussion of this data and its import, see Nina E. Olson, More Than a 'Mere' Preparer: Loving and Return Preparation, 2013 TNT 92-31 , Tax Analysts Tax Notes Today (May 13, 2013). IRS Compliance Data Warehouse, Individual Returns Transaction File and Return Preparers and Providers Database, TY 2011 (filed through Mar. 2013). The category "unregulated preparer" reflects returns prepared by individuals with preparer tax identification numbers who did not list a profession when registering with the IRS. IRS Compliance Data Warehouse, Individual Returns Transaction File and Return Preparers and Providers Database, TY 2011 (filed through Mar. 2013). IRS records show about one million returns as paid preparer returns that did not have a Preparer Tax Identification Number (PTIN) match in the Return Preparers and Providers Database.

⁵ 111 A.F.T.R.2d (RIA) 589 (D.D.C. Jan. 18, 2013).

⁶ Government Accountability Office, GAO-06-563T, Paid Tax Return Preparers: In a Limited Study, Chain Preparers Made Serious Errors 2 (Apr. 4, 2006) (statement of Michael Brostek, Director -- Strategic Issues, Before the Committee on Finance, U.S. Senate); Treasury Inspector General for Tax Administration (TIGTA), Ref. No. 2008-40-171, Most Tax Returns Prepared by a Limited Sample of Unenrolled Preparers Contained Significant Errors (Sept. 3, 2008).

⁷ By statute, the IRS cannot require attorneys and accountants to pass the competency exam or satisfy continuing education requirements to prepare returns. 5 U.S.C §§ 500(b) & (c) grant attorneys and certified public accountants, respectively, the authority to represent clients before federal agencies (upon submitting a written declaration stating that he or she is currently qualified).

⁸ National Taxpayer Advocate 2009 Annual Report to Congress 41-69; National Taxpayer Advocate 2008 Annual Report to Congress 503-512; National Taxpayer Advocate 2006 Annual Report to Congress 197-221; National Taxpayer Advocate 2005 Annual Report to Congress 223-237; National Taxpayer Advocate 2004 Annual Report to Congress 67-88; National Taxpayer Advocate 2003 Annual Report to Congress 270-301; National Taxpayer Advocate 2002 Annual Report to Congress 216-230; Fraud in Income Tax Return Preparation: Hearing Before the Subcomm. on Oversight of the H. Comm. on Ways and Means, 109th Cong. (2005) (statement of Nina E. Olson, National Taxpayer Advocate).

⁹ The organizations were the American Bar Association, the American Institute of Certified Public Accountants, the National Association of Enrolled Agents, the National Society of Accountants, and the National Association of Tax Professionals. See Fraud in Income Tax Return Preparation: Hearing Before the Subcomm. on Oversight of the H. Comm. on Ways & Means, 109th Cong. (2005).

¹⁰ H.R. 1528 (incorporating S. 882) (108th Cong.); S. 1321 (incorporating S. 832) (109th Cong.).

¹¹ H.R. 1528 (incorporating S. 882) (108th Cong.).

¹² S. 1219, § 4, 110th Cong. (2007); H.R. 5716, § 4, 110th Cong. (2008); S. 3215, § 202. 111th Cong. (2010).

¹³See also GAO, GAO-08-781, Oregon's Regulatory Regime May Lead to Improved Federal Tax Return Accuracy and Provides a Possible Model for National Regulation (Aug. 15, 2008).

¹⁴ IRS Publication 4832, Return Preparer Review (Dec. 2009).

¹⁵ Treas. Reg. § 1.6109-2(d).

¹⁶ 31 C.F.R. §§ 10.4(c) (testing) and 10.6(e) (continuing education).

¹⁷See IRS News Release, IR-2010-106, IRS Begins Notifying Tax Return Preparers on PTIN Renewals (Oct. 25, 2010).

¹⁸ IRS News Release, IR-2011-111, IRS Moves to Next Phase of Return Preparer Initiative; New Competency Test to Begin (Nov. 22, 2011).

¹⁹Chevron U.S.A., Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837, 842-43 (1984). ''If the intent of Congress is clear, that is the end of the matter; for the court, as well as the agency, must give effect to the unambiguously expressed intent of Congress" (step one). If, however, the reviewing court determines that the statute is ambiguous or silent regarding Congress's intent, the court must ask whether the agency position ''is based on a permissible construction of the statute'' (step two).

²⁰Loving v. IRS, 917 F. Supp. 2d 67 (D.D.C. Jan. 18, 2013). The government filed a motion to suspend the injunction pending appeal. The U.S. District Court for the District of Columbia denied the motion but then modified the terms of the injunction to make clear that the IRS is not required to suspend the preparer tax identification number (PTIN) program, and not required to shut down all of its testing and continuing centers. See Loving, 111 A.F.T.R.2d (RIA) 702 (D.D.C. Feb. 1, 2013). On February 25, 2013, the government filed a motion for a stay pending appeal. On March 27, 2013, the U.S. District Court for the District of Columbia denied the motion for stay. Loving, 111 A.F.T.R.2d (RIA) 1384 (D.D.C. Mar. 27, 2013). Oral argument was held before the Court of Appeals for the D.C. Circuit on September 24, 2013.

²¹Loving v. IRS, 917 F. Supp. 2d 67 (D.D.C. Jan. 18, 2013).

²²See Government Files Brief in D.C. Circuit Court in Return Preparer Oversight Case, 2013 TNT 62-20 , Tax Analysts Tax Notes Today (Apr. 3, 2013); Loving v. IRS, No. 1:12-cv-00385 (D.D.C. 2013) (USCA Case No. 13-5061). The oral arguments were held at the D.C. Circuit on September 24,2013. See Matthew R. Madara, Appeals Judges Turn Skeptical Eye Toward IRS Return Preparer Requirements,Tax Analysts Tax Notes Today (Sept. 24, 2013).

²³ For a more detailed discussion of the National Taxpayer Advocate's views, see Nina E. Olson, More Than a 'Mere' Preparer: Loving and Return Preparation, 2013 TNT 92-31 , Tax Analysts Tax Notes Today (May 13, 2013).

²⁴Loving v. IRS, 917 F. Supp. 2d 67, 74 (D.D.C. Jan. 18, 2013). The Secretary of the Treasury has the authority to require that a representative demonstrate:

²⁵See also Brief of Former Commissioners of Internal Revenue as amici curiae, supporting defendants-appellants, Loving v. IRS, No. 13-5061 (D.C. Cir. filed Apr. 5, 2013).

²⁶See Lawrence B. Gibbs, Loving v. IRS: Treasury Has the Authority to Regulate Unregulated Commercial Preparers, 2013 TNT 203-50 , Tax Analysts Tax Notes Today (Oct. 21, 2013). In the article, the former IRS Commissioner argues in favor of the government's position and provides that the preparation of a return is the presentation of a case. Moreover, the article analogizes the preparation of return to the preparation of a will, which is undeniably considered representation, despite the absence of a principal-agent relationship.

²⁷ For TY 2011, the IRS received 142,424,022 individual income tax returns, of which 114,511,777 (80.4 percent) claimed refunds. IRS Compliance Data Warehouse, Individual Returns Transaction File, TY 2011 (filed through Mar. 2013). For TY 2011, preparers prepared 79,008,158 individual returns, of which 61,680,140 (78.1 percent) claimed refunds. IRS Compliance Data Warehouse, Individual Returns Transaction File, TY 2011 (filed through Mar. 2013).

²⁸ Treas. Reg. § 1.6695-2. For tax returns and claims for refund for tax years ending on or after December 31, 2011, preparers are required to submit Form 8867, with the taxpayer's return. T.D. 9570. This recent revision is consistent with recommendations made by the National Taxpayer Advocate in 2003. National Taxpayer Advocate 2003 Annual Report to Congress 270-302. The knowledge requirement provides that the preparer have no knowledge that any of the information used to determine if a taxpayer is eligible for the EITC is incorrect.

²⁹ IRS, Returns Preparer and Provider Database.

³⁰ IRS, Compliance Data Warehouse Individual Returns Transaction File; IRS, Individual Master File (net of transactions 764, 765, and 768); IRS, Returns Preparer and Provider Database (through Nov. 2013) (Note that the amounts paid out by the IRS may have been subsequently disallowed in post-refund audits).

³¹ IRS, Submission Processing Miscellaneous Monitoring Report, Headquarters, ERS (IMF/BMF) 2013 vs. 2012 (week ending Sept. 27, 2013).

³² Individual Returns Transaction File (IRTF) tax module table from CDW tax year 2012 (transaction codes 604, 605,and 743) (Oct. 2013). For a detailed description of the path a return takes from submission to assessment and refund issuance, and all the possible controversies arising from that path, see Nina E. Olson, More Than a 'Mere' Preparer: Loving and Return Preparation, 2013 TNT 92-31 , Tax Analysts Tax Notes Today (May 13, 2013).

³³ IRS Compliance Data Warehouse (CDW), Individual Returns Transaction File and Individual Master File, TY 2010 and 2011 (through Mar. 2013).

³⁴ Results of Google search "Professional Tax Preparation Software Price" (Apr. 30, 2013).

³⁵ Government Accountability Office, GAO-06-563T, Paid Tax Return Preparers: In a Limited Study, Chain Preparers Made Serious Errors 5, 23 (Apr. 4, 2006) (finding preparers made significant mistakes on 17 of the 19 returns prepared for GAO employees posing as taxpayers, including the omission of income on ten); TIGTA, Ref. No. 2008-40-171, Most Tax Returns Prepared by a Limited Sample of Unenrolled Preparers Contained Significant Errors 2 (Sept. 3, 2008) (finding preparers made mistakes on 17 of the 28 returns prepared for TIGTA employees posing as taxpayers, including six willful or reckless errors).

³⁶http://www.youtube.com/watch?v=W00BmbrIvHk&sns=em (Southern King Taxes promotional video) (last viewed Dec. 10, 2013).

³⁷ Taxpayer Advocate Service, Tax Preparation Sites Across the United States: A Random Selection of Services Marketed to U.S. Taxpayers, available at http://www.taxpayeradvocate.irs.gov/preparervideo (Dec. 10, 2013).

³⁸ Brief of National Consumer Law Center and National Community Tax Coalition, as amici curiae, supporting defendants-appellants, Loving v. IRS, No. 13-5061 (D.C. Cir. filed Apr. 5, 2013) (Doc. #1429234). See also National Consumer Law Center, Riddled Returns: How Errors and Fraud by Paid Tax Preparers Put Consumers at Risk and What States Can Do (Nov. 2013), available at http://www.nclc.org/issues/riddled-returns.html (last visited Dec. 20, 2013).

³⁹ For a more detailed description of return preparer misconduct and IRS procedures to assist victims of the misconduct, see Most Serious Problem: The IRS Still Refuses to Issue Refunds to Victims of Return Preparer Fraud, Despite Ample Guidance Allowing the Payment of Such Refunds, supra;National Taxpayer Advocate Fiscal Year 2014 Objectives Report to Congress 1-4; National Taxpayer Advocate 2012 Annual Report to Congress 68-94 (Most Serious Problem: The IRS Harms Victims of Return Preparer Misconduct by Failing to Resolve Their Accounts Fully).

⁴⁰ Section 10.7 of Circular 230 (31 C.F.R. § 10.7) was amended before Loving to remove the authorization for unenrolled, unlicensed individuals to represent before the agency on returns they signed. However, Notice 2011-6, 2011-3 I.R.B. 315 provided interim authority for these individuals to represent in this context during "the transition years" of the return preparer program. It is the opinion of the Office of Professional Responsibility (OPR) that this anticipated temporary authority should be amended to remove this privilege. OPR response to TAS information request 5 (Oct. 31, 2013).

⁴¹ 31 C.F.R. § 10.3(f)(3).

⁴²See Rev. Proc. 81-38, 1981-2 C.B. 592.

⁴³Loving v. IRS, 917 F. Supp. 2d 67, 71 (D.D.C. Jan. 18, 2013).

⁴⁴ 31 C.F.R. Part 10.

⁴⁵ OPR response to TAS information request 5 (Oct. 31, 2013).

⁴⁶ However, the prohibition should clearly exclude persons not in the business of preparing returns, such as parents preparing their child's return.

⁴⁷ OPR response to TAS information request 5 (Oct. 31, 2013).

⁴⁸ Instructions, Form 8821, Tax Information Authorization.

⁴⁹ W&I response to TAS information request (Dec. 20, 2013). The IRS will refer taxpayers who visit the TACs for tax preparation to the nearest volunteer site for tax return preparation.

⁵⁰ The communication should clearly provide that the taxpayer should not select a preparer based on the promised size of the refund.

⁵¹ The Taxpayer Advocate Service developed a poster (IRS Publication 5074, Protect Your Refund), and distributed copies to all W&I taxpayer assistance centers (TACs) and low income taxpayer clinic (LITC) offices. The communication should instruct the taxpayer to require the preparer to include the preparer's name and address on the return.

⁵² OPR response to TAS information request 3 (Oct. 31, 2013).

⁵³ IRS National Public Liaison response to TAS information request. The IRS made presentations on EITC at the 2012 and 2013 Tax Forums. W&I response to TAS information request 3 (Oct. 28, 2013). In addition, OPR also presented three levels of training at the Tax Forums in 2013. OPR response to TAS information request (Oct. 31, 2013).

⁵⁴ See National Taxpayer Advocate Fiscal Year 2014 Objectives Report to Congress 51-53.

⁵⁵ The IRS held webinars on the topic of EITC due diligence in both English and Spanish in 2012. W&I response to TAS information request 3 (Oct. 28, 2013). The IRS website includes comprehensive information about EITC due diligence requirements for preparers. See http://www.eitc.irs.gov/rptoolkit/dd/. OPR has also held webinar broadcasts, phone forums, and various other types of broadcasts, press releases, and face-to-face speaking engagements. OPR response to TAS information request (Oct. 31, 2013). RPO also conducts live webinars, video presentations and uses various social media channels. RPO response to TAS information request (Nov. 12, 2013).

⁵⁶ W&I response to TAS information request 2 (Oct. 28, 2013) (The IRS did notify examiners to limit education on its Knock and Talk Visits to just PTIN compliance after Loving). RPO has noted that its outreach and education has changed due to Loving in that there is a reduction in public speaking requests, and their education is directed more at individual preparers and related to program and tax compliance as well as complaints as opposed to more large preparer groups pre-Loving. RPO response to TAS information request (Nov. 12, 2013).

⁵⁷ See IRC §§ 6694, 6695, 6713 and 31 C.F.R. § 10.50.

⁵⁸ SB/SE response to TAS information request 2 (Nov. 5, 2013) ("SBSE Examination has not increased scrutiny and enforcement of return preparers in response to the injunction ordered by the District Court in Loving v. IRS. We have continued to identify, evaluate and conduct appropriate investigations of questionable return preparers referred to Examination or identified through compliance activity.").

⁵⁹ SB/SE response to TAS information request (Nov. 5, 2013). SB/SE Exam conducted a total of 3,406 preparer outreach visits in FY 2012 and decreased to 3,049 total visits in FY 2013. The number of planned total return preparer visits in FY 2013 was originally 3,434; however, visitations were reduced due to Hurricane Sandy. SB/SE Exam conducted 2,013 RPVP visits in FY 2012 and then dropped to only 1,798 visits in FY 2013. RPVP visits declined by approximately 10.7 percent from FY 2012 to FY 2013. In 2012, the RPVP visits consisted of both Schedule C and e-file mandate visits; however, in FY 2013 the visits were conducted and counted separately -- 1,113 Schedule C visits and 685 e-file mandate visits.

⁶⁰ OPR response to TAS information request 3 (Oct. 31, 2013). Section 10.8(a) and (c) were added to Cir 230 in the 2011 amendments to insure that ethical oversight of the expanded universe of Circular 230 practitioners was available during the transition period without regard to whether a preparer had tested (or was required to test).

⁶¹ Kristin Parillo, ABA Meeting: OPR and DOJ Coordinating Enforcement Against Return Preparers, 2013 TNT 185-9 , Tax Analysts Tax Notes Today (Sept. 24, 2013); OPR response to TAS information request (Oct. 31, 2013).

⁶² IRS W&I Research Analysis, Filing Season 2013 EITC Real Time Return Preparer Initial Findings/Recommendations (Dec. 5, 2013).

⁶³ FY 2014 EITC Return Preparer Strategy (Dec. 2013).

⁶⁴See National Taxpayer Advocate 2009 Annual Report to Congress 207 (recommending that the IRS require preparers of offers in compromise to sign the forms to enable the IRS to track such preparers).

Debra Holland, Commissioner, Wage and Investment Division Mary Howard, Director, Office of Privacy, Governmental Liaison, and Disclosure

DEFINITION OF PROBLEM

Tax-related identity theft continues to impose significant burdens on taxpayers and the IRS. Since 2004, the National Taxpayer Advocate has identified this issue as one of the "Most Serious Problems" faced by taxpayers in nearly every annual report submitted to Congress.¹ In addition, the National Taxpayer Advocate has testified at numerous hearings on this subject, including seven since the start of 2012.²

To its credit, the IRS has recognized identity theft as a major challenge and has devoted significant resources to addressing it. Yet the IRS still takes much too long to fully unwind the harm suffered by identity theft victims and issue refunds to the legitimate taxpayers. Moreover, the IRS has yet to implement an effective program for overseeing cases with multiple issues that require coordination among different IRS units, and is allowing too many victims to fall between the cracks of IRS bureaucracy. Thus, victim assistance overall, as well as the IRS's specialized but decentralized approach, continues to be inadequate.

To start, the IRS should rethink how it views identity theft. It must recognize that identity theft is a traumatic crime. A person's identity is core to his or her being -- when someone steals and uses your identity, it is an invasion of your person. The IRS's approach to assisting the victims ignores this important fact, and in many ways treats the victim as someone experiencing a minor inconvenience instead of a frightening personal disaster. The National Taxpayer Advocate believes the IRS should set up a centralized identity theft unit similar to the centralized innocent spouse unit that assists taxpayers who may have been victims of domestic abuse. Moreover, the IRS should assign one person within the centralized identity theft unit to work with the victim until all actions are taken to resolve all related tax issues; this is the approach that TAS takes with taxpayers that come to our office.

ANALYSIS OF PROBLEM

The IRS must recognize that victims of identity theft are not just experiencing minor tax issues, but are victims of a traumatic crime and re-evaluate its approach to identity theft victim assistance. The National Taxpayer Advocate suggests that the IRS adopt a design that mirrors its approach to aiding victims of domestic abuse who have filed for relief from joint and several liability, or "innocent spouse" relief and the Taxpayer Advocate Service's approach to taxpayers who experience significant hardship as a result of the IRS's actions or inaction.

In 1998, the IRS was given expanded authority for innocent spouse relief, following hearings that showed the IRS's handling of these cases was not only insensitive but often downright harmful to victims of psychological, physical, or financial abuse.⁵ In response, the IRS set up a dedicated unit, the Cincinnati Centralized Innocent Spouse Operation (CCISO), that handles cases by assigning one person to interact with the taxpayer.⁶ Employees in CCISO are trained in working with taxpayers in difficult and emotional situations.⁷ This approach has enabled the IRS to deal with these taxpayers in a sensitive manner. The IRS needs to adopt a similar approach with identity theft victims.

The Taxpayer Advocate Service operates in a similar manner to the innocent spouse unit. Each taxpayer whose case is accepted into TAS is assigned a single case advocate whose toll-free phone number is given to the taxpayer, and every Local Taxpayer Advocate office has a toll-free fax number, eliminating barriers to communication. TAS case advocates speak with the taxpayer to gather relevant information and perform initial triage, route requests to the appropriate unit (often to multiple units), negotiate timeframes for response, and track the IRS responses. TAS case advocates follow up to make sure the IRS meets those deadlines, and keeps the taxpayer updated on the case. If a case advocate will be on leave or otherwise unavailable for an extended time, he or she will find another case advocate or supervisor to conduct the follow-up actions so the case will not stall.

We believe the primary reason TAS can resolve identity theft cases in 87 days, while cases worked under normal IRS procedures can languish for more than a year,⁹ is because our customers work with a single point of contact who is responsible for all aspects of their cases.¹⁰ Although the cases are complex, TAS case advocates have achieved a relief rate of 87 percent in identity theft cases in FY 2013 (compared to 78 percent for TAS cases overall).¹¹ An overwhelming 94 percent of identity theft victims who come to TAS in fiscal year (FY) 2013 (through June) have expressed satisfaction (compared to a customer satisfaction score of 90 percent for TAS cases overall in that period).¹²

The IRS can and should operate in a similar manner when assisting identity theft victims. Such an approach may even save resources by cutting down on phone calls and correspondence from the victims. Taxpayers may have more patience if they are assigned a single caseworker who keeps them updated on their accounts. If the IRS wishes to conduct a pilot program, it could test whether these assumptions hold true.

In FY 2013, the IRS adopted a specialized approach under which each department (or "function") that deals with identity theft created a dedicated group of employees to work on those issues. Because identity theft cases can be complex, they sometimes require adjustments by multiple functions.¹⁴

 

FIGURE 1.6.1, Percent of TAS Identity Theft Cases with Multiple

 

Issue Codes, FY 2011-FY 2013¹⁵

 

TAS Identity Theft Closed Cases with Multiple Issue Codes

 

 

 

Although IRS guidance instructs those working identity theft cases to identify all taxpayer issues, including possible multiple year involvement,¹⁶ the current procedures under this specialized approach fall short of having this initial IRS employee be responsible for ensuring all issues are addressed. Under the current approach, the IRS employee working an identity theft case will look only at the one issue being worked by his or her particular function, and not assessing the taxpayer's problem holistically. Instead, because no single employee is responsible for the entirety of the case, the IRS is forcing the taxpayer to navigate an alphabet soup of departments, forms, and notices before the IRS can fully unwind the harm caused by the identity theft.¹⁷

The IRS has drafted a complex "transfer matrix" outlining situations in which a case must be routed from one specialized function to another. The National Taxpayer Advocate is concerned that routing cases among functions sequentially is inefficient, causing excessive delays. Based on TAS's experience with identity theft cases over the years, the National Taxpayer Advocate believes that transfers among functions will continue to be commonplace.

To illustrate the complexity of an identity theft case and how many "touches" the victim may have with various IRS functions, we have provided a detailed example in congressional testimony that shows how complex identity theft cases are and the multiple units and delays involved.¹⁸ The timeline below illustrates the complex and convoluted process that taxpayers may need to navigate to receive full resolution of their identity theft issue.¹⁹

 

FIGURE 1.6.2, ID Theft Cycle Time for Taxpayers

 

Cycle Time From the Taxpayer's Perspective in ID Theft

 

 

 

The Treasury Inspector General for Tax Administration (TIGTA) has confirmed that identity theft cases are complex and easy for the IRS to lose in the shuffle. In its May 2012 report on IRS identity theft victim assistance, TIGTA selected a sample of 17 identity theft cases and found the IRS had opened 58 separate cases to resolve the accounts of those 17 victims -- an average of nearly three and a half cases for each person.²¹ In a follow-up report released in September 2013, TIGTA found that the typical identity theft case was assigned to an average of 10 different assistors (some of whom were within the same function) prior to case resolution.²²

The National Taxpayer Advocate continues to believe the IRS should follow TAS's approach to case resolution, and allow the IPSU to "own" identity theft cases rather than simply "monitor" them. Yet five years after establishment of the IPSU, it is clear that the IRS has gone in the opposite direction and has adopted a decentralized approach to identity theft victim assistance, one that imposes undue burden on the victims and creates procedures that would make Rube Goldberg proud.²³

The IRS Should Track Cycle Time from the Perspective of the Victim.

Despite the commitment by former Commissioner Shulman in 2008 that the IRS would resolve identity theft victims' tax accounts "quickly and efficiently," the IRS does not know whether its processing time for identity theft cases has been increasing or decreasing.²⁴ While some IRS functions can track the length of time a case is in their inventory, the IRS still cannot provide an overall cycle time from the taxpayer's perspective. For example, specialized units generally measure cycle time solely from the date they receive the case; their cycle time measure does not reflect the time elapsed since the taxpayer filed his or her return or all of the interactions the victim had with the IRS prior to assignment to the function. Thus, the IRS cannot determine how well it has done in meeting this commitment to resolve identity theft cases "quickly and efficiently."

We recognize that cycle time start dates may differ depending on the facts and circumstances of the cases, but the IRS should be able to count cycle time in a way that more closely reflects the taxpayer's experience and more accurately flags overaged cases. Currently, as the above case example shows, an identity theft case might not be considered overaged until the victim has been in the system for more than a year.

In a September 2013 audit, the Treasury Inspector General for Tax Administration (TIGTA) reported the average cycle time for the 100-case sample of identity theft cases it reviewed was 312 days, including 277 days of inactivity.²⁵ In other words, though the cases lingered in various IRS units for 312 days or approximately ten months, the average case was resolved with just 35 days of direct contact.

The National Taxpayer Advocate is concerned that unless the IRS significantly changes its procedures to keep identity theft cases moving, cycle time will continue to increase in the coming year as the IRS struggles to keep up with its inventory. The fact that the IRS cannot accurately track the cycle time of an identity theft case from the perspective of the victim is astonishing, disappointing, and inexcusable.

The IRS Should Institute "Timeliness" Measures to Ensure Identity Theft Cases Do Not Languish.

TIGTA's 2013 report noted that the identity theft cases it reviewed showed an average of 277 days of inactivity.²⁶ The IRS should adopt an approach similar to TAS's "timeliness" goals that are intended to help our case advocates move cases along. For example, an IPSU employee could:

• Set a goal to contact the taxpayer within three to five days of case receipt, depending on the nature of the case;

• Develop a case action plan within three days of contact with the taxpayer;

• Issue a request to a function within three days of receiving all information from the taxpayer necessary to address the issue; and

• Follow up with the function within one day of a missed requested completion date.

The IRS Should Develop an Identity Theft Database or System Accessible to All Functions Working on Identity Theft Cases.

As noted above, the IRS does not track cycle time from the identity theft victim's perspective; rather, each specialized function tracks the cycle time of the particular aspect of an identity theft case within its silo. With many cases requiring action by multiple functions, the IRS cannot track these cases accurately.

By creating a servicewide platform for tracking and monitoring its cases, the IRS could accurately assess the inventory at a given time and measure cycle time from the date the taxpayer identities himself or herself as a victim of identity theft. Such a system would also allow seamless transfers of cases from one function to another. Additionally, a single identity theft database would allow functions to share information. Any employee could see if the taxpayer submitted documentation and what actions the other functions have taken, thereby helping to reduce duplicative actions.

Proposed Enhancements to the Identity Protection Personal Identification Number (IP PIN) Process Make It Easier for Victims to Protect Their Accounts

In January 2011, the IRS initiated a pilot program to issue an Identity Protection Personal Identification Number (IP PIN) to a select group of taxpayers with an active identity theft indicator on their account.²⁷ An IP PIN is a unique code that the taxpayer must use, along with his or her taxpayer identification number, to file electronically and bypass certain filters.²⁸ In prior years, taxpayers who lost, misplaced, or did not receive their IP PIN were required to contact the IRS to obtain a replacement IP PIN.²⁹ However, taxpayers who filed a return using a replacement IP PIN would be subject to delay in the processing of their return.

Effective in filing season 2014, the IRS is proposing to have taxpayers who have lost, misplaced, or never received their IP PIN retrieve their original IP PIN using an online application. This will allow the taxpayer's return to post to their account without additional delays. Under this proposal, only in instances where the taxpayer is unwilling or unable to use the online application will a replacement IP PIN be issued. We commend the IRS for considering this enhancement to the IP PIN program.

CONCLUSION

Identity theft causes significant problems for both the taxpayer and the IRS. IRS leadership has responded to this challenge not only by assigning more employees to work on identity theft but also by spending significant resources reengineering its victim assistance processes over the years.³⁰ Certainly, some improvements have been made. Yet the IRS is not where it needs to be on this serious taxpayer problem.

The IRS must design its processes around the key fact that victims of identity theft have suffered serious trauma and need a specially trained group of employees working identity theft cases, much like victims of spousal abuse who are helped by employees in the IRS's innocent spouse unit. One key component of such an approach is to ensure that the victim deals with a single employee within the IRS during the duration of the case. That employee will serve as a buffer between the victim and the complex processes and multiple functions necessary to resolve the problem.

Given the multiple points of contact, lengthy inactive periods, and first-in, first-out processing for each unit, we believe the IRS will find, if it adopts our suggestions, that it would actually require fewer resources to do the same volume of work. The National Taxpayer Advocate proposes that the IRS conduct a pilot program to test this hypothesis. In such a pilot program, the IRS could detail some of its IPSU employees to TAS and have them work identity theft cases in the same manner that TAS works them -- and then measure cycle time and extent of relief (addressing all issues) compared to a control sample of cases handled in the way IPSU currently does.

The National Taxpayer Advocate is confident that taxpayers -- our customers -- would be much more satisfied with their experience. Unless the IRS wants to continue to add to the victims' grief and trauma, it must do this. There is a clear choice here.

RECOMMENDATIONS

The National Taxpayer Advocate recommends that the IRS:

²See, e.g., Examining the Skyrocketing Problem of Identity Theft Related Tax Fraud at the IRS: Hearing Before the H. Comm. on Oversight and Government Reform, Subcomm. on Government Operations, 112th Cong. (2013) (statement of Nina E. Olson, National Taxpayer Advocate); Tax Fraud, Tax ID Theft, and Tax Reform: Moving Forward with Solutions: Hearing Before the S. Comm. on Finance, 112th Cong. (2013) (statement of Nina E. Olson, National Taxpayer Advocate).

³See T. Sharp et al., Exploring the Psychological and Somatic Impact of Identity Theft, J. of Forensic Sci., Vol. 49:131 (Jan. 2004); J. Monchuk, Researcher Finds the Psychological Effects of Identity Theft Lingers with Victims, (Apr. 20, 2011), available at http://medicalxpress.com/news/2011-04-psychological-effects-identity-theft-lingers.html.

⁴See Identity Theft Resource Center, ITRC Fact Sheet 108: Overcoming the Emotional Impact, http://www.idtheftcenter.org/Fact-Sheets/fs-108.html (last visited Dec. 13, 2013); L. Carey, Can PTSD Affect Victims of Identity Theft: Psychologists Say Yes (July 29, 2009), available at http://voices. yahoo.com/can-ptsd-affect-victims-identity-theft-psychologists-3915926.html.

⁵See IRC § 6015. "Innocent spouse relief" is frequently used to describe relief from joint and several liability under IRC § 6015(b). See also JointCommittee on Taxation, JCX-6-98, Present Law and Background Relating to the Treatment of "Innocent Spouses" (Feb. 9, 1998); IRS Restructuring (Innocent Spouse Tax Rules): Hearing Before the S. Comm. on Finance, 105th Cong. (1998).

⁶See Internal Revenue Manual (IRM) 25.15.7.4, First Read at the Cincinnati Centralized Innocent Spouse Operation (CCISO) Overview (Feb. 19,2013); IRM 25.15.8.2, Innocent Spouse Relief (Aug. 17, 2010); IRM 25.15.8.5.3.2, CCISO Processing (Aug. 17, 2010).

⁷See http://win.web.irs.gov/innocentspouse/innocent_jobaids.htm (intranet site).

⁸ IRS responses to TAS information request (Oct. 30, 2013, and Nov. 13, 2013).

⁹See TIGTA, Ref. No. 2012-040-050, Most Taxpayers Whose Identities Have Been Stolen to Commit Refund Fraud Do Not Receive Quality Customer Service (May 3, 2012); TIGTA, Ref. No. 2013-40-129, Case Processing Delays and Tax Account Errors Increased Hardship for Victims of Identity Theft (Sept. 26, 2013).

¹⁰ Analysis conducted by TAS Technical Analysis and Guidance of data obtained from TAMIS (Oct. 1, 2013).

¹¹Id.

¹² Analysis conducted by TAS Business Assessment of customer satisfaction scores reported for FY 2013 (through June 2013); data obtained from TAMIS (Oct. 1, 2013).

¹³See IRS response to TAS information request (Nov. 13, 2013). However, these employees are spread among more than 20 different groups within the IRS. IRS response to TAS information request (Oct. 30, 2013, and Nov. 13, 2013).

¹⁴ The IRS states that upwards of 20 different functions may touch an identity theft case. IRS responses to TAS information request (Oct. 30, 2013, and Nov. 13, 2013).

¹⁵ The IRS does not track the number of issues in a given identity theft case because, unlike TAS, it treats each module (year/tax/issue) as a different case. Accordingly, we can provide TAS data only. This chart is meant to illustrate that the vast majority of TAS identity theft cases involve multiple issue codes. The increase in the percentage of cases with multiple issue codes from FY 2011 to FY 2013 may be due to better coding by TAS case advocates to record secondary issue codes; it does not necessarily mean that TAS identity theft cases have become more complex in recent years.

¹⁶See IRM 10.5.3.2.1.2, Assessing Scope of Taxpayer's Issues (May 8, 2013).

¹⁷See Examining the Skyrocketing Problem of Identity Theft Related Tax Fraud at the IRS: Hearing Before the H. Comm. on Oversight and Government Reform, Subcomm. on Government Operations, 112th Cong. (2013) (chart included in statement of Nina E. Olson, National Taxpayer Advocate).

¹⁸See Examining the Skyrocketing Problem of Identity Theft Related Tax Fraud at the IRS: Hearing Before the H. Comm. on Oversight and Government Reform, Subcomm. on Government Operations, 112th Cong. (2013) (statement of Nina E. Olson, National Taxpayer Advocate), available at http://www.irs.gov/Advocate/National-Taxpayer-Advocate-Congressional-Testimony.

¹⁹ This example is not based on an actual or typical case; the timeline described is a hypothetical meant to show how many functions could be involved, and how much time could elapse, before an identity theft victim receives full relief. IRM 21.9.2.3, Identity Theft -- Telephone Overview (Oct. 1, 2013); Letter 5073C; IRM 3.11.3-1, Attachment Guide (Jul. 25, 2013); IRM 10.5.3.2.4.1, Multiple Function Criteria (MFC) Cases Requiring Referral to IPSU for Monitoring (May 8, 2013); IRM 21.6.2.4.2.3, Preliminary Research (Oct. 1, 2013) IRM 4.19.13.25.11, Referrals to CPAT/DITA (Apr. 4, 2013); IRM 21.9.2.4.2, Tax-Related Identity Theft -- (Andover and Fresno IPSU only) (Oct. 18, 2013).

²⁰ IRS responses to TAS information request (Oct. 30, 2013, and Nov. 13, 2013).

²¹See TIGTA, Ref. No. 2012-040-050, Most Taxpayers Whose Identities Have Been Stolen to Commit Refund Fraud Do Not Receive Quality Customer Service (May 3, 2012).

²²See TIGTA, Ref. No. 2013-40-129, Case Processing Delays and Tax Account Errors Increased Hardship for Victims of Identity Theft (Sept. 26, 2013).

²³ Merriam-Webster defines the adjective Rube Goldberg as "doing something simple in a very complicated way that is not necessary." See Merriam-Webster online dictionary, http://www.merriam-webster.com/dictionary/rube%20goldberg (last visited Nov. 21, 2013).

²⁴Identity Theft: Who's Got Your Number, Hearing Before the S. Comm. on Finance, 110th Cong. (2008) (response of IRS Commissioner Douglas H.Shulman to questions from Chairman Max Baucus), available at http://finance.senate.gov/hearings/hearing/download/?id=f989b16e-5da3-452d-9675-b75d796fe2b4.

²⁵See TIGTA, Ref. No. 2013-40-129, Case Processing Delays and Tax Account Errors Increased Hardship for Victims of Identity Theft (Sept. 26, 2013).

²⁶See TIGTA, Ref. No. 2013-40-129, Case Processing Delays and Tax Account Errors Increased Hardship for Victims of Identity Theft (Sept. 26, 2013).

²⁷ IRM 10.5.3.2.16(1), Identity Protection Personal Identifying Number (IP PIN) (Jan. 11, 2013).

²⁸ IRM 10.5.3.2.16, Identity Protection Personal Identifying Number (IP PIN) (Jan. 11, 2013).

²⁹ IRM 10.5.3.2.16(5), Identity Protection Personal Identifying Number (IP PIN) (Jan. 11, 2013).

³⁰ The latest example involved the hiring of an external consulting firm to lead the Identity Theft Assessment and Action Group, which recommended the adoption of a specialized approach to identity theft victim assistance.

Debra Holland, Commissioner, Wage and Investment Division

Karen Schiller, Commissioner, Small Business/Self-Employed Division

DEFINITION OF PROBLEM

The IRS is required by law to release a levy that it knows is causing an economic hardship due to the financial condition of the taxpayer.¹ In the Vinatieri case, the U.S. Tax Court held that when the IRS sustains even a proposed levy on a taxpayer it knows is in economic hardship, it abuses its discretion.² In spite of this ruling, in 2011 the IRS levied on the Social Security Administration (SSA) and Railroad Retirement Board (RRB) benefits of nearly 67,000 taxpayers belonging to a group the IRS considers likely to be experiencing economic hardship -- those whose incomes were less than 250 percent of the federal poverty level, or about $27,000 for a single person.³ The median income of taxpayers subject to these levies was at most about $17,500.⁴ The least amount of expenses the IRS would routinely allow, known as Allowable Living Expenses (ALE), added up to approximately $17,200 for a single person in 2011.⁵ Therefore, it is likely that the expenses of many taxpayers whose benefits were levied exceeded their incomes. The federal poverty level for a single person in 2011 was $10,890, meaning that some of the 67,000 taxpayers whose benefits were levied were likely actually living in poverty and not just considered to be low income.

The court in Vinatieri held that the fact that the taxpayer has unfiled returns does not justify proceeding with a levy if the taxpayer has shown he or she is in economic hardship.⁶ Of the nearly 67,000 low income (or possibly poverty-stricken) taxpayers whose federal payments the IRS levied, TAS determined that the IRS would have spared the accounts of nearly 41,000 -- more than half -- from the automatic levy program that triggered the levies, if not for these taxpayers' unfiled returns.⁷

Whether they are included in automated levy programs or subjected to levies on their wages or bank accounts, some taxpayers in economic hardship turn to TAS or low income taxpayer clinics (LITCs) for assistance in obtaining levy releases.⁸ Clinic directors report, and TAS cases confirm, that even when the IRS agrees these taxpayers are experiencing economic hardship, it continues to insist on receiving their unfiled returns as a condition of releasing the levies.⁹ When the IRS conditions levy release on securing delinquent returns from taxpayers who have shown they are in economic hardship, it burdens the taxpayers and creates unnecessary work for itself. Most importantly, the IRS in these cases acts in violation of the law, thereby subjecting itself to potential suit for negligent or reckless collection action.¹⁰

ANALYSIS OF PROBLEM

Background

In Vinatieri v. Commissioner, the Tax Court Clarified that Not Only is the IRS Required to Release Levies on Taxpayers who Have Shown they are in Economic Hardship, it Abuses its Discretion When it Sustains a Proposed Levy on These Taxpayers.

IRC § 6343(a)(1)(D) states that a levy shall be released if "the Secretary has determined that such levy is creating an economic hardship due to the financial condition of the taxpayer." Economic hardship "exists when a levy will cause an individual to be unable to pay his or her reasonable living expenses."¹¹ In the Vinatieri case, the IRS sent Ms. Vinatieri a notice of its intent to levy and of her right to a pre-levy collection due process (CDP) hearing. Ms. Vinatieri requested a hearing and demonstrated she was in economic hardship, but the Appeals Officer sustained the proposed levy. Relying on Internal Revenue Manual (IRM) provisions in effect at the time, the Appeals Officer cited Ms. Vinatieri's unfiled returns as justification for sustaining the proposed levy rather than placing the account into Currently Not Collectible (CNC) status.¹² The Tax Court held it was not appropriate to proceed with the levy given that IRC § 6343(a)(1)(D) requires the IRS to release a levy if it is causing economic hardship, and such economic hardship had already been shown. Sustaining a proposed levy that would have to be immediately released constituted an abuse of discretion.

Following the Vinatieri Decision, the IRS Changed Some Provisions of the IRM, but Training Materials, Electronic Job Aids, and Quality Standards Need Adjusting.

In the light of the Vinatieri holding, TAS worked with the IRS and the Office of Chief Counsel to revise the IRM.¹³ Various IRM provisions now make clear that unfiled returns are not an impediment to immediate levy release when a taxpayer is in economic hardship, and the account should be classified as CNC even if the taxpayer has unfiled returns.¹⁴ The IRS has also clarified how collection employees should handle the issue of unfiled returns when they talk with taxpayers.¹⁵ The National Taxpayer Advocate applauds the IRS for making these needed changes. They should be incorporated into IRS training materials and job aids, some of which are inadequate. For example, the materials the IRS used to train Automated Collection System (ACS) employees in 2011, 2012, and 2013 did not cover the holding in Vinatieri.¹⁶ Moreover, ACS employees and Compliance Services Collection Operation employees rely on automated decision trees, called e-guides, that have not been cleared through the appropriate IRS review process, including vetting by TAS.¹⁷ The IRS should update and vet these materials. More importantly, as the National Taxpayer Advocate has urged, the IRS should evaluate collection employees specifically on whether they recognized, considered, and addressed a taxpayer's economic hardship.¹⁸

The IRS Adopted a Filter Intended to Prevent Automatic Levies on Social Security Payments to Low Income Taxpayers, but Excluded Accounts of Taxpayers with Unfiled Returns from the Filter.

The IRS has the authority to issue a continuous levy on a variety of federal sources of income, including Social Security and Railroad Retirement Board benefits, and since 2000 has carried out automatic levies on these sources pursuant to the Federal Payment Levy Program (FPLP).¹⁹ The IRS has long recognized that most FPLP levies are on taxpayers' Social Security payments, and has sought to avoid levying on Social Security payments to low income taxpayers.²⁰ In 2002, the IRS developed a filter to exclude from the FPLP program the accounts of low income taxpayers, relying on the total positive income (TPI) reported on the taxpayer's last filed return as its sole measure of the taxpayer's financial situation.²¹ The IRS filter did not recognize that taxpayers may not have recently filed a return, making available data potentially dated and unreliable, and did not consider the possibility the taxpayer could have assets from which the tax liability could be paid. For these reasons, the General Accounting Office (GAO, now the Government Accountability Office) in 2003 questioned the effectiveness of the filter, and the IRS removed it in 2005.²² TAS cases with FPLP levies immediately increased sharply.²³

In 2008, TAS Research began to design, develop, and test an improved filtering or screening model.²⁴ The purpose of the low income filter was to identify and remove low income taxpayers that the model demonstrated would experience economic hardship and thus be entitled to immediate levy release under IRC § 6343(a)(1)(D). The new TAS model, in addition to using taxpayers' income information from filed individual income tax returns, used third-party payor documents supplied to the IRS to estimate the taxpayers' incomes.²⁵ The TAS model then used other tax return data to estimate ALE (living expenses the IRS routinely allows when determining a taxpayer's abil-ity to pay).²⁶ If the most recent year's tax return was not filed, allowable expenses were based on a household size of one, since the number of dependents could not be determined.²⁷ The TAS model was designed to offer a conservative estimate of taxpayer expenses, while also using multiple sources to ascertain all taxpayer income, even if unreported. TAS then performed additional analyses to explore the availability of other taxpayer assets to satisfy the liability and investigated whether IRS databases are sufficient to detect such available assets. The study findings suggested that a significant number of taxpayers are subject to a levy on their SSA income even though they cannot afford the levy.²⁸

Subsequent to the publication of TAS's study findings, the National Taxpayer Advocate engaged in ongoing discussions with the IRS Director of Compliance, Wage & Investment Division, to discuss the development of a new low income filter for taxpayers otherwise subject to FPLP levies. The IRS accepted the results of the TAS study, but expressed concern about the difficulties of automating the algorithm TAS used in its research study to determine economic hardship.²⁹ A more administrable measure, such as a minimum dollar amount of income, or income as a percentage of the federal poverty level, was needed as a proxy for economic hardship. The discussions culminated in a meeting on October 6, 2009, at which the IRS proposed a filter that, among other things, would exclude the accounts of taxpayers with unfiled returns, leaving them subject to FPLP levies even though they were low income.³⁰ Although the National Taxpayer Advocate was uncomfortable with this approach, the IRS assured her that it would exclude these taxpayers from the filter only if they appeared to have a filing requirement.³¹ The Deputy Commissioner for Services and Enforcement and the Commissioner of the Wage and Investment Division had collectively determined that the low income filter would be set at 250 percent of the federal poverty level.³²

This low income filter, which failed to protect the accounts of taxpayers with unfiled returns, was adopted prior to the Tax Court's decision in Vinatieri. As discussed above, the court in Vinatieri found that IRC § 6343(a)(1)(D) requires the IRS to release a levy that would cause the taxpayer economic hardship, with no exception to that mandate for taxpayers who have unfiled returns. After the Vinatieri decision, despite urging by the National Taxpayer Advocate, the IRS refused to adjust the filter to cover accounts with unfiled returns.³³ The National Taxpayer Advocate responded on January 12, 2012 by issuing Taxpayer Advocate Directive 2012-2, "Taxpayers Whose Incomes Are Below 250 percent of the Federal Poverty Level Set by the Department of Health and Human Services and who receive Social Security or Railroad Retirement Board Benefits Should Be Screened Out of the Federal Payment Levy Program, regardless of unfiled returns or outstanding business debts."³⁴

The IRS studied the effect that the mandate in the Taxpayer Advocate Directive would have and prepared a report in May of 2013.³⁵ It stated that about 151,000 low income taxpayers received Social Security or Railroad Retirement Board benefits in 2010, had an outstanding tax liability in 2011, and had unfiled returns or business debt.³⁶ They were consequently subject to levy under the FPLP program in 2011 rather than excluded through the low income filter. Of these approximately 151,000 taxpayers, the IRS actually levied on the Social Security or RRB benefits of 66,926.³⁷ Of these 66,926 taxpayers, 40,984 (61 percent) remained in the levy program solely because they had unfiled returns.³⁸

 

FIGURE 1.7.1, IRS Levies on Benefits

 

IRS Levied on the Benefits of Low Income Taxpayers Rather Than

 

Excluding Them Through the Low Income Filter

 

 

 

Moreover, Appendix A of the IRS study shows that the federal poverty level in 2011 was:

• $10,890 for one person;

• $14,710 for a couple;

• $18,530 for a family of three; and

• $22,350 for a family of four.⁴²

The characteristics of taxpayers whose SSA payments were levied in FY 2012 demonstrate the needless burden placed on taxpayers who, but for unfiled returns, would have been excluded from levy. A TAS Research analysis found about 53,000 taxpayers were subject to FPLP levies in 2012, and they collectively failed to file about 95,000 returns.⁴⁵ By July 2013, only slightly more than 16,000 returns had been secured.⁴⁶

 

FIGURE 1.7.2, Return Filing by Taxpayers Excluded

 

from Low Income Filter

 

Excluding Taxpayesr From the Low Income Filter Solely Because of

 

Unfiled Returns Is Not Effective

 

 

 

Taxpayers in Economic Hardship Continue to Come to TAS and LITCs Because IRS Employees Persist in Conditioning Levy Release on Filing Delinquent Returns.

Directors of Low Income Taxpayer Clinics across the country have told TAS that about 75 percent of their levy release cases follow a similar fact pattern.⁵⁰ Typically, the taxpayer contacts the clinic because the IRS is levying on his or her wages, bank account, or Social Security payments. The taxpayer demonstrates that he or she is in economic hardship, so the LITC representative contacts the IRS and requests release of the levy. The IRS employee does not usually reject the assertion that the taxpayer is in economic hardship, but tells the clinic employee the IRS will not release the levy because the taxpayer has unfiled returns -- that "until the returns are filed, I can't help you."⁵¹ Only if the clinic employee specifically cites the Vinatieri case, or the IRM requirements for CNC status, or otherwise insists that levy release and CNC status is appropriate does the IRS agree to release the levy without first receiving unfiled returns. TAS cases reflect the same fact pattern.⁵² As the LITC directors observed, an unassisted taxpayer would probably find these obstacles insurmountable.

The IRS Can Determine from its Own and Third-Party Databases Whether a Taxpayer is Likely in Economic Hardship Before it Issues a Levy.

The Treasury regulation pertaining to levy release contemplates a taxpayer acting in good faith when requesting a levy release, and providing documentation to support the claim that the levy is causing economic hardship.⁵³ As discussed above, the IRS identified a proxy for establishing economic hardship within the meaning of IRC § 6343 for one class of taxpayers (those subject to levies on their Social Security payments), and adopted the FPLP low income filter to avoid levying on those taxpayers in the first place. This approach reduces the burden on taxpayers and on the IRS by obviating the need for taxpayers to request the release and substantiate the hardship the IRS already presumes, and for the IRS to release the levies.

The IRS could systemically exclude accounts from levies other than FPLP levies (such as wage and bank levies), if not based on a proxy, then on actual data that shows the taxpayer is in economic hardship. Revenue officers are already authorized to release a levy or place an account into CNC status solely on the basis of information on returns and in databases (both internal to the IRS and those maintained by third parties) that contain financial information about the taxpayer.⁵⁴ As an alternative to simply expanding the existing FPLP filter to include taxpayers who have unfiled returns, the IRS could develop a computer program that identifies taxpayers who, based on IRS records and other databases, are likely in economic hardship. It could deploy the program annually, and adjust it as necessary to identify taxpayers who, if levied, would be entitled to immediate levy release; conversely, annual review would identify taxpayers whose financial circumstances have improved to the point that collection action might be warranted. The National Taxpayer Advocate and TAS Research intend to explore the viability of this approach in the coming calendar year.

CONCLUSION

When taxpayers in demonstrated economic hardship contact the IRS to request levy release, the IRS continues to insist on securing unfiled returns as a condition to releasing the levy, a violation of IRC § 6343(a)(1)(D). Even sustaining a proposed levy under these circumstances is unlawful, according to the holding in Vinatieri. In addition to failing to appropriately deal with taxpayers when they contact the IRS, the IRS does not consistently ascertain before levying whether a taxpayer is likely facing economic hardship, even though information in its own and third-party databases permit it to make this determination. On the contrary, the IRS purposely excludes from a pre-levy filter some taxpayers it would otherwise presume to be in economic hardship solely because they have unfiled returns.

RECOMMENDATIONS

The National Taxpayer Advocate recommends that the IRS:

²Vinatieri v. Comm'r, 133 T.C. 392 (2009).

³ Small Business/Self-Employed Division (SB/SE) Finance, Research and Strategy Project DEN0206 Federal Payment Levy Program (FPLP) and Low Income Taxpayers Appx. H, 4 Table H7 (May 2013). There were 66,926 taxpayers in this group. The levies were issued pursuant to the Federal Payment Levy Program (FPLP), discussed below. Appendix A of the study contains federal poverty levels.

⁴ The median income of taxpayers subject to levies on their SSA or RRB benefits was at most $17,439 depending on the source the IRS used to measure it. SB/SE Finance, Research and Strategy Project DEN0206 Federal Payment Levy Program (FPLP) and Low Income Taxpayers Appx. H, 3 Table H5 (May 2013).

⁵ As explained below, the IRS publishes allowable expense guidelines based on average, actual taxpayer expenditures. The allowable amounts vary by geographical location. The IRS uses these guidelines to determine a taxpayer's ability to pay delinquent tax liabilities. TAS used the lowest allowable housing expense and the lowest allowable vehicle operation cost to generate a conservative measure of ALE, even though these expenses correspond to different geographic areas and therefore could not have actually been sustained by the same taxpayer.

⁶Vinatieri v. Comm'r, 133 T.C. 392 (2009).

⁷ TAS analysis of taxpayer accounts that formed the basis of the SB/SE Finance, Research and Strategy Project DEN0206 Federal Payment Levy Program (FPLP) and Low Income Taxpayers. Of the 66,926 levies, TAS found 40,984 accounts (61 percent) that could have been filtered out of the FPLP program but were not, solely because of unfiled returns. TAS Research could not determine how many name mismatches there were, or whether a spouse had an invalid taxpayer identification number. To the extent either of these conditions were present, there may have been fewer than 40,984 such accounts.

⁸ In recognition of the need for low income taxpayers to have access to representation before the IRS and the courts, Congress in 1998 created the Low Income Taxpayer Clinic (LITC) program. IRC § 7526; Internal Revenue Service Restructuring and Reform Act of 1998 (RRA 98), § 3601(a), Pub. L. No. 105-206, 112 Stat. 758 (1998). The clinics, which are independent from the IRS, represent low income taxpayers before the IRS and the Tax Court for free or no more than a nominal fee. IRC § 7526(b)(2). According to IRC § 7526(b)(1)(B), taxpayers with income of less than 250 percent of the poverty level are low income taxpayers for purposes of qualifying for LITC assistance.

⁹ August 7, 2013 conference call with directors of nine low income taxpayer clinics; Taxpayer Advocate Management Information System (TAMIS) cases 5511491, 5503338, and 5379810.

¹⁰ IRC § 7433(a) authorizes a taxpayer to bring a civil action for damages if an IRS employee "recklessly or intentionally, or by reason of negligence, disregards any provision of this title, or any regulation promulgated under this title" in connection with any collection of Federal tax with respect to that taxpayer.

¹¹ Treas. Reg. § 301.6343-1(b)(4).

¹²Vinatieri v. Comm'r, 133 T.C. 392, 395 (2009). IRS employees may remove an account from active inventory and place it into CNC status where"collection of the liability would create a hardship for taxpayers by leaving them unable to meet necessary living expenses." IRM 5.16.1.1 (May 22, 2012).

¹³ National Taxpayer Advocate 2010 Annual Report to Congress 85 (Most Serious Problem: IRS Collection Policies and Procedures Fail to Adequately Protect Taxpayers Suffering an Economic Hardship).

¹⁴See, e.g., IRM 5.19.4.4.10.5(j) (Sept, 10, 2013) (for release of levy); IRM 5.16.1.2.9(9) (May 22, 2012) (for CNC status). IRM 5.16.1.1 (May 22, 2012).

¹⁵ IRM 5.19.4.4.10.5(j) (Sept, 10, 2013), which ACS employees consult, now provides: "When the Service determines that the levy is creating an economic hardship, do not refuse, delay or understate the release amount as a means to secure other compliance, e.g., missing tax returns. When there are also open delinquent returns, do not condition relief of the economic hardship upon receiving the delinquent returns. Inform the taxpayer of the financial information needed to make a collection determination and provide relief of the economic hardship if appropriate. You may, as a separate issue, inform the taxpayer of the unfiled tax returns and pursue appropriate actions to resolve them separate from the economic hardship relief issue. You may also inform the taxpayer before an installment agreement can be established delinquent returns must be filed." The IRS agreed to revise IRM 5.11.2.3.1.4(5), directed to Field Revenue Officers, to provide: "When contacted by a taxpayer claiming an inability to meet basic living expenses due to the levy and there are also open Del Rets [delinquent returns], do not condition relief of the economic hardship upon receiving the delinquent returns. These are separate collection issues. Inform the taxpayer of the financial information needed to make a collection determination and provide relief of the hardship if appropriate. You may, as a separate issue, inform the taxpayer of the unfiled tax returns and pursue appropriate actions to resolve them separate from the hardship relief issue. You may also inform the taxpayer before an installment agreement can be established delinquent returns must be filed." TAS Systemic Advocacy Management System Internal Management Document IRM review 27283 (July 30, 2013).

¹⁶ IRS response to TAS information request (Sept. 16, 2013).

¹⁷ The e-Guides are available at http://serp.enterprise.irs.gov/databases/irm-sup.dr/compliance_eguides.htm For a discussion on how IRS materials are vetted, see National Taxpayer Advocate, Toward a More Perfect Tax System: A Taxpayer Bill of Rights as a Framework for Effective Tax Administration (Nov. 4, 2013; National Taxpayer Advocate's Report in Response to the Acting Commissioner's 30-day Report: Analysis and Recommendations to Raise Taxpayer and Employee Awareness of the Taxpayer Advocate Service and Taxpayer Rights (Aug. 23, 2013).

¹⁸ See National Taxpayer Advocate 2010 Annual Report to Congress 85 (Most Serious Problem: IRS Collection Policies and Procedures Fail to Adequately Protect Taxpayers Suffering an Economic Hardship) which includes a discussion of collection case quality measurement and the recommendation that the IRS "[e]stablish quality review procedures that measure whether employees considered the possibility that a taxpayer was in economic hardship and managed the account appropriately." The IRS recently revised some quality standards, see IRM 21.10.1-6 (Oct. 1, 2013), available at http://serp.enterprise.irs.gov/databases/irm.dr/current/21.dr/21.10.dr/21.10.1.dr/21.10.1-6.htm, but they still do not measure whether the employee considered whether a taxpayer is in economic hardship before taking enforced collection action.

¹⁹ IRC § 6331(h)(2). IRM 5.11.7.2.1.1 (2) (Aug. 28, 2012).

²⁰ For example, in 2008, the IRS received more than two million FPLP levy payments from taxpayers, with more than 83 percent of those payments coming from Social Security benefits. National Taxpayer Advocate 2008 Annual Report to Congress vol. 2, 48 (Building a Better Filter: Protecting Lower Income Social Security Recipients from the Federal Payment Levy Program).

²¹ TPI is simply the sum of the values shown in various income fields on a return (wages; interest; dividends; distributions from partnerships, small business corporations, estates, or trusts; Schedule C net profits; Schedule F net profits; and other income such as Schedule D profits and capital gains distributions. Losses reported for any of these values are treated as a zero.).

²² GAO, GAO 03-356, Tax Administration, Federal Payment Levy Payment Program Measures, Performance and Equity Can Be Improved 13-15 (Mar. 6, 2003). The General Accounting Office was renamed the Government Accountability Office in July 2004.

²³ National Taxpayer Advocate 2008 Annual Report to Congress vol. 2, 48 (Building a Better Filter: Protecting Lower Income Social Security Recipients from the Federal Payment Levy Program).

²⁴Id.

²⁵Id.

²⁶ Allowable expenses for some items (e.g., food, clothing, and health care) are based on national standards, while allowable expenses for other items (e.g., housing and transportation) are based on local standards. See IRM 5.15.1.7 Allowable Expense Overview (Oct. 2, 2012). The IRS ALEs are available at http://mysbse.web.irs.gov/Collection/toolsprocesses/AllowExp/Standards/default.aspx.

²⁷ National Taxpayer Advocate 2008 Annual Report to Congress vol. 2, 54 n. 31 (Building a Better Filter: Protecting Lower Income Social Security Recipients from the Federal Payment Levy Program).

²⁸Id. at 57.

²⁹ It would be difficult for the IRS to create a program that could manually draw data from multiple databases, as the TAS study did, to identify taxpayer income, household size, and allowable expense information.

³⁰ IRS PowerPoint presentation, Federal Payment Levy Program: Proposed Process to Implement Low Income Filter for Social Security and Railroad Retirement (Sept. 29, 2009), presented to the National Taxpayer Advocate on Oct. 6, 2009.

³¹ Notes of Oct. 6, 2009 meeting, on file with National Taxpayer Advocate.

³²Id.

³³See, e.g., National Taxpayer Advocate 2011 Annual Report to Congress 350, 365 (Most Serious Problem: The New Income Filter for the Federal Payment Levy Program Does Not Fully Protect Low Income Taxpayers from Levies on Social Security Benefits).

³⁴ Delegation Order No. 13-3 grants the National Taxpayer Advocate the authority to issue a TAD to mandate administrative or procedural changes to improve the operation of a functional process or to grant relief to groups of taxpayers (or all taxpayers) when implementation will protect the rights of taxpayers, prevent undue burden, ensure equitable treatment, or provide an essential service to taxpayers. IRM 1.2.50.4, Delegation Order 0-3 (formerly DO-250, Rev. 1), Authority to Issue Taxpayer Assistance Directives, (Jan. 17, 2001). See also IRM 13.2.1.6, Taxpayer Advocate Directives (July 16,2009). Almost two years after the National Taxpayer issued the TAD, the Deputy Commissioner for Services and Enforcement sustained the appeal of the portion of the TAD pertaining to unfiled returns, refusing to adopt the National Taxpayer Advocate's position that the low income filter should cover these accounts. His memo notes: "Nonfilers are not compliant with their filing requirements and, thus, the IRS does not have the information to be able to determine if their income is less than 250% of the poverty level. Failing to comply with filing requirements is a threshold requirement that disqualifies taxpayers from consideration in other collection programs, such as installment agreement or offers in compromise." Memorandum from John M. Dalrymple, IRS Deputy Commissioner, Services and Enforcement to Nina E. Olson, National Taxpayer Advocate, TAD 2012-2, Low Income Filter in the Federal Payment Levy Program (Dec. 20, 2013). The Deputy Commissioner sustained the TAD on the issue of whether outstanding business debt should disqualify an account from the filter, and agreed to change the current policy as soon as practical.

³⁵ SB/SE Finance, Research and Strategy Project DEN0206 Federal Payment Levy Program (FPLP) and Low Income Taxpayers (May 2013).

³⁶Id. at 6, identifying 150,963 of these taxpayers.

³⁷Id.

³⁸ TAS analysis of taxpayer accounts that formed the basis of the SB/SE Finance, Research and Strategy Project DEN0206 Federal Payment Levy Program (FPLP) and Low Income Taxpayers. Throughout the study, SB/SE overstated the number of accounts with unfiled returns. Although the status code that indicates an unfiled return for purposes of the filter is 3, the SB/SE study also included, as accounts with unfiled returns for purposes of the filter, accounts with other status codes. TAS Research could not determine how many name mismatches there were, or whether a spouse had an invalid taxpayer identification number. To the extent either of these conditions were present, there may have been fewer than 40,984 such accounts.

³⁹ As discussed above, the IRS determined that 250 percent of the federal poverty level fairly approximates the regulatory definition of economic hardship and that determination operates as a presumption, at least for purposes of the FPLP levy filter.

⁴⁰ The lowest amount allowed for housing and utilities was $645 per month, which is the amount allowed for taxpayers who live in Arthur County, Nebraska. The lowest amount of operating costs for one vehicle (not including ownership costs) was $192 per month, the amount allowed for taxpayers who live in Seattle, Washington. The national standard for food and clothing was $534 per month and for health care was $60 per month. Thus, the least amount of ALE for a hypothetical taxpayer who lived in Arthur County, Nebraska but used the vehicle operating cost for Seattle, Washington was $1,431. Total annual expenses for this hypothetical taxpayer would be $1,431 X 12 = $17,172. The October 2011 version of the IRS ALEs is available at http://mysbse.web.irs.gov/Collection/toolsprocesses/AllowExp/Standards/default.aspx.

⁴¹ The median income of taxpayers subject to levies on their SSA or RRB benefits was at most $17,439 depending on the source the IRS used to measure it. SB/SE Finance, Research and Strategy Project DEN0206 Federal Payment Levy Program (FPLP) and Low Income Taxpayers Appx. H, 3 Table H5 (May 2013). The study does not provide the range of these taxpayers' incomes.

⁴² SB/SE Finance, Research and Strategy Project DEN0206 Federal Payment Levy Program (FPLP) and Low Income Taxpayers Appx. A, Table 9 (May 2013).

⁴³ The median income of taxpayers subject to levies on their SSA or RRB benefits was at most $17,439 depending on the source the IRS used to measure it. SB/SE Finance, Research and Strategy Project DEN0206 Federal Payment Levy Program (FPLP) and Low Income Taxpayers Appx. H, 3 Table H5 (May 2013), The study does not provide the range of these taxpayers' incomes.

⁴⁴ Rather than posing to itself the question of whether it proceeded appropriately in automatically levying on these taxpayers who may have been living at or near the poverty level, the IRS appears to congratulate itself on the additional revenue it raised, noting that it collected an average of $793 from each of the 66,926 taxpayers it levied and observing, "[t]he IRS could have lost $53 million revenue if the NTA recommendation had been in place in CY 2011." SB/SE Finance, Research and Strategy Project DEN0206 Federal Payment Levy Program (FPLP) and Low Income Taxpayers 12 (May 2013). Moreover, as noted above, SB/SE overstated the number of accounts that had unfiled returns and consequently the"lost revenue" that could have resulted from adopting the National Taxpayer Advocate's recommendation.

⁴⁵ We found that 52,857 low income taxpayers with 95,057 different unfiled returns received a levy in FY 2012. Individual Master File from IRS Compliance Data Warehouse.

⁴⁶ Taxpayers filed 16,311 returns. Individual Master File from IRS Compliance Data Warehouse. The IRS filed an additional 4,566 substitutes for return but could have taken this action even without the FPLP levy.

⁴⁷ Taxpayers filed 16,311 returns, 6,422 of which (39 percent) showed no balance due. Individual Return Transaction file, IRS Compliance Data Warehouse.

⁴⁸ Of the $30.8 million total tax shown on the returns, $24.6 million remained uncollected as of October 2013. Accounts Receivable Dollar Inventory, IRS Compliance Data Warehouse.

⁴⁹ Only 17.2 percent (16,311) of the 95,057 returns were secured and 79.9 percent of the $30.8 million of total taxes was still due.

⁵⁰ August 7, 2013 conference call with directors of nine LITCs in nine different states.

⁵¹ As discussed below, the IRS is not required to obtain documentation of the economic hardship before releasing a levy when the assessed amount is below a certain amount and other conditions are present. See IRM 5.11.2.2.1.4 (Aug. 24, 2010), cross referencing IRM 5.16.1.2.9(3) (May 22, 2012).

⁵²See, e.g., TAMIS cases 5511491, 5503338, and 5379810.

⁵³ See Treas. Reg. 301.6343-1.

⁵⁴ IRM 5.16.1.2.9(3) (May 22, 2012) provides that where the assessed amount is below a certain amount and other conditions are present, a collection information statement (CIS) is not required. IRM 5.11.2.2.1.4 (Aug. 24, 2010), pertaining to levy release, provides, "[w]hen the taxpayer cannot pay, assuming the levy is released, a CIS is required unless the exceptions listed in IRM 5.16.1.2.9(3), Hardship, (CNC exceptions) are met."

John Koskinen, Commissioner of Internal Revenue

DEFINITION OF PROBLEM

While most tax return preparers treat their clients with honesty and integrity, some unscrupulous preparers prey on unsuspecting taxpayers by altering return information without their clients' knowledge or divert refunds for their personal benefit. This type of fraud creates significant challenges for the IRS, harms innocent taxpayers, and undermines trust in our tax system.

In 2012, the IRS developed interim guidance¹ that addresses in a taxpayer-favorable manner the type of fraud where the preparer inflates the refund without the taxpayer's knowledge, provides the taxpayer with the accurate refund amount, and pockets the difference.² Yet in cases where the preparer alters return information without the taxpayer's consent and directs the entire refund to an account under his or her control, the IRS has refused to make these victims whole -- namely, by issuing the refunds claimed on their legitimate returns.

On October 17, 2012, the National Taxpayer Advocate issued a proposed Taxpayer Advocate Directive (TAD) directing the Commissioner of Wage and Investment (W&I) to, among other things, develop procedures to issue refunds to victims of return preparer fraud who are due a refund after they file a correct original return. After receiving an unsatisfactory response, the National Taxpayer Advocate included return preparer fraud as a most serious problem faced by taxpayers in her 2012 Annual Report to Congress.

The National Taxpayer Advocate has elevated 25 preparer fraud Taxpayer Assistance Orders (TAOs) to the Acting Commissioner. These taxpayers have been waiting an average of more than two years to receive their refunds. Some of these victims have been waiting for refunds ever since they filed 2008 tax returns.³ These victims are typically low income taxpayers, with a median adjusted gross income of $17,548; the median refund amount is $2,511. In at least 14 cases, the taxpayer reported the refund fraud to the local police.

ANALYSIS OF PROBLEM

Background

The IRS has developed interim guidance and procedures to address situations where a victim of return preparer fraud has received the full refund that he or she expected.⁴ However, the IRS response is insufficient in cases where the victim of the preparer has not received the full refund to which he or she is entitled because the preparer has stolen it. The guidance falls short of instructing IRS employees to issue refunds to victims of preparer fraud, which from the victim's perspective is likely the most important aspect of the case. Instead, the procedures instruct employees to suspend action on such cases pending further guidance.

TAS began keeping track of preparer fraud TAOs in fiscal year 2012; there are 107 open preparer fraud TAOs within TAS as of December 16, 2013.⁵ Of these, the National Taxpayer Advocate has elevated 25 preparer fraud TAOs involving refund theft to the Acting Commissioner of Internal Revenue, with another 59 in the process of being elevated to that level.

 

Taxpayer Assistance Orders*

 

 

 

   FIGURE 1.8.1, Statistical Snapshot of the 25 Preparer Fraud TAOs

The National Taxpayer Advocate is not naïve and recognizes that collusion is a legitimate area of concern. However, there are ways to deal with that possibility without harming a whole class of taxpayers. Some taxpayers that have come to TAS have filed police reports (taxpayers did so in 14 of the 25 TAO cases) and even assisted law enforcement personnel in having the preparer arrested for fraud. In such cases, any suspicion of collusion should be allayed. Instead of trying to develop workable documentation requirements to address this concern of collusion, the IRS made a blanket decision to deny payment to all victims of preparer fraud who have not received the full amount of their refund (unless they can show that the return filed was completely unauthorized; the IRS may try to resolve those cases using identity theft procedures).⁹

It Is Permissible for the IRS to Reissue Refunds to Victims of Preparer Fraud, When the Return Preparer Has Absconded with the First Refund.

Since 2000, the IRS has received the benefit of several Chief Counsel opinions that address preparer fraud.¹⁰ These opinions, when read together, authorize the IRS to:

An Unauthorized Tax Return Should Not Be Treated as a Legitimate Return of the Taxpayer.

In Beard v. Commissioner,¹¹ involving a taxpayer who altered a Form 1040, U.S. Individual Income Tax Return, the Tax Court applied a four-part test to determine whether a document filed with the IRS qualifies as a "return" for tax purposes. Those requirements are that the document:

In a typical preparer fraud case scenario, the preparer alters some information on the return after the taxpayer has authorized a prior version. Accordingly, the return submitted by the return preparer was not reviewed, authorized, or signed by the taxpayer under penalties of perjury. It is not a valid return, as it fails the signature requirement of the Beard test, and should not be treated as a return of the taxpayer.

Thus, the decision faced by IRS leadership in whether it will pay refunds to victims of preparer fraud is largely one of public policy, rather than a legal question.

Public Policy Concerns Dictate that the IRS Make Victims of Preparer Fraud Whole.

In 2012, the National Taxpayer Advocate has designated the complexity of the Internal Revenue Code (IRC) as one of the most serious problems facing taxpayers.¹³ The existing code, by our count, has reached nearly four million words and imposes unconscionable burden on taxpayers.¹⁴ Our analysis of IRS data indicates that individuals and businesses spend about 6.1 billion hours a year complying with tax-filing requirements.¹⁵

Even as tax compliance becomes more complex, the IRS provides fewer resources to help taxpayers file their returns. For example, IRS Taxpayer Assistance Center staff will no longer help customers with return preparation.¹⁶ Many taxpayers, particularly low-income ones who are eligible for various refundable credits, feel pressure to hire a preparer to meet their statutorily-mandated tax filing requirement.

      FIGURE 1.8.2, Taxpayers Claiming Refundable Credits, Claim

 

Taxpayer Use of Tax Professionals for Return Preparation

 

 

 

When this happens, the IRS response has been underwhelming. While the IRS may eventually untangle the victim's account issues, the IRS's position has been that the taxpayer's sole recourse for any stolen refunds lies with the preparer, not the IRS. Victims of preparer fraud, particularly low income and unsophisticated taxpayers who may not be well-versed in the civil litigation options theoretically available to them, would be right in feeling that the IRS has failed them.

A Victim of Preparer Fraud Is Similar to an Innocent Spouse

Generally, married taxpayers who file jointly are jointly and severally liable for any tax, interest, and penalties due as shown on the return.²⁰ However, innocent spouses may file for relief from joint and several liability under IRC § 6015. In 1998, the IRS was given expanded authority for innocent spouse relief.²¹ Congress wanted the IRS, when it had evidence of misdoing through no fault of the victim, to refund the money to the innocent spouse -- even when the other party (the "non-innocent" spouse) was unable to pay.

In the case of preparer fraud, no statutory fix is needed to make the victim whole. A series of Chief Counsel opinions make it clear that the IRS has the legal right to issue refunds to victims of preparer fraud -- even in instances where the other party (the preparer) is unable to return the proceeds from the first refund. The Office of Chief Counsel recently reaffirmed that position to the National Taxpayer Advocate and the IRS Commissioner.

Although Preparer Fraud Is Similar to Identity Theft, the IRS Treats Victims Substantially Differently.

Return preparer fraud is similar to identity theft in that both crimes delay refunds and cause account problems, but the IRS deals with the victims in substantially different ways. Over the years, the IRS has developed victim assistance procedures that ultimately unwind the harm to a victim of identity theft. Although it may take much longer than an identity theft victim prefers, the IRS has procedures to "back out" the return filed by the perpetrator, process the true return, and pay out the associated refund claim, if applicable.²²

In contrast, the IRS has not developed procedures that would fully unwind the harm suffered by victims of preparer fraud. For instance, although the IRS is willing to process the correct original return from the taxpayer, the IRS will not provide full relief by issuing a refund to these victims in cases where the preparer absconded with the initial refund that the IRS issued after receiving the falsified return.²³

The IRS has the legal authority to issue such refunds to victims of preparer fraud. The National Taxpayer Advocate urges IRS leadership to make these vulnerable taxpayers whole once it is established that they were not complicit in the crime, just as the IRS works to make identity theft victims whole.

The IRS Should Consider Multiple Factors -- Including Mitigation, Restitution, and Substantiation -- Before Deciding Whether to Release a Refund to a Victim of Preparer Fraud.

In the absence of any regulation of return preparers, taxpayers have many options when choosing someone to prepare and file their tax returns. Return preparers run the gamut from attorneys and certified public accountants to large, national tax preparation firms to nonprofessionals who have purchased off-the-shelf software and volunteer to prepare a neighbor's return. Undoubtedly, some taxpayers are swayed by claims made by certain preparers to obtain a refund amount that may seem too good to be true. The IRS, rightfully, must be cognizant of the possibility of collusion between the preparer and the "victim" in an attempt to defraud the government. Moreover, the IRS does not want to serve as the de facto insurer of taxpayers who choose a preparer solely based on the size of the refund they were promised. Doing so would create a moral hazard by encouraging taxpayers to engage in high-risk behavior.

With these concerns in mind, the National Taxpayer Advocate proposes a framework of analysis the IRS can undertake when deciding whether to issue refunds to purported victims of preparer fraud. This framework includes mitigation, restitution, and substantiation.

Mitigation

The IRS should ask the victim what actions were taken to prevent the preparer fraud or to minimize the loss. For example, did the victim request a copy of the return that he or she authorized for filing? If the refund was not received by the expected date, did the victim promptly follow up with the preparer to check on the status? Did the victim contact the IRS to request a refund trace?

If the fraud was committed by an employee of a national, franchised tax preparation firm, did the victim request a settlement from the firm? To take the onus off the victim, the National Taxpayer Advocate suggests that the IRS establish a liaison with the nation's largest tax preparation firms to present these cases and request that they make the victims whole. TAS could spearhead coordination with the Wage & Investment division, the Criminal Investigation division, Chief Counsel, the Return Preparer Office, and the Office of Professional Responsibility.

Restitution

The IRS should not be obligated to pay out the full amount of the refund when restitution is available and recovered. If the preparer, whether out of guilt or under a court order, paid the victim a portion of the refund after being confronted or convicted, the IRS should subtract the amount of any money recovered by the victim. In these cases, emphasis should be on restitution received. Some preparers may be indigent or incarcerated. Thus, they may be unable to comply with a court order to pay restitution.

Substantiation

Victims of preparer fraud should be encouraged to provide the IRS with as much documentary evidence of the claim as possible. In addition to the required forms,²⁴ victims may wish to submit: -- A copy of the unaltered return (if provided by the preparer);

• A business card, flyer, or other advertisement with the preparer's contact information;

• A copy of any refund traces requested;

• A copy of bank statements showing the expected refund was not deposited into the victim's account; and

• Taxpayer statement (signed under penalties of perjury).

CONCLUSION

In many return preparer fraud cases, refunds are directed to an account under the preparer's control, leaving the taxpayer with no monetary benefit from the fraudulent filing and having to deal with the IRS in the aftermath. Although there is no legal impediment to the IRS reissuing refunds to victims of preparer fraud, IRS leadership has refused to make the policy call to do so. These taxpayers, who have been victimized by return preparers, are being harmed again by IRS inaction.

In the case of a return altered by a preparer, the IRS should have even more reason to assist the taxpayer than in refund fraud cases not involving a preparer. While a non-preparer third party who alters a return may be a mere thief, an errant preparer is not only a thief but is violating his or her fiduciary duty to the taxpayer and the tax system.

Not long ago, an IRS report stated that, "tax return preparers and the associated industry play a pivotal role in our system of tax administration and they must be a part of any strategy to strengthen the integrity of the tax system."²⁵ To protect the integrity of tax administration, the IRS must develop procedures that address the 21st-century version of return preparers' misappropriation of their clients' federal tax refunds.

RECOMMENDATIONS

The National Taxpayer Advocate recommends that the IRS:

² In such cases, the taxpayer has a copy of the legitimate return, receives the refund he or she was expecting, and has no reason to suspect fraud. Only when the IRS ultimately discovers the taxpayer's return is incorrect and attempts to recover the excess refund through levies, liens, and other enforcement actions does the taxpayer learn of the preparer's fraud.

³See, e.g., Taxpayer Advocate Management Information System (TAMIS) case numbers 4757753, 5269873, and 5361465.

⁴See Director, Accounts Management, Interim Guidance on Return Preparer Misconduct (For Memphis Accounts Management ONLY), WI-21-0813-02 (Aug. 5, 2013); Director, Collection Policy, Interim Guidance Memorandum on Return Preparer Fraud or Misconduct, SBSE-05-0613-0034 (June 3, 2013).

⁵See email from Director, TAS Technical Analysis & Guidance (Dec. 19, 2013).

⁶See, e.g., TAMIS case numbers 4757753, 5269873, and 5361465.

⁷ Measured from the date the taxpayer came to TAS for assistance through December 2013.

⁸See Deputy Commissioner for Services and Enforcement response to the National Taxpayer Advocate re: Return Preparer Fraud TAOs (Dec. 20,2013) (stating "It would be extremely difficult to ensure that the taxpayer and the return preparer are not in collusion in order to obtain an additional refund. If collusion is not present in the current cases, establishing a process whereby IRS issues a second refund could certainly create an incentive for taxpayers and preparers to abuse in order to obtain additional Federal monies.").

⁹See Deputy Commissioner for Services and Enforcement response to the National Taxpayer Advocate re: Return Preparer Fraud TAOs (Dec. 20,2013).

¹⁰See Field Service Advice 200038005 (June 6, 2000); IRS Office of Chief Counsel Memorandum, Horse's Tax Service, PMTA 2011-13 (May 12,2003); IRS Office of Chief Counsel Memorandum, Refunds Improperly Directed to a Preparer, POSTN-145098-08 (Dec. 17, 2008); IRS Office of Chief Counsel Memorandum, Tax Return Preparer's Alteration of a Return, PMTA 2011-20 (June 27, 2011).

¹¹ 82 T.C. 766, 777-78 (1984), aff'd per curiam, 793 F.2d 139 (6th Cir. 1986).

¹²See IRS Office of Chief Counsel Memorandum, Horse's Tax Service, PMTA 2011-13 (May 12, 2003); IRS Office of Chief Counsel Memorandum, Tax Return Preparer's Alteration of a Return, PMTA 2011-20 (June 27, 2011). In discussions with IRS Executives, the Office of Chief Counsel recently advised that the IRS, as an innocent third party, would not be required to pay out these refunds under agency law. Specifically, the IRS could rely on the fraudulent representation of the return preparer (the agent) who filed a return he or she fraudulently altered; thus, any refunds issued by the IRS to the return preparer would satisfy the IRS's obligation to pay a refund to the taxpayer (the principal). The Office of Chief Counsel has not adopted or advanced this position in any of its opinions pertaining to return preparer fraud. Indeed, this theory contradicts all prior opinions on the matter and would result in treating taxpayers who are similarly situated, but for the issuance of a refund, being treated disparately.

¹³See, e.g., National Taxpayer Advocate 2012 Annual Report to Congress 3-23 (Most Serious Problem: The Complexity of the Tax Code).

¹⁴See Id. at 6.

¹⁵See Id. at 5.

¹⁶See Id. at 302 (Most Serious Problem: The IRS Lacks a Servicewide Strategy that Identifies Effective and Efficient Means of Delivering Face-to-Face Taxpayer Services); IRS, W&I Business Performance Review (Nov. 20, 2013); IRS, Wage & Investment Division, Response to TAS information request (email dated Dec. 20, 2013). The IRS will refer taxpayers who visit Taxpayer Assistance Centers for tax preparation to the nearest volunteer site for tax return preparation.

¹⁷ IRS Compliance Data Warehouse, Individual Returns Transaction File and Individual Master File, tax year 2010 and 2011 (through Mar. 2013).

¹⁸See IRS, IR-2013-33, IRS Releases the Dirty Dozen Tax Scams for 2013, available at http://www.irs.gov/uac/Newsroom/IRS-Releases-the-Dirty-Dozen-Tax-Scams-for-2013; IRS, IR-2008-2, Treasury and IRS Give Taxpayers Greater Control over Information Held by Tax Preparers, Propose Marketing Restrictions on RALs, available at http://www.irs.gov/uac/Treasury-and-IRS-Give-Taxpayers-Greater-Control-over-Information-Held-by-Tax -Preparers;-Propose-Marketing-Restrictions-on-RALs.

¹⁹See Most Serious Problem: Regulation of Return Preparers: Taxpayers and Tax Administration Remain Vulnerable to Incompetent and Unscrupulous Return Preparers While the IRS is Enjoined from Continuing Its Efforts to Effectively Regulate Unenrolled Preparers, supra. In November 2011, theIRS launched a return preparer competency test with a deadline for completion by December 31, 2013. See IRS News Release, IR-2011-111, IRS Moves to Next Phase of Return Preparer Initiative; New Competency Test to Begin (Nov. 22, 2011). However, in January 2013, a U.S. District Court judge in Loving v. Internal Revenue Service disagreed with the IRS's view that it has the authority to implement these requirements on its own, and invalidated the testing and continuing education requirements. Loving v. IRS, 917 F. Supp. 2d 67 (D.D.C. Jan. 18, 2013). The government filed a motion to suspend the injunction pending appeal. The U.S. District Court for the District of Columbia denied the motion but then modified the terms of the injunction. See Loving v. IRS, 920 F. Supp. 2d 108 (D.D.C. Feb. 1, 2013). The Justice Department has appealed the District Court's decision. Loving v. IRS, No. 1:12-cv-00385 (D.D.C. 2013) (USCA Case No. 13-5061).

²⁰See IRC § 6013(d)(3).

²¹See IRC § 6015. "Innocent spouse relief" is frequently used to describe relief from joint and several liability under IRC § 6015(b). Refunds are also available under IRC 6015(f), called "equitable relief." See also Joint Committee on Taxation, JCX-6-98, Present Law and Background Relating to the Treatment of "Innocent Spouses" (Feb. 9, 1998); IRS Restructuring (Innocent Spouse Tax Rules): Hearing Before the S. Comm. on Finance,105th Cong. (1998).

²²See generally IRM 21.6.2, Individual Tax Returns, Adjusting TIN-Related Problems (Oct. 1, 2013).

²³See Director, Accounts Management, Interim Guidance on Return Preparer Misconduct (For Memphis Accounts Management ONLY), WI-21-0813-02 (Aug. 5, 2013).

²⁴ The IRS requires victims of preparer fraud to submit Forms 14157, Return Preparer Complaint, and 14157-A, Tax Return Preparer Fraud or Misconduct Affidavit, to the Memphis Accounts Management office. See Director, Accounts Management, Interim Guidance on Return Preparer Misconduct (For Memphis Accounts Management ONLY), WI-21-0813-02 (Aug. 5, 2013).

²⁵ IRS Pub. 4832, Return Preparer Review, at 32 (Dec. 2009).

Debra Holland, Commissioner, Wage and Investment Division

Karen Schiller, Commissioner, Small Business/Self-Employed Division

William J. Wilkins, Chief Counsel

DEFINITION OF PROBLEM

Section 32(k) of the Internal Revenue Code (IRC) authorizes the IRS to ban taxpayers from claiming the earned income tax credit (EITC) for two years if the IRS determines they claimed the credit improperly due to reckless or intentional disregard of rules and regulations.¹ This standard requires more than mere negligence on the part of the taxpayer.² According to IRS Chief Counsel guidance, a taxpayer's failure to participate in an EITC audit does not justify imposing the ban.³ Once the IRS imposes the ban, any EITC claimed in the next two years will be disallowed even if the taxpayer is otherwise eligible for the credit.

IRS data shows:

• The IRS imposed the ban improperly almost 40 percent of the time in 2011;⁴

• Taxpayers who were (but for the 2011 ban) eligible for the credit in the following two years were deprived of a tax benefit that averaged more than $4,600 for the two years combined.⁵

• In 19 percent of the cases, the IRS imposed the ban solely because EITC had been disallowed in a previous year;⁶

• In only ten percent of the cases did a taxpayer's response to the audit raise the possibility that he or she had the requisite state of mind to justify the two-year ban;⁷

• In 69 percent of the cases, the ban was imposed without required managerial approval;⁸

• In almost 90 percent of the cases, neither IRS work papers nor communications to the taxpayer contained the required explanation of why the ban was imposed;⁹ and

• Taxpayers' average income was about $15,500.¹⁰

Addressing the inaccurate and unsupported application of the two-year bans is even more urgent and necessary if the Administration's proposal to permit the IRS to use math error authority in the context of these bans is adopted by Congress.¹¹ The National Taxpayer Advocate does not support such a proposal unless and until the IRS improves its procedures to ensure its auditors make affirmative and reasonable determinations that a taxpayer acted with reckless or intentional disregard of rules or regulations before imposing the two-year ban. Moreover, Congress should clarify that IRS bears the burden of proving the taxpayer acted intentionally or recklessly with respect to his or her EITC claim.

ANALYSIS OF PROBLEM

Background

IRC § 32(k) Authorizes a Two-Year Ban on Claiming EITC, But Only If the IRS Determines the Taxpayer's Actions or Intent Meets Statutory Criteria.

IRC § 32(k)(1)(B)(ii) disallows EITC claims for two taxable years if there has been "a final determination that the taxpayer's claim of credit was due to reckless or intentional disregard of rules and regulations."¹² Neither section 32 nor its regulations define the terms "reckless or intentional disregard," nor is there any judicial interpretation of the subsection.¹³ However, IRS Chief Counsel guidance provides that if EITC was disallowed because the taxpayer did not respond (or did not respond adequately) to a request for substantiation of claimed EITC, the ban should not be imposed.¹⁴

Recognizing that "each case may have a different reason for asserting the penalty/ban," the IRM requires examiners who propose the two-year ban to note in their work papers the reason for the decision.¹⁵ A manager must approve all two-year bans.¹⁶

IRS Data Shows the IRS Frequently Imposes the Two-Year Ban Inappropriately.

TAS research of IRS databases shows that the IRS imposed the two-year EITC ban in tax years 2009-2011 as follows:

 

FIGURE 1.9.1, Total Number of Two-Year Bans and Number

 

of Accounts Designated as No Show/No Response or

 

Undelivered Mail¹⁷

 

Two-Year Bans and No Show/No Response

 

or Undelivered Mail Accounts

 

 

 

Analysis of a Random Sample of EITC Ban Cases Also Shows the IRS Frequently Imposes the Two-Year Ban Inappropriately.

To learn more about how the IRS handles the two-year ban, TAS Research extracted a random, statistically valid sample of 333 instances of the 5,438 cases in which the IRS imposed the two-year ban in 2011.¹⁸ The TAS team reviewed records stored on IRS databases and ordered hardcopy files from IRS storage facilities as necessary.¹⁹ Among the study's principal findings:

• Of the 333 two-year ban cases in the sample, almost 80 percent stemmed from audits of tax year 2011.²⁰

• The average adjusted gross income of taxpayers in the sample was $15,478.²¹

• The average amount of denied EITC was $3,731, or 24 percent of adjusted gross income on average.²²

• In almost 30 percent of the sample cases, the taxpayer did not participate in the audit (i.e., did not respond to notices or requests for information).²³

• In almost 90 percent of the cases, there was no clear explanation of why the ban was imposed or the "explanation" was that EITC had been disallowed in a prior year.²⁴

• PC 0027 -- Full scope EITC with 2 year ban proposed

• PC 0028 -- Schedule C and full scope EITC with 2 year ban proposed.

As Figure 1.9.2 shows, of the 333 cases in the sample, taxpayers' audits were percent of the time in designated with project code 27 or 28, and the taxpayer did not participate in the 2011. audit, in 50 cases, or in 15 percent of the cases in the sample. This resulted in automatic imposition of the two-year ban. In some cases, mail to the taxpayer had been returned as undeliverable -- the taxpayer may have never realized he or she was being audited.

 

FIGURE 1.9.2, Frequency with Which the IRS Imposed

 

the Two-Year Ban in Cases Assigned Project Code 27 or 28²⁸

 

 

 

• In more than two-thirds of the sample cases, the required managerial approval of the ban was not secured.²⁹

• When a manager approved the ban, the explanation was insufficient 80 percent of the time.³⁰

• In only six percent of the cases did the IRS follow its own procedures by adequately explaining why the ban was imposed and obtaining managerial approval.³¹

FIGURE 1.9.3, Managerial Approval/Non-Approval and

 

Adequate Explanations

 

 

 

• In 122 cases, or almost 40 percent of the time, it appeared from the documents submitted that the taxpayer actually believed he or she qualified for the EITC.³² An example of a case in this category is one in which a taxpayer claimed the credit with respect to her children and provided birth certificates to show the qualifying relationship. The documentation the taxpayer initially submitted to satisfy the residency was for a year other than the year under exam. The taxpayer then provided a letter from the children's school that showed where the children resided for the year under exam, but did not show the children lived with the taxpayer.

• About 50 percent of the time, it was unclear whether the taxpayer understood whether he or she qualified for the credit.³³ For example, in an audit that encompassed 2009-2011, the taxpayer submitted birth certificates for two children and his marriage certificate, which substantiated a qualifying relationship for only one child. The taxpayer also submitted school records and receipts for rent and after-school care for both children, but only for 2010. In this instance, the taxpayer made an effort to provide some substantiating documentation, but not for both children and not for all audit years, although it is not clear whether he understood the law or the procedural requirements.

• In only ten percent of the cases were the documents clearly insufficient to support the claimed EITC, raising the possibility that the taxpayer had the requisite state of mind to justify the two-year ban.³⁴ For example, a taxpayer submitted copies of school records that did not reflect the taxpayer's address, paperwork from a doctor's office showing the other parent's address, and a birth certificate that appeared to have been typed.³⁵

The National Taxpayer Advocate has repeatedly described the unique difficulties low income taxpayers face in attempting to comply with IRS requests for substantiation of claimed EITC.³⁶ Each year, the composition of the EITC population changes by about a third.³⁷ A chart prepared by the Treasury Inspector General for Tax Administration (TIGTA), reproduced below as Figure 1.9.4, shows how taxpayers move in and out of EITC.³⁸ Thirty-seven percent are intermittent or first-time filers, meaning they do not have any experience in claiming the credit or they have no recent experience.³⁹ Only 20 percent of taxpayers are termed "continual filers" who might be expected to have learned from their experience.⁴⁰

 

FIGURE 1.9.4, Movement of Taxpayers in the EITC Program

 

(Processing Years 2000-2006)

 

 

 

IRM Provisions May be Leading IRS Employees to Impose Bans Inappropriately.

The main IRM provision that explains when to impose the two-year ban clarifies that first-time disallowance of EITC should not generally trigger the ban and, in an "if/then" formulation, gives eight scenarios in which the examiner should impose it.⁴⁴ Two of these scenarios are reasonable formulations -- they presume the examiner actually spoke with the taxpayer and gathered enough information to ascertain the taxpayer's state of mind.⁴⁵ Two other scenarios at least remind the examiner that the decision to impose the ban depends on the facts and circumstances of the case.⁴⁶ Three of the scenarios, however, contain unexamined assumptions about the taxpayer's state of mind or even presuppose reckless or intentional disregard of the rules and regulations.⁴⁷

One scenario in the IRM table merges the substantive requirements for claiming EITC with the requirements for imposing the ban, and reflects a misconception of the law. It provides:

The Avenues Available to a Taxpayer to Challenge an IRS Application of the Two-year Ban Are Procedurally Complex.

When the IRS audits a taxpayer's return and determines to disallow claimed EITC and impose the ban, it issues a statutory notice of deficiency which includes notice of the IRS's determination to impose the two-year ban.⁵¹ The taxpayer may petition the Tax Court for review of the disallowed EITC as well as the determination to impose the ban.⁵² If the taxpayer petitions the Tax Court, he or she may bear the burden of proving the IRS erred in imposing the ban.⁵³ If the taxpayer does not timely file a Tax Court petition, the additional tax, if any, will be assessed and the two-year ban will remain uncontested. IRS records will reflect the two-year ban, and if the taxpayer claims EITC the following year, the credit will be automatically disallowed even if the taxpayer otherwise qualifies for it.⁵⁴ The same deficiency procedures also apply to a later year's disallowance.⁵⁵ If the taxpayer files a Tax Court petition for review of a later disallowance due to the ban, the court may consider whether the ban was properly imposed in the earlier year because this is relevant to determining the tax for the later year, but the court would not have jurisdiction to redetermine the tax for the earlier year when the ban was imposed.⁵⁶

We note that the Treasury Department's fiscal year (FY) 2014 revenue proposals would allow the IRS to use math error authority to disallow EITC if the taxpayer claimed the credit while subject to the two-year ban.⁵⁷ Math error authority permits the IRS to assess a tax deficiency without issuing a statutory notice of deficiency with the attendant right to petition the Tax Court for review.⁵⁸ The National Taxpayer Advocate does not support the Treasury Department's proposal to extend the use of math error authority in this manner unless and until: 1) the IRS adopts procedures that ensure IRS auditors make a considered (as opposed to automated or presumed) determination that reckless or intentional disregard of rules or regulations occurred; and 2) Congress clarifies that the IRS bears the burden of proving the taxpayer acted intentionally or recklessly with respect to his or her EITC claim.⁵⁹

The IRS Has Imposed More Stringent Due Diligence Requirements on Paid Preparers who Prepare Returns that Claim EITC, and These Requirements May Increase Compliance.

Paid return preparers were involved in about 71 percent of the returns in the TAS sample of two-year ban cases.⁶⁰ In more than half (27) of the 50 cases in which the IRS automatically imposed the ban because EITC had been disallowed in a previous year and the taxpayer did not respond to audit notices, the tax return was prepared by a paid preparer. IRC § 6695(g) provides that:

The 2012 version of Form 8867, in Part IV, "Due Diligence Requirements," poses two new questions that relate to relationship and residency of any qualifying children with respect to whom the credit is being claimed.⁶⁴ The same portion of the form now asks the preparer to identify, from a list of documents, which one(s) he or she relied on to determine the residence or disability of a qualifying child and which documents supported any claimed Schedule C income or expenses. The preparer can also indicate, by checking a box, that he or she relied on "other" unspecified documents, "did not rely on any documents, but made notes in file," or simply "did not rely on any documents."⁶⁵ The preparer is instructed that due diligence requires that he or she keep for three years:

• Form 8867, Paid Preparer's Earned Income Credit Checklist;

• The EIC worksheet(s) or the preparer's own worksheet(s);

• Copies of any taxpayer documents the preparer relied on to determine eligibility for or amount of EIC;

• A record of how, when, and from whom the information used to prepare the form and worksheet(s) was obtained; and

• A record of any additional questions the preparer asked and the client's answers.⁶⁶

CONCLUSION

IRC § 32(k) is a unique penalty provision because it permits the IRS to sanction taxpayers not only for the year they improperly claim EITC, but also for two subsequent tax years, whether or not the taxpayers become eligible for EITC in those later years. Because of its reach, the statute applies only where the taxpayer noncompliance was egregious or is attributable to a particular state of mind, i.e., due to reckless or intentional disregard of the EITC rules. The IRS, by imposing -- sometimes automatically -- the ban on taxpayers who did not participate in the audit or who submitted documents demonstrating they believed they were entitled to the claimed EITC, does not act within the statutory confines. By not articulating the reason for imposing the ban and securing managerial approval, the IRS does not adhere to its own IRM and acts arbitrarily and capriciously.

RECOMMENDATIONS

The National Taxpayer Advocate recommends the IRS:

² For example, as discussed below, for purposes of the accuracy-related penalty under IRC § 6662, "negligence" includes "any failure to make a reasonable attempt to comply with the provisions of this title" and is distinguished from a "disregard" which is "reckless" or "intentional." IRC § 6662(c).

³ IRS Service Center Advisory SCA 200245051 (Nov. 8, 2002). As discussed below, IRS procedures permitted automatic imposition of the ban in some in which the taxpayer did not respond to IRS audit notices.

⁴ Of the 5,438 taxpayers on whom the IRS imposed the ban in 2011, the accounts of 2,121 are designated on IRS records as "no show/no response" or carry the notation that mail sent to them was returned as undelivered. 2,121 out of 5,438 is 39 percent. IRS Compliance Data Warehouse (CDW), Individual Returns Transaction File (Tax Year 2011).

⁵ The average amount of EITC for eligible taxpayers was $2,274 in 2012 and $2,358 in 2013. The combined average was $4,632. IRS response to TAS fact check (Dec. 20, 2013).

⁶ In 62 cases out of 333, the only explanation for imposing the ban was the prior year's disallowance. Sixty two out of 333 is 19 percent. As described below, the IRS assigned project codes to some audits that resulted in automatic imposition of the two-year ban because of a previous disallowance of the credit.

⁷ Of the 330 cases in which the IRS requested substantiation of claimed EITC, the taxpayer responded by submitting documents that were clearly insufficient in 32 cases. Thirty two out of 330 is ten percent.

⁸ Internal Revenue Manual (IRM) 4.19.14.6.1 (Jan. 1, 2013). Of the 333 cases in the sample, there was no evidence of managerial approval of the ban in 229 cases. Two hundred twenty nine out of 333 is 69 percent.

⁹ IRM 4.19.14.6.1 (Jan. 1, 2013). Of the 333 cases in the sample, there was no explanation (or there was only a conclusory or cursory statement that the ban applied, or the "explanation" for imposing the ban was that EITC had been disallowed in a previous year) in 295 cases. Two hundred ninety five out of 333 is 89 percent.

¹⁰ The average adjusted gross income for the 333 taxpayers in the sample was $15,478. TAS Research, CDW, Individual Returns Transaction File.

¹¹ Budget of the United States Government, Fiscal Year 2014 212, 219, available at http://www.whitehouse.gov/omb/budget/Overview. Under IRC § 6213(b), the IRS may correct mathematical or clerical errors on returns and send notices to taxpayers explaining the changes. Taxpayers who do not request an abatement of the resulting tax within 60 days after the notice is issued are assessed the additional tax and they do not have the right to petition the Tax Court on the basis of the notice.

¹² IRC § 32(k)(1)((B)(ii) (emphasis added). IRC § 32(k) was enacted as part of the Tax Reform Act of 1997, Pub. L. No. 105-34, § 1085(a)(1), 111 Stat. 788, 956. IRC § 32(k(1)(B)(i) authorizes the IRS to impose a ten-year ban on taxpayers who fraudulently claim EITC, but the IRS imposes the ten-year ban infrequently (13 times, 27 times, and 17 times in 2009, 2010, and 2011 respectively). IRS CDW, Individual Returns Transaction File (Tax Years 2009, 2010, 2011).

¹³ Neither the statute nor the regulations cross reference any other Code section (such as IRC § 6662) or regulations that contain similar language. Under IRC § 6662(b)(1), an accuracy-related penalty may be imposed on certain underpayments due to "negligence or disregard of rules or regulations." IRC § 6662(c) provides: "For purposes of this section, the term 'negligence' includes any failure to make a reasonable attempt to comply with the provisions of this title, and the term 'disregard' includes any careless, reckless, or intentional disregard." Treas. Reg. § 1.6662-3(b)(2) provides: "A disregard is 'reckless' if the taxpayer makes little or no effort to determine whether a rule or regulation exists, under circumstances which demonstrate a substantial deviation from the standard of conduct that a reasonable person would observe. A disregard is 'intentional' if the taxpayer knows of the rule or regulation that is disregarded.

¹⁴ IRS SCA 200245051 (Nov. 8, 2002).

¹⁵ IRM 4.19.14.6.1 (Jan. 1, 2013).

¹⁶Id. The 2013 version of this IRM cross references to IRM 20.1.5.1.6, which describes managerial approval as mandated by IRC § 6751(b).

¹⁷ TAS Research, CDW, Audit Information Management System (AIMS) Closed Case Database (Tax Year 2011). As described below, for tax year 2011, the TAS sample only found 28 percent (with margin of +/- about 5 percent) of accounts were designated as "no show/no response" or "undelivered mail."

¹⁸ A TAS Examination Senior Technical Analyst, together with a team of TAS employees consisting mainly of three experienced Internal Revenue Agent Technical Advisors, developed a data collection instrument to analyze cases in the sample. The sample is statistically valid at the 95 percent confidence level with a margin of error of about five percent, which allows study findings to be projected to the population. TAS originally intended to review 365 cases but succeeded in getting all relevant information for 333.

¹⁹ Among other databases, the TAS team consulted the IRS Correspondence Examination Automation Support (CEAS) database that includes copies of correspondence with taxpayers. Where CEAS records did not contain an explanation of why the ban was imposed, the team ordered the paper case file and reviewed it for the missing information.

²⁰ In the sample cases, 261 of the bans stemmed from audits of tax year 2011, 63 stemmed from audits of tax year 2010, eight stemmed from audits of tax year 2009, and one stemmed from a 2008 audit. 261 out of 333 is 78 percent. Most of the audits (206 or 62 percent), were handled by the Wage and Investment division (W&I), while 127 or 38 percent were handled by the Small Business/Self Employed divisions (SB/SE). TAS Research, CDW, AIMS Closed Case Database.

²¹ TAS Research, CDW, Individual Returns Transaction File.

²² TAS Research, CDW, Individual Master File.

²³ Out of 333 cases in the sample, 92 or 28 percent were no-response cases -- there was no interaction between the IRS and the taxpayer.

²⁴ There were 233 cases in which there was no clear explanation for imposing the ban other than the prior year's disallowance. There were 62 cases in which the only explanation for imposing the ban was the prior year's disallowance. Two hundred thirty-three + 62 is 295, and 295 out of 333 is 89 percent. A typical statement in a communication to a taxpayer was simply: "Based upon the information we have available, we propose that you should be restricted from receiving the EITC for the following 2 years. This 2-year ban is asserted for the reckless or intentional disregard of the rules and regulations regarding the EITC under IRC Section 32(k)(1)(B)(ii)." Moreover, the TAS team reviewing the cases in the sample reported that IRS examiners sometimes indicated they were imposing the ban because they believed the taxpayer acted negligently (as opposed to recklessly or with intentional disregard of the EITC rules). The team did not quantify the number of cases in which the examiner gave this explanation for imposing the ban and therefore we cannot project the frequency with which it occurs. However, this terminology certainly suggests inappropriate application of the ban.

²⁵ IRM 4.19.14.6, Recertifications (Jan.1, 2013).

²⁶ IRM 4.19.14.6.1.5 Project Codes 0027 and 0028 -- EITC Recertification with a Proposed 2 Year EITC Ban (Jan. 1, 2013).

²⁷ The National Taxpayer Advocate recommends that Congress amend IRC § 32 to clarify that the burden is on the IRS to show the ban should apply. See Legislative Recommendation: Allocate to the IRS the Burden of Proving it Properly Imposed the Two-Year Ban on Claiming the Earned Income Tax Credit, infra.

²⁸ In the TAS sample of cases, 101 cases had been assigned project code 27 or 28. Of these 101 cases, 50 were no-response cases, 12 of them with undelivered mail. Fifty out of 333 is 15 percent.

²⁹ Of the 333 cases in the sample, there was no evidence of managerial approval of the ban in 229 cases, or 69 percent.

³⁰ In the 104 cases in which a manager approved the ban, in 83 cases the explanation was not clear explanation or the only explanation was that EITC had been disallowed in a prior year. Eighty three out of 104 is 80 percent.

³¹ Only 21 cases contained an adequate explanation of why the ban was imposed (other than because EITC had been disallowed in a prior year) and had the required managerial approval. Twenty one out of 333 is six percent.

³² Of the 330 cases in which the IRS requested substantiation, the taxpayer responded by submitting documents that were reasonable attempts to substantiate the claimed credit in 122 cases, or 37 percent of the time.

³³ Of the 330 cases in which the IRS requested substantiation, in 176 cases, or 53 percent, it was unclear whether the taxpayer believed he or she was entitled to the claimed EITC.

³⁴ Of the 330 cases in which the IRS requested substantiation, the taxpayer responded by submitting documents that were clearly insufficient in 32 cases, or ten percent of the time.

³⁵ When questioned, the taxpayer admitted the children lived with their other parent five days a week.

³⁶See, e.g., National Taxpayer Advocate 2011 Annual Report to Congress 296, 304 (Most Serious Problem: The IRS Should Reevaluate Earned Income Tax Credit Compliance and Take Steps to Improve Both Service and Compliance) ("IRS letters are legalistic, not tailored to the taxpayer's particular situation, and do not discuss alternate sources of documentation. Low income persons may live without written leases or may not have school records for their children because of their living situation or patterns of moving. Migratory living patterns, lack of education, lack of time (e.g. holding multiple jobs), lack of transportation, and limited access to technology (internet, faxes, etc.) add to the difficulty of finding and submitting documents."); National Taxpayer Advocate 2009 Annual Report to Congress 110 (Most Serious Problem: Beyond EITC: The Needs of Low Income Taxpayers Are Not Being Adequately Met) ("Although a diverse population, low income taxpayers do share common characteristics.Low income taxpayers are found more frequently among the elderly, the disabled, Native Americans, and taxpayers who may have limited English proficiency (LEP) relative to the general Wage and Investment (W&I) taxpayer population. Many require extra assistance to understand tax law changes, as demonstrated by the widespread confusion about the 2008 Economic Stimulus Payment (ESP) and the resulting flood of calls to the IRS toll-free line. Low income taxpayers tend to be more transitory than the general population, with 27.5 percent of those below the poverty level moving in 2007 while only 15 percent of the general population moved during the same time.").

³⁷ Kathleen M. Carley, Simulating EITC Filing Behaviors: Validating Agent Based Simulation for IRS Analyses: The 2004 Hartford Case Study, prepared for the National Taxpayer Advocate. National Taxpayer Advocate 2007 Annual Report to Congress, vol. 2.137.

³⁸ Treasury Inspector General for Tax Administration (TIGTA) Ref. No. 2009-40-024, The Earned Income Tax Credit Program Has Made Advances; However, Alternatives to Traditional Compliance Methods Are Needed to Stop Billions of Dollars in Erroneous Payments 2 (2008), available at http://www.treas.gov/tigta/auditreports/2009reports/200940024fr.pdf. The report refers to taxpayers who claim EITC as being "in the EITC program."

³⁹ Intermittent Filers are taxpayers who claim the EITC in one year but not the next, then file and claim the credit again at a later time.

⁴⁰ Discontinued Filers are taxpayers who had consistently claimed the EITC but who stopped filing a tax return or no longer qualified for the EITC.

⁴¹ IRC § 6015(f), for example, allows for relief from liability for a taxpayer who did not know or have reason to know, of an understatement of tax shown on a joint return, or of an underpayment of the tax. Rev. Proc. 2013-34, 2013-43 I.R.B. 397, § 4.03(2)(c)(iii) provides "[t]he facts and circumstances that are considered in determining whether the requesting spouse had reason to know of an understatement, or reason to know whether the nonrequesting spouse could or would pay the reported tax liability, include, but are not limited to, the requesting spouse's level of education, any deceit or evasiveness of the nonrequesting spouse, the requesting spouse's degree of involvement in the activity generating the income tax liability, the requesting spouse's involvement in business or household financial matters, the requesting spouse's business or financial expertise, and any lavish or unusual expenditures compared with past spending levels." IRC § 6664 provides that reasonable cause for an underpayment and the taxpayer acting in good faith with respect to the underpayment may constitute a defense to imposition of the IRC § 6662 accuracy related penalty. Treas. Reg. § 1.6664-4(b) provides that "[c]ircumstances that may indicate reasonable cause and good faith include an honest misunderstanding of fact or law that is reasonable in light of all of the facts and circumstances, including the experience, knowledge, and education of the taxpayer." The regulation also provides that reliance on the advice of a professional tax advisor may constitute reasonable cause and good faith. As discussed below, most of the returns in our sample of cases were prepared by paid tax preparers.

⁴²See, e.g., Restatement 2d of Torts § 283, which provides "[u]nless the actor is a child, the standard of conduct to which he must conform to avoid being negligent is that of a reasonable man under like circumstances." Comment d notes that "[i]n determining whether the actor should realize the risk which his conduct involves, the qualities which are of importance are those which are necessary for the perception of the circumstances existing at the time of his act or omission and such intelligence, knowledge, and experience as are necessary to enable him to recognize the chance of harm to others involved therein."

⁴³ IRS employees, who apply these complex rules by relying on IRM lists of "acceptable documentation" to substantiate claimed EITC, may not evaluate the claim accurately and completely. See National Taxpayer Advocate 2012 Annual Report to Congress, vol. 2, 71, Study of Tax Court Cases in Which the IRS Conceded the Taxpayer was Entitled to Earned Income Tax Credit (EITC); National Taxpayer Advocate 2011 Annual Report to Congress vol. 2, 77 An Analysis of the IRS Examination Strategy: Suggestions to Maximize Compliance, Improve Credibility, and Respect Taxpayer Rights. Historically, taxpayers often recover substantially all of the credit when the IRS takes a "second look" at denied EITC claims. In the 2004EITC Audit Reconsideration study, TAS Research found that in audit reconsiderations, 40 percent of EITC claimants working with IRS Exam employees, and 45 percent of those working with TAS, recovered EITC payments. The 2010 TAS EITC No Relief, No Response Review showed that on average, TAS obtains full or partial relief in approximately 48 percent of EITC cases. See TAS Business Performance Review, 2nd Qtr. 2011, 15 (Mar. 2011).

⁴⁴ IRM 4.19.14.6.1(7) (Jan. 1, 2013). The scenarios are shown in a table, referred to as a nonexclusive "starting point to help determine if the two-year ban is appropriate," but no additional analytical framework is provided.

⁴⁵ IRM 4.19.14.6.1(7) (Jan. 1, 2013). The first example, which would justify imposing the ban even on a first-time disallowance, is: "During a conversation, the taxpayer admits he/she knew they did not meet the eligibility requirements but decided to 'try it anyway.' In this instance, the ban would be justified because the taxpayer intentionally disregarded the rules and regulations." TAS found that this occurred in seven of the 333 sample cases. The second example is: "If the taxpayer is claiming different qualifying children each year and when asked to identify the qualifying children, the taxpayer does not know who they are claiming," then "[t]he two year ban should be imposed."

⁴⁶ The first scenario is: if "[t]his is a Recertification case [ i.e., the taxpayer's claimed EITC was previously denied and the taxpayer is now required, per Treas. Reg. § 1.32-3(c), to file Form 8862, Information To Claim Earned Income Credit After Disallowance ], and "[i]nadequate documentation is received from the taxpayer and the case results in the EITC being disallowed again," then '[b]ased on facts and circumstances presented apply the two-year ban." The example also says, however, "The taxpayer was previously informed of the requirements and the specific rules and regulations pertaining to EITC." This may or may not be true -- the taxpayer may not have received any explanation for the previous disallowance, or may not have understood an explanation that was received. Moreover, the reason for the second disallowance may differ from the reason for the first disallowance. The second scenario is: if "[a] decedent's SSN is used for a qualifying child" and "[t]he person died before the year under examination," then "[b]ased on facts and circumstances presented apply the two-year ban."

⁴⁷ They are: if "[t]he technician can determine the taxpayer's claim was due to reckless or intentional disregard rather than misunderstanding or confusion of the rules" then the two year ban should be imposed; if "[t]here is a lack of acceptable records" and "[t]he taxpayer understood what types of documentation could be accepted" the ban should be imposed; if "[t]he taxpayer agreed with the assessment and denial of EITC in the previous tax year(s)" and '[i]s again unable to verify eligibility for claiming the EITC and qualifying children" the ban should be imposed.

⁴⁸ A married taxpayer need only be "treated as" not married within the meaning of IRC § 7703(b) to file a separate return using a filing status of Head of Household, if the other requirements of IRC § 2(b) are also met. IRC § 2(c), Certain married individuals living apart, provides: "For purposes of this part, an individual shall be treated as not married at the close of the taxable year if such individual is so treated under the provisions of section 7703(b)." IRC § 7703(b)(3) provides that married taxpayers who are not members of the same household for the last six months of the year may be considered as not married if the requirements of IRC § 7703(b)(1) and (2) (pertaining to maintaining a household) are also met.

⁴⁹See, e.g., The Ohio State University Research and Innovation Communications, Marital Separations an Alternative to Divorce for Poor Couples (Aug.13, 2012), available at http://researchnews.osu.edu/archive/maritalsep.htm (last visited Sept,12, 2013). The research, carried out by Dmitry Tumin and Zhenchao Qian showed that 15 percent of separations did not end in either divorce or reconciliation within ten years and that couples in these prolonged separations tended to be racial and ethnic minorities. These couples also tended to have young children. and low family income -- the very population EITC is intended to reach.

⁵⁰ The error is perpetuated in the IRM audit reconsideration provisions. IRM 4.13.3.18 (Sept. 30, 2010) describes the audit reconsideration procedures and makes clear that the IRS can remove the ban and reverse disallowance of the EITC. However, it provides that "[i]f the taxpayer failed to substantiate EITC entitlement for the year that triggered the ban, the audit reconsideration will be disallowed." The provision seems illogical because if the taxpayer initially substantiated entitlement to EITC the IRS would have allowed the EITC and not imposed the ban. Moreover, the provision would appear to prevent audit reconsideration of bans imposed on taxpayers who simply did not respond to IRS requests for information or whose mail was returned as undelivered.

⁵¹ The statutory notice of deficiency, authorized by IRC § 6212, informs the taxpayer of the additional amount of tax the IRS believes he or she owes and advises of the right to petition the Tax Court for review of that determination. IRM 4.19.14.6.1.1 (6), (11) (Jan. 1, 2013); IRM 4.13.3.18 (Sept. 30, 2010).

⁵²See, e.g., Garcia v. Comm'r, T.C. Summ. Op. 2013-28 (Apr. 3, 2013) for the facts contained therein; under IRC § 7463(b), the opinion is not precedent for any other case.

⁵³ Tax Court Rule of Practice and Procedure 142(a); Welch v. Helvering, 290 U.S. 111, 115 (1933). The National Taxpayer Advocate recommends that Congress amend IRC § 32 to clarify that the burden of showing the appropriateness of the ban is on the IRS. See Legislative Recommendation: Allocate to the IRS the Burden of Proving it Properly Imposed the Two-Year Ban on Claiming the Earned Income Tax Credit, infra.

⁵⁴ IRM 4.19.14.6.1.1 (6), (11) (Jan. 1, 2013).

⁵⁵ IRM 4.19.14.6.1.1 (11) (Jan. 1, 2013).

⁵⁶ IRC § 6214(b) provides that the Tax Court "in redetermining a deficiency of income tax for any taxable year or of gift tax for any calendar year or calendar quarter shall consider such facts with relation to the taxes for other years or calendar quarters as may be necessary correctly to redetermine the amount of such deficiency, but in so doing shall have no jurisdiction to determine whether or not the tax for any other year or calendar quarter has been overpaid or underpaid." IRM 4.19.14.6.1.3 (Jan. 1, 2007) instructs employees that if the taxpayer petitions the Tax Court, they should provide Chief Counsel attorneys with the complete case file for the year that is the subject of the Tax Court petition as well as the year in which the ban was imposed.

⁵⁷ Budget of the United States Government, Fiscal Year 2014 212, 219, available at http://www.whitehouse.gov/omb/budget/Overview; Perspectives, Budget of the United States Government, Fiscal Year 2014 205, available at http://www.whitehouse.gov/omb/budget/Analytical_Perspectives.

⁵⁸ IRC § 6213(b)(1). The analysis that accompanies the President's budget proposal explains, "[t]he IRS may correct certain mathematical or clerical errors made on tax returns to reflect the taxpayer's correct tax liability (this authority is generally referred to as 'math error authority')." Perspectives, Budget of the United States Government, Fiscal Year 2014 205, available at http://www.whitehouse.gov/omb/budget/Analytical_Perspectives.

⁵⁹See Legislative Recommendation: Allocate to the IRS the Burden of Proving it Properly Imposed the Two-Year Ban on Claiming the Earned Income Tax Credit, infra.

⁶⁰ In 237 out of 333 cases, a paid preparer signed the return or there are other indications, such as a refund anticipation loan, that indicate a paid preparer was involved.

⁶¹ The United States-Korea Free Trade Agreement Implementation Act, Pub. L. No. 112-41, § 501, 125 Stat 428, amended IRC § 6695(g) by increasing the amount of the penalty from $100 to $500 for returns filed after December 31, 2011. See Treas. Reg. § 1.6695-2(a). The National Taxpayer Advocate recommended increasing the amount of the preparer penalty in 2003. See National Taxpayer Advocate 2003 Annual Report to Congress 272 (Legislative Recommendation: Federal Tax Return Preparers: Oversight and Compliance).

⁶² Treas. Reg. § 1.6695-2(b)(1). Most of the returns in the TAS sample cases were filed after Dec. 31, 2011. Although a 2009 version of Form 8867 was available, preparers of returns filed before Dec. 31, 2011, were not required to file Form 8867 with the returns they prepared.

⁶³ The penalty was imposed against 881 individuals in FY 2012. IRS response to TAS fact check (Dec. 20, 2013).

⁶⁴ One question is: "If any qualifying child was not the taxpayer's son or daughter, did you ask why the parents were not claiming the child and document the answer?"' Another question is "If the answer to question 13a is 'Yes' (indicating that the child lived for more than half the year with someone else who could claim the child for the EIC), did you explain the tiebreaker rules and possible consequences of another person claiming your client's qualifying child?" A "qualifying child" is a person who among other things meets age requirements, bears a specified relationship to the taxpayer, and has the same principal residence as the taxpayer for more than half the year. IRC §§ 32(c)(3), 152(c). The last two components of EITC eligibility -- relationship and residency -- can be particularly difficult to substantiate. National Taxpayer Advocate 2011 Annual Report to Congress 296, 304 (Most Serious Problem: The IRS Should Reevaluate Earned Income Tax Credit Compliance and Take Steps to Improve Both Service and Compliance).

⁶⁵ This format, which serves as a prompt for the preparer by suggesting documents that might be appropriate substantiation, appeared for the first time on the 2012 version of the form.

⁶⁶ These directions correspond to the requirements of Treas. Reg. 1.6695-2(b)(4) that the preparer submit with the return "A) A copy of the completed Form 8867 (or successor form); (B) A copy of the completed Earned Income Credit Worksheet (or other record of the tax return preparer's EIC computation permitted under paragraph (b)(2)(i)(B) of this section); and (C) A record of how and when the information used to complete Form 8867 (or successor form) and the Earned Income Credit Worksheet (or other record of the tax return preparer's EIC computation permitted under paragraph (b)(2)(i)(B) of this section) was obtained by the tax return preparer, including the identity of any person furnishing the information, as well as a copy of any document that was provided by the taxpayer and on which the tax return preparer relied to complete Form 8867 (or successor form) or the Earned Income Credit Worksheet (or other record of the tax return preparer's EIC computation permitted under paragraph (b)(2)(i)(B) of this section)."

⁶⁷ The National Taxpayer Advocate first recommended that the IRS impose broader due diligence requirements on EITC return preparers in 2003 (see National Taxpayer Advocate 2003 Annual Report to Congress 36 (Most Serious Problem: Earned Income Tax Credit Compliance Strategy). She also in 2003 recommended that Congress amend IRC § 6695(g) to impose the same requirements the Treasury regulation now imposes. National Taxpayer Advocate 2003 Annual Report to Congress 272 (Legislative Recommendation: Federal Tax Return Preparers: Oversight and Compliance). The National Taxpayer Advocate renewed these recommendations over the years. See, e.g, National Taxpayer Advocate 2009 Annual Report to Congress 56 (Most Serious Problem: The IRS Lacks a Servicewide Return Preparer Strategy). We note, however, that attorneys, certified public accountants, enrolled agents, or enrolled actuaries, all of whom are regulated by the IRS, may not be willing to prepare returns that claim EITC because of the additional burden Treas. Reg. 1.6695-2(b)(4) and the revised Form 8867 imposes on them. To the extent regulated return preparers are unwilling to prepare returns claiming EITC, the returns may be prepared by unenrolled return preparers (i.e., preparers with no recognized credentials to prepare returns and over whom the IRS does not have regulatory authority). See Loving v. IRS, 917 F. Supp. 2d 67 (D.D.C. 2013); Most Serious Problem: Regulation of Return Preparers: Taxpayers and Tax Administration Remain Vulnerable to Incompetent and Unscrupulous Return Preparers While the IRS is Enjoined from Continuing Its Efforts to Effectively Regulate Return Preparers, supra.

⁶⁸ The Treasury Department's Office of Tax Policy and the IRS use the Annual Guidance Priority List each year to identify and prioritize the tax issues that should be addressed through regulations, revenue rulings, revenue procedures, notices, and other published administrative guidance. See IRM 32.1, Chief Counsel Regulation Handbook. The National Taxpayer Advocate's proposal that guidance to determine whether EITC was claimed in "reckless or intentional disregard of rules and regulations" for purposes of IRC § 32(k)(1)(B)(ii) be included in the 2013-2014 Guidance Priority Plan was not adopted. See 2013-2014 Priority Guidance Plan, available at http://www.irs.gov/uac/Priority-Guidance-Plan (Aug. 9, 2013).

Debra Holland, Commissioner, Wage & Investment Division

Karen Schiller, Commissioner, Small Business/Self-Employed Division

Sunita B. Lough, Commissioner, Tax-Exempt & Government Entities Division

William J. Wilkins, Chief Counsel

DEFINITION OF PROBLEM

In filing season 2013, an IRS filter wrongly flagged Indian tribal member returns as fraudulent due to common filing characteristics that the IRS has identified as indicators of fraud. This error in tax administration is symptomatic of the IRS's failure to recognize legitimate geographic, economic, and cultural circumstances of a unique taxpayer population. Although the National Taxpayer Advocate's 2008 Annual Report to Congress applauded IRS outreach to Indian Nations as exemplary, it is unclear if all IRS functions are responsive to their needs. In certain cases, IRS operating divisions (ODs) remain unaware of the particular characteristics and needs of Indian taxpayers, potentially resulting in unnecessary contact with the IRS and unwarranted audits, taxes, or penalties. Particular concerns relate to the IRS's:

• Improper treatment of tribal distributions;

• Misunderstanding of Native American family structure;

• Ignorance of tribal sovereignty;

• Delays in processing of certain settlement awards; and

• Failure to publish legal guidance for tribes.

ANALYSIS OF PROBLEM

Indian Tribal Taxpayers Have Unique Status.

Indian tribes have a unique status in federal tax law.¹ In some respects, tribes have a level of sovereignty similar to that of the 50 states, which are not subject to tax on their income.² Historically, the Supreme Court classified tribes as domestic dependent nations.³ The Internal Revenue Manual (IRM) sets forth the following overview of tribal sovereignty.⁴

The Internal Revenue Manual Gives an Overview of Tribal Sovereignty.

The U.S. government has a unique legal relationship with Indian tribal governments as set forth in the Constitution, treaties, statutes, and court decisions. Congress may limit the authority of Indian tribes, but within those limits the tribes retain "attributes of sovereignty over both their members and their territory."⁵ Tribal government powers include the authority to choose the form of government, determine tribal membership, regulate tribal and individual property, levy taxes, establish courts, and maintain law and order. Generally, Indian tribes provide governmental services, such as transportation, education, and medical care to tribal members.

Although Congress can limit tribal powers of sovereignty, the states cannot. The general rule in the field of Indian law is that unless there is specific delegation of authority provided by Congress, laws do not apply to Indians on reservations. Thus, Indian tribes are "semi-sovereign" entities, or "distinct, independent political communities" within the borders of the states in which they reside. Their sovereign powers can be limited or defined by an act of Congress or, in some cases, those powers may have been implicitly lost when tribes became subject to overriding federal sovereignty. On the other hand, the laws of any state can have but limited effect on Indian residents of reservations, or on the exercise of tribal sovereign power within reservations.⁶

Over the years, presidents have issued executive orders that directed federal agencies, to the extent permitted by law, to "respect Indian tribal self-government and sovereignty, honor tribal treaty and other rights, and strive to meet the responsibilities that arise from the unique legal relationship between the Federal Government and Indian tribal governments."⁷

The IRS Should Follow the Indian Tribal Government Function (ITG) in Exercising Cultural Sensitivity.

The ITG function, which operates within the Tax-Exempt/Government Entities Operating Division (TE/GE), addresses tribal employment, programs, trusts, businesses, and distributions to individual members. While the 2008 Annual Report to Congress praised the exemplary outreach conducted by ITG toward its customers, it is unclear if the function has received cooperation within the IRS.⁸ On the contrary, ITG and TAS staff have heard IRS employees utter culturally insensitive remarks to tribal people. An IRM provision that directs IRS employees to follow ITG protocol when contacting tribes could establish a model for consultation of the ITG function within the IRS.⁹ While the ITG function focuses on tribal entities:

Tribal Members Confront Issues Different from Those of the Overall Taxpayer Population.

Indian taxpayers may confront IRS misunderstandings and delays relating to issues such as tribal distributions, presumed fraud or frivolous positions, family relations, settlement awards, and health coverage. As these issues are reflected on individual returns, they would be processed by ODs rather than the ITG function which focuses on Native American issues. Consequently, individual Indians may have to reinvent the wheel to resolve systemic problems on a case-by-case basis. It would be more efficient for the IRS to establish a cross-functional working group on issues of Indian individuals, parallel to the ITG function that focuses on tribal entities.

The IRS Has Treated Tribal Distributions Improperly.

Tribes may distribute funds, such as tax-exempt revenue of the tribe, to individual members. IRS compliance functions consistently subject tribal distributions, that are not from work, to self-employment tax apparently due to misinterpretation of Form 1099, U.S. Information Return. For federal tax purposes, these amounts may constitute income, but it is unclear why they would be treated as self-employment earnings. The TE/GE intranet includes a form instructing ITG staff to advise IRS campuses that such distributions are not an individual's self-employment earnings, and to file Form 911, Application for Taxpayer Assistance Order, with the LTA if a campus does not comply.¹²

While TAS is pleased that the ITG function shows concern by referring problems for resolution, this approach all but concedes that Automated Underreporter (AUR, the IRS program that processes information returns) may have a harmful effect, and at worst, may discriminate against a particular taxpayer population. For tax year 2011, TAS has identified in LTA inventory at least 42 cases where the IRS inaccurately assumed that a tribal member's Form 1099 was incorrect, either because the withholding amount apparently did not meet expected parameters or otherwise. The data reveal an underlying systemic issue that the IRS should be trying to resolve.

The IRS Has Filtered Returns Inaccurately.

In the 2013 filing season, an IRS filter wrongly flagged returns of tribal members as fraudulent presumably because their characteristics, such as certain mail delivery patterns, happened to resemble those in a fraudulent scheme.¹³ This error in tax administration is symptomatic of IRS failure to recognize legitimate geographic, economic, and cultural circumstances of a unique taxpayer population, and to program IRS systems to avoid false positives that have a disparate impact on that population. Given that the IRS routinely changes filters to reflect characteristics of the filing population, this experience should afford an opportunity for greater accuracy in the future. To avoid repeating past mistakes, IRS functions (such as Wage & Investment Pre-Refund, AUR, Automatic Substitute for Return (ASFR), Correspondence Exam, and Field Exam) should consult ITG before implementing filters or similar programs that could erroneously target Indian taxpayers.

The IRS May Misunderstand Native American Family Structure.

Eligibility for various tax benefits may depend on family relations as documented by the taxpayer. However, some Native American families do not fit the standard family structure. Last year, the National Taxpayer Advocate proposed a Legislative Recommendation to recognize children with special needs adopted under tribal law, as the tax law recognizes only those adopted under state law.¹⁴ Generally, the Internal Revenue Code (IRC) allows a credit to parents who adopt children, with a larger amount for a child who has special needs relating to ethnic background, age, membership in a minority or sibling group, or a medical condition.¹⁵ However, the tax law allows only a state to certify special needs.¹⁶ In specified circumstances, the tax law treats a tribe as a state, but unfortunately the adoption credit is not a specified provision.¹⁷

Similar legislative or administrative misapprehensions of Indian households, which can consist of multiple generations living together, may arise in the context of filing status, the child tax credit, Earned Income Tax Credit, dependency deduction, or otherwise.¹⁸ The IRS has recognized unique circumstances of tribal members in informal guidance on "Alternative Documentation for Native Americans," which lists tribal -- rather than state -- documents acceptable for identifying qualifying children.¹⁹ Such informal guidance deserves to be codified in the IRM.

The IRS May Display Ignorance of Tribal Sovereignty.

TAS is aware of cases in which tribal members who may have misunderstood federal tax requirements tell the IRS that they are members of sovereign nations. In response, the IRS asserts a penalty for a frivolous position.²⁰ While certain allegations of sovereignty may be frivolous, Indian tribes are sovereign entities.²¹ In good faith, the taxpayer may have made a true statement that was simply inapplicable to an individual return. Thus, a tribal member's statement about sovereignty may not reflect a desire to delay or impede the administration of federal tax laws within the meaning of the penalty provision. The IRS should clarify that not all statements about sovereignty deserve a frivolous penalty.

The IRS May Delay Processing of Keepseagle Awards.

In 2011, the U.S. Department of Agriculture (USDA) settled a class action lawsuit, known as Keepseagle, for discrimination against Indian borrowers in the Farm Loan Program.²² Under the settlement, 4,200 "Track A" individuals received up to $50,000 each in 2012; 170 "Track B" individuals received up to $250,000 each.²³ In addition, USDA forgave outstanding debt and remitted to the IRS amounts to cover the taxes on the awards, including the forgiveness. In general, forgiven debt constitutes income, with exceptions for insolvent taxpayers, among other cases.²⁴ TAS is aware of Keepseagle cases in which the IRS has not credited USDA remittances to taxpayers' accounts. In addition, taxpayers who claim the insolvency exception may face refund delays pending IRS verification of insolvency.²⁵ In this case, taxpayers may need assistance in submitting the required information.²⁶ The IRS should render assistance as required, after consultation and collaboration with TAS.

Patients of the Indian Health Service Should Be Exempt from the Affordable Care Act.

The Affordable Care Act (ACA) requires individuals to obtain health insurance or pay a tax.²⁷ This individual requirement excepts various people, such as those experiencing hardship -- as determined by the Department of Health & Human Services (HHS) -- as well as Indians, who may receive tribal health care.²⁸ Technically, the latter exemption covers members of federally-recognized tribes, a category that covers only a portion of the Native American and Alaska Native population, excluding some patients of the federal health care providers such as the Indian Health Service (IHS), which is available to those of Indian descent, even if not enrolled in a recognized tribe.²⁹ Commentators have complained that penalties should not apply to patients of the IHS or similar services.³⁰ In response, HHS expanded the hardship exemption to cover those patients, explaining that "HHS does not have the legal authority to modify through regulation the statutory definitions of 'Indian' as referenced in the Affordable Care Act . . . Any changes to the definition must be legislative."³¹

Tribes Need Legal Guidance.

While the IRS recently issued various pieces of guidance helpful to Indian individuals, major projects remain outstanding, especially those applicable to tribal entities. The resulting uncertainty can sustain a chilling effect on tribal enterprise, distorting economic opportunities.

In particular, integral part regulations, which would offer guidance to tribal entities, have been pending for six years. Historically, a series of IRS rulings has exempted from tax certain entities that are integral parts of governments, which as such are themselves tax-exempt.³² This patchwork of rulings could affect a variety of entities, including recent forms such as charter schools, as well as enterprises of tribes. In view of the uncertainty of this law with potential economic impact, the Priority Guidance Plan (PGP) annually co-signed by the Commissioner of Internal Revenue, IRS Chief Counsel, and Treasury Assistant Secretary (Tax Policy) has promised, every year since 2007, regulations setting forth criteria for treating an entity as an integral part of a state, local or tribal government.³³ Yet the IRS has issued no such guidance.

On a related topic, the IRS declined to issue guidance on corporations chartered under tribal law. For federal tax purposes, corporations chartered under state law are corporations, but the status of those chartered under tribal law is unclear.³⁴ From 2001 to 2007, a PGP commitment to guidance on this topic turned into another broken promise. By way of explanation, tribal corporations could be subsumed under integral part regulations if the IRS completes those regulations.

Nevertheless, the IRS recently issued guidance helpful to tribal members, responding in part to a long-standing executive order that memorializes a U.S. government commitment to consultation with tribes.³⁵ Significant publications include:

• General Welfare Exclusion . Under an administrative doctrine harking back at least to the New Deal era, the IRS has excluded from income government payments to needy individuals. Notice 2012-75 proposes guidance on applying this general welfare exclusion to tribal programs, specifically creating a safe harbor where individual need may be unclear (e.g. payments to attend pow-wows).³⁶ Upon consideration of public comments, the IRS should finalize this guidance.

• Indian Gaming Regulatory Act (IGRA) Trusts. Under IGRA, tribes may set aside per capita payments derived from tribal-owned enterprises (such as casinos) for children (and other legal incompetents) in trust. In general, trust deposits are income when the beneficiary obtains control of the money.³⁷ As set forth in prior guidance, judicial (and regulatory) doctrines of constructive receipt (or economic benefit) may allow deferral of inclusion in income when the beneficiary's control is subject to substantial limitations or restrictions, such as claims of the tribe's creditors.³⁸ Recent guidance maintains deferral while clarifying that trustees may make staggered distributions to beneficiaries at different ages or upon the occurrence of specific events rather than distributing all the trust assets when the beneficiary attains a specified age, broadening the class of survivors who may inherit a beneficiary's trust interest, and modifying trustees' discretion to make health and welfare distributions.³⁹

• Tribal Trust Settlements. In 2012, the U.S. settled major litigation in which tribes complained that federal agencies had historically mismanaged property that the government holds in trust for tribes. Consequently, the U.S. agreed to pay more than $1 billion to tribes, which may in turn make per capita payments to members. Recent IRS guidance clarifies that per capita payments are excluded from members' income to the extent attributable to the settlement, while interest earned after transfer to the tribe would be included.⁴⁰

While the ITG function conducts exemplary outreach, other IRS organizations remain unaware of particular characteristics and needs of Indian individual and tribal taxpayers. This lack of awareness could result in unnecessary contact with the IRS and unwarranted auditing, taxation, or penalties. Informal and published guidance could direct IRS employees to consult the ITG function or otherwise account for special considerations surrounding Native American individuals and tribal governments.

RECOMMENDATIONS

The National Taxpayer Advocate recommends that the IRS:

• Train all compliance employees about the culture and needs of Native American taxpayers, rendering assistance as required by this population, after consulting with and referring taxpayers to TAS when necessary.⁴¹

• Establish a cross-functional working group on issues of Indian individuals, parallel to the ITG function which focuses on tribal entities.

• Consult with the ITG function before implementing filters or similar programs (such as those operated by Wage & Investment Pre-Refund, AUR, ASFR, Correspondence Exam; Field Exam) that could have the effect of erroneously targeting Indian taxpayers.

• Correct procedures that result in routine failure to comply with ITG directives.

• Finalize guidance on tribal documentation of qualifying children, frivolous claim penalties, integral parts of governments including tribal corporations, general welfare exclusion of tribal distributions, and other questions as they arise.

²See 10th Amend. to U.S. Const.; IRS Pub. 963, Federal-State Reference Guide.

³See Cherokee Nation v. Georgia, 30 U.S. 1 (1831). Further, lands reserved by tribes are defined by statute as Indian Country. See 18 U.S.C. § 1151; IRM 4.86.1.1.1(2), Who We Are (June 1, 2006); IRM 4.86.1.3(2), Other Tribal Contacts (June 1, 2006). "Indian Country is a multifaceted term that historically has been used as a geographical designation, as a legal term, and as a cultural concept that encompasses the past, present, and future of American Indian people. It embodies the idea that there is 'a place' for Indians. The existence of Indian Country, through the many evolutions of that term, represents an acknowledgment and agreement that Indian people will survive. It is a concession to the notion that the melting pot is not everyone's idea of the American dream, and that many Indian people desire to live in that place they call Indian Country." Gale Encyclopedia of U.S. History, available at http://www.answers.com/topic/indian-country#ixzz2TCAlJZCq (last visited July 31, 2013). See also Stephen W. Silliman, The 'Old West' in the Middle East: U.S. Military Metaphors in Real and Imagined Indian Country, 110 American Anthropologist 237 (2008), available at http://www.faculty.umb.edu/stephen_silliman/articles/oldwestinmiddleeast.pdf (last visited July 31, 2013); Rob't Imrie, Tribes Angered by General's Reference to Enemy Land as Indian Country, Associated Press (Feb. 21, 1991), available at http://www.apnewsarchive.com/1991/Tribes-Angered-By-General-s-Reference-to-Enemy-Land-as-Indian-Country-/id-ce150feb55e4a9058c307295efc07f4a (last visited July 31, 2013).

⁴ The following passage is taken from IRM 4.86.1.5, Tribal Sovereignty Overview (Jan. 1, 2003).

⁵ IRM 4.86.1.5, Tribal Sovereignty Overview (Jan. 1, 2003) (quoting U.S. v. Mazurie, 419 U.S. 544, 557 (1975)).

⁶ IRM 4.86.1.5, Tribal Sovereignty Overview (Jan. 1, 2003) (citing Mary B. Magnuson, Indian Legal Issues, Minn. Inst. of Legal Educ'n (1995)).

⁷Id. (quoting Exec. Ord. No. 13175, 65 Fed. Reg. 67249 (Nov. 6, 2000)).

⁸ National Taxpayer Advocate 2008 Annual Report to Congress 99-100 (footnotes omitted): "Another example of outstanding service is the IRS's Office of Indian Tribal Governments outreach to Indian Nations. During 2008, the office conducted 85 events with a total attendance of more than 3,600 customers. The office also offered large-scale workshops for 227 Alaskan tribal villages and 112 Navajo villages. Services include educational workshops on Title 31, employment tax forms, tip reporting, employment taxes, the Earned Income Tax Credit (EITC), information reporting, and gaming issues. VITA also held sessions at seven events. The IRS should follow the Office of Indian Tribal Governments' model in targeting and bringing programs to other taxpayer populations."

⁹See IRM 4.86.1.2, Protocol for Contacting Tribes (Jan. 1, 2003).

¹⁰See IRM 4.86.1.1.3, Coordination Between Divisions (July 28, 2008).

¹¹Working Effectively with Tribal Governments, available at http://tribal.golearnportal.org/return.php (last visited July 31, 2013).

¹²See http://tege.web.irs.gov/article.asp?category=tege&title=mytege-ge-itg-government-functions&path=/my-tege/4_govt-entities (last visited Apr.26, 2013).

¹³ The IRS uses statistical and other criteria, commonly known as filters, to segregate returns into treatment streams. See generally IRM 4.1.3, Sources of Returns-Priority Programs-DIF and Ordering (Aug. 10, 2012).

¹⁴See National Taxpayer Advocate 2012 Annual Report to Congress 520 (Legislative Recommendation: Amend the Adoption Credit to Acknowledge Jurisdiction of Native American Tribes).

¹⁵See IRC § 23(d)(3).

¹⁶See id.

¹⁷See IRC § 7871.

¹⁸See IRC §§ 2, 24, 32, 151.

¹⁹See Service-wide Electronic Research Program (SERP) Alert W 04158 (Mar. 4, 2004).

²⁰See IRC § 6702.

²¹Compare Rev. Rul. 2007-22, 2007-1 C.B. 866, with IRM 4.86.1.5, Tribal Sovereignty Overview (Jan. 1, 2003).

²²See Keepseagle v. Vilsack, No. 1:99CV03119 (D.D.C. 2011).

²³See Nat'l Cong. of Amer. Indians, Protect Native Money Update (Jan. 30, 2013), available at http://www.ncai.org/protectnativemoney (last visited July 31, 2013).

²⁴See IRC § 108.

²⁵See IRS Pub. 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments.

²⁶Cf. National Taxpayer Advocate 2008 Annual Report to Congress 39 (Most Serious Problem: Understanding and Reporting the Tax Consequences of Cancellation of Debt Income), 391 (Legislative Recommendation: Simplify the Tax Treatment of Cancellation of Debt Income); 2007 Annual Report to Congress 13 (Most Serious Problem: Tax Consequences of Cancellation of Debt Income).

²⁷See supra Most Serious Problem: Affordable Care Act: The IRS Communication and Taxpayer Education Strategy Needs Improvement to Meet the Needs of Taxpayers.

²⁸See IRC § 5000A(e).

²⁹See Indian Health Serv., Indian Health Man. 2-1.2, available at http://www.ihs.gov/IHM/index.cfm?module=dsp_ihm_pc_p2c1#2-1.2 (last visited Aug. 1, 2013).

³⁰See Assoc. Press, Some Native Americans May Be Penalized Under ACA (May 15, 2013), available at http://www.cbsnews.com/8301-204_162-57584676/ap-some-native-americans-may-be-penalized-under-affordable-care-act/ (last visited Aug. 1, 2013).

³¹ 78 Fed. Reg. 39,501 (July 1, 2013); see also IHS Press Release, Administration Renews Commitment to American Indians and Alaska Natives (June 26, 2013), available at http://www.ihs.gov/newsroom/pressreleases/2013pressreleases/renewcommitment/ (last visited Aug. 8, 2013); cf. infra Legislative Recommendation: Premium Tax Credit: Lower the Affordability Threshold.

³²See Ellen Aprill, The Integral, the Essential, and the Instrumental, 23 J. Corp. L. 803 (1998).

³³See IRS Priority Guidance Plans, available at http://www.irs.gov/uac/Priority-Guidance-Plan (last visited Aug. 2, 2013).

³⁴See Karen Atkinson & Kathleen Nilles, Tribal Business Structure Handbook (Dep't of the Interior, 2008), Ch. III, http://www.irs.gov/pub/irs-tege/tribal_business_structure_handbook.pdf.

³⁵See Exec. Ord. 13,175, 65 Fed. Reg. 67,249 (Nov. 9, 2000); supplemented by Pres. Memo. 74 Fed. Reg. 57,879 (Nov. 5, 2009); implemented byO.M.B. Memo. M-10-33 (July 30, 2010).

³⁶ 2012-2 C.B. 715 (Dec. 5, 2012).

³⁷See Treas. Reg. § 1.451-2.

³⁸See Rev. Proc. 2003-14, 2003-1 C.B. 319.

³⁹See Rev. Proc. 2011-56, 2011-2 C.B. 834.

⁴⁰See Notice 2013-55, 2013-38 I.R.B. 207; Notice 2013-1, 2013-3 I.R.B. 281; Notice 2012-60, 2012-41 I.R.B. 445.

⁴¹Cf. National Taxpayer Advocate 2010 Annual Report to Congress 15 (Most Serious Problem: The IRS Mission Statement Does Not Reflect the Agency's Increasing Responsibilities for Administering Social Benefits Programs); 2009 Annual Report to Congress, vol. 2, § 4, 75 (Research Study: Running Social Programs Through the Tax System).

Debra Holland, Commissioner, Wage and Investment Division

Karen Schiller, Commissioner, Small Business/Self-Employed Division

DEFINITION OF PROBLEM

The Automated Collection System (ACS) is a computerized inventory system that sends taxpayers notices demanding payment, issues liens and levies, and answers telephone calls in an effort to resolve balance due accounts and delinquencies.¹ ACS collects tax largely by offsetting taxpayers' refunds, and eliminates much of its inventory by passing cases to other parts of the IRS:

• In fiscal year (FY) 2013, ACS collected approximately $5.4 billion on open Taxpayer Delinquent Accounts (TDA).² However, $2.5 billion (about 47 percent) of this amount came through automatic refund offsets, which are generally not attributable to ACS employees' direct efforts.³

• While collections on open TDA accounts totaled $5.4 billion, ACS transferred approximately three times as much -- $16.1 billion -- in unresolved tax liabilities to other IRS collection inventory, i.e., the Queue, the Collection Field function (CFf), or Shelved Inventory.⁴

• Rather than applying the appropriate type of contact for each type of taxpayer, ACS generally relies on notices of intent to levy or systemically generated levies, which are often not effective. For instance, in FY 2013 the ACS received 2,889,971 new taxpayer cases and issued 1,216,302 levies, averaging almost one levy for every two cases received.⁶ Although this is still a high number of levies, it is about 46 percent lower than in FY 2012.⁷ Despite this substantial reduction, ACS's overall collections actually increased for the latter period. This result is not surprising, based on a TAS review of ACS cases that found about 75 percent of levies were unproductive (i.e., did not attach to a payment source).⁸

• Several studies show that letters and phone calls are superior to levies in generating a response and collecting outstanding tax.⁹ In one IRS study, the rate of response from taxpayers after receiving letters was nearly three times greater than the rate for those who received levies.¹⁰ A recent study showed that an expanded use of predictive dialer calls that were connected to live assistors generated a 45 percent contact rate.¹¹

• Some types of cases are more suitable to ACS treatment than others. For instance, in FY 2013, only four percent of the cases processed through the Wage and Investment (W&I) division's ACS were sent to the Queue, while Small Business/Self-Employed division (SB/SE) ACS, which receives many employment tax cases, transferred 31 percent.¹²

ANALYSIS OF PROBLEM

Background

ACS Is the IRS's Collection Call Center.

When a delinquent account is not resolved through the normal notice process, the IRS typically assigns it to the ACS.¹³ Cases are assigned to contact representatives or tax examiners. If the accounts remain unpaid or unresolved in ACS, they are transferred to the Collection Queue or to the Collection Field function. If a case moves to the Queue, the IRS makes little attempt to stay in contact with the taxpayer, unlike other creditors such as credit card companies that send regular notices.

When in ACS, taxpayers will often find themselves subject to a lien or levy. In cases where a levy source is available, one of ACS's first actions is usually to send out a Final Notice of Intent to Levy and Your Notice of a Right to a Hearing, rather than trying to contact the taxpayer through an outgoing call. ACS employees spend only about two percent of all their direct time making outbound calls.¹⁴

ACS Performance

ACS is not using the most effective methods for resolving cases and collecting liabilities. Over the past six years, ACS has consistently collected a modest percentage of dollars placed in its inventory, and almost half of those dollars came through computer-generated refund offsets, which are not part of ACS employees' direct efforts. Rather than collecting the outstanding liabilities, ACS has routinely transferred a large percentage of its inventory to the Queue or Shelved Inventory where penalties and interest continue to accrue. The chart below details ACS's performance.

 

FIGURE 1.11.1, ACS Activity by Fiscal Year

 

ACS Dollars -- Liabilities and Activity

 

 

 

ACS's Over-reliance on its Levy Authority Is Counterproductive.

A recent study indicates ACS's current practice of relying primarily on its levy authority to generate taxpayer contacts may not maximize case closures. The SB/SE Denver ACS study reviewed 72,770 TDA cases that were in SB/SE ACS, and were closed during May of 2011 either as:

A significant omission of the SB/SE Denver ACS study was that it did not consider levies issued during the 180-day period that did not result in a case closure (i.e., unproductive levies). However, TAS did conduct such an analysis in a separate review of a statistically representative sample of 579 ACS cases that were in ACS inventory from about mid-2012 to mid-2013, and found most ACS levies are unproductive. In the analysis of the 579 ACS cases, 227 were issued a levy, but only 56 of these levies (or about 25 percent) were productive (i.e., attached to a revenue source).¹⁷ The remaining 75 percent of levies were unproductive, and possibly discouraged the taxpayer from contacting ACS.

Reliance on ACS Enforcement Powers Can Cause Economic Hardship to Taxpayers and Unnecessarily Tie Up IRS Resources.

ACS's tendency to rely heavily on its levy authority can produce severe consequences for the taxpayer and the IRS alike. For instance, when ACS issues a levy without first attempting to contact the taxpayer, it risks causing economic hardship. Once a taxpayer has shown hardship, the IRS is required by law to release that levy, creating unnecessary work for the IRS.¹⁸ Not only do these levies unnecessarily harm the taxpayer, but the release process unnecessarily ties up IRS resources in resolving problems that could have been avoided altogether. Both the taxpayer and the IRS would be better served if the IRS designed its collection action to be "no more intrusive than necessary."¹⁹ It can do this by attempting to ensure upfront that the levy is the best way to collect the tax and that all other methods of collection, including outgoing calls, are ineffective.

ACS Can Limit its Use of Levies, Reducing Harm to Taxpayers without Reducing Dollars Collected.

ACS's most recent performance supports the premise that more levies do not necessarily translate into more dollars collected. For example, in FY 2013, ACS issued approximately 1.2 million levies, a reduction of about 46 percent from FY 2012.²⁰ This decrease likely results from the IRS's decision to dedicate three ACS call sites to Accounts Management call center duties this past filing season. Despite this substantial reduction in levy action, dollars collected on TDAs actually increased for the latter period.²¹ Specifically, through FY 2013, the IRS reported collection revenue generated by ACS on TDAs as approximately $2.8 billion, an increase of about $25.5 million compared to 2012.²² The fact that revenue secured through ACS operations did not suffer in light of the substantial decline in ACS levies indicates that levies are not the principal drivers of ACS collections, and that other, proactive collection treatments may prove more effective, and reduce unnecessary harm inflicted on taxpayers.

ACS Could Improve Its Case Resolution Rate by Increasing the Use of Notices and Phone Calls.

Although levies are an important tool for the IRS in addressing uncooperative, "won't pay" taxpayers, systemically generated levies will unnecessarily harm many taxpayers, while failing to collect the optimal amount of revenue. By relying on one collection method over others, ACS is ignoring one of its own studies that shows certain letters generate a higher response rate when compared to levies. Ignoring this study, and maintaining a collection strategy that relies heavily on levies, fails to achieve the highest possible response or resolution rate.

Kansas City Customer Service Site Study Conducted in 2000

In a 2000 study by the Kansas City customer service site, the IRS compared the effectiveness of letters and levy actions in generating a telephone response from the taxpayer.²³ The study was conducted by randomly pulling and analyzing 2,000 delinquent accounts that had one of the following actions:

This study concluded, "[a]ny of the four letters sent prompted a higher rate of telephone response from the taxpayer than levy action." More specifically, the response rate for levies was about 13 percent, while the response rate for Letter 16, Please Call Us About Your Overdue Taxes or Tax Return, was nearly 37 percent, and all letters had a response rate over 30 percent.³¹ Further, the study concluded that ACS could increase the effectiveness of its letters by securing better addresses, which could be done by enhancing its efforts to search for a last known address.³² This step could have a significant impact as the study found about 29 percent of ACS letters were returned as undelivered.³³

Although the finding that a levy notice was not the most effective way to generate a response from the taxpayer was significant, this was probably not the most important conclusion from the report. The key point was the significance of determining what type of action best generates a resolution. The study found that a case is twice as likely to close when a taxpayer responds to a letter.³⁴ This finding is consistent with TAS's review of ACS cases described above, which showed a case was resolved in 50 percent of cases where an ACS letter or phone call resulted in a contact with the taxpayer.³⁵

The Kansas City study also found certain actions that generated a response led to case resolution more often than others. For instance, the study showed not only that taxpayers are less likely to respond to a levy action than letters, but that when taxpayers do respond to these actions, levy actions were less likely to lead to closed cases. When taxpayers responded by telephone to a levy, the IRS closed only 24 percent of their cases. Conversely, when taxpayers responded by telephone to a letter titled Please Call Us About Your Overdue Taxes or Tax Returns, 35 percent of the cases ended in closure. Moreover, only eight percent of the taxpayers who responded by telephone to a levy fully paid their accounts and only six percent entered into installment agreements. By comparison, 17 percent of taxpayers who responded by telephone to a letter paid in full and 12 percent entered into an IA.³⁶ Therefore, when crafting the best collection strategy, ACS's study shows that considering what action will most likely generate a response and a resolution to the case is critical.

A Predictive Dialer Study Showed that a Number of Taxpayers Are Best Reached by an Outgoing Call.

A recent study provides more evidence that methods more effective than levies are at ACS's disposal. In 2013, W&I Research and Analysis tested the effectiveness of the W&I ACS predictive dialer system.³⁷ The study showed that when a live person answers predictive dialer calls, and the number of attempted calls is not limited, the system generated a contact rate of up to 45 percent.³⁸ This far exceeded the response rate when only Letter 16, Please Call us About Your Overdue Taxes or Tax Return, was sent out to taxpayers, which was at most 17 percent. Further, the contact rate for the predictive dialer calls exceeds the results of ACS levies in the SB/SE Denver ACS study, discussed above, which showed a 25 percent productive contact rate.³⁹ The predictive dialer study also observed that predictive dialer calls where the number of attempts was not limited and live assistors operated the line generated a "significantly higher proportion of contacts," and a "significantly higher proportion of IAs" than predictive dialer calls using a recorded voice.⁴⁰

ACS Is Not Very Successful at Working Business Cases.

In addition to using the right method to generate a contact with the taxpayer, and ultimately resolving the case, another part of making ACS more effective is assigning it the appropriate types of cases to work. An examination of ACS indicates that SB/SE ACS is being assigned cases that would be better worked in the field. More specifically, compared to W&I, SB/SE ACS is significantly less successful at resolving cases and placing taxpayers in installment agreements. For instance, in FY 2013, W&I ACS resolved (as a percentage) twice as many TDA cases with installment IAs as SB/SE ACS.⁴¹

However, the most significant difference between SB/SE and W&I ACS is the number of cases transferred to the Queue. In FY 2013, only four percent of the cases processed through W&I ACS went to the Queue, while SB/SE ACS transferred 31 percent.⁴²

 

FIGURE 1.11.2, ACS Inventory Movement

 

W&I and SB/SE ACS Inventory Movement

 

 

 

This comparison reveals that ACS can be effective in resolving TDAs of certain segments of the population, notably wage earners, but strikingly ineffective in collecting on other TDAs, namely, business trust fund cases.⁴⁶ It is unclear why the IRS places these cases in SB/SE ACS, especially when they are more likely to be resolved in the field. The field closed 57 percent of trust fund modules with a balance between $1,500 and $5,000 as full paid, while SB/SE ACS only closed 42 percent as full paid.⁴⁷ Of greater concern is the fact that SB/SE ACS transferred 42 percent of modules that have a liability within the $1,500-$5,000 range to the Queue, while the CFf transferred only four percent. This is yet another indicator that business trust fund cases are not being assigned appropriately, causing them to go unresolved, penalties and interest to accrue, and revenue to be lost. If the field is not available to work business trust fund cases at a particular time, the IRS should place those cases with a core ACS unit trained to work them effectively, rather than allowing them to sit in the queue unaddressed.⁴⁸

A Recent Change to the Internal Revenue Manual (IRM) Will Expand the Case Resolution Discussion Between the Taxpayer and ACS and Increase the Likelihood that Certain Cases Will Be Resolved.

Although ACS's overall collection strategy remains counterproductive, positive changes have occurred. A recent revision to IRM 5.19.1, Liability Collection, Balance Due, and proper training on the change for ACS assistors will expand collection alternatives to more taxpayers and remove barriers to resolving cases. Under the new provisions, the IRS will not require liquidation of assets or equity in an asset even when such liquidation would result in full or substantial partial payment of the liability, if:

• Factors such as advanced age, ill health, or other special circumstances would prevent the liquidation of the assets; or

• The taxpayer qualifies for guaranteed, streamlined, or in-business trust fund express agreements.⁴⁹

Past IRS practice has been to push for full payment of the liability through liquidation of assets, and if the taxpayer was unable to make a full payment, the case was likely to land in the Queue. These changes should expand the conversation between ACS assistors and taxpayers. In the circumstances discussed above, assistors will be able to discuss collection options, such as IAs. To be effective, however, the IRS must train ACS assistors on this significant change.⁵⁰ Moreover, the IRS should expand these provisions to other taxpayer circumstances. Merely insisting on the taxpayer paying in full is not a realistic position in many situations, and, as the ACS data illustrate, doing so has not yielded and will not yield effective tax collection.

CONCLUSION

The ACS plays a vital part in collecting outstanding tax liabilities. However, the National Taxpayer Advocate believes a re-orientation of ACS practices could increase productive case resolutions, while reducing unnecessary harm to the taxpayer. This new approach should place more emphasis on better segmentation of taxpayer debtors and effective initial contacts. It should embody less immediate reliance on levy authority, which harms taxpayers, is not highly productive, and creates IRS re-work. Further, the IRS should immediately assign small business cases to a revenue officer to be worked, or place them with a core ACS unit that is trained and has the necessary skills to work cases when the field is unavailable.

RECOMMENDATIONS

The National Taxpayer Advocate recommends that ACS:

² TDAs are collection accounts that remain unresolved at the conclusion of the collection notice process and have been designated for additional collection activity, e.g., ACS or the Collection Field function (CFf). A taxpayer may have multiple TDAs (e.g., one for each delinquent tax period).

³ IRS Collection Activity Report, NO-5000-2, Taxpayer Delinquent Accounts Report (Sept. 2013). In FY 2013, the IRS collected $2.8 billion of the $5.4 billion through taxpayers making full or partial payments on their delinquent accounts.

⁴Id. The Queue is a holding inventory where collection cases sit, usually after being in ACS, and before being assigned to the CFf or reassignment to ACS. Cases sit in the Queue based on business rules and available resources. Shelved Inventory means accounts that are not being worked due to resource limitations. The CFf is predominantly staffed by revenue officers who make field contact with taxpayers, secure delinquent returns and financial information, initiate installment agreements, and take enforcement action including liens, levies, and seizures of property.

⁵ National Taxpayer Advocate 2012 Annual Report to Congress 381.

⁶ IRS Collection Activity Report, NO-5000-24, Levy & Seizure Report (Sept. 2013).

⁷ In FY 2012, ACS received 2,758,926 new taxpayer cases and issued 2,247,168 levies. The decrease from FY 2012 to FY 2013 likely results from the IRS's decision to dedicate three ACS call sites to Accounts Management call center duties this past filing season.

⁸ TAS reviewed 579 taxpayers in ACS.

⁹ ACS Telephone Response Study, Kansas City Customer Service Site (Mar. - Apr. 2000).

¹⁰Id. This only included levies and Letters 16 that were presumed to reach the taxpayer (i.e., did not come back as undelivered).

¹¹ Predictive Dialer Test -- ACS Accounts, Wage and Investment, Research and Analysis (May 2013). The 45 percent response rate is for accounts where a call was made and a letter sent. However, when just a call was made on the account the response rate was 37 percent. A predictive dialer is a telephone control system that automatically calls a list of telephone numbers in sequence, screening out no-answers, busy signals, answering machines and disconnected numbers and predicting when a live person will answer the call.

¹² IRS Collection Activity Report NO-5000-2, Taxpayer Delinquent Accounts Report (Sept. 2013).

¹³ Internal Revenue Manual (IRM) 5.19.5.1 (Mar. 6, 2009); IRM 5.19.5.2 (Dec. 1, 2007). When a case is assigned to ACS it may take steps to issue a lien or levy against the taxpayer or send the taxpayer one of the following letters: Letter 16, Please Call us About Your Overdue Taxes or Tax Return; Letter 99, Please Call Us About Your Overdue Taxes or Tax Returns; Letter 40, Advisory Notice to Taxpayer of Need to Contact Third Parties; Letter 11, Final Notice, Notice of Intent to Levy and Your Notice of a Right to a Hearing.

¹⁴ IRS response to TAS research request (Oct. 24, 2012). In FY 2012, the percentages of ACS employees' direct time spent making outgoing calls on cases were 2.4 percent for SB/SE and 2.0 percent for W&I. A Treasury Inspector General for Tax Administration (TIGTA) report showed SB/SE ACS as spending 62 percent of its time answering incoming calls, 35 percent of its time working correspondence and research on accounts, and three percent of its time making outbound calls. For W&I ACS, 74 percent of its time was spent answering incoming calls, 24 percent of its time was spent working correspondence inventory and research accounts, and two percent making outbound calls. TIGTA, Ref. No. 2010-30-046, More Management Information Is Needed to Improve Oversight of Automated Collection System Outbound Calls 6 (Apr. 28, 2010).

¹⁵ ACS Closed Case Actions Project DEN0181, SB/SE Research (Aug. 2012). Fully Satisfied applies to cases that were resolved by payment or abatement of assessed amounts. Installment agreements are not fully satisfied at time of closure and the case may reopen if the taxpayer does not keep the terms of the agreement. Cases closed as CNC have a balance due that is not being pursued.

¹⁶ Within 180 days of the levy being issued 25,657 cases were closed. Further, 12,455 of these cases were fully satisfied, 9,241 were put into IAs, and 3,961 were placed in CNC status.

¹⁷ TAS reviewed 600 taxpayers in ACS. The ACS sample was selected by extracting Individual Master File (IMF) and Business Master File (BMF) taxpayers assigned to ACS at some time from cycle 201230 forward (from mid-2012 to mid-2013). Taxpayers were determined to be assigned to ACS from the Accounts Receivable Dollar Inventory entity table. After identifying this population, a sample of 600 taxpayers was randomly selected. TAS was able to obtain information to complete 579 data collection instruments (DCI). The other 21 DCIs could not be completed. The random sample of 579 taxpayers has a 90 percent confidence level with about a five percent plus or minus margin.

¹⁸ IRC § 6343(a)(1)(D).

¹⁹ IRC § 6330(c)(3)(C). See also National Taxpayer Advocate 2007 Annual Report to Congress 478 (Legislative Recommendation: Taxpayer Bill of Rights and De Minimis "Apology" Payments); National Taxpayer Advocate's Report to Acting Commissioner Daniel Werfel, Toward a More Perfect Tax System: A Taxpayer Bill of Rights as a Framework for Effective Tax Administration (Nov. 4, 2013) at 2, 3; National Taxpayer Advocate 2011 Annual Report to Congress 493 (Legislative Recommendation: Enact the Recommendations of the National Taxpayer Advocate to Protect Taxpayer Rights).

²⁰ IRS Collection Activity Report NO-5000-24, Levy & Seizure Report (Sept. 2013). In FY 2013, the field also issued fewer levies when compared to FY 2012, albeit it was not as significant of a decline as ACS's. Specifically, the CFf issued 11 percent fewer levies in FY 2013 when compared to 2012. IRS Collection Activity Report, NO-5000-2, Taxpayer Delinquent Accounts Report (Sept. 2013).

²¹ This revenue is collected by the use of Collection resources. It includes levies, IAs, payments on collection notices, etc. It does not include refund offsets.

²² IRS Collection Activity Report No. 5000-2, Taxpayer Delinquent Accounts Report (Sept. 2013). The $2.8 billion collected on TDAs for FY 2013 does not include dollars collected through offsets. When offsets are included for FY 2013, $5.4 billion was collected. About $5.2 billion was collected for FY 2012 when including offsets, which means that ACS actually collected about $200 million more in FY 2013 than it did in FY 2012, despite the reduction in the issuance of levies.

²³See ACS Telephone Response Study, Kansas City Customer Service Site (Mar. - Apr. 2000). While not specified in the study, the sample size would generally yield results with a margin of plus or minus five percent at the 95 percent confidence level.

²⁴ This letter is sent by certified mail with a return receipt and is required before the IRS can take any enforcement action.

²⁵ This letter asks the taxpayer to call the IRS regarding overdue taxes or tax returns.

²⁶ This letter advises the taxpayer that the IRS could be contacting a third party regarding a balance due and does not require a response. Even though it requires no response by taxpayers, the study found it was the most effective tool in prompting telephonic customer contact, because taxpayers were concerned that their neighbors or employers would become aware of their affairs. (This form letter is no longer in use.)

²⁷ This letter is the same as Letter 16, but mailed out when a new case comes to ACS.

²⁸ After a Letter 11, Final Notice, Notice of Intent to Levy and Your Notice of a Right to a Hearing, has been sent, a levy is sent to both the levy source and the taxpayer. The levy sources may have been contacted on some of the cases in order to verify financial relationship with the taxpayer.

²⁹ The sample was further divided to 200 of each for W&I and 200 each for SB/SE.

³⁰ The data was captured in date increments to show the impact of letter mailing over the 30 days.

³¹See ACS Telephone Response Study, Kansas City Customer Service Site (Mar. - Apr. 2000). This only included levies and Letters 16 that were presumed to reach the taxpayer (i.e., did not come back as undelivered).

³² National Taxpayer Advocate 2009 Annual Report to Congress 221 (Most Serious Problem: The IRS Has Not Studied or Addressed the Impact of the Large Volume of Undelivered Mail on Taxpayers).

³³See ACS Telephone Response Study, Kansas City Customer Service Site (Mar. - Apr. 2000).

³⁴ ACS Telephone Response Study, Kansas City Customer Service Site (Mar. - Apr. 2000). Case closure actions include: full payment of the liability, the taxpayer has entered into an IA, case is CNC, case is in bankruptcy status, or the case has been sent to the Queue or CFf.

³⁵ TAS reviewed a sample of 579 taxpayers who were assigned to ACS at some time from cycle 201230 forward (from mid-2012 to mid-2013).

³⁶ ACS Telephone Response Study, Kansas City Customer Service Site (Mar. - Apr. 2000). Taxpayers were responding to Letter 99, Please Call Us About Your Overdue Taxes or Tax Returns.

³⁷ Predictive Dialer Test -- ACS Accounts, Wage and Investment, Research and Analysis (May 2013).

³⁸ The study conducted a review of the effectiveness of the W&I ACS predictive dialer system by conducting a predictive dialer test with two different groups. In large part, the two test groups were conducted in the same manner. Test group one had a response rate of 37 percent. This test group included 12,497 taxpayers and was conducted in December of 2012, but only made outgoing calls. The 45 percent response rate was for test group two, which included 11,951 taxpayers and was conducted in February of 2013 but made outgoing calls and sent letters.

³⁹ ACS Closed Case Actions Project DEN0181, SB/SE Research (Aug. 2012).

⁴⁰ Predictive Dialer Test -- ACS Accounts, Wage and Investment, Research and Analysis (May 2013).

⁴¹ IRS Collection Activity Report NO-5000-2, Taxpayer Delinquent Accounts Report (Sept. 2013).

⁴²Id.

⁴³ IRC § 7501 provides that taxes withheld from others, which are to be paid to the United States, are held in a special fund in trust for the United States. These taxes are often referred to as the "trust fund" taxes. Trust fund taxes include employment taxes, income tax withheld from employees' wages, and certain types of excise taxes. IRC § 6672 provides for the assessment of a Trust Fund Recovery Penalty (TFRP) against those deemed responsible persons when these monies are not paid as required.

⁴⁴ About $1 billion of the $2.9 billion in business trust fund cases received by ACS are uncollected dollars that remain in its inventory

⁴⁵ IRS Collection Activity Report, NO-5000-2, Taxpayer Delinquent Accounts Report (Sept. 2012). As discussed further in Most Serious Problem: Collection Process: IRS Collection Procedures Harm Business Taxpayers and Contribute to Substantial Amounts of Lost Revenue, infra, SB/SE ACS employees are not authorized to consider a business taxpayer's complex financial statements, such as cash flow and profit and loss statements, nor are they trained to complete a financial analysis of BMF cases. Further, ACS employees are limited to granting in-business trust fund express installment agreements (IBTFE) for business accounts with a balance due of $25,000 or less. This means that business taxpayers who call ACS after receiving a notice (potentially a levy notice) will speak with an ACS assistor who has limited authority to agree to an IA.

⁴⁶ National Taxpayer Advocate 2013 Annual Report to Congress, vol. 2 (A Comparison of Revenue Officers and the Automated Collection System in Addressing Similar Employment Tax Delinquencies), infra.

⁴⁷Id. These are rates of cases directly assigned to the CFf. In this Vol. 2 study, TAS focused on newly-delinquent taxpayers with one or two employment tax delinquencies TDA modules in 2003, and those with three delinquencies in 2003, provided they were not pyramiding (i.e., there was a gap between the last two delinquencies).

⁴⁸See Most Serious Problem: Collection Process: IRS Collection Procedures Harm Business Taxpayers and Contribute to Substantial Amounts of Lost Revenue, infra.

⁴⁹ IRM 5.19.1.5.4.2 (Oct. 18, 2013). In Business Trust Fund Express Agreements can be granted for liabilities up to the aggregate assessed balance (CC SUMRY) of $25,000. The entire liability, including accruals, must be paid within 24 months or before the Collection Statute Expiration Date (CSED), whichever is earlier. In order to qualify, the taxpayer must be in full filing compliance and current on tax deposits.

⁵⁰See Most Serious Problem: The Drastic Reduction in IRS Employee Training Impacts the Ability of the IRS to Assist Taxpayers and Fulfill Its Mission, supra; Most Serious Problem: Taxpayer Rights Training: Insufficient Education and Training about Taxpayer Rights Impairs IRS Employees' Ability to Assist Taxpayers and Protect Their Rights, supra.

Karen Schiller, Commissioner, Small Business/Self-Employed Division

Debra Holland, Commissioner, Wage and Investment Division

DEFINITION OF PROBLEM

The existing IRS collection strategy fails to recognize and meet the needs of business taxpayers in re-solving collection issues.¹ The majority of business taxpayers working with the IRS are initially routed through collection units that have neither the authority nor the expertise to fully resolve their problems. Consequently, in fiscal year (FY) 2013, approximately 60 percent of the collection "final" notices involving business-related "trust fund" taxes were not resolved through the notice process.² In FY 2013, approximately 3.7 times more delinquent trust fund dollars passed through the Automated Collection System (ACS) with unresolved cases than the ACS actually collected (including refund offsets and installment agreements).³ As a result, the resolution of these collection accounts is unnecessarily delayed, which contributes to additional tax delinquencies and the rapid accumulation of penalties and interest -- factors that increase the risk these taxpayers may never pay the taxes or get back into compliance.

Alternative collection solutions for business taxpayers, e.g., installment agreements (IAs) and offers in compromise (OICs), are exceptionally rare. The IRS's reluctance or failure to proactively consider these options for in-business, trust fund (IBTF) taxpayers contributes to unnecessary delays in resolving their accounts. As a result, at the conclusion of FY 2013:

• Approximately three quarters of the open inventory of trust fund tax cases involved multiple tax delinquencies;⁴

• Almost half involved four or more delinquent tax periods;⁵ and

• Over 70 percent of the delinquent trust fund inventory involved debts for tax years at least three years old.⁶

The National Taxpayer Advocate is troubled by the high percentage of business taxpayers who are unable to resolve their tax problems in response to IRS collection notices or contacts with ACS, noting that:

• The withholding and payment of trust fund taxes are vital components of the voluntary tax system;

• Trust fund tax delinquencies can quickly become unmanageable for business taxpayers;

• The IRS provides inadequate attention and service for emerging trust fund collection cases;

• The IRS insists on assigning trust fund tax cases to employees who are not fully equipped to provide the services needed to resolve them; and

• The full range of collection options are often not available to business taxpayers until the tax debts have become uncollectible.

ANALYSIS OF PROBLEM

The withholding of employment taxes by business taxpayers is a vital component of the voluntary compliance tax system.

Taxpayer businesses contribute to the administration of the nation's voluntary tax system through the withholding and payment of employment-related "trust fund" taxes. IRS studies have confirmed that taxpayers subject to trust fund tax withholding maintain the highest levels of voluntary compliance.⁸ In FY 2012, trust fund taxes comprised approximately 70 percent of the total tax revenues collected by the IRS.⁹ In a very real sense, trust fund taxes collected by employers help form the "backbone" of the nation's tax system.

Trust fund tax delinquencies are "high risk" debts, which can quickly become unmanageable for business taxpayers.

Bureau of Labor Statistics data reveal that over half of newly established businesses fail within the first five years of operation,¹⁰ and only about a third survive ten years or more.¹¹ It is not uncommon for a financially struggling business to fail to meet its trust fund tax obligations. Without adequate attention, these debts can multiply rapidly and quickly become very difficult for the taxpayer to resolve. In FY 2013, the IRS reported in inventory over 450,000 taxpayer cases involving delinquent trust fund taxes.¹² As shown in Figure X, of these accounts, 75 percent involved more than one delinquent tax period, and 44 percent involved four or more.¹³ These cases accounted for over $14 billion in delinquent trust fund taxes.¹⁴ Consequently, the IRS has traditionally categorized trust fund tax delinquencies as "high risk" debts.¹⁵

 

FIGURE 1.12.1, Trust Fund Taxpayers in Inventory -- 75 Percent

 

Have Multiple Taxpayer Delinquent Accounts¹⁶

 

Trust Fund Taxpayers in Inventory

 

 

 

In recent years, the National Taxpayer Advocate has expressed concerns that despite the high-risk nature of cases involving trust fund taxes, the IRS has consistently failed to interact with these taxpayers with a proper sense of immediacy.¹⁷ The IRS continues to view emerging trust fund tax problems as relatively simple cases that do not warrant early intervention by field-based revenue officers. Almost all trust fund tax cases are initially addressed through collection notices and IRS call centers, even though employees in these areas are not trained or empowered to resolve many of these accounts. Consequently, the IRS has lost billions in tax revenues by failing to employ an effective collection strategy for this important taxpayer segment. From FY 2010 through FY 2013, the IRS reported as uncollectible an average of approximately $4.2 billion per year in trust fund tax debts -- or roughly 1 1/2 times the amount the IRS collected on these TDA accounts, including refund offsets and installment agreements.¹⁸

 

FIGURE 1.12.2, Substantial Amounts of Trust Fund Taxes are

 

Reported as Currently Not Collectible (CNC) Each Year¹⁹

 

Trust Fund Taxes

 

 

 

In virtually all IRS tax delinquency cases, the collection activity starts with the IRS sending notices to the taxpayer. Generally, delinquencies involving trust fund taxes receive two collection notices. While a significant number of taxpayers resolve debts in response to these notices, the majority of this population does not.

In FY 2013, the IRS issued approximately 1.5 million "final notices" (CP 504B) to small business taxpayers, representing approximately $7.2 billion in unpaid trust fund taxes.²⁰ About 38.8 percent of these notices were resolved by full payments (37.2 percent) or IAs (1.6 percent).²¹ The IRS collected $740 million in response to these notices, or 10.3 percent of the balances due.²² On the other hand, approximately $5.7 billion in employment tax debts -- over 60 percent of the "final" notice accounts went forward in the collecting process as TDAs because the taxpayers did not successfully resolve the balances due after the IRS issued the "final" collection notice.²³

 

FIGURE 1.12.3, Most Delinquent Trust Fund Taxes are Not Collected

 

Via Final Notices²⁴

 

Trust Fund Final Notices

 

 

 

The first notice (CP 14) issued to delinquent taxpayers employs a curt, matter-of-fact tone, which informs the taxpayer of unpaid taxes, and emphasizes that the taxpayer needs to pay the full amount immediately (in big bold letters). While the second page of the notice does provide information about contacting the IRS to discuss payment arrangements, the front page clearly stresses the message of "full pay now!"

However, if the taxpayer does not respond within five weeks, the final notice (CP 504B) is issued, and the tone is even more harsh.

 

 

Taxpayer responses to collection notices are handled by IRS employees who are not fully equipped to resolve trust fund tax cases.

Business taxpayers responding to collection notices are directed to call an IRS toll-free number, serviced by customer service representatives (CSRs) in the Accounts Management (AM) operation of the Wage and Investment (W&I) operating division. Written responses are worked by tax examiners (TEs) in the Compliance Services Collection Operation (CSCO) of the Small Business/Self-Employed (SB/SE) operating division. However, the IRS imposes significant limitations on the abilities of these employees to provide full service to taxpayers with trust fund tax debts.

Accounts Management and CSCO employees receive no formal training in performing financial analysis on business cases and have very limited authorities to place taxpayers with trust fund tax debts into installment agreements.²⁵ For example, AM employees are only authorized to enter into an IA that meets the "streamlined" IA criteria established for AM, limited to cases with balances due of $10,000 or less and payment terms of no more than 24 months.²⁶ AM employees may not allow any short-term payment extensions to IBTF taxpayers.²⁷ If the taxpayer owes more than $25,000, or cannot pay in full within 24 months, AM will advise the taxpayer the account is being assigned for a field contact by a revenue officer.²⁸ If the taxpayer is not in full filing compliance, AM advises the taxpayer to file the delinquent return and call back within 30 days.²⁹

Although virtually all collection notices instruct taxpayers to call AM for assistance in resolving delinquent accounts, IBTF taxpayers who do not meet AM's strict criteria for streamlined IAs will generally not succeed in their attempts to resolve their tax liability at the first point of contact, and will be passed on to the next step of the collecting process.³⁰ The abysmal collection statistics cited above show the consequences of the IRS's failure to work with the taxpayer at the first point of contact. Punting a noncompliant taxpayer downstream, when that taxpayer has reached out to the IRS, is foolhardy and costly.

The Automated Collection System (ACS) frequently fails to resolve trust fund tax delinquency problems; yet the IRS still assigns almost all business cases to ACS.

When not resolved by notices, almost all business cases involving trust fund taxes are initially assigned to ACS. However, in their efforts to assist these taxpayers, ACS employees are hampered by the same training limitations and procedural restrictions as employees working collection notices. For example, ACS employees do not have the authority to grant extensions to pay on IBTF accounts,³¹ will not discuss alternative payment options if the taxpayer has an unfiled return,³² and are not trained or authorized to enter into non-streamlined IAs for accounts involving business taxes.³³

In light of these restrictions, ACS has limited success in resolving business cases involving trust fund taxes.

• Of the trust fund cases processed through ACS, approximately 65 percent left ACS as unresolved cases, i.e., transfers to the Queue³⁴ (52 percent), transfers to the Field (eight percent), or cases that were deferred or shelved (five percent).³⁵

• ACS received approximately $2.9 billion in trust fund accounts, but reported only $310 million -- or 11 percent -- as collected or offset while the accounts were in ACS.³⁶

• Of the trust fund dollars that passed through ACS, $1.6 billion left ACS with unresolved accounts, including $1.2 billion transferred to the Queue.³⁷

• Including revenue collected through installment agreements and offsets, approximately 3.7 times as many delinquent trust fund dollars left ACS with unresolved cases as were collected by ACS.³⁸

FIGURE 1.12.4, ACS is Usually Not Successful in Collecting Trust

 

Fund Dollars³⁹

 

Results of ACS Actions on Trust Fund Cases

 

 

 

Despite the high risk nature of trust fund tax debts, the IRS collecting process does not allow taxpayers timely access to the services and payment options that can only be provided by revenue officers in the Collection Field operation. IRS focus group participants have indicated that the main reason business taxpayers do not pay their payroll taxes is because "they do not see the immediate consequences of noncompliance."⁴⁰ When asked how the IRS could help these taxpayers, the number one strategy participants recommended was "the need for the IRS to react faster."⁴¹ They stated, "The main problem is that many taxpayers are buried too deep by the time the IRS gets involved."⁴²

Unfortunately, "reacting faster" from the taxpayer's perspective is not a key component of the IRS collection strategy and "getting involved" is too often limited to issuing collection notices, and restricting the subsequent taxpayer contacts to untrained and unempowered employees. Delays in service delivery are further exacerbated by the IRS's practice of assigning most trust fund cases that are not resolved through the notice process or ACS into the Collection Queue. These questionable assignment practices promote the pyramiding of additional trust fund tax liabilities, and the aging of IRS accounts receivable. At the end of FY 2013, 55 percent of these high risk cases were assigned to the Queue.⁴³Not surprisingly, approximately 71 percent of the current trust fund TDA inventory involved debts for tax years at least three years old.⁴⁴ Studies conducted by the IRS recognize the "collectibility curve" that becomes apparent as delinquent accounts age. This "curve" indicates that after three years of becoming overdue, these accounts produce minimal collections.⁴⁵ Yet clearly, the assignment practices employed by the IRS for IBTF cases ignore this critically important collecting principle.

The current use of the Collection Field operation does little to improve revenue collection or taxpayer compliance.

The IRS's strategy for dealing with the large, aged inventory of high risk trust fund cases emphasizes the use of the Trust Fund Recovery Penalty (TFRP).⁴⁶ However, IRS data indicates the escalating use of TFRP investigations and assessments has been an unproductive use of valuable collection resources. From FY 2007 to FY 2012, the dollar value of TFRP assessments issued as TDAs increased by 61 percent, but TFRP dollars collected actually decreased by seven percent.⁴⁷ Although $4.9 billion in TFRP assessments were issued as TDAs in FY 2012, only $199 million was collected (including offsets) -- about four percent of the dollars issued.⁴⁸ Moreover, the IRS's increasing emphasis on the use of the TFRP indicates the IRS is aware that many trust fund tax cases assigned to the CFf are likely to be uncollectible. Nevertheless, the IRS continues to resist changing its collection strategy for servicing these accounts.

 

FIGURE 1.12.5, Only A Small Portion of TFRP Assessments

 

Is Actually Collected⁴⁹

 

TFRP Assessments

 

 

 

Improved use of collection payment options, including installment agreements and offers in compromise, employed earlier in the collecting process, would improve revenue collected, reduce revenue loss, and promote compliance within the business community.

The use of IAs and OICs to assist in the collection of trust fund tax delinquencies is astonishingly rare.⁵² While the IRS does not track the number of IAs or OICs granted to IBTF taxpayers, it does report the overall numbers of IAs involving taxes reported on the business master file (BMF). The IRS issued 87,875 BMF IAs through September 2013, a 17 percent decline from the same period in FY 2011,⁵³ the year in which the IRS "Fresh Start" initiative brought more flexibility into the "IBTF Express" IA criteria.⁵⁴ Of particular concern is that in FY 2013, only 24,415 trust fund accounts receiving the CP 504B "final notice" were resolved with IAs -- only 1.6 percent of the final notices issued -- even though 97 percent of these notices met the new "IBTF Express" criteria.⁵⁵ Likewise, once cases left the notice stream and moved on in the collecting process, ACS issued only 29,246 BMF installment agreements, representing only 5.5 percent of the BMF taxpayer cases received by ACS during FY 2013.⁵⁶

 

FIGURE 1.12.6, BMF IAS Issued By AM, CSCO

 

and ACS Are Rare⁵⁷

 

BMF IAs Issued

 

 

 

CONCLUSION

For case assignment purposes, the IRS collection strategy categorizes collection cases involving business taxpayers with trust fund tax debts as relatively simple delinquencies that do not warrant immediate assignment to revenue officers. Yet, the IRS also views these cases as "high risk," and significantly restricts the ability of employees to provide the services needed to resolve the majority of these accounts. For many business taxpayers, the result is the IRS version of the proverbial "runaround." The delays in providing adequate service for these taxpayers result in not only poor service for business taxpayers, but also billions of dollars of lost revenue.

RECOMMENDATIONS

To improve service delivery for business taxpayers with tax debts, the National Taxpayer Advocate recommends that the IRS:

² IRS, Collection Activity Report, NO-5000-2/242, Taxpayer Delinquent Accounts Report, Part 2 Account Receivable Notices (Sept. 2013). A "trust fund" tax is money withheld from an employee's wages (income tax, social security, and Medicare taxes) by an employer and held in trust until paid to the Treasury. Definition found at IRS, Businesses-&-Self-Employed/Trust-Fund-Taxes, www.irs.gov/Businesses/Small (last visited Aug. 9, 2013.).

³ IRS, Collection Activity Report, NO-5000-2, Taxpayer Delinquent Accounts Report (Sept. 2013). In FY 2013, ACS transferred $1.202 billion in trust fund delinquencies to the Queue (the Queue is an inventory of Taxpayer Delinquent Accounts (TDAs) that are active, but unassigned), $396 million to the Collection Field function (CFf), and reported $20 million as "shelved" (currently not collectible). ACS reported $243 million as collected on open trust fund accounts, $67 million collected through offsets, and $128 million collected on installment agreements established by ACS on BMF accounts.

⁴ IRS, Collection Activity Report, NO-5000-2, Taxpayer Delinquent Accounts Report (Sept. 2013). As of Sept. 2013, 75 percent of the trust fund cases in inventory involved more than one TDA.

⁵Id. As of Sept. 2013, 44 percent of the trust fund cases in inventory involved four or more TDAs.

⁶ IRS, Collection Activity Report, NO-5000-2, Taxpayer Delinquent Accounts Report (Sept. 2013). In FY 2013, the IRS reported in inventory 1,197,082 TDAs involving trust fund taxes associated with tax years 2010 and prior, or 71.2 percent of the total.

⁷Id; see also IRS, Collection Activity Report, NO-5000-6, Installment Agreement Report (Sept. 2013). The IRS reported $4.158 billion, $5.091 billion, $4.149 billion, and $3.586 billion in trust fund taxes as currently not collectible in FYs 2010, 2011, 2012, and 2013, respectively. The IRS reported dollars collected/offset on trust fund TDA accounts as $2.192 billion, $2.344 billion, $1.925 billion, and $1.808 billion for FYs 2010, 2011, 2012, and 2013, respectively. The IRS reported $625 million, $728 million, $857 million, and $875 million collected from installment agreements on BMF accounts during FYs 2010, 2011, 2012, and 2013, respectively. Note: the installment agreement figures include all payments on all BMF accounts -- not only those involving trust fund taxes.

⁸ IRS, IR-2012-4, IRS Releases New Tax Gap Estimates; Compliance Rates Remain Statistically Unchanged From Previous Study (Jan. 6, 2012). The IRS reports that compliance is highest where there is third-party information reporting and/or withholding. For example, most wages and salaries are reported by employers to the IRS on Forms W-2 and are subject to withholding. As a result, a net of only one percent of wage and salary income was misreported in 2006. In contrast, amounts subject to little or no information reporting had a 56 percent net misreporting rate.

⁹ IRS, Internal Revenue Service Data Book (October 1, 2011, to September 30, 2012).

¹⁰ U.S. Bureau of Labor Statistics, Business Employment Dynamics, www.bls.gov/bdm/entrepreneurship/bdm_chart 3.htm (last visited Aug. 7, 2013).

¹¹Id.

¹² IRS, Collection Activity Report, NO-5000-2, Taxpayer Delinquent Account Cumulative Report (Sept. 2013). The IRS reported 451,861 taxpayer cases in inventory that included trust fund taxes.

¹³Id. The IRS reported 338,431 taxpayer cases involving more than one delinquent trust fund period, and 198,529 involving four or more such periods.

¹⁴Id. The IRS reported in inventory $14,018,345,606 in delinquent trust fund taxes at the conclusion of FY 2013.

¹⁵ Internal Revenue Manual (IRM) 5.3.1.2.3, Case Codes and Subcodes (Feb. 22, 2012).

¹⁶ IRS, Collection Activity Report, NO-5000-2, Taxpayer Delinquent Account Cumulative Report (Sept. 2013).

¹⁷ For an in-depth discussion of these issues, see National Taxpayer Advocate 2010 Annual Report to Congress, vol. 2, 39-70 (An Analysis of the IRS Collection Strategy: Suggestions to Increase Revenue, Improve Taxpayer Service, and Further the IRS Mission) and National Taxpayer Advocate 2012 Annual Report to Congress 358-380 (Most Serious Problem: The Diminishing Role of the Revenue Officer Has Been Detrimental to the Overall Effectiveness of IRS Collection Operations).

¹⁸ IRS, Collection Activity Report, NO-5000-2, Taxpayer Delinquent Account Cumulative Report (Sept. 2013); IRS, Collection Activity Report, NO-5000-6, Installment Agreement Report (Sept. 2013). The IRS reported $4.158 billion, $5.091 billion, $4.149 billion, and $3.586 billion in trust fund taxes as currently not collectible in FYs 2010, 2011, 2012, and 2013, respectively. The IRS reported dollars collected/offset on trust fund TDA accounts as $2.192 billion, $2.344 billion, $1.925 billion, and $1.807 billion for FYs 2010, 2011, 2012, and 2013, respectively. The IRS reported $625 million, $728 million, $857 million, and $875 million collected from installment agreements on BMF accounts during FYs 2010, 2011, 2012, and 2013, respectively. Note: the installment agreement figures include all payments on all BMF accounts -- not only those involving trust fund taxes.

¹⁹ IRS, Collection Activity Report, NO-5000-2, Taxpayer Delinquent Account Cumulative Report (Sept. 2013); IRS, Collection Activity Report, NO-5000-6, Installment Agreement Report (Sept. 2013).

²⁰ IRS, Collection Activity Report, NO-5000-2/242, Taxpayer Delinquent Accounts Report, Part 2 Account Receivable Notices (Sept. 2013).

²¹Id.

²²Id.

²³Id.

²⁴ IRS, Collection Activity Report, NO-5000-2/242, Taxpayer Delinquent Accounts Report, Part 2 Account Receivable Notices (Sept. 2013). See also IRS, Collection Activity Report, NO-5000-6, Installment Agreement Report (Sept. 2013). In FY 2013, the IRS reported approximately $935 million as collected or offset from final notices involving business trust fund taxes. Another $84 million in delinquencies were included in installment agreements, and $5.659 billion moved on in the collecting process as TDAs.

²⁵ IRS response to TAS information request (Sept. 13, 2012).

²⁶ IRM 21.3.12.4.7, In-Business Trust Fund (IBTF) Express Agreement Criteria (Oct. 1, 2012). AM employees are authorized to establish IBTF Express Agreements up to the aggregate assessed balance (CC SUMRY) of $10,000. The entire liability, including accruals, must be paid within 24 months, or before the collection statute expiration date, whichever is earlier. In order to qualify, the taxpayer must be in full filing compliance and current on federal tax deposits (FTDs). If the taxpayer owes more than $10,000 but less than $25,000, the IA request is forwarded to CSCO.

²⁷ IRM 21.3.12.4.2, Taxpayer Can Full Pay Within 11 to 59 Days -- IMF, BMF Out-of-Business or BMF In-Business Non-Trust Fund Accounts (Oct. 1, 2012) and IRM 21.3.12.4.3, Taxpayer Can Full Pay Within 60 to 120 Days -- IMF, BMF Out-of-Business or BMF In-Business Non-Trust Fund Accounts (Mar. 27, 2013).

²⁸ IRM 21.3.12.4.7, In-Business Trust Fund (IBTF) Express Agreement Criteria (Oct. 1, 2012).

²⁹Id.

³⁰ Note: Written responses from taxpayers are worked in the SB/SE CSCO operation. CSCO has similar restrictions in providing service on IBTF accounts, but works with expanded criteria for considering IBTF Express IAs, i.e., tax balances of $25,000 or less.

³¹ IRM 5.19.1.5.3, Full Pay Within 60 or 120 Day Agreement (Oct. 18, 2013) ("This type of agreement cannot be granted for any In-Business Trust Fund (IBTF) taxpayer. Any taxpayer with an open employment tax filing requirement is considered in-business and is not eligible for this type of agreement.").

³² IRM 5.19.1.5.4.2, IA Requirements, IBTF Express Agreement (Oct. 18, 2013) ("Taxpayers must be in filing compliance. If not, the IA will not be granted.").

³³ IRS response to TAS information request (Sept. 13, 2012).

³⁴ The Collection Queue is an inventory of TDA accounts that are active, but unassigned to the ACS or CFf functions. See IRM 5.1.20.2, Collection Inventory Management (May 27, 2008). IRS, Collection Activity Report, NO-5000-2, Taxpayer Delinquent Accounts Report (Sept. 2013). At the conclusion of FY 2013, 230,550 trust fund taxpayer cases, including 928,472 trust fund TDA modules were assigned to the Queue inventory.

³⁵ IRS, Collection Activity Report, NO-5000-2, Taxpayer Delinquent Accounts Report (Sept. 2013).

³⁶Id.

³⁷Id.

³⁸Id.

³⁹ IRS, Collection Activity Report, NO-5000-2, Taxpayer Delinquent Accounts Report (Sept. 2013). See also IRS, Collection Activity Report, NO-5000-6, Installment Agreement Report (Sept. 2013).

⁴⁰ IRS, SB/SE Research, Your Clients and the Economy -- How Can the IRS Help, 4 (Jan. 2010).

⁴¹Id.

⁴²Id.

⁴³ IRS, Collection Activity Report, NO-5000-2, Taxpayer Delinquent Accounts Report (Sept. 2013).

⁴⁴Id. At the conclusion of FY 2013, the IRS reported in inventory 1,197,082 trust fund TDA accounts related to tax years 2010 and prior.

⁴⁵ IRS, TACT: Collection Team VSM Decision Paper I (July 8, 2009).

⁴⁶ IRM 5.7.3.1, Introduction (Nov. 12, 2010). The TFRP is a penalty provided by Internal Revenue Code § 6672 against any person required to collect, account for, and pay over taxes held in trust who willfully fails to perform any of these activities. The penalty is equal to the total amount of tax evaded, not collected, or not accounted for and paid over.

⁴⁷ IRS, Collection Activity Report, NO-5000-2, Taxpayer Delinquent Accounts Report (Sept. 2012).

⁴⁸Id. Note: in FY 2013, the IRS issued $4.146 billion in TFRP TDA assessments -- a significant decrease from FY 2012, and reported $200 million collected on TFRP accounts. While a trend is not yet evident, the decrease in TFRP dollars issued is noteworthy. However, the dollars collected on TFRP accounts remains a very small percentage of TFRP dollars issued -- five percent in FY 2013.

⁴⁹ IRS, Collection Activity Report, NO-5000-2, Taxpayer Delinquent Accounts Report (Sept. 2012).

⁵⁰ IRM 5.7.1.1, Federal Tax Deposit FTD Alerts (May 15, 2012). The FTD Alert process identifies, at an early stage (i.e., before the return is due), taxpayers who have fallen behind in their deposits. FTD Alerts determine an employer's compliance with employment tax deposit requirements for the quarter of Alert issuance, and for subsequent quarters until the taxpayer is brought into full compliance. In FY 2012, the IRS issued 5,217 FTD Alerts to revenue officers in the CFf, a 37 percent reduction from FY 2009. IRS response to information request (Sept. 9, 2013).

⁵¹ IRM 5.7.2.2, Issuance of Letter 903 (Sept. 28, 2012). Issuance of the Letter 903, You Haven't Deposited Federal Employment Taxes, systemically generates TC 148-09 to the IDRS database. If a subsequent balance due, return delinquency, or FTD Alert is issued, it will be coded with an "L" and it will be accelerated to the field. IRS data reveals that as of July 2013, the IRS had only 717 taxpayer cases in inventory where issuance of the L-903 had generated the TC 148-09 coding. IRS, Business Return Transaction File (July 2013).

⁵² IRS response to information request (Sept. 9, 2013). The IRS acknowledges that the number of IAs, SLIAs, and OICs granted to IBTF taxpayers is not systemically tracked. In FY 2012, the IRS reports that 1,376 offers were accepted that included any type of BMF tax delinquency, including those from business taxpayers who were no longer operating at the time the offers were accepted.

⁵³ IRS, Collection Activity Report, NO-5000-6, Installment Agreement Report (Sept. 2013).

⁵⁴ IBTF Express IAs may be granted if the entire liability, including accruals total $25,000 or less, and the taxes will be fully paid within 24 months. (Note: AM employees working notice responses on the toll-free phone lines may only issue IBTF Express IAs on liabilities of $10,000 or less.)

⁵⁵ IRS, Collection Activity Report, NO-5000-2/242, Taxpayer Delinquent Accounts Report, Part 2 Account Receivable Notices (Sept. 2013).

⁵⁶ IRS, Collection Activity Report, NO-5000-6, Installment Agreement Report (Sept. 2013); IRS, Collection Activity Report, NO-5000-2, Taxpayer Delinquent Accounts Report (Sept. 2013).

⁵⁷ IRS, Collection Activity Report, NO-5000-6, Installment Agreement Report (Sept. 2013); IRS, Collection Activity Report, NO-5000-2, Taxpayer Delinquent Accounts Report (Sept. 2013); IRS, Collection Activity Report, NO-5000-2/242, Taxpayer Delinquent Accounts Report, Part 2 Account Receivable Notices (Sept. 2013).

⁵⁸ Throughout IRM 21 and IRM 5.19, the IRS prohibits the issuance of an IA to any taxpayer with unfiled returns.

Karen Schiller, Commissioner, Small Business/Self-Employed Division

Debra Holland, Commissioner, Wage and Investment Division

DEFINITION OF PROBLEM

As of December 31, 2013, 2,371 taxpayers remain subject to IRS collection action because of waivers of the applicable statutory period for collection, which violate the IRS policy limit of five years.¹ Before 2000, IRS collection personnel solicited waivers to extend the collection period when it did not appear the taxpayer could pay the tax owed prior to the collection statute expiration date (CSED).² Congress limited this practice as part of the IRS Restructuring and Reform Act of 1998 (RRA 98), which generally ended CSED waivers, other than for extensions entered in connection with installment agreements (IAs).³ In response to Taxpayer Advocate Directive (TAD) 2010-3, the IRS Small Business/Self-Employed Division (SB/SE) and TAS formed a workgroup to investigate and resolve CSED extensions that exceeded five years.⁴

The IRS has placed almost 82 percent (1,939) of these accounts in currently not collectible (CNC) status or in the collection queue, and has no plan to collect these amounts.⁵ A TAS analysis of these accounts reveals that 309 of these taxpayers are deceased.⁶ Further, more than half of the taxpayers subject to these CSED extensions owe more than $50,000, of which almost 76 percent is attributable to accrued penalties and interest.⁷

 

FIGURE 1.13.1, CSED Cases as of December 31, 2013⁸

 

 

 

ANALYSIS OF PROBLEM

Background

The IRS generally has ten years to collect a tax liability from a taxpayer.⁹ The CSED is the date the IRS must cease taking collection actions on a taxpayer's account. By statute, various conditions suspend the period and extend the CSED.¹⁰

RRA 98 Changed the Rules for Seeking Collection Statute Waivers.

Before January 1, 2000 (the effective date of section 3461 of RRA 98), the IRS would solicit waivers to extend the CSED to a time when taxpayers could pay their full liabilities or pay in connection with IAs. The IRS initially solicited these waivers on accounts with an open CSED and for periods as long as 10, 20, 30, 40 or even 50 years.¹¹ Despite adopting the policy on October 30, 1991 of limiting CSED waivers to five years in connection with IAs, the IRS continued soliciting waivers of longer than five years in certain cases until the law changed in 2000.¹² The American Jobs Creation Act of 2004 amended IRC § 6159 to provide for partial payment installment agreements (PPIAs).¹³ The IRS responded by limiting its five-year extension policy to PPIAs.¹⁴

Collection statute extensions concerned Congress in 1998 because the IRS often did not inform taxpayers about their legal rights or consequences of extending statutory periods:

The National Taxpayer Advocate Proposes Legislation and Orders IRS Review and Resolution of Lengthy CSED Accounts.

In 2006, the National Taxpayer Advocate proposed legislation to eliminate the IRS's inventory of over 32,000 accounts affecting approximately 14,000 taxpayers with lengthy CSED extensions.¹⁹ In 2009, the National Taxpayer Advocate recommended that the IRS resolve excessively long CSEDs by writing off accounts with CSEDs greater than the original CSED plus five years (absent other lawful extensions).²⁰

On January 20, 2010, the National Taxpayer Advocate issued TAD 2010-3, directing the SB/SE Commissioner to, among other things, provide employees for an SB/SE-TAS workgroup for review, resolution, adjustment, or correction of all accounts with CSEDs extended beyond 15 years after assessment (plus any statutory suspensions).²¹ On June 10, 2010, the Deputy Commissioner for Services and Enforcement modified the TAD to require SB/SE (as part of the SB/SE-TAS workgroup, and in coordination with the Office of Chief Counsel) to review these accounts on a case-by-case basis and determine whether alternative resolutions could be reached.

The Resolution of All Lengthy CSED Accounts Hinges on Accurate Research of Accounts and Remedies that Comport with the Law.

In response to the TAD, the TAS-SB/SE CSED Workgroup investigated CSEDs extended by taxpayers longer than five years. The group initially determined that 4,466 taxpayers held accounts with extensions exceeding policy limits.²²

The TAS -- SB/SE CSED Workgroup Reviews Taxpayer Accounts.

The workgroup is investigating whether it can resolve accounts systemically, rather than case by case.²³ As of December 31, 2013, 2,371 individual taxpayers, who waived the collection statute for more than five years on tax periods before 1999, have open CSEDs.²⁴ Figure 1.13.2 shows the number of taxpayers by length of the waiver, whether the IRS has placed their accounts in currently not collectible (CNC) status, and the percentage of taxpayers in CNC status.

 

FIGURE 1.13.2, CSED Waivers Exceeding Five Years

 

and Taxpayers in CNC Status²⁵

 

 

 

• 1,628 or almost 69 percent of these taxpayers signed waivers exceeding five years on or after October 30, 1991 in violation of IRS policy in effect at that time.²⁶

• Over 87 percent only owe income tax liabilities.²⁷

• 295, approximately 12 percent, owe trust fund taxes.²⁸

• 2,209, over 93 percent, defaulted on the IA entered in connection with his or her lengthy CSED waiver.²⁹

• 117, less than five percent, incurred additional tax liabilities after 1998.³⁰

 

FIGURE 1.13.3, Taxpayers Affected by Lengthy CSEDs³¹

 

 

 

The IRS's Unacceptable Delay in Resolving These Lengthy CSED Accounts Is Due in Part to Chief Counsel's Concerns About The Commissioner's Authority to Undo These Extensions.

In connection with the TAD, the Office of Chief Counsel issued an opinion addressing whether the Commissioner could revoke, modify, or cancel the taxpayers' waivers for lengthy CSEDs, or whether the Commissioner could abate such liabilities as excessive in amount. Counsel concluded that while the Commissioner lacked the authority to modify or rescind a CSED waiver, the Commissioner could place these accounts into a separate noncollectible status "as to which refund offset and state-income tax levy would also be suspended."³³ However, placing the account in this special separate noncollectible status would not entirely solve the matter.

Liens filed against taxpayers facing lengthy CSEDs would continue to attach to their property and continue to harm these taxpayers by negatively impacting their credit score and economic viability.³⁴ Unpaid tax liens may remain on a taxpayer's credit history, leaving a derogatory mark on the credit history indefinitely.³⁵

Counsel further concluded, "The Commissioner's authority under section 6404(c) to abate tax "under uniform rules" when "the administrative and collection costs involved would not warrant collection of the amount due" would not authorize blanket abatements directed by the National Taxpayer Advocate. These abatements are typically made on a case-by-case basis, as the financial situations of taxpayers vary."³⁶ The National Taxpayer Advocate's position is that the abatement authorization under IRC § 6404(c) contains no explicit exception or prohibition for applying "uniform rules" for abatement to a group or class of taxpayers. Here, we have clearly defined groups of taxpayers with clearly described similar circumstances. Some of these circumstances fit squarely within the 6404(c) abatement language. The language of 6404(c) does not ignore the needs of administrative efficiency -- indeed, the statutory language, together with principles of efficient tax administration, clearly contemplates a blanket abatement in these situations.

In 2012, IRS Chief Counsel concluded that the IRS can only solicit offers in compromise from these taxpayers if it makes determinations of equity or hardship based on the facts and circumstances of each case.³⁷ Most recently, the workgroup requested assistance from Counsel to see whether there was a way to resolve these accounts under the existing statutory scheme. Counsel is in the process of writing a legal memo that we hope will provide a way or ways to resolve these cases. The National Taxpayer Advocate, however, is running out of patience.

CONCLUSION

Lengthy CSED accounts are a remnant of the era preceding RRA 98. The IRS continues to burden taxpayers who waived a collection statute for more than five years in connection with an IA. While RRA 98 limited other CSED waivers, the IRS has not yet implemented a plan to resolve lengthy CSED waivers, even though many were solicited in violation of IRS policy. Further, IRS data show little or no collection activity on these accounts. The National Taxpayer Advocate is greatly concerned that the IRS will do nothing and hold these uncollectible debts over taxpayers' heads, rather than resolve all lengthy CSED accounts once and for all as agreed to in response to TAD 2010-3.

RECOMMENDATIONS

The National Taxpayer Advocate offers the following recommendations to finally resolve all lengthy CSED accounts:

² National Taxpayer Advocate 2006 Annual Report to Congress 428.

³ Internal Revenue Service Restructuring and Reform Act of 1998 (RRA 98), Pub. L. No. 105-206, § 3461, 112 Stat. 685, 764 (1998). The legislation also provided for collection statute extensions in connection with the release of levies after the collection statute expiration date (CSED) expired. However, the IRS has not implemented this provision.

⁴ Taxpayer Advocate Directive (TAD) 2010-3 and responses to the TAD, available at: http://www.irs.gov/Advocate/Taxpayer-Advocate-Directives-and-Related-Documents.

⁵ IRS CDW, analysis of IDRS TC 550, DC 0 and 1, TC 470, and Status Code 24 (Queue) for Individual Master File (IMF) (April 20, 2013). The IRS deems accounts currently not collectible (CNC) or places them in the collection queue where it does not have the resources to collect or identifies a noncollectible account. See, e.g., Internal Revenue Manual (IRM) 5.11.1.2.2.2(7)(d) (Feb. 3, 2012), IRM 5.19.5.5.8(3) (Sept. 21, 2011), and IRM 5.16.1.1 (May 22, 2012).

⁶ IRS CDW, analysis of IDRS TC 550, DC 0 and 1, TC 470 for Individual Master File (IMF) (Apr. 20, 2013).

⁷ IRS CDW, analysis of IDRS TC 550, DC 0 and 1, Tax Module Balances (TMODBAL) by Taxpayer Identification Number (TIN) for the IMF (Apr. 20, 2013).

⁸ IRS, Compliance Data Warehouse (CDW), Integrated Data Retrieval System (IDRS), analysis of IDRS transaction code (TC) 550, definer code (DC) 0 and 1 for Individual Master File (IMF) accounts for tax periods ended on or before December 31, 1998 (April 20, 2013).

⁹ Internal Revenue Code (IRC) § 6502(a).

¹⁰ A number of code sections provide that the statute may be suspended by operation of law. See, e.g., IRC § 6330(e) (after a timely request for a Collection Due Process (CDP) hearing); IRC § 6331(i) & (k) (during the pendency of an installment agreement (IA) or offer in compromise (OIC) investigation, or refund suit for a divisible tax; 30 days after the rejection or termination of an IA, or rejection of an OIC; and for any appeals of a rejected IA or OIC, or a terminated IA); IRC § 6503 (during a deficiency proceeding, and for 60 days thereafter; any period for which a taxpayer is outside the United States for six months or longer; any period for which the IRS holds property wrongfully seized until it returns the property; during the pendency of a substitution of value lien discharge proceeding).

¹¹See Internal Revenue Manual (IRM) 53(11)(1) (Oct. 28, 1993) (stating, "The ten year collection period may, at any time prior to its expiration, be extended for any period of time agreed upon by the taxpayer and the district director.").

¹² IRM 5331.1(12)(b)2 (Oct. 30, 1991).

¹³ American Jobs Creation Act of 2004 (AJCA), Pub. L. No. 108-357, § 843(a) and (b), 118 Stat. 1600 (Oct. 22, 2004). Prior to 1998, IRS employees sometimes entered into monthly payment agreements that would not fully pay the tax liability over the term of the agreement. In 1998, IRS Counsel concluded that these partial payment agreements were not permitted. In 2004, Congress enacted the AJCA to legally provide for partial payment IAs. H.R. Conf. Rpt. 108-755, at 649-650 (Oct. 7, 2004).

¹⁴ IRM 5.14.2.1 (July 12, 2005). The procedure permits waivers of five years plus one year may be added for administrative actions.

¹⁵ Internal Revenue Service Restructuring and Reform Act of 1998 (RRA 98), Pub. L. No. 105-206, S. Rept. No. 105-174 at 87 (June 24, 1998).

¹⁶ IRC § 6502(a)(2); Treas. Reg. § 301.6502-1(b)(2). Even though the IRS currently has no procedures regarding when seeking an extension of the CSED in connection with a levy release might be appropriate, the statute and regulations provide that the IRS may secure a CSED waiver in con-nection with a release of a levy where the CSED on the underlying tax liability has expired. The agreement to extend the collection statute must be entered into prior to the levy being released.

¹⁷ RRA 98, Pub. L. No. 105-206, § 3461(c)(2), 112 Stat. 685, 764 (1998).

¹⁸ IRS Office of Chief Counsel, Program Manager Technical Advice (PMTA) 2010-10, Memorandum to Director, Collection Policy, Small Business/Self-Employed Division (SB/SE) (Feb. 12, 2010).

¹⁹ National Taxpayer Advocate 2006 Annual Report to Congress 428.

²⁰ National Taxpayer Advocate 2009 Annual Report to Congress 227.

²¹ National Taxpayer Advocate, Taxpayer Advocate Directive 2010-3 (Jan. 20, 2010).

²² National Taxpayer Advocate 2012 Annual Report to Congress 470.

²³ TAS-SB/SE CSED Workgroup, Memorandum re: Effective Tax Administration Offers In Compromise for Certain Taxpayers Under a Lengthy CSED Extension (June 21, 2012).

²⁴Id.

²⁵ TAS-SB/SE CSED Workgroup, Memorandum re: Effective Tax Administration Offers In Compromise for Certain Taxpayers Under a Lengthy CSED Extension (June 21, 2012).

²⁶Id.

²⁷Id.

²⁸Id. Trust fund taxes refer to taxes collected or withheld under a trust imposed under IRC § 7501. The Trust Fund Recovery Penalty (TFRP) is a penalty that is assessed under IRC § 6672 against the individual or individuals who are responsible for paying the trust fund taxes but willfully did not do so. The amount of the penalty is equal to the amount of the unpaid trust fund taxes.

²⁹ IRS CDW, analysis of IDRS TC 550, DC 0 and 1 for IMF accounts and Masterfile Status code (MF status) (June 25, 2013).

³⁰ IRS CDW, analysis of IDRS TC 550, DC 0 and 1 for IMF accounts (June 25, 2013).

³¹ IRS CDW, analysis of IDRS TC 550, DC 0 and 1 for IMF accounts (June 25, 2013).

³²Id.

³³ IRS Office of Chief Counsel, Program Manager Technical Advice (PMTA) 2010-10, Memorandum to Director, Collection Policy, Small Business/Self-Employed Division (SB/SE) (Feb. 12, 2010).

³⁴ The Counsel Memo did indicate that the IRS might be able, on a case-by-case basis, to withdraw the lien under the best interest test found in section 6323(j)(1)(D) which would remove the lien from the taxpayer's credit history. On average, a lien filing reduces a taxpayer's credit score by 100 points. The impact of the lien filing is greatest upon the initial filing and diminishes over time. See written response from Vantage Score® (Sept. 17, 2009); National Taxpayer Advocate 2009 Annual Report to Congress 20 (Most Serious Problem: One-Size-Fits-All Lien Filing Policies Circumvent the Spirit of the Law, Fail to Promote Future Tax Compliance, and Unnecessarily Harm Taxpayers).

³⁵ As a matter of policy, Experian keeps unpaid tax liens on a credit report for 15 years and Equifax for ten years, while Transunion credit reports reflect them indefinitely. Released liens, including those paid off by the taxpayer, are not generally removed from the credit history until seven years from the date of release. See The Fair Credit Reporting Act (FCRA), § 605(a)(3), 15 USC 1681c(a)(3); IRC § 6325(a)(1) (lien will be released if the liability is satisfied or becomes unenforceable). However, California requires that all liens, released and open, be removed from credit histories ten years after the filing date. See Cal. Civ. Code, § 1785.13(d).

³⁶ IRS Office of Chief Counsel, Program Manager Technical Advice (PMTA) 2010-10, Memorandum to Director, Collection Policy, Small Business/Self Employed Division (SB/SE) (Feb. 12, 2013).

³⁷Id.

Kirsten B. Wielobob, Chief, Office of Appeals

Debra Holland, Commissioner, Wage and Investment Division

Karen Schiller, Commissioner, Small Business/Self-Employed Division

DEFINITION OF PROBLEM

The IRS's current procedures for Collection Due Process (CDP) hearings do not always result in a fair, impartial, and independent review. The IRS Restructuring and Reform Action of 1998 (RRA 98) established a taxpayer's right to an independent review of IRS lien and levy actions by the Office of Appeals, known as a CDP hearing.¹ Unlike other creditors, the IRS can file a lien against or levy a taxpayer's assets without first obtaining a court order. Providing due process rights for collection actions forces the IRS to consider the taxpayer's circumstances before (or immediately after, in the case of lien filing) exercising these powers.²

As conducted by the IRS today, CDP hearings do not provide most taxpayers with a meaningful hearing. In many cases, the IRS issues a CDP notice before making any other contact with the taxpayer and before he or she has a chance to meaningfully engage with Collection. As a result, taxpayers may feel pressured into requesting a CDP hearing, and Appeals may receive cases that are not fully developed. When Collection receives a CDP request, it has discretion as to when to send the case to Appeals. In situations where the taxpayer works with Collection and does reach an agreement, Collection will ask the taxpayer to withdraw the CDP request, taking away his or her opportunity for an independent review.

One of the most significant problems with CDP hearings is that Appeals may not give proper attention to a core taxpayer rights aspect of the hearing, namely, the balancing test that requires the Hearing Officer to weigh the need for collection against the taxpayer's interest that the action be no more intrusive than necessary.³ Moreover, Hearing Officers do not exercise settlement authority used by other Appeals Officers and thus may not fully carry out the balancing test.

ANALYSIS OF PROBLEM

RRA 98 established a taxpayer's right to a CDP hearing to give taxpayers who are dealing with the IRS the same protections they have when dealing with other creditors.⁴ Congressional testimony explained, "Many people were shocked to learn that a number of the due process protections Americans take for granted in other legal proceedings do not apply to actions involving the IRS."⁵ As a result, Congress sought increased protection for taxpayers.⁶ The Senate committee report emphasized, "a proposed collection action should not be approved solely because the IRS shows that it has followed appropriate procedures."⁷

CDP hearings have three major elements:

Of the taxpayers who receive CDP notices, few request CDP hearings. In FY 2012, the IRS issued over 3.6 million CDP notices and received only about 47,500 CDP hearing requests, approximately 1.31 percent of hearings offered.¹¹ CDP cases represented 37.9 percent of Appeals receipts in 2012 and 35.9 percent through June 30, 2013, the largest single receipt source.¹²

 

FIGURE 1.14.1, CDP and Equivalent Hearing (EH) Requests,

 

Fiscal Years 2008-2013¹³

 

CDP and Equivalent Hearing Requests Received by Collection

 

 

 

The IRS must issue a CDP notice within five days of filing a notice of federal tax lien (NFTL), and at least 30 days before it can levy with respect to the unpaid tax.¹⁴ Although the statute ties the timing of the CDP notice to the NFTL and notice of intent to levy ("NIL"), issuing the CDP notice too early undercuts the entire CDP process.¹⁵ In many cases, Collection employees do not attempt to contact the taxpayer before sending the CDP notice. The Internal Revenue Manual (IRM) requires employees to make reasonable efforts to contact the taxpayer (by visiting, calling, or mailing a notice to the last known address) before issuing the NFTL.¹⁶ However, the IRS undermines this protection by requiring the NFTL filing determination ten days after the initial contact attempt or when the contact was due (before any undeliverable mail would be returned and processed).¹⁷ For levies, there is no requirement that the IRS contact the taxpayer before issuing the NIL, which the IRS can issue as early as ten days after issuing the notice of assessment and demand for payment.¹⁸ Neither the Automated Collection System (ACS) nor Field Collection tracks how often employees contact taxpayers by phone or mail prior to sending CDP notices.¹⁹ Given that ACS employees only spend about two or three percent of their time on outbound calls, it is unlikely ACS contacts most taxpayers before issuing the CDP notice.²⁰ For Field Collection, Revenue Officers (ROs) issue the CDP notice at the same time as the initial contact when the RO asks for the financial analysis.²¹

A taxpayer has only 30 days to file a CDP request after receiving a CDP notice, and may feel pressured to request a hearing even if he or she is still putting together documentation and trying to work with Collection.²² If a taxpayer does not provide the requested information before Collection's deadline, it may deny the taxpayer's position as unsubstantiated and transfer the case file to Appeals without reviewing the documents later provided.²³ In some cases, ROs may perceive the filing of a CDP request as an action solely to delay collection and refer the taxpayer's representative to the Office of Professional Responsibility, despite the fact that filing a CDP request is a reasonable and legal action to take.²⁴

Taxpayers may sacrifice their rights if they come to an agreement with Collection after filing the CDP request.

A taxpayer who files a CDP request to preserve the right to a hearing may end up sacrificing this right if he or she reaches an agreement with Collection. If the taxpayer and the IRS come to a proposed settlement, the IRS asks the taxpayer to withdraw the CDP request.²⁵ While Collection has told TAS that a taxpayer is not required to withdraw a CDP request upon reaching a resolution, the IRM states "the RO should solicit a withdrawal of the hearing request."²⁶ If a taxpayer withdraws a CDP request, the taxpayer loses the opportunity for Appeals to verify independently that the IRS has followed the law and procedures and conduct the balancing test.²⁷

The IRS should change these procedures so that Appeals enters into the agreement with the taxpayer, meaning Appeals will still be required to make the CDP determination.²⁸ When a taxpayer reaches an agreement with Appeals, he or she must sign a form that waives the right to judicial review of Appeals' determination.²⁹ Under the current system, where a taxpayer signs an agreement with Collection, the result is the worst of both worlds -- the taxpayer loses the opportunity for a future Appeals determination that is subject to judicial review, while at the same time giving up the current opportunity for Appeals to review Collection's actions and conduct the balancing test.

The process of requesting a hearing raises impartiality concerns.

A taxpayer who requests a CDP hearing may doubt whether the review will be independent because the taxpayer must send the request to Collection, the same office demanding payment.³⁰ Collection has discretion as to when to send the CDP case to Appeals, and can delay a hearing by not sending the case to Appeals for up to 90 days if it determines the taxpayer is willing to work with Collection.³¹ Collection can also send the case immediately if it determines the taxpayer does not want to work with collection or raises frivolous arguments.³² Thus, the timing of when Appeals receives a case comes with an implication that the taxpayer is a "good taxpayer" willing to work with Collection, or a "bad taxpayer" acting unreasonably. The Appeals Customer Satisfaction Survey reflects the disparity in the time it takes a case to reach Appeals, and found that taxpayers whose cases took 30 days or less to assign to an Appeals Officer were significantly less satisfied overall than those whose cases took longer."³³ Taxpayers may have been dissatisfied because they felt rushed into the Appeals proceedings without the opportunity to have their information and specific facts considered.³⁴ However, other Appeals customers who were dissatisfied with the amount of time it took to hear from Appeals thought Appeals should schedule an initial conference within 30 days of a request.³⁵

Current procedures may prevent taxpayers from effectively challenging the underlying liability.

Some taxpayers may disagree with the underlying liability even though they do not meet the statutory requirements for challenging it.³⁶ If eligible, taxpayers can raise the liability through other channels.³⁷ Currently, when a taxpayer raises liability issues such as Innocent Spouse, penalties, or interest abatement, or the taxpayer submits a Doubt as to Liability (DATL) OIC, Appeals assigns the case to an Appeals Officer or Settlement Officer for consideration.³⁸ If a taxpayer files an amended return or disputes an automated substitute for return (ASFR), the CDP hearing is suspended while the return is sent to Exam or the ASFR Reconsideration team.³⁹ As part of the Appeals Judicial Approach and Culture (AJAC) project, Appeals is considering which function should make the initial determination on DATL OICs settled by Appeals.⁴⁰ Compliance will determine whether to abate any of the liability, while the CDP hearing itself will remain in Appeals' jurisdiction.⁴¹ These forthcoming changes are positive if they allow Compliance to first consider the DATL offer (subject to the right to an administrative appeal of a rejection) and then allow Appeals to consider other issues as part of the CDP hearing. Unless the appropriate IRS function first resolves the liability issue, Appeals could end up sustaining a levy action even though resolving the liability may extinguish the levy entirely or qualify the taxpayer for a guaranteed or streamlined installment agreement (IA).⁴²

Another issue is that taxpayers cannot contest prior-year liabilities in CDP hearings. The regulations refer to a taxpayer's ability to contest liabilities "for any tax period shown on the CDP notice."⁴³ Appeals does not hear challenges to prior-year liabilities if they are not included on the CDP notice. This does not allow the taxpayer to resolve the collection matter in the most efficient way because most collection alternatives -- IAs, OICs, and currently not collectible status -- need to cover all years with a liability. One solution to this problem would be for Appeals to suspend the CDP hearing when non-CDP liability issues would be included in collection alternatives covered by the CDP hearing, to allow the taxpayer to resolve these related liability issues with the appropriate IRS function.

Taxpayers face roadblocks to receiving equivalent hearings.

If a taxpayer does not request a CDP hearing within the 30-day period, the taxpayer may still qualify for an equivalent hearing.⁴⁴ However, the IRS does not make it simple -- the taxpayer will only receive an equivalent hearing if specifically requested.⁴⁵ Collection will not automatically process late-filed CDP requests as equivalent hearing requests.⁴⁶ Because equivalent hearings generally follow the same procedures as CDP hearings, taxpayers miss an important opportunity for Appeals to conduct the balancing test and review the collection action.⁴⁷

AJAC procedures are promising, but need further development.

When a taxpayer requests a CDP hearing, Appeals may receive a partial case file or the case may have no development at all.⁴⁸ Under the AJAC interim guidance, CDP Hearing Officers have three options for cases that are not fully developed.⁴⁹ They can:

• Request information from the taxpayer;

• Issue an Appeals Referral Investigation (ARI) to Collection to secure information;⁵⁰ or

• Make a determination based on the information they have.⁵¹

Under AJAC procedures, if the taxpayer submits an OIC, the Centralized Offer in Compromise (COIC) unit will review it and share the results with the taxpayer. If COIC's recommendation is anything other than acceptance, Appeals will make the final determination.⁵³ This approach is positive in that it allows Appeals to retain jurisdiction, ensure the IRS followed proper procedures, and conduct the balancing test.

Concerns remain regarding Appeals' independence from Collection.

Despite the AJAC changes, concerns remain regarding Appeals' independence because it lacks IRM guidance of its own regarding CDP cases.⁵⁴ The AJAC interim guidance advises Settlement Officers to use the Collection IRM to:

• Verify whether administrative procedures were followed in issuing the NFTL or NIL;

• Review Collection case actions and decisions; and

• Evaluate alternatives to collection action.⁵⁵

Another issue is the practice of sustaining Collection's interpretation without independent verification, especially where Collection determines the taxpayer raised frivolous issues or requested a CDP hearing to delay or impede collection.⁵⁸ The Collection official can assert in the transmittal document that the taxpayer is making a frivolous argument or one intended to delay collection. If Collection believes the CDP request is frivolous, the taxpayer receives a special Appeals letter, giving him or her 30 days to amend the request.⁵⁹ The taxpayer loses the right to a face-to-face hearing if he or she does not amend the request to remove all "frivolous" arguments, including one that reflects a desire to delay.⁶⁰

Appeals does not exercise its settlement authority in CDP cases.

Revenue Procedure 2012-18 and the Appeals IRM make it clear that Appeals has the authority to settle cases.⁶¹ However, Appeals only considers the hazards of litigation in CDP cases in limited situations.⁶² Since the advent of CDP in RRA 98, a significant body of law has developed around what constitutes abuse of discretion on the part of the IRS in collection actions. Where case law is unfavorable to the IRS position or practice in a case, Appeals' failure to take these conditions into account may mean that the IRS is misapplying the balancing test. If the IRS has a high risk of losing the issue in litigation, then the collection action may not be "no more intrusive than necessary." In its response to TAS's research request regarding the hazards of litigation, Appeals stated, "Collection Due Process cases can be reviewed by the Tax Court, but only for an abuse of discretion, not on the actual case resolution."⁶³ However, the Tax Court's application of an abuse of discretion standard does not mean that Appeals should not exercise its settlement authority and take the hazards of litigation into account. The rationale for judicial review of collection actions is to provide guidance for when IRS actions constitute abuse of discretion. If the IRS ignores that guidance, it will harm taxpayers.

CONCLUSION

The National Taxpayer Advocate has written about CDP-related issues in numerous Annual Reports to Congress and has offered several legislative recommendations.⁶⁴ Without receiving an independent hearing from Appeals, taxpayers will continue to face emotional and economic hardship without the protections Congress intended. Taxpayers have a right to an independent review of collection actions by an impartial Hearing Officer, who must verify that the IRS followed the law and administrative procedures and conduct the balancing test. To make these protections real, the IRS needs to take the recommended actions.

RECOMMENDATIONS

The National Taxpayer Advocate recommends that the IRS:

² The taxpayer must file a CDP request within 30 days of receiving the CDP notice. The IRS sends the CDP notice within five days of the filing of the lien or the Notice of Intent to Levy. IRC §§ 6330(b)(1) and 6330(b)(3). In limited circumstances described in IRC § 6330(f) the taxpayer does not have CDP rights until after the levy.

³ "Hearing Officer" describes" a group of employees who deal with taxpayers and resolve disputes. An Appeals hearing officer is any Settlement Officer, Appeals Officer, Appeals Account Resolution Specialist or other employee holding hearings, conferences or who otherwise resolves open case issues in Appeals." IRS, AJAC FAQs, http://appeals.web.irs.gov/about/ajac-faq.htm (updated Sept. 30, 2013).

⁴ S. Rep. No. 105-174, at 68 (1998).

⁵ 144 Cong. Rec. 4,190 (1998).

⁶ 144 Cong. Rec. 4,184 (1998). "Currently there is a woeful lack of protection in this area, particularly during collection activity, where the IRS is the judge and jury, and where some agency employees take a cavalier approach to issuing a notice of lien, levy, or seizure of a taxpayer's home, personal belongings, or business property."

⁷ S. Rep. No. 105-174, at 68 (1998).

⁸ IRC § 6330(c).

⁹ IRC § 6330(c)(2)(A).

¹⁰ IRC § 6330(c)(2)(B).

¹¹ IRS response to TAS information request (Nov. 15, 2013). Fiscal year is based on when the CDP hearing was requested. In the first half of 2013, the IRS issued over 2.4 million CDP notices, but received only 35,780 CDP requests, approximately 1.48 percent.

¹² IRS response to TAS information request (Sept. 17, 2013). Appeals receipts include other issues taxpayers commonly appeal, such as issues in examination. Compare to Examination/TEGE appeals, comprising 31.4 percent in fiscal year (FY) 2012 and 31.4 percent through June 30, 2013.

¹³ TAS Research Individual Master File transaction code 971 action code 275 or 278 (Nov. 17, 2013). Fiscal year is based on when the CDP notice was mailed to the taxpayer, as opposed to the date when the CDP hearing was requested, as used in the text above.

¹⁴ IRC §§ 6320(a)(2), 6330(a)(2). In limited situations, the IRS can levy before providing the right to a CDP hearing. IRC § 6330(f). IRC § 6320(a) (2) requires the IRS to issue a notice of the taxpayer's right to a CDP hearing within five days of filing the notice of tax lien.

¹⁵ IRC § 6331(d)(2) requires the IRS to provide notice of intent to levy at least 30 days before the day of the levy, except where the collection of tax is in jeopardy.

¹⁶ IRM 5.12.2.2(1) (Oct 14, 2013). If the taxpayer does not send in a payment, the IRS must advise the taxpayer of his or her right to appeal under the Collection Appeals Program, which is the only pre-lien administrative appeal process. It is limited to procedural arguments. See IRM 5.12.6.4 (2) (Oct. 14, 2013).

¹⁷ IRM 5.12.2.3.2(1) (Oct 14, 2013).

¹⁸See IRM 5.11.1 (Feb. 3, 2012). The IRS usually issues the Notice of Intent to Levy and Notice of Your Right to a Hearing (L1058) on initial contact with a business taxpayer or combination business/individual taxpayer when a deadline is set for the taxpayer to take specific action. For individual taxpayers, the IRM advises using discretion as to whether to issue the L1058 on initial contact. IRM 5.11.1.2.2 (Dec. 11, 2009).

¹⁹ IRS Response to TAS Information Request (Sept. 3, 2013).

²⁰ Treasury Inspector General for Tax Administration (TIGTA), Ref. No. 2010-30-046, More Management Information is Needed to Improve Oversight of Automated Collection System Outbound Calls 3 (Apr. 28, 2010).

²¹ "While the notices sent in the notice stream are sufficient for filing an NFTL, generally when an NFTL has not been previously filed the revenue officer's determination with respect to the filing of the NFTL will be done in conjunction with the initial actual contact or initial attempted contact." While it is preferable to contact the taxpayer in person, the initial contact can also be done by phone or by mailing a notice or letter to the last known address. IRM 5.12.2.2 (Oct. 14, 2013). See also IRM 5.1.30.2 (July 8, 2011), 5.1.30.3 (July 8, 2011), 5.1.30.5 (July 8, 2011).

²² IRC § 6330(a)(3); IRC § 6320(a)(3).

²³ In some cases, a taxpayer may not receive the NIL or NFTL letter. In FY 2012, 33.9 percent of the NIL letters and 6.5 percent of the NFTL letters were unclaimed, refused, or undeliverable. TAS Research Individual Master File, ratio of taxpayers with transaction code 971 action code 67 or 68 to number of taxpayers with transaction code 971 action code 69. (Nov. 16, 2013). See IRM 5.12.6.3.17 (Oct. 14, 2013).

²⁴ The Director of the IRS Office of Professional Responsibility (OPR) has warned practitioners that assisting with a CDP claim involving collection alternatives could lead to practitioner discipline if the taxpayer is not compliant with payment and filing obligations. See 137 Tax Notes 742 (Nov. 12, 2012).

²⁵ IRM 5.1.9.3.4 (Feb. 23, 2012).

²⁶ IRS response to TAS information request (Sept. 3, 2013). The regulations provide that withdrawal is allowed but not required. Treas. Reg. 301.6330-1(c), A-C9 provides that when a taxpayer resolves the matter with Collection after filing a CDP request, "the taxpayer may withdraw in writing the request that a CDP hearing be conducted by Appeals" (emphasis added). See IRM 5.1.9.3.3 (3) (Feb. 23, 2012).

²⁷ IRM 8.22.5.2.5(5) (Nov. 8, 2013) states, "The Legal and Administrative review is not required when a taxpayer withdraws his/her hearing request," but the IRM is silent as to whether Appeals must conduct the balancing test. The taxpayer also loses the ability to challenge the underlying liability, if allowed in the CDP hearing. See IRC § 6330(c)(2)(B).

²⁸ IRC § 6330(c)(3) provides that the CDP determination shall take into consideration: the verification that the law and applicable procedures were followed, any issues raised relating to the unpaid tax or the proposed levy allowed to be raised under IRC § 6330(b)(2), and the balancing test.

²⁹ IRM 8.22.7.1.2 (Nov. 5, 2013). This is similar to what takes place when a taxpayer settles a case in Tax Court and must agree not to appeal the decision.

³⁰See IRS Form 12153 (Mar. 2012).

³¹ During the first three quarters of 2013, the average time from the filing of a CDP request to Appeals receiving the CDP case was 69 days. IRS Response to TAS Information Request (Sept. 5, 2013). See also IRM 5.1.9.3.3 (Feb. 23, 2012).

³² See IRM 5.1.9.3.3 (Feb. 23, 2012).

³³ Appeals Customer Satisfaction Survey, National Report, Fiscal Year 2012 Results, Time to Hear from Appeals 9. Appeals Customer Satisfaction Survey, National Report, Fiscal Year 2012 Results, Overall Satisfaction by Time from Appeal Request to Case Assignment 15.

³⁴ Two of the strongest drivers of satisfaction for Appeals customers were "Consideration of Information You Presented" and "Application of the Law to the Facts in Your Case." Id. at 23.

³⁵ This seemingly contradictory finding may be the result of some Appeals customers experiencing extreme wait times for their conferences to be scheduled. A recent TIGTA report found 58 CDP or Equivalent Hearing cases from a sample of 132 that exceeded the target time of 90 days to resolve or forward to Appeals. Twenty-nine of these cases took more than 180 days to resolve or forward to Appeals. See TIGTA, Ref. No. 2013-10-103, The Office of Appeals Continues to Experience Difficulties in the Handling of Collection Due Process Cases 7 (Sept. 17, 2013). The sample was taken from 2011 and 2012. Id. at 31.

³⁶ The taxpayer can contest a liability during a CDP hearing if he or she did not receive a notice of deficiency, never signed a consent for assessment, and did not have a prior opportunity to dispute the tax liability with Appeals. IRC § 6320(c) and IRC § 6330(c)(2)(B). A taxpayer may not have received a statutory notice of deficiency where the notice was undeliverable and the IRS had the taxpayer's last known address, but the IRS failed to send the notice the taxpayer's last known address.

³⁷ These channels include audit reconsiderations, amended returns, and doubt as to liability (DATL) offer in compromise (OIC). A taxpayer is eligible for audit reconsideration if he or she meets four criteria: the taxpayer must have filed a tax return, the assessment must be unpaid or the IRS has reversed tax credits that the taxpayer is disputing, the taxpayer must identify which adjustments he/she is disputing, and the taxpayer must provide additional information not considered during the original examination. IRM 4.13.1.4 (Oct. 1, 2006). IRC § 7122 provides the authority to enter in OICs, including offers relating only to liability issues.

³⁸ IRM 8.22.8.5.1 (Nov. 8, 2013).

³⁹ IRM 8.22.8.7.1.1 (Nov. 8, 2013). The National Taxpayer Advocate recommended a legislative change codifying the audit reconsideration process and providing, inter alia, that the Office of Appeals shall not issue a Notice of Determination in said case until such reconsideration and administrative appeal of the underlying liability have been concluded and the results are taken into consideration in making the CDP determination. National Taxpayer Advocate 2005 Annual Report to Congress 463.

⁴⁰ The AJAC project has the goal of "enhancing internal and external customer perceptions of fair, impartial, and independent Office of Appeals." See Memorandum for Appeals Employees, Implementation of the Appeals Judicial Approach and Culture (AJAC) Project, Control No. Ap-08-0713-03(July 18, 2013).

⁴¹ IRS, AJAC FAQS, Offers in Compromise Q6, http://appeals.web.irs.gov/about/ajac-faq.htm#Offers_in_Compromise (updated Nov. 17, 2013).

⁴² See IRM 5.19.1.5.4 (Oct. 18, 2013).

⁴³ IRC§ 6330(c)(2)(B) allows the taxpayer to raise at the CDP hearing "challenges to the existence or amount of the underlying tax liability for any tax period if the person did not receive any statutory notice of deficiency for such tax liability or did not otherwise have an opportunity to dispute such tax liability." Treas. Reg. 301.6330-1(e)(1) provides, "The taxpayer also may raise challenges to the existence or amount of the tax liability specified on the CDP Notice for any tax period shown on the CDP Notice if the taxpayer did not receive a statutory notice of deficiency for that tax liability or did not otherwise have an opportunity to dispute that tax liability." (emphasis added).

⁴⁴ IRM 5.19.8.4.3 (Nov. 1, 2007).

⁴⁵ A taxpayer can request an equivalent hearing by checking a box on Form 12153, Request for Collection Due Process or Equivalent Hearing (which the taxpayer may not have checked because he or she thought the CDP request was timely), by making a written request, or by confirming that he or she wants the untimely CDP hearing request to be treated as an Equivalent Hearing when notified by Collection of an untimely CDP hearing request. The taxpayer must request the hearing within the one year period beginning the day after the date of the CDP levy notice or the day after the end of the five-day period following an NFTL filing. IRM 8.22.4.3 (Mar. 29, 2012).

⁴⁶ IRM 5.19.8.4.3 (Nov. 1, 2007).

⁴⁷ IRM 8.22.4.3 (Mar. 29, 2012). The Collection Statute Expiration date is not suspended for an equivalent hearing. The taxpayer cannot receive judicial review of the equivalent hearing, except for innocent spouse issues, abatement of interest issues, and the timeliness of the CDP hearing request. Id. See Treas. Reg. 301.6330-1(i).

⁴⁸ IRM 8.22.4.6(3) a-g (Mar. 29, 2012). See also IRM 5.1.9.3.3 (Feb. 23, 2012).

⁴⁹ See footnote 45 supra.

⁵⁰ Appeals can use an ARI to request a Collection officer research the taxpayer's assets and income, or evaluate their proposed Collection Alternative. Collection provides this information or analysis to the hearing officer.

⁵¹See Memorandum for Appeals Employees, Control No. Ap-08-0713-03, Implementation of the Appeals Judicial Approach and Culture (AJAC) Project (July 18, 2013) (revising IRM 8.22.4.2.1). IRM 8.22.4.2.1 was revised on November 5, 2013 and provides only two options in these situations: request the information from the taxpayer or issue an ARI to Collection.

⁵² "Appeals exercises independent judgment concerning disputed valuations and business decisions made by Collection." IRM 8.23.1.1 (8) (Nov. 20, 2013). "A cadre of Appeals hearing officers will provide the additional review of real property valuations for Appeals." IRM 8.23.3.3.2.5 (Nov. 21, 2013).

⁵³See Memorandum for Appeals Employees, Control No. Ap-08-0713-03, Implementation of the Appeals Judicial Approach and Culture (AJAC) Project (July 18, 2013) (revising IRM 8.22.7.10.6.5). IRM 8.22.7.10.6.5 was revised on November 5, 2013 and incorporates this change.

⁵⁴ Complaints regarding Appeals' lack of independence have been common since Congress created CDP hearings. In 2012, the IRS published Rev. Proc. 2012-18, which prohibits certain communications between Appeals and the IRS function where the case originated (originating function). See Rev. Proc. 2012-18, 2012-10 I.R.B. 455.

⁵⁵See Memorandum for Appeals Employees, Control No. Ap-08-0713-03 Implementation of the Appeals Judicial Approach and Culture (AJAC) Project (July 18, 2013) (revising IRM 8.22.4.2.1).

⁵⁶ IRC § 6330(c)(3).

⁵⁷ The National Taxpayer Advocate has recommended that fundamental taxpayer rights, such as the right to be heard and the right to a fair and just tax system, be incorporated into ongoing Collection and Appeals training. National Taxpayer Advocate's Report to the Acting Commissioner, Toward a More Perfect Tax System: A Taxpayer Bill of Rights as a Framework for Effective Tax Administration 26-27 (Nov. 4, 2013).

⁵⁸See IRM 5.19.8.4.7.7 (Sept. 2, 2009). Appeals still receives CDP requests that Collection has deemed to delay or impede collection. Conversely, offers in compromise or installment agreement requests that Collection deems "Solely to Delay" may not go to Appeals. See IRM 5.14.3.2 (3)(e) (Jun. 12, 2009); IRM 5.8.3.13.1 (May 14, 2013).

⁵⁹ "If I do not hear from you or if you submit another issue that is frivolous, or reflects a desire to delay or impede the administration of federal tax laws, I will disregard your hearing request and return your case to the IRS Collection office that referred it to Appeals." Letter 4380 (July 2008).

⁶⁰ Letter 4380 (July 2008).

⁶¹ "Appeals employees remain ultimately responsible for independently evaluating the strengths and weaknesses of the issues in cases assigned to them and making independent judgments concerning the overall strengths and weakness of the cases and the hazards of litigation." Rev. Proc. 2012-18, § 2.02(3)(b). "The judicial attitude is one which reasonably appraises the facts, law, and litigating prospects; uses sound judgment and ability to see both sides of a question; and is objective and impartial. Any approach which contemplates a maximum possible result in favor of the Government or a deficiency in every case is incompatible with a judicial attitude and the Appeals mission." IRM 8.6.4.1.4 (Oct. 26, 2007).

⁶² "Settlement Officers use hazards of litigation when working Trust Fund Recovery Penalties. Hazards of Litigation are germane to TFRP cases because the determination of the exact amount of the proposed penalty can be tried in court. Collection Due Process cases can be reviewed by the Tax Court, but only for an abuse of discretion, not on the actual case resolution." IRS response to TAS information request (Sept. 5, 2013).

⁶³ IRS response to TAS information request (Sept. 5, 2013).

⁶⁴See National Taxpayer Advocate 2002 Annual Report to Congress 110-15, 2003 Annual Report to Congress 38-59, 2004 Annual Report to Congress 264-89, 2006 Annual Report to Congress 266-88, 2009 Annual Report to Congress 70-84, 2010 Annual Report to Congress 128-48 (Most Serious Problem: Inadequate Collection Due Process Hearings May Deprive Taxpayers of an Opportunity to Have Their Cases Fully Considered); National Taxpayer Advocate 2011 Annual Report to Congress (Most Litigated Issue: Appeals from Collection Due Process (CDP) Hearings Under Internal Revenue Code Sections 6320 and 6330 619); National Taxpayer Advocate 2012 Annual Report to Congress 6 (Legislative Recommendation: Amend IRC §§ 6320 and 6330 to Provide Collection Due Process Rights to Third Parties (Known as Nominees, Alter Egos, and Transferees) Holding Legal Title to Property Subject to IRS Collection Actions).

Sunita B. Lough, Commissioner, Tax Exempt & Government Entities Division

DEFNITION OF PROBLEM

The IRS's Exempt Organization (EO) unit receives about 60,000 applications for exempt status each year.¹ In addition, EO receives applications for reinstatement from organizations whose exempt status was automatically revoked. These applications added more than 50,000 cases to EO's workload over the past three years.² Already understaffed, EO did not allocate more resources to its Determinations Unit, which processes both initial and reinstatement applications. Its inventory backlog now stands at about 66,000 cases, more than the number of initial applications it usually receives in an entire year, four times the 2010 level, and more than triple the 2011 level.³ Organizations consulting the "Where is My Exemption Application?" page on IRS.gov are informed that applications requiring review by an EO specialist take a year and a half just to be assigned.⁴

There is no procedure for administrative review of automatic revocations, yet EO uses automated systems that erroneously identify thousands of organizations as no longer exempt.⁵ Planned programming changes will not avert future erroneous revocations. By erroneously listing an organization as having lost its tax exempt status, the IRS may cause the organization to lose funding it needs to survive and the effect may be community-wide.

In today's difficult economy and in light of long-term cuts in projected spending known as sequestration, exempt organizations are faced with a gap between an increasing need for their assistance and diminishing resources available to meet that need.⁶ The single largest category of public charities deliver human services -- they "provide networks of direct services to people in need. They feed our hungry, strengthen our communities, shelter our homeless, care for our elderly, and nurture our young."⁷ When charities lose funds because they cannot obtain timely recognition of their exempt status, or are erroneously treated as no longer exempt, these vulnerable populations suffer the consequences.

ANALYSIS OF PROBLEM

Background

EO Has Struggled for the Past Decade to Process Its Inventory of Applications for Exempt Status, and Automatic Revocations Made the Problem Worse.

Since 2004, the National Taxpayer Advocate has reported on the increased number of applications for exempt status and the decrease in the number of EO employees who handle them.⁸ Three of the past six Annual Reports to Congress identified the delay in processing applications for exempt status as among the Most Serious Problems.⁹ EO's workload grew substantially in 2010, when it began notifying organizations their exempt status had been automatically revoked.¹⁰ Many of these organizations applied for reinstatement, and they have done so in increasing numbers. EO, however, had projected a decrease in the number of applications for reinstatement over time. Figure 1.15.1 shows the relationship between EO's projected and actual receipts of reinstatement applications.

 

FIGURE 1.15.1, Projected and Actual Receipts of Applications

 

for Reinstatement of Exempt Status, FY 2011-2013¹¹

 

Receipts of Applications for Reinstatement of Exempt Status

 

 

 

 

FIGURE 1.15.2, Applications for Reinstatement of Exempt Status and

 

Full-time Cincinnati Staff Handling the Applications

 

FY 2011-2013¹³

 

Staffing and Application Requests

 

for Reinstatement of Exempt Status

 

 

Organizations affected by delays in obtaining recognition of exempt status include those that deliver human services such as food and shelter. Of public charities that report to the IRS, there are more in this category than in any other.¹⁶ Increased need for their assistance coincides with reductions in the amount of government funds to meet the need, especially at the state and local levels. For example, according to a 2012 survey by the U.S. Conference of Mayors:¹⁷

• Over 80 percent of the survey cities reported an increase in requests for emergency food assistance over the past year and three fourths expect such requests to increase in the future.¹⁸

• Nearly half of the survey cities expect that resources to provide emergency food assistance will decrease over the next year.¹⁹

• More than half the survey cities reported an increase in the total number of persons experiencing homelessness and expect the number of homeless families to increase in the future.²⁰

• More than half of the survey cities expect resources to provide emergency shelter to decrease over the next year.²¹

EO Erroneously Notified Thousands of Organizations Their Exempt Status Had Been Revoked.

Since the first automatic revocations became effective in 2010, EO has notified about 550,000 organizations they are no longer exempt, with about 9,000 of these notifications being in error.²² The IRS notes the loss of exempt status on an electronic list of organizations whose exempt status was automatically revoked and removes the organization from the list of organizations to which deductible contributions may be made. An organization will likely immediately suffer the consequences of being taken off the "right" list and placed on the "wrong" list, while it faces potentially lengthy timeframes in the reinstatement process. EO refuses to implement a review procedure that would avert these drastic consequences long enough to allow it to consider the possibility that the revocation might have been erroneous.²³ In the meantime, an organization may become ineligible for grants and may lose donor funding it needs to survive.

As described in last year's Annual Report, after the Treasury Inspector General for Tax Administration found a programming problem existed, EO identified more than 2,270 cases in which an organization was erroneously listed as having had its exempt status revoked, and 300 to 400 additional entities identified themselves as erroneously listed as revoked. The most common reason for the erroneous revocations was that IRS systems did not recognize subordinate organizations as part of a group return when the subordinates and the parent organizations had different accounting periods.²⁴

This year, EO reported to TAS additional programming conditions that caused erroneous revocations. As reported in the National Taxpayer Advocate's Fiscal Year 2014 Objectives Report to Congress, one programming change caused IRS computers to calculate the three-year nonfiling period that triggers automatic revocation only with reference to the date the organization obtained its Employer Identification Number (EIN).²⁵ An organization obtaining its EIN in 2007, for example, would be treated as having had reporting obligations since 2007, even if the organization commenced operations and obtained recognition of its exempt status only in 2011. Systemic review of filing activity would show three or more consecutive years of nonfiling (2007-2010) and EO would notify the organization that it was no longer exempt. EO does not track the number of organizations it treated as automatically revoked because of this issue.²⁶

EO relies on affected organizations to come forward and seek relief, then rectifies an error by restoring the organization's exempt status on its databases and issuing a letter attesting to its exempt status.²⁷ In an effort to minimize erroneous revocations, EO plans to change its procedures by identifying taxpayers who, in the process of obtaining an EIN, indicate they are nonprofit organizations.²⁸ The IRS will then send these organizations that do not file returns Notice 259A. The notice does not actually remind (or inform) the organization of its filing obligation, but is captioned simply "You didn't file a Form 990/990-EZ or Form 990-N." The recipient is told that if it did not file, it should respond to the letter, and EO believes that this may prompt organizations that do not have a filing requirement to contact the IRS.²⁹ However, the portion of the notice "If We Don't Hear From You" begins, "[b]ecause you have tax-exempt status, you must file Form 990/990-EZ or Form 990-N." An organization that does not (yet) have exempt status would likely conclude that the notice simply doesn't apply to it. Nothing in the notice or any other IRS communication alerts the taxpayer that as far as the IRS is concerned, the three-year nonfiling period for automatic revocations has begun.

EO's decision to continue to measure the three-year nonfiling period with reference to issuance of the EIN is essentially a business decision. EO reasons that because an organization generally has an annual filing requirement from the time it forms and generally obtains an EIN in conjunction with its legal formation, "the EIN establishment date is an appropriate, and the best available, metric from which to begin looking for filings."³⁰ We agree that this may be an accurate description of how events generally unfold, and we recognize the convenience of using the EIN establishment date as a point of reference. However, the National Taxpayer Advocate takes issue with the imposition of this general rule because it is coupled with EO's refusal to provide administrative review of automatic revocations. By computing the three-year nonfiling period with reference to the EIN date, EO is perpetuating erroneous revocations. Some taxpayers may obtain EINs without actually forming a legal entity or conducting any activity. These taxpayers would not, as a matter of law, have a filing obligation. Other taxpayers, as generic organizations, may obtain EINs, have no filing requirements, and only later become nonprofit organizations, yet the nonfiling period would start on the date the EIN was obtained. Because the best available metric also ensures continued error, EO should allow administrative review of automatic revocations that result from this business decision.

A related procedure unfairly penalizes organizations that do file for exempt status as soon as they obtain their EINs, namely EO's inclusion in the three-year nonfiling period the time an e-Postcard filer was waiting for EO to process its application for exempt status. It is impossible to submit an e-Postcard in that period without assistance from the IRS.³¹ TAS's position, with which the IRS has not agreed, is that it is unfair to "count" any failure to file during this period as one of the three periods that triggers automatic revocation, when the Internal Revenue Code requires electronic filing of the postcard and the IRS has designed a system that makes it physically impossible for the EO to make such an e-filing on its own. EO expects to partially address this problem with the same change in its procedures described above. Taxpayers that indicate on their applications for an EIN that they are nonprofit organizations will be able to file a return or e-Postcard without assistance from the IRS.³² This solution will not help taxpayers whose EIN applications do not show they are nonprofits. As noted above, it also does not help taxpayers who, although they have an EIN, have not commenced operations or do not respond to the IRS's notice because they do not believe it applies to them.

A separate programming change affected reinstated organizations. IRS databases did not show that organizations whose exempt status had been reinstated had a new three-year automatic revocation period. This caused the IRS to revoke exempt status a second time shortly after granting reinstatement.³³ The IRS does not know how many organizations it treated as automatically revoked because of this change.³⁴ While the IRS has resolved the problem for many of these organizations, it does not know how many it may have overlooked.³⁵ EO requested programming changes that will essentially suspend the three-year nonfiling period while the organization's exempt status remains automatically revoked. If approved, the changes will be implemented in January of 2015.³⁶ As the National Taxpayer Advocate has repeatedly pointed out, administrative review of all proposed automatic revocations (rather than the current ad hoc and nonpublic approach) would likely have averted many errors.³⁷

CONCLUSION

EO's inventory backlog, which now exceeds the number of initial applications it usually receives in an entire year, burdens taxpayers who must wait for 18 months for their applications to be assigned to an analyst. Thousands of organizations were forced to cope with EO's troubled inventory management only because EO erroneously treated them as having had their exempt status automatically revoked and they were required to apply for reinstatement. EO is aware that measuring the three-year nonfiling period with reference to the EIN date causes erroneous revocations, yet it intends to retain that practice. It does not adequately inform organizations how the practice may affect them or provide organizations any way to seek administrative review of automatic revocations.

RECOMMENDATIONS

The National Taxpayer Advocate recommends the IRS:

² Total EO determinations case receipts were 66,038 for fiscal year (FY) 2011; 79,362 for FY 2012; and 79,740 for FY 2013. IRS response to TAS fact check, referencing TE/GE's fourth quarter 2013 Business Performance Review (BPR) (Dec. 16, 2013).

³ TE/GE response to TAS information request (Nov. 12, 2013). FY 2010 open inventory consisted of 15,570 determinations cases. For FY 2011, the level was 20,603 cases. IRS response to TAS fact check, referencing TE/GE's fourth quarter 2013 Business BPR (Dec. 16, 2013). TE/GE's most recent BPR posted on its webpage is for the second quarter of FY 2012. See TE/GE BPR FY 2012: Second Quarter (May 23, 2012), available at http://tege.web.irs.gov/support/planning/planning.asp.

⁴ Where Is My Exemption Application?, available at http://www.irs.gov/Charities-&-Non-Profits/Where-Is-My-Exemption-Application (informing taxpay as of Nov. 14, 2013, that EO was assigning applications it received in May of 2012). The web page was last updated on Sept. 23, 2013. Organizations consulting the more recently updated "Where's My Application?" page on IRS.gov are informed that the IRS might take up to six months after acknowledg the application to either inform the applicant that the application has been approved or to request additional information. See Where's My Application, available at http://www.irs.gov/Charities-&-Non-Profits/Charitable-Organizations/Where's-My-Application%3F (last vis-Dec. 17, 2013, showing the page had been updated Dec. 11, 2013). This new webpage was first available around Nov. 1, 2013. See Systemic Advocacy Management System submission 28938. Because six months have not yet elapsed since then, TAS cannot verify the reliability of the six-month estimate.

⁵ TE/GE estimates it erroneously treated about 9,000 organizations as having had their exempt status automatically revoked. TE/GE response to TAS information request (Nov. 12, 2013).

⁶ Marcus Baram, Filling The Gap: As Government Shrinks, Community Groups Seek Local Solutions, The Huffington Post (May 2, 2012), available at http://www.huffingtonpost.com/2012/05/02/filling-the-gap-crisis-assistance_n_1379761.html; Annie Lowrey, Government Giving Nonprofits Angst, The New York Times (Nov. 7, 2013), available at http://www.nytimes.com/2013/11/08/giving/government-giving-nonprofits-angst.html?_r=0.

⁷ Charity Navigator, available at http://www.charitynavigator.org/index.cfm?bay=search.categories&categoryid=6; Sarah L. Pettijohn, Urban Institute, The Nonprofit Sector in Brief 4 (2013), available at www.urban.org/UploadedPDF/412923-The-Nonprofit-Sector-in-Brief.pdf, noting that of 335,037public charities reporting to the IRS in 2011, 116,643 (35 percent) were classified as part of the human services subsector.

⁸ National Taxpayer Advocate 2004 Annual Report to Congress 193, 203 (Most Serious Problem: Application and Filing Burdens on Small Tax-Exempt Organizations).

⁹ National Taxpayer Advocate 2012 Annual Report to Congress 192 (Most Serious Problem: Overextended IRS Resources and IRS Errors in the Automatic Revocation and Reinstatement Process Are Burdening Tax-Exempt Organizations); National Taxpayer Advocate 2011 Annual Report to Congress 442 (Most Serious Problem: The IRS Makes Reinstatement of an Organization's Exempt Status Following Revocation Unnecessarily Burdensome); National Taxpayer Advocate 2007 Annual Report to Congress 210 (Most Serious Problem: Determination Letter Process).

¹⁰ Section 1223 of the Pension Protection Act of 2006 (PPA) (Pub. L. No. 109-280, 120 Stat. 780 (2006)) imposed a new annual reporting requirement, Form 990-N, Electronic Notice (e-Postcard) for Tax-Exempt EOs Not Required to File Form 990 or 990-EZ, on small exempt organizations and mandated automatic revocation of tax-exempt status of organizations that fail to file required returns or e-Postcards for three consecutive years.

¹¹ TE/GE response to TAS information request (Nov. 12, 2013). AWSS Employee Support Services, Payroll/Personnel Systems, HR Reporting Section, Oct 5, 2013, available at https://persinfo.web.irs.gov/track/workorg.asp.

¹² EO does not assign specific employees to work only on applications for reinstatement. TE/GE response to TAS information request (Nov. 12, 2013).

¹³ TE/GE response to TAS information request (Nov. 12, 2013) noting that "all Exempt Organizations, Determinations (EOD) and Exempt Organizations, Technical (EOT) employees who work on applications may work on reinstatement requests" and "[t]he approximate number of employees in EOD working applications is 150. The approximate number of employees in EOT working applications is 30." TAS found that as of Oct. 5, 2013, there were 183 full-time Cincinnati Determinations staff. AWSS Employee Support Services, Payroll/Personnel Systems, HR Reporting Section, available at https://persinfo.web.irs.gov/track/workorg.asp.

¹⁴ EO's budget equaled $98,759,800 or 35.6 percent of TE/GE's budget in FY 2011; $100,547,400 or 37.2 percent in FY 2012; and $97,154,000 or 38.1 percent in FY 2013; TE/GE response to TAS information request (Nov. 12, 2013). For FY 2011, the level of open inventory was 20,603 cases compared to the FY 2013 level projected to be 66,000 cases. IRS response to TAS fact check, referencing TE/GE's fourth quarter 2013 Business BPR (Dec. 16, 2013).

¹⁵See National Taxpayer Advocate 2012 Annual Report to Congress 196 (Most Serious Problem: Overextended IRS Resources and IRS Errors in the Automatic Revocation and Reinstatement Process Are Burdening Tax-Exempt Organizations); National Taxpayer Advocate 2011 Annual Report to Congress 449; Where Is My Exemption Application?, available at http://www.irs.gov/Charities-&-Non-Profits/Where-Is-My-Exemption-Application (informing taxpayers that, as of Nov. 14, 2013, EO was assigning applications it received in May of 2012). The web page was last updated on Sept. 23, 2013.

¹⁶ Sarah L. Pettijohn, Urban Institute, The Nonprofit Sector in Brief 4 (2013), available at www.urban.org/UploadedPDF/412923-The-Nonprofit-Sector-in-Brief.pdf. Of the 335,037 public charities reporting to the IRS in 2011, 116,643 (35 percent) were classified as part of the human services subsector. The next largest category included the 58,568 educational organizations (17.5 percent of the total), followed by the 41,619 health organizations (12.4 percent of the total). All other classifications (arts, culture and humanities; environment and animals; international and foreign affairs; public and social benefit; and religion related) each accounted for less than 12 percent of the total.

¹⁷ The U.S. Conference of Mayors, Hunger and Homelessness Survey (Dec. 2012), available at http://usmayors.org/publications/.

¹⁸Id., at 1-2, reporting that 82 percent of the cities reported an increase in requests for emergency food assistance and three fourths of the survey cities expect requests for emergency food assistance to increase over the next year.

¹⁹Id., at 2, reporting that 48 percent expect that resources to provide emergency food assistance will decrease over the next year.

²⁰Id., at 2-3, reporting that 60 percent of the cities reported an increase in homelessness and 60 percent expect the number of homeless families to increase over the next year.

²¹Id., at 3, reporting that 58.5 percent of the cities expect resources to provide emergency shelter to decrease over the next year.

²² TE/GE response to TAS information request (Nov. 12, 2013); IRS response to TAS fact check (Dec. 16, 2013).

²³See National Taxpayer Advocate 2012 Annual Report to Congress 192, 202 (IRS Response: Most Serious Problem: Overextended IRS Resources and IRS Errors in the Automatic Revocation and Reinstatement Process Are Burdening Tax-Exempt Organizations).

²⁴Id. at 199.

²⁵ National Taxpayer Advocate Fiscal Year 2014 Objectives Report to Congress 33 (June 30, 2013). An EIN is a nine-digit number assigned by the IRS to sole proprietors, corporations, partnerships, estates, trusts, and other entities for tax filing and reporting purposes. An organization requests an EIN by submitting IRS Form SS-4, Application for Employer Identification Number (EIN). The form does not require that the organization already be operational. For example, the applicant may select "banking purpose" as the reason for applying for the EIN. Thus, a new organization might obtain an EIN, set up a business bank account, and then use a check or credit card from the business bank account to pay the incorporation fee imposed by the state in which the organization is created. The EIN application asks what type of entity the applicant is, and contains a box for "other nonprofit organization."

²⁶ TE/GE response to TAS information request (Nov. 12, 2013).

²⁷ TE/GE response to TAS information request (Nov. 12, 2013).

²⁸Id. This capability is expected to be available beginning in January of 2014.

²⁹ TE/GE response to TAS information request (Nov. 12, 2013).

³⁰Id.

³¹ One of the Frequently Asked Questions about exempt organizations' annual filing requirements is "Does an organization whose gross receipts are normally $25,000* or less have to file the e-Postcard if its application for tax exemption is pending?" The answer is "Yes, but to do so an officer of the organization must first call Customer Account Services at 1-877-829-5500 (a toll-free number) and ask that the organization be set up to allow filing of the e-Postcard." Exempt Organizations Annual Reporting Requirements -- Annual Electronic Notice (Form 990-N): Frequently Asked Questions and Answers, available at http://www.irs.gov/Charities-&-Non-Profits/Exempt-Organizations-Annual-Reporting-Requirements-Annual-Electronic-Notice-(Form-990-N):-Organization-With-Application-Pending-Must-File. Taxpayers who call the number cited above can expect to wait 17 minutes to speak to an IRS employee. The level of service (the percentage of callers requesting a customer service representative who received assistance) is 68.58 percent. TE/GE response to TAS information request (Nov. 12, 2013).

³² TE/GE response to TAS information request (Nov. 12, 2013). In fact, as described above, the IRS will issue these taxpayers notice CP 259A to notify them they did not file a return.

³³ Upon learning that EO programming was causing erroneous revocations, TAS issued guidance to its employees explaining how to identify and advocate for taxpayers who come to TAS with these problems.

³⁴ TE/GE response to TAS information request (Nov. 12, 2013).

³⁵Id.

³⁶Id.

³⁷ National Taxpayer Advocate 2012 Annual Report to Congress 192 (Most Serious Problem: Overextended IRS Resources and IRS Errors in the Automatic Revocation and Reinstatement Process Are Burdening Tax-Exempt Organizations); National Taxpayer Advocate 2011 Annual Report to Congress 442 (Most Serious Problem: The IRS Makes Reinstatement of an Organization's Exempt Status Following Revocation Unnecessarily Burdensome); National Taxpayer Advocate 2011 Annual Report to Congress 562 (Legislative Recommendation: Provide Administrative Review of Automatic Revocations of Exempt Status, Develop a Form 1023-EZ, and Reduce Costs to Taxpayers and the IRS by Implementing Cyber Assistant).

Jodi Patterson, Director, Return Integrity and Correspondence Services

Mary Howard, Director, Privacy, Governmental Liaison and Disclosure

Debra Holland, Commissioner, Wage and Investment Division

DEFINITION OF PROBLEM

Return integrity programs are designed to detect and prevent civil fraud in tax returns before the IRS issues refunds to taxpayers, as part of the overall revenue protection strategy. The National Taxpayer Advocate identified problems with these programs as early as 2005. However, despite improvements, issues within the return integrity strategies persist and continue to harm taxpayers.¹

• The IRS eliminated the Pre-Refund Program Executive Steering Committee (ESC) at the end of fiscal year (FY) 2012. This left no overarching governance of the design or implementation of revenue protection strategies or filters to detect fraud, and inhibited an integrated approach, resulting in potentially duplicative or over-inclusive filters.

• Filters delayed 308,868 refunds due to "false positive" signs of fraudulent activity in filing season 2013.²

• If certain letters informing taxpayers of the status of refunds caught in filters are returned as undeliverable, the IRS destroys them, and the taxpayers may never learn the status of their cases or receive their refunds.³

• Many taxpayers caught in the Automated Questionable Credit (AQC) program do not receive letters informing them of the status of their accounts and what to do next.⁴

• Taxpayers caught in the bank/external leads program only received letters informing them that their financial institutions could not process their direct-deposit refunds from the IRS and to allow an additional ten weeks to receive them in about 12 percent of cases.⁵

• TAS receipts of Integrity Verification and Operation (IVO) cases have increased over 45 percent for the year to date from FY 2012 to FY 2013.⁶

• In about 80 percent of cases closed in FY 2013, taxpayers who contacted TAS about delayed refunds flagged by the Electronic Fraud Detection System (EFDS) received full or partial relief from the IRS.⁷

• The IRS's failure to implement the new Return Review Program (RRP) on schedule could lead to a crash of EFDS until the aged system could be repaired, which would force the IRS to decide whether to stop issuing refunds in the event of crash, or issue billions of dollars in potentially fraudulent refunds without screening.⁸

ANALYSIS OF PROBLEM

Background

The return integrity process is complex and multifaceted. A tax return must travel a long path with many potential roadblocks before the IRS accepts it as filed. The main goal of IVO is to stop fraudulent refunds before they are issued by identifying potentially false returns, usually through wages or withholding reported on the returns. The IRS does this primarily with the Electronic Fraud Detection System, which was built in the 1990s. EFDS runs all individual tax returns through various filters to identify characteristics that may indicate a high risk of fraud.¹⁰

Once EFDS completes the initial screening and flags a return as having a high likelihood of fraud, the IRS freezes the taxpayer's refund for 11 weeks so IVO can attempt to verify wages and withholding. The IRS sends a letter to the taxpayer explaining that income, withholding, or tax credits are being reviewed and the refund is being held pending this review.¹¹

One way the IRS attempts to verify information during this period is to compare it with the Information Returns Master File (IRMF). The IRMF is populated with third-party reporting data such as wage and withholding reported on Form W-2, Wage and Tax Statement, and most Forms 1099, U.S. Information Return.¹² If the return information cannot be automatically verified through the IRMF database, the next step is manual verification. IVO employees will attempt to contact the employers listed on the return to verify the wages and withholdings reported.¹³ If the employer verifies the information and IVO is satisfied that the return is valid, the IRS will release the refund.

The IRS formed an Information Returns Acceleration team in 2012 to develop a way for the IRS to obtain W-2 information from the Social Security Administration (SSA) earlier in the processing season to verify wages claimed on returns with information reported by payors. The team also continued to utilize the Disc program, where multiple major employers submit a copy of W-2 data directly to the IRS by mid-March to allow the IRS to match potentially fraudulent information returns to the employer database. Both programs are a step in the right direction by allowing the IRS to verify income and withholding information before releasing a refund.

If IVO cannot verify the return information through IRMF or employer contact, the IRS sends a letter to the taxpayer requesting documentation to substantiate the information.¹⁴ Finally, if IVO cannot verify the return information before the 11-week hold expires, the IRS will make the hold permanent.¹⁵

A taxpayer caught in a variety of filters may believe he or she has been audited multiple times.

• A return could possess certain characteristics of identity theft and be stopped by the Taxpayer Protection Program (TPP) until the taxpayer verifies that he or she is not an identity thief;¹⁶

• The same return could then be selected for a pre-refund audit of a claimed Earned Income Tax Credit (EITC); or

• A return can be selected for income and withholding verification, and then also be audited.

The National Taxpayer Advocate Continues to Identify Return Integrity Programs as a Most Serious Problem.

Return integrity programs first made the National Taxpayer Advocate's list of the most serious problems facing taxpayers in 2005 and were discussed in a corresponding research study.¹⁷ The National Taxpayer Advocate has recommended many improvements to limit the burden these programs cause for taxpayers seeking legitimate refunds, while still protecting the IRS's very valid need to reduce and prevent fraud. While the IRS has altered return integrity programs and strategies, it has failed to implement many of these recommendations.¹⁸

TAS monitors the IRS's progress on all recommendations in the National Taxpayer Advocate's Annual Reports to Congress, documenting whether the IRS agreed to take action and what it has done. In the three reports where various return integrity programs were cited as most serious problems facing taxpayers, the National Taxpayer Advocate made 21 recommendations to improve the programs.¹⁹ The IRS agreed to fully or partially implement nine of the 14 recommendations in the 2011 and 2012 Annual Reports and declined to accept five others.²⁰

The National Taxpayer Advocate Disagrees with the Elimination of the Pre-Refund Program Executive Steering Committee.

The IRS eliminated the Pre-Refund Program Executive Steering Committee at the end of FY 2012. This left the IRS with no overarching governance of the design or implementation of revenue protection strategies or filters and inhibited an integrated approach, resulting in potentially duplicative or over-inclusive filters. The committee provided a forum where decision makers from various parts of the IRS could not only inform other areas of new programs, but also allowed the parties to raise concerns. It provided the IRS, including TAS, a forum to work as one to identify and prevent fraud. Dismantling the ESC was a step in the wrong direction. By not addressing fraud globally and in a collaborative manner, the IRS is missing opportunities to share information and prevent innocent taxpayers from being caught in fraud filters.

Taxpayers are Harmed by Various Uncoordinated Return Integrity Strategies.²¹

The Automated Questionable Credit (AQC) program may be confusing to taxpayers.

In November 2011, RICS developed and implemented a streamlined statutory notice of deficiency pilot program -- the AQC. AQC expanded the IRS's use of automation to prevent improper refunds of questionable withholding and refundable credits.²² TAS identified and elevated areas of concern, including the possible expansion of math error authority. Significant concerns included a statement in the initial AQC letter to taxpayers that the inquiry is not an audit and the IRS may examine the return again later, leaving the taxpayer with little certainty.²³

As of October, 2013 RICS had issued over 80,000 4800C letters but has nearly 112,000 cases in inventory received through AQC.²⁴ TAS reviewed 50 of these cases from TAS inventory; of those, only 16 taxpayers received the 4800C letter informing them of the actions proposed for their accounts and the next steps the taxpayers needed to take.²⁵

External Leads Program burdens taxpayers

In 2011, RICS implemented the External Leads Program, which is responsible for receiving and processing informational leads and funds returned by partner financial institutions and various other sources because the funds were deemed questionable. External leads may involve Treasury checks, direct deposits/Automated Clearing House, refund anticipation loans or checks, and pre-paid debit cards. The program receives leads from over 130 external sources as well as internal leads from throughout the IRS.²⁶

Within approximately 15 business days of receiving an external lead, RICS employees begin their research to determine the validity of the refund and will advise the financial institution to return the funds if it cannot determine the refund was valid.²⁷ The RICS employee is not required to notate the taxpayer's account to show the interception of the refund, and only in limited circumstances must notify the taxpayer before the financial institution returns the funds to the IRS.²⁸ Consequently, if the taxpayer contacts the IRS about his or her refund, a Customer Service Representative (CSR) cannot identify RICS involvement by reviewing the main tax account database or provide any guidance on what the IRS is doing. In most instances, the CSR refers the taxpayer back to the financial institution, even though it was the IRS that decided the funds must be returned. Additionally, financial institutions are advised to inform their account holders that:

Undelivered mail procedures may mean taxpayers never learn about refund delays.

When corresponding with a taxpayer, the IRS uses the "address of record," which is generally the address given on the taxpayer's last return.³³ When the IRS sends a notice or document to a "last known address," it is legally effective even if the taxpayer never receives it.³⁴ The IRS issues several important refund status notices following the last known address rule.³⁵ If a preparer makes a mistake in entering the address, or the taxpayer moves without leaving a forwarding address, the IRS will destroy the undelivered letters upon their return. This means the taxpayer never learns that his or her return is under review and has no chance to prove the wages and withholding are valid.³⁶

Often, however, the IRS already has the correct address in its records and could resolve the issue with a simple review. For example, if a preparer makes a transposition error on the house number, the notice will be returned as undeliverable. However, the taxpayer may have filed from the same address for several years, so by checking the address history the IRS could easily correct the address and resend the notice, thus providing the taxpayer an opportunity to provide supporting documentation. By reclassifying these letters so employees would conduct further research when they come back as undeliverable, the IRS could direct them to the proper addresses.³⁷

Delays in implementation of the Return Review Program may result in harm to the government and taxpayers.

The Electronic Fraud Detection System is the IRS's primary frontline system for detecting fraudulent returns. Although it assisted the IRS in successfully preventing the release of over $18 billion in fraudulent refunds,³⁸ the Treasury Inspector General for Tax Administration (TIGTA) has estimated the IRS still may have paid $5.2 billion in potentially fraudulent tax refunds on 1.5 million returns in tax year 2010.³⁹ The IRS has declared EFDS "too risky to maintain, upgrade, or operate beyond 2014."⁴⁰

In 2009, the IRS began developing the Return Review Program (RRP) to replace EFDS; Congress approved $54 million for IRS Information Technology (IT) to establish the RRP. RRP is expected to enhance revenue by $28.8 million per year when fully implemented, and its estimated five-year rate of return is 15,800 percent. More simply put, the IRS estimates it will recoup over $15,000 for every dollar spent.⁴¹ RRP also will automate a variety of tasks, many of them manual, that employees now perform. For example, today when a case is referred for an audit, employees enter data on a spreadsheet, which is then transferred to headquarters personnel who open and assign the case. TAS has identified multiple instances where the case was lost in transit, thus imposing severe burden on the taxpayer and significantly delaying resolution.

Despite estimated high levels of return, significant monetary investment, and a huge resource investment in teams and development of system requirements, the IRS is now forced to consider non-deployment or a limited deployment of RRP. On January 15, 2013, IT reported it did not have enough resources to bring RRP online by the January 1, 2015 deadline.⁴²

Not deploying the RRP as intended could impose significant harm and cost on both the IRS and the public. A failure of the EFDS system, which according to a 2010 IRS statement is becoming increasingly likely, would force the IRS to decide whether to stop issuing refunds until the system could be repaired, or issue billions of dollars in potentially fraudulent refunds without screening.⁴³ In addition, as EFDS becomes harder to update and maintain, it could erroneously stop an increasing number of valid refunds. The lack of automation to handle administrative adjustments and actions is straining the IRS's limited resources as fraud and identity theft grow and staffing declines.

Service to Taxpayers Ensnared by Filters Continues to Decline.

Over the last three years, TAS has seen a significant increase in wage verification cases. In FY 2011, TAS received just over 21,000 such cases; in FY 2013 the number rose to more than 26,000.⁴⁴ Cases involving taxpayers facing an economic burden increased 111 percent during that time.⁴⁵ This increase shows that although the wage verification unit tries to get innocent taxpayers out of the process as fast as possible, it still holds up many refunds when a filter inadvertently catches a valid return.

The number of taxpayers who came to TAS seeking and received the release of IVO refund holds shows the IRS continues to impose significant delays on innocent taxpayers. The percentage of taxpayers who received full or partial relief after contacting TAS, has increased from 75 percent in FY 2012 to 80 percent in FY 2013.⁴⁶

According to the IRS, the Taxpayer Protection Program (TPP) stopped 1,039,000 refunds with a false positive rate of 29.7 percent in FY 2013, compared to 402,000 refunds stopped in FY 2012 with a false positive rate of 20.9 percent.⁴⁷ The significant growth in refunds stopped correlates to an increase in the number of filters the TPP uses, from 11 in FY 2012 to more than 80 in the FY 2013 filing season.⁴⁸ The increase in innocent taxpayers being caught in the filters has significantly taxed the TPP's ability to respond to taxpayer inquiries. Overall, fewer than six of ten calls to the TPP reached a live assistor for help, and only after waiting an average of almost 21 minutes.⁴⁹

CONCLUSION

The National Taxpayer Advocate recognizes the need for return integrity strategies and the importance of automated filters to screen returns for potential fraud. However, automated screens will never achieve perfection. The IRS must remain cognizant of the taxpayers who are innocently caught by these screens and work diligently to timely resolve their cases and adjust filters. Dismantling the Pre-Refund Executive Steering Committee was a step in the wrong direction, contravening IRS efforts to work globally to address screening returns, and eliminating the opportunity for separate IRS functions, including TAS, to work together. This action further handicaps the development and refining of filters, thereby not only jeopardizing revenue but also the legitimate taxpayers whose returns are dragged into this process.

RECOMMENDATIONS

The National Taxpayer Advocate recommends that the IRS:

² IRS Return Integrity & Correspondence Services (RICS), Update of the Taxpayer Protection Program (TPP) (Oct. 31, 2013); IRS Return Integrity & Correspondence Services (RICS), Update of the Taxpayer Protection Unit (TPU) (Oct. 31, 2012).

³ IRM Exhibit 3.13.62-55 (May 10, 2013) and IRM 25.25.5.5 (Oct. 1, 2013). The letters classified as "just destroy" are the CP05 (We're holding your refund until we finish reviewing your tax return), CP05A (We need more information to determine whether you're due a refund), 4115C (Information Regarding Your Refund), and 4464C (Questionable Refund 3rd Party Notification).

⁴ IRS response to TAS research request (Oct. 15, 2013). As of October 15, 2013 RICS had issued 82,109 4800C letters and has 111,670 cases in inventory.

⁵ Refund Fraud & ID Theft Global Report, July 2013; CP 53A, A Message About Your Request, for an Electronic Deposit Refund, SNIP CP53A data as of cycle 201344. Through September 30, 2013, the Refund Fraud & ID Theft Global Report reports bank/external leads affecting 171,189 accounts, but the IRS sent only 20,409 letters to taxpayers.

⁶ Data obtained from Business Performance Management System (BPMS) (Oct. 1, 2012; Oct. 1, 2013). IVO is an IRS unit within the Wage and Investment (W&I) operating division, the purpose of which is to support civil fraud detection and prevention. TAS received 18,012 cases in FY 2012 and 26,136 cases in FY 2013.

⁷ Data obtained from BPMS (Oct. 1, 2013).

⁸ Privacy Impact Assessment (PIA) 250 (Oct. 2, 2012), available at: http://www.irs.gov/pub/irs-utl/RRP_TS_pia.pdf. A PIA is a process for examining the risks and ramifications of using information technology to collect, maintain and disseminate information in identifiable form about members of the public and agency employees.

⁹ Filters are created and implemented by at least three distinct IRS units: Criminal Investigation (CI); Privacy, Governmental Liaison and Disclosure (PGLD); and RICS.

¹⁰ Based on prior years' returns, including those involving "verified" fraud, models are built and implemented for detecting fraud. Incoming returns requesting refunds are passed through the knowledge base and scored for likelihood of fraud. Returns that are flagged are diverted into a workload for further inspection before any refund is issued. IRS, Kenneth A. Kaufman, An Analysis of Data Mining in the Electronic Fraud Detection System (Apr. 28, 2010).

¹¹ Notice CP 05, Information Regarding Your Refund.

¹² Under present law, issuers who file these forms electronically have until March 31 to file them with the government. Issuers send Forms 1099 directly to the IRS and Forms W-2 directly to the Social Security Administration (SSA), which in turn sends information extracted from the forms to the IRS each week, starting in late March. Internal Revenue Code (IRC) §§ 6051(a), 6049(a), 6042(a); see IRS Instructions for Forms W-2 and W-3, Wage and Tax Statement and Transmittal of Wage and Tax Statements; Social Security Administration, Employer W-2 Filing Instructions & Information, available at http://www.ssa.gov/employer/gen.htm (last visited Oct. 24, 2012). For a more detailed discussion of third-party information reporting and its uses, see National Taxpayer Advocate 2012 Annual Report to Congress (Status Update: The Preservation of Fundamental Taxpayer Rights Is Critical as the IRS Develops a Real-Time Tax System).

¹³ IRM 21.9.1.8(1) (May 4, 2012). The IRS employs several methods to contact employers for verification of wages, adhering to the employer preference if one exists. Letters are sent annually to certain large employers, requesting them to provide wage information on a computer disc. Requests for verification are automatically generated by fax; phone calls are made based on employer preference.

¹⁴ IRM 21.9.1.8(1) (May 4, 2012). Letter 4115 requests income documentation from the taxpayer/employee (e.g., copies of checks, bank statements, pay statements, check stubs, and employer letters).

¹⁵ Email from AMTAP analyst (Sept. 28, 2011).

¹⁶ IRM 21.9.1.14, Taxpayer Protection Program (June 4, 2013). For a full discussion of the National Taxpayer Advocate's concerns about identity theft, see Most Serious Problem: The IRS Should Adopt a New Approach to Identity Theft Victim Assistance that Minimizes Burden and Anxiety for Such Taxpayers, supra.

¹⁷ See National Taxpayer Advocate 2005 Annual Report to Congress (Most Serious Problem: Criminal Investigation Refund Freezes); National Taxpayer Advocate 2005 Annual Report to Congress vol. 2 (Criminal Investigation Refund Freeze Study).

¹⁸See National Taxpayer Advocate 2005 Annual Report to Congress (Most Serious Problem: Criminal Investigation Refund Freezes); National Taxpayer Advocate 2011 Annual Report to Congress (Most Serious Problem: The IRS's Wage and Withholding Verification Procedures May Encroach on Taxpayer Rights and Delay Refund Processing); and National Taxpayer Advocate 2012 Annual Report to Congress (Most Serious Problem: Despite Some Improvements, the IRS Continues to Harm Taxpayers by Unreasonably Delaying the Processing of Valid Refund Claims That Happen to Trigger Systemic Filters).

¹⁹See National Taxpayer Advocate 2005 Annual Report to Congress (Most Serious Problem: Criminal Investigation Refund Freezes); National Taxpayer Advocate 2011 Annual Report to Congress (Most Serious Problem: The IRS's Wage and Withholding Verification Procedures May Encroach on Taxpayer Rights and Delay Refund Processing); and National Taxpayer Advocate 2012 Annual Report to Congress (Most Serious Problem: Despite Some Improvements, the IRS Continues to Harm Taxpayers by Unreasonably Delaying the Processing of Valid Refund Claims That Happen to Trigger Systemic Filters).

²⁰ Annual Report to Congress 2011 Report Card, available at http://www.irs.gov/Advocate/Annual-Report-to-Congress-Report-Cards. The seven recommendations made in the 2005 Annual Report to Congress were not reported and tracked in the same manner as the TAS tracking system was not implemented until 2007. The IRS now responds in a standardized manner to Annual Report to Congress recommendations. Therefore, only information on the 14 recommendations in the 2011 and 2012 Annual Reports to Congress is available. (The 2012 Report Card is not finalized, will provide link and potentially update numbers when it is available.)

²¹ For a discussion of the National Taxpayer Advocate's concerns regarding identity theft fraud programs, see Most Serious Problem: The IRS Should Adopt a New Approach to Identity Theft Victim Assistance that Minimizes Burden and Anxiety for Such Taxpayers, supra.

²² TAS, Business Performance Review First Quarter FY 2012.

²³ IRS, 4800C, Questionable Credit 30 Day Contact Letter.

²⁴ IRS response to TAS research request (Oct. 15, 2013). As of October 15, 2013 RICS had issued 82,109 4800C letters and has 111,670 cases in inventory.

²⁵ TAMIS data, June 12, 2013.

²⁶ Publication 5033, External Leads Guidelines (Feb. 2013).

²⁷Id.

²⁸ IRM 25.25.8.2 (Oct. 29, 2013). A notation on the account could be made in Integrated Data Retrieval System (IDRS), the IRS system that allows employees to see activity on taxpayers' accounts, to inform employees of the status of a refund intercepted through the external leads program.

²⁹ Publication 5033, External Leads Guidelines, Rev. 02-2013.

³⁰ IRS, Refund Fraud & ID Theft Global Report (Sept. 2013).

³¹ CP 53A, A Message About Your Request for an Electronic Deposit Refund, SNIP Notice Volume through Oct. 5, 2013 (Cycle 40).

³² Servicewide Electronic Research Program (SERP) Alert 13A0407, Direct Deposit Reject Calls Related to Reason Code 17 (June 27, 2013).

³³ IRS policy requires the taxpayer to provide "clear and concise" notice of any change of address during telephone calls with the IRS, in correspondence submitted to the IRS, or through a change of address filed with the U.S. Postal Service (USPS) and transmitted to the IRS via the National Change of Address (NCOA) system. Treas. Reg. § 301.6212-2: Definition of Last Known Address; Rev. Proc. 2010-16.

³⁴ Treas. Reg. § 301.6212-2; Rev. Proc. 2010-16.

³⁵ Notices classified as "just destroy" informing taxpayers of the status of their refunds caught in fraud filters include CP05 (We're holding your refund until we finish reviewing your tax return), CP05A (We need more information to determine whether you're due a refund), 4115C (Information Regarding Your Refund), and 4464C (Questionable Refund 3rd Party Notification).

³⁶ IRM 3.13.62-55 (May 10, 2013); IRM 25.25.5.5 (Oct. 1, 2013). The letters classified as just destroy are the CP05 (We're holding your refund until we finish reviewing your tax return), CP05A (We need more information to determine whether you're due a refund), 4115C (Information Regarding Your Refund), and 4464C (Questionable Refund 3rd Party Notification).

³⁷ For a full discussion of the National Taxpayer Advocate's concerns regarding undelivered mail, see National Taxpayer Advocate 2012 Annual Report to Congress (Status Update: Underfunding IRS Initiatives to Modernize Its Taxpayer Address Correspondence Systems Undermines Taxpayers' Statutory Rights and Impedes Efficient Resource Allocation) and National Taxpayer Advocate 2010 Annual Report to Congress (Most Serious Problem: The IRS Has Not Studied or Addressed the Impact of the Large Volume of Undelivered Mail on Taxpayers). One of the National Taxpayer Advocate's primary recommendations to address the problems created by undelivered mail is for the IRS to create a single unit responsible for processing all undelivered mail, including searches for a better taxpayer address. This would provide an IRS-wide solution and strategy to address undelivered mail.

³⁸ IRS, W&I Business Performance Review (Nov. 14, 2012).

³⁹ TIGTA, Ref. No. 2013-40-015, Improper Payments Elimination and Recovery Act Risk Assessments of Revenue Programs Are Unreliable (Jan. 31 2013).

⁴⁰ Privacy Impact Assessment (PIA) 250 (Oct. 2, 2012). http://www.irs.gov/pub/irs-utl/RRP_TS_pia.pdf. A PIA is a process for examining the risks and ramifications of using information technology to collect, maintain and disseminate information in identifiable form about members of the public and agency employees.

⁴¹ Wage & Investment Division Summary of Proposed FY 2013 Budget Initiatives (as of Feb. 1, 2011).

⁴² Email from Supervisory Tax Analyst, Wage & Investment, Business Modernization dated Jan. 15, 2013.

⁴³ Privacy Impact Assessment (PIA) 250 (Oct. 2, 2012). http://www.irs.gov/pub/irs-utl/RRP_TS_pia.pdf.

⁴⁴ Data obtained from BPMS, Oct. 1, 2011; Oct. 1, 2013. TAS received 21,286 cases in FY 2011 and 26,136 in FY 2013.

⁴⁵Id. Economic burden cases increased 111.2 percent from FY 2011 to FY 2013.

⁴⁶ Data obtained from BPMS, Oct. 1, 2012; Oct. 1, 2013.

⁴⁷ IRS Return Integrity & Correspondence Services, Update of the Taxpayer Protection Program (TPP) (Oct. 31, 2013); Update of the Taxpayer Protection Unit (TPU) (Oct. 31, 2012).

⁴⁸ TIGTA, Ref. No. 2013-40-083, Income, and Withholding Verification Processes Are Resulting in the Issuance of Potentially Fraudulent Tax Refunds (Aug. 7, 2013).

⁴⁹ Joint Operations Communications (JOC) Executive Level, Taxpayer Protection Program (TPP) performance report (Sept. 28, 2013).