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Correctible Error Authority Part 2: Why Correctible Error Authority Creates More Problems Than It Resolves

Taxpayer Advocate - Wed, 2017-08-16 10:00

In my last blog, I discussed my concerns about the IRS’s current use of math and clerical error authority under IRC §§ 6213 (b) and (g). This week, I’ll take a closer look at the proposal to expand math error authority to “correctible errors,” and explain why I think Congress should not grant such expansion in two of the three instances. Although the Treasury Department recently scored this proposal as raising a significant amount of revenue, the concerns I raise in these two blog postings should make folks think deeply about whether we should raise revenue at the expense of taxpayer rights.

The Sufficiency of Documentation Can Be Ambiguous and Difficult to Explain


The “correctible error” proposal contains a broad grant of authority to the IRS to use summary assessment procedures where a required form or schedule is not attached to the return.  However, it is unclear from the proposal whether these procedures will be used to deny benefits due to a lack of sufficient documentation, as opposed to no documentation at all.

A real-world example from a few years ago illustrates why this distinction matters.  Congress authorized the IRS to use math error authority to deny the First-Time Homebuyer Credit (FTHBC) to taxpayers who did not attach a “settlement statement,” as required.  (IRC § 6213(g)(2)(P)(iii))  Initially, the IRS accepted a settlement statement as sufficient only if it showed all parties’ names and signatures, the property address, sales price, and date of purchase. After learning that not all states required a settlement statement to include a complete address or both parties’ signatures, the IRS reversed its position. In fact, the IRS’s handling of FTHBC issues in the 2011 filing season delayed processing over 128,000 returns, by IRS estimates, and led to a sharp increase in related TAS cases (from 669 through April 30 of fiscal year (FY) 2010 to 4,299 for the same period in FY 2011).

Clearly, the use of math error authority in this circumstance would have been unwise. To make this and other determinations about the sufficiency of a settlement statement, an IRS employee had to read papers attached to the return and explain any problems to the taxpayer (or summarily assess the liability without providing a good explanation, thereby violating the taxpayer’s right to be informed). Accordingly, I recommended the use of math error authority only when a return does not contain a document that purports to be a settlement statement (i.e., a simple yes/no determination) and leaving the facts-and-circumstances determination of the sufficiency of the settlement statement to normal deficiency procedures.

A related problem arises from the differences between e-filed returns and paper returns. Running counter to Congress and the IRS’s efforts to increase e-filing, taxpayers required to provide documentation to substantiate a return position generally must file paper returns. A much-needed investment in the IRS’s systems to allow taxpayers to file required documentation electronically instead of on paper would go a long way toward improving tax compliance while still preserving taxpayer rights. The IRS has processes for handling incomplete paper returns and could develop similar ones for e-filed returns. If an incomplete return were e-filed, the IRS could simply reject it at the outset, alerting the taxpayer or preparer immediately that more information is needed and allowing the taxpayer to cure the defect and re-file the return.

The proposal to expand math error authority (or “correctible” errors) in this context is like the tail wagging the dog and is driven by the IRS’s 20th century technology. We should be designing tax administration looking forward, not backward.

Government Databases Can Be Unreliable for Tax Purposes, Such That Accurate Returns May Appear Inconsistent with Third-Party Data


The “correctible error” proposal authorizes the IRS to use summary assessment authority where the information provided by the taxpayer does not match the information in government databases. I have long recommended the IRS not use math error authority to correct discrepancies between information shown on a return and information from government databases that are not sufficiently reliable for tax purposes. For example, the IRS has the authority to assess math errors against Earned Income Tax Credit (EITC) returns that are inconsistent with the Federal Case Registry of Child Support Orders (FCR) database – where a person listed as a noncustodial parent in the FCR database claims the child. (IRC § 6213(g)(2)(M)) However, the IRS has not done so (correctly, to my thinking) because a study, which Congress mandated be undertaken with my office, showed that the FCR was not sufficiently reliable for purposes of verifying a child’s residence. The study found that up to 40 percent of the cases selected solely based on FCR data were incorrect. (This data comes from an unpublished Treasury report.) Thus, while the FCR is useful for identifying questionable returns and selecting them for audit, it is not appropriate as a basis for summarily denying a credit or exemption.

Moreover, applying data collected for nontax purposes to tax claims is akin to relying on the addresses shown in a telephone directory to deny the home mortgage interest deduction. Even if virtually all of the entries in a directory were accurate, they were compiled for a different purpose, do not disprove eligibility under the tax law, were compiled at a prior date and may not be current, and should not deprive a taxpayer of a due process right to present his or her own facts.

The definition of what constitutes a “government database” is itself problematic. The “correctible error” proposal has been touted as reducing EITC improper payments, but it is unclear to me how it can do that unless “government databases” include the IRS’s Dependent Database (DDb), a compilation of business rules and different datasets. Each return that claims a dependent or other family-status benefit (like the EITC) is run through the DDb. While some of the underlying data is reliable (e.g., Kidlink, which contains Social Security Administration information linking a child’s Social Security number (SSN) to its mother’s SSN, and in many instances, the father’s SSN), other data – like the FCR – are unreliable.

The DDb has value -- it is a collection of circumstances from which the IRS is inferring the likelihood of error. But it is not a binary (yes/no) determination that makes it suitable for summary assessment authority. The Taxpayer Advocate Service (TAS) has seen instances where a taxpayer’s return has broken nearly all of the rules contained in the DDb and the taxpayer is still eligible for the exemption or credit claimed. The results derived from the DDb are probabilistic in nature. It is unprecedented to give the IRS summary assessment authority based on some unstated probability that it is correct. To undermine taxpayers’ right to petition the Tax Court based on a probability is equally unprecedented.

My concerns about the unreliability of IRS “government databases” are founded in experience.  For example, in FY 2016, the IRS delayed over 2.1 million refunds based on its filters as part of the Taxpayer Protection Program, yet 53 percent of those refunds were later deemed to be “false positives." I am concerned that if the IRS rejects returns with valid refund claims or adjusts returns using math error-like procedures, it may prevent taxpayers from receiving the refunds to which they are entitled. Inconsistencies between a return and data that is not sufficiently reliable or determinative may indicate the IRS should do further research or initiate an audit, but should not automatically trigger summary assessment procedures, which unnecessarily burden taxpayers and the IRS.

For these reasons, I recommended in 2011, and again in my 2014 report, that Congress:

  • Confine the IRS’s use of math error authority to instances that are not factually complex,
  • Permit the IRS to use math error authority only in conjunction with databases that are reliable and accurate,
  • Restrict math error authority in situations with a high abatement rate, and
  • Require the Department of the Treasury, in consultation with the National Taxpayer Advocate, to evaluate and report to Congress on whether any proposed expansions satisfy these criteria.

I also recommended that the report should analyze the burdens and benefits of the proposed use of math error authority, considering downstream costs such as those for audit reconsideration and TAS intervention, and rigorously analyze the proposed expansions for accuracy and suitability. The Government Accountability Office has proposed similar safeguards. As noted above, Congress mandated a similar study before the effective date of the IRS’s math error authority to address FCR data mismatches, a study that the IRS would not have undertaken without the mandate.

I am certainly not against the use of math or clerical error. In many instances, it is a useful and efficient tool to correct unambiguous errors. It can be used appropriately – that is, without undermining taxpayer rights and the due process protections afforded by pre-payment access to the United States Tax Court – where a statutory provision imposes age limits or lifetime dollar caps, or where there are truly relevant and accurate government databases that do not raise facts-and-circumstances determinations. Congress has and can continue to legislate specific grants of summary assessment authority in these areas. But as these two blog postings have shown, expanding the IRS’s summary assessment authority beyond these necessarily narrow boundaries raises serious issues relating to due process and taxpayer rights concerns.  For almost nine decades, since 1926, Congress has consistently expressed concern about granting the IRS unbridled authority in this area, and it should continue to do so.

Read more from the NTA's blog on Why Correctible Error Authority Raises Significant Taxpayer Rights Concerns - Part I. Additional blogs from the National Taxpayer Advocate can be found at www.taxpayeradvocate.irs.gov/blog.

The views expressed in this blog are solely those of the National Taxpayer Advocate. The National Taxpayer Advocate is appointed by the Secretary of the Treasury and reports to the Commissioner of Internal Revenue. However, the National Taxpayer Advocate presents an independent taxpayer perspective that does not necessarily reflect the position of the IRS, the Treasury Department, or the Office of Management and Budget.

Why Correctible Error Authority Raises Significant Taxpayer Rights Concerns – Part 1

Taxpayer Advocate - Wed, 2017-08-09 12:31

People occasionally ask me which areas of tax administration worry me the most. There is certainly no shortage of candidates, but if I had to narrow it down, the IRS’s math and clerical error authority under IRC § 6213(b) and (g) would be right up there at the top of the list, along with the IRS correspondence examination program. In fact, I expressed my concerns about the IRS’s administration of its math error authority since my first Annual Report to Congress in 2001, when I was fresh from representing low income taxpayers as Executive Director of a Low Income Taxpayer Clinic. I’ve gone on to write, conduct research studies, and make legislative recommendations about math error authority in my 2002, 2003, 2006, 2011, and 2014 Reports to Congress, as well as congressional testimony in 2011 and 2015. My past concerns take on new meaning, what with the current Administration’s budget proposal echoing the former Obama Administration's call for the IRS to be granted “correctible error” authority. 
 
While I have offered many proposals to minimize improper payments, I believe Congress should not address the problem by delegating to the Treasury Department the authority to expand the IRS’s power to summarily assess additional tax liabilities, at least not without sufficient limits and oversight. The IRS is currently authorized to assess tax to correct math and clerical errors – arithmetic mistakes and the like – under summary assessment procedures that bypass procedural taxpayer rights protections. The Administration has proposed legislation that would delegate authority for the Treasury Department to expand the IRS’s summary assessment (or “math error”) authority to other “correctible” errors (by regulation) where: 

  1. The information provided by the taxpayer does not match the information in government databases;
  2. The taxpayer has exceeded the lifetime limit for claiming a deduction or credit; or
  3. The taxpayer has failed to include with his or her return documentation that is required by statute.

In my opinion, summary assessment authority is appropriate in only one of the instances described above; namely, where there can be no doubt that the taxpayer has claimed amounts in excess of a lifetime limitation, income cap, or age requirement. In fact, Congress’ original legislation back in 1926 was intended to limit the IRS’s authority to summarily assess math errors to situations involving such unambiguous errors. (See H.R. Rep. No. 69-1, at 10-11 (1926); S. Rep. No. 94-938(I), at 375 (1976); H.R. Rep. No. 94-658, at 289 (1976)). 
 
For example, in cases where it is clear on the face of the return that a taxpayer has claimed a credit in excess of a statutory limit, such as overclaiming the American Opportunity Tax Credit (AOTC), then the summary assessment process may be appropriate. The AOTC is a partially-refundable credit for qualified post-secondary education expenditures that is available only for the first four years of a student’s post-secondary education (see IRC § 25A(i).) Because the number of years claimed for each student is apparent on the face of current and past income tax returns, allowing the IRS to use math error procedures to stop the improper payment of capped claims may be appropriate and cost effective, although probably not as cost effective as alerting the taxpayer to the problem before or at filing, through software checks and warnings, and e-filing rejection of the return in real time so it can be corrected and resubmitted.
 
Without adequate safeguards and congressional oversight, however, significant expansion of the IRS’s math error authority could permit the IRS to take property without adequate due process, as described below. It may also violate taxpayer rights, discourage eligible taxpayers from claiming the Earned Income Tax Credit (EITC) and other credits, and waste resources by requiring taxpayers to contact the IRS to correct the IRS’s errors and inaccurate inferences. In the face of such risks, in my opinion, Congress should not grant the IRS broad discretion to use its summary assessment authority.

The Right to Judicial Review Before Paying an Audit Assessment is the Cornerstone of Due Process in the U.S. Tax System.

Under current law, if the IRS during an audit proposes a deficiency, the IRS must issue a Statutory Notice of Deficiency (SNOD), also known as a “90-day letter.” This letter explains the basis for the proposed deficiency and gives the taxpayer 90 days to file a petition with the Tax Court to contest the proposed deficiency (see IRC § 6213). A taxpayer who misses this deadline for filing a Tax Court petition can only seek judicial review by paying the assessment and filing a claim for refund. If the claim is denied or if no action is taken on the claim within six months, the taxpayer may file a refund suit in the federal district court or the Court of Federal Claims within the limitations period (see IRC §§ 6511, 6532, 7422). Low income taxpayers are less likely to be able to afford to pay the assessment before disputing it or navigate these more complicated procedures.
 
Empowering taxpayers to seek judicial review in a prepayment forum (i.e., before they pay) protects them from arbitrary administrative actions by the IRS, which might otherwise unjustly deprive them of property without due process. Taxpayers who cannot understand the IRS’s position, determine if they agree or disagree, and respond appropriately within the 30- and 90-day periods may be deprived of this key right.  Therefore, even under normal deficiency procedures, confusing IRS correspondence, illiteracy, language barriers, and unequal access to competent tax professionals can cause taxpayers – particularly low income taxpayers – to miss these deadlines and lose access to judicial review in a prepayment forum.
 
Because prepayment judicial review is a cornerstone of due process in our tax system, any limitations on affording taxpayers access to prepayment judicial forums should be made in only the most compelling circumstances and when no other reasonable alternative solutions to a compliance problem exist.  

 
Math Error Assessments Place the Burden on Taxpayers to Ask for the Right to Petition the Tax Court, Rather than Automatically Receiving That Right Under Normal IRS Procedures.
 

IRC §§ 6213(b) and (g) authorize the IRS to use its math error authority to summarily assess and immediately collect tax without first providing the taxpayer the right access to the Tax Court. If the taxpayer wants to preserve her right to petition the Tax Court, she must request an abatement of the assessment within 60 days.  Initially Congress limited this summary assessment authority to situations involving mathematical errors (e.g., 2+2=5), (see Revenue Act of 1926, enacting IRC § 274(f); H.R. Rep. No. 69-1, at 10-11 (1926)). Congress later expanded math error authority to address “clerical errors” (e.g., inconsistent entries on the face of the return), and other circumstances where a return is clearly incorrect (e.g., omits a required Taxpayer Identification Number, uses a Social Security Number that does not match the one in the Social Security Administration’s Numident database, or claims tax credits in excess of statutory maximums).  

 
Math Error Adjustments Are Intended to Allow Correction of Unambiguous Errors That Are Easy to Explain.
 

As I noted in my 2014 report, Congress was concerned about removing more situations from the deficiency procedures and placing them under the summary assessment procedures, particularly in the case of complicated errors. If taxpayers do not understand the supposed error, they may have difficulty deciding whether to request an abatement (assuming they understand that requesting an abatement is an option), and they are less likely to request an abatement within the shorter 60-day period applicable to summary assessments. Accordingly, Congress enacted IRC § 6213(b)(1), requiring that “[e]ach notice under this paragraph shall set forth the error alleged and an explanation thereof.” 
 
In legislative history, Congress provided an example of how simple it expected math error notices to be, which we have paraphrased below:   
 
Example from Legislative History: You entered six dependents on line x but listed a total of seven dependents on line y. We are using six. If there is one more, please provide corrected information. 
 
Although the IRS has been working to simplify these notices for nearly 40 years, even its current notice on this very issue (i.e., inconsistent number of dependents on the return) does not identify the discrepancy as clearly as Congress envisioned. The notice states: 
 
Current Math Error Notice (Document 6209): “We changed your total exemption amount on page 2 of your tax return because there was an error in the:

  • number of exemptions provided on lines 6a - 6d and/or 
  • computation of your total exemption amount.” 

Other math error notices are inscrutable. The IRS’s problem with math error notice clarity is a serious, longstanding, and well-documented problem that disproportionately affects low income taxpayers – the very taxpayers that Congress intends to claim the EITC and similar credits. Moreover, unclear math error notices jeopardize the taxpayer’s rights to be informed, to challenge the IRS’s position and be heard, and to appeal an IRS decision in an independent forum.    
 
The IRS Should Attempt to Resolve Minor Inconsistencies With Third-Party Data Before Burdening Taxpayers and Issuing Math Error Notices.
 
Not every return that contains a typo or similar error contains an understatement. For example, the IRS should not automatically conclude that a taxpayer does not have a qualifying child just because the Taxpayer Identification Number (TIN) of the child listed on the return does not match a TIN in the IRS’s database.  Such mismatches can be typos. 
 
As reported in a research study published in my 2011 Annual Report to Congress, TAS studied a statistically valid sample of tax year 2009 accounts in which the IRS reversed all or part of its dependent TIN math error corrections. The IRS ended up abating all or part of the math error in 55 percent of the returns in which it originally assessed additional tax.  Further, the study found that the IRS could have resolved 56 percent of these errors using information already in its possession (e.g., the correct TIN listed on a prior year return), rather than charging a math error and asking the taxpayer to explain the apparent discrepancy. In other words, the IRS imposed a burden on taxpayers in a large percentage of math error cases, generating phone calls and letters it could not timely handle, rather than investing a few minutes of research at the front end. 
 
Based on this study, in 2011 I recommended that even if it finds a mismatch between the return and a reliable database, the IRS should not use summary assessment procedures before taking additional steps to reconcile the mismatch. The same holds true today.  Until the IRS decides to (1) develop clear, specific and informative math error notices as Congress has directed at least since 1976; and (2) uses the data it has in its own possession to identify easily resolvable typographic errors without resorting to summary assessment authority, Congress should be very wary about granting the IRS additional authority.
 
In my next blog, I will discuss my concerns about specific aspects of the correctible error proposal.

Additional blogs from the National Taxpayer Advocate can be found at www.taxpayeradvocate.irs.gov/blog.

The views expressed in this blog are solely those of the National Taxpayer Advocate. The National Taxpayer Advocate is appointed by the Secretary of the Treasury and reports to the Commissioner of Internal Revenue. However, the National Taxpayer Advocate presents an independent taxpayer perspective that does not necessarily reflect the position of the IRS, the Treasury Department, or the Office of Management and Budget.

NTA Nina Olson Testified on IRS FY 2018 Budget Request

Taxpayer Advocate - Wed, 2017-08-09 11:53

National Taxpayer Advocate Nina Olson testified before the Subcommittee on Financial Services on IRS FY 2018 Budget Request.

Read her complete testimony.

IRS Allowable Living Expense Standards Do Not Provide Taxpayers With a Sustainable Standard of Living

Taxpayer Advocate - Wed, 2017-08-02 05:23

At TAS, we help taxpayers from all walks of life. When it comes to taxpayers with tax debt, some taxpayers have the resources to pay their debt. This blog focusses on the method the IRS uses to determine the amount of basic living expenses it should take into account if a taxpayer needs to pay his or her tax debt over time. 

Congress directed the IRS to make sure taxpayers who enter into offers in compromise still have enough money to cover their basic expenses. Specifically, in Internal Revenue Code (IRC) § 7122(d)(2)(A), Congress told the IRS to “develop and publish schedules of national and local allowances designed to provide that taxpayers entering into a compromise have an adequate means to provide for basic living expenses.” The resulting Allowable Living Expense (ALE) standards have come to play a large role in many types of collection cases. For instance, if you want a non-streamlined installment agreement or are claiming an economic hardship, the IRS will want you to give them the information found on IRS Form 433-F, Collection Information Statement. IRS Form 433-F relies on the ALE standards to calculate a taxpayer’s monthly expenses, which in turn affects the resolution of the taxpayer’s case because it reflects how much he or she can afford to pay the IRS. ALEs cover common expenses such as food, clothing, transportation, housing, and utilities.  

In its efforts to base the ALEs on reliable and consistent data, the IRS relies heavily on the Bureau of Labor Statistics. In particular, the IRS uses the Consumer Expenditure Survey (CES), which measures what people spend to live. I’ve identified these problems with the current ALE standards:

  • The standards are based on what taxpayers pay, not what it costs to live. And since many of the IRS standards are based on average expenditures, there is a chance the taxpayer’s expense is greater than the survey average. There is also a chance the taxpayer’s spending will be less than the survey average.  
  • Spending habits are not consistent over income levels. For instance, while housing costs now account for about 25 percent of a family’s pre-tax income, among low income renters, some may spend up to half of their pre-tax income on rent.
  • The ALE standards are outdated and should include all expenses necessary to maintain the health and welfare of households today, including an allocation for digital technology access, child care, and retirement savings. 
  • The IRS decreased the amounts for some of the expenses in 2016 based on its belief that expenses are going down. This was done despite the fact that the IRS and TAS reached a joint agreement in 2007 saying “the allowance amount for any ALE category cannot be decreased unless something economic changes significantly, such as a major sustained recession or depression.” Even with TAS’s concerns with the IRS decision last year, the IRS again decreased ALE standards in 2017. All of our research shows that costs are going up.  More importantly, the average taxpayer is facing more financial strain.  When income levels are broken into thirds, the typical household in the middle third found its financial slack drop from $17,000 in 2004 to $6,000 in 2014. This means that middle income families now have less opportunity to create a cushion for unexpected expenses, bouts with unemployment or long-term illness, or to make long-term savings a reality. 

The IRS claims a lack of data prevents it from updating the ALE standards. But it’s hard to imagine taxpayers today surviving without daycare, a basic home computer, or retirement savings. Furthermore, Congress gave a clear directive. Congress didn’t intend for the IRS to develop a system that was “good enough” based on available information for the average taxpayer. Congress wants all taxpayers protected.

The case of Leago v. Commissioner demonstrates the degree of harm that can result from ALEs that don’t meet the needs of taxpayers. Mr. Leago suffered from a brain tumor that required surgery estimated to cost $100,000. Mr. Leago had no health insurance. In calculating how much Mr. Leago could afford to pay on his tax liability, the IRS refused to allow the cost of Mr. Leago’s operation because it wasn’t an expense he was currently paying. The Tax Court remanded this case back to Appeals twice and there is no further information after the second remand. However, it is clear from the record that the IRS expected Mr. Leago to forego any real possibility of surgery until he paid his IRS debt. A taxpayer with the resources to pay for the surgery would likely see a different outcome.  
 
I’ve offered some alternatives to the IRS. For instance, the IRS could consider an alternative approach to determining household health and welfare, such as the family budget or self-sufficiency standard. My suggestions aren’t perfect; however, they’re a starting point. Until there is improvement, the ALE standards won’t truly capture what it costs for a taxpayer to pay for basic expenses. And any taxpayer who is unable to resolve their tax debt will be vulnerable to IRS collection action otherwise prohibited by Congress.

Additional blogs from the National Taxpayer Advocate can be found at www.taxpayeradvocate.irs.gov/blog.

The views expressed in this blog are solely those of the National Taxpayer Advocate. The National Taxpayer Advocate is appointed by the Secretary of the Treasury and reports to the Commissioner of Internal Revenue. However, the National Taxpayer Advocate presents an independent taxpayer perspective that does not necessarily reflect the position of the IRS, the Treasury Department, or the Office of Management and Budget.

IRS Frequently Asked Questions Can Be a Trap for the Unwary

Taxpayer Advocate - Wed, 2017-07-26 04:42

At a recent hearing before the Subcommittee on Oversight of the Committee on Ways and Means, I was asked a seemingly simple question about what types of guidance taxpayers can rely on. Unfortunately, the answer is not simple at all.

Generally speaking, there are three buckets of tax guidance:

1. Regulations – Treasury (tax) regulations are subject to a public notice-and-comment period pursuant to the Administrative Procedures Act (APA). Accordingly, Treasury regulations are deemed to be binding on both the IRS and taxpayers, except in rare instances where a taxpayer is able to persuade a court to invalidate the regulation. Treasury (tax) regulations are published in the Federal Register.

2. Other “Official” Tax Guidance – The IRS publishes various forms of guidance in the Internal Revenue Bulletin (IRB). This is referred to as “published guidance” and includes revenue rulings, revenue procedures, notices, and announcements. Documents published in the IRB generally do not go through a notice-and-comment process. The IRS is generally required to follow published guidance and to administer the law in accordance with it. However, it represents merely the IRS’s interpretation of the law, so taxpayers may challenge the position in court and seek to persuade a judge that their own interpretation of the law is correct.

3. Other “Unpublished” Guidance – The IRS provides guidance in many other forms. It issues tax forms and instructions as well as publications. It issues press releases. And it posts Frequently Asked Questions (FAQs) and answers on IRS.gov. These forms of guidance are generally not reviewed by the Treasury Department, and sometimes do not even go through an internal review process. For that reason, the IRS takes the position that taxpayers may not rely on them and that the IRS may change its position at any time.

Many FAQs are posted on IRS.gov and therefore are not considered to be “published guidance.” However, some FAQs are published in the IRB and are considered binding on the IRS. For example, the IRS virtual currency guidance instructing taxpayers to treat virtual currencies as property was only issued in FAQ form. These FAQs were included as part of a notice that was published in the IRB. Accordingly, they represent the official position of the IRS, and the IRS is bound to maintain the position taken in the virtual currency FAQs unless and until it publishes further guidance in the IRB modifying or revoking them.

If an FAQ is not published in the IRB, the IRS may change its position at any time. Indeed, the IRS recently reminded its examiners that FAQs "and other items posted on IRS.gov that have not been published in the Internal Revenue Bulletin are not legal authority . . . and should not be used to sustain a position unless the items (e.g., FAQs) explicitly indicate otherwise or the IRS indicates otherwise by press release or by notice or announcement published in the Bulletin.” However, the fact that an FAQ had been posted may provide taxpayers with some degree of protection from penalties.  In general, under IRC section 6662(d) and related regulations, a taxpayer may avoid penalties if it is determined he or she had “substantial authority” for the position taken, and “IRS information or press releases” are considered “authorities” for this purpose. But note the “in general” caveat, because the regulations regarding “substantial authority” are too complex to cover in a blog posting.

Apart from penalties, however, the IRS may change the answer to an FAQ (or unexpectedly reinterpret an FAQ) to the detriment of taxpayers who rely on them. One recent example that illustrates the problem with FAQs involves the Offshore Voluntary Disclosure Programs (OVDPs). The OVDPs are a series of IRS settlement programs. In the past, the IRS published its settlement programs in the IRB after incorporating comments from stakeholders and obtaining approval from the Treasury Department. Beginning March 23, 2009, however, the IRS issued an internal memorandum and a series of FAQs to promulgate the 2009 OVDP terms, which were not vetted by internal or external stakeholders or approved by the Treasury Department. All subsequent OVDPs have been governed by FAQs posted to the IRS website, rather than published in the IRB. (I’ve discussed this issue in detail in previous Annual Reports to Congress.)

The OVDP FAQs were issued in such haste and so poorly drafted that the IRS had to clarify them repeatedly.  As a result, they treated similarly situated taxpayers inconsistently.  These FAQs are frequently the subject of disputes.  The IRS changes them regularly without providing any formal record of what changed and when.  For example, between March 1, 2011, and August 29, 2011, the IRS made twelve changes to the 2011 Offshore Voluntary Disclosure Initiative FAQs, which were entirely removed from the IRS’s website in 2016.  And as I noted in my recent FY 2018 Objectives Report to Congress, only certain practitioners know how the IRS interprets them.  Disputes arise when it does not interpret them in accordance with their plain language.  Taxpayers and practitioners who do not work on OVDP cases often are at a disadvantage because they do not know how the IRS interprets its OVDP FAQs.  

This approach is unfair to taxpayers. Although the IRS may have felt an urgent need to provide OVDP guidance as FAQs in 2009, I see no compelling justification for continuing to run its OVDPs this way over seven years later. At the very least, the IRS should publish its FAQs and all updates to them in the IRB. It should also give serious consideration to issuing the OVDP FAQs using the notice and comment process established under the APA. Such a procedure could help avoid the problems large numbers of taxpayers have experienced with the OVDPs to date. 

More generally, my view is that the IRS should use FAQs when there is a need to provide guidance on an emergency or highly expedited basis. Examples include relief provided to victims of Hurricane Katrina or victims of the Bernard Madoff Ponzi scheme. However, my recommendation is that the IRS converts FAQs into published guidance as quickly as possible whenever an issue affects a significant number of taxpayers or will have continuing application. U.S. taxpayers are entitled to finality, and the prospect that the IRS may change its position and assess additional tax after a tax return has been filed in reliance on an IRS’s position is simply unfair.

In addition, to ensure taxpayers understand the limitations of FAQs and other unpublished guidance, we recommend the IRS prominently display a disclaimer near such guidance that says something along the following lines: “Taxpayers may only rely on official guidance that is published in the Internal Revenue Bulletin.  Various IRS functions try to provide unofficial guidance to taxpayers by posting Frequently Asked Questions (FAQs) and other information on IRS.gov. Unless otherwise indicated, however, this information is not binding, and taxpayers may not rely on it because it may not represent the IRS’s official position.”

Additional blogs from the National Taxpayer Advocate can be found at www.taxpayeradvocate.irs.gov/blog.

The views expressed in this blog are solely those of the National Taxpayer Advocate. The National Taxpayer Advocate is appointed by the Secretary of the Treasury and reports to the Commissioner of Internal Revenue. However, the National Taxpayer Advocate presents an independent taxpayer perspective that does not necessarily reflect the position of the IRS, the Treasury Department, or the Office of Management and Budget.

TAS assistance offered at local Problem Solving Days

Taxpayer Advocate - Tue, 2017-07-25 05:08

   

The Taxpayer Advocate Service (TAS) will conduct Problem Solving Day events in communities throughout the country in the coming months and year. During these events, TAS employees from a local office will be available to assist taxpayers in person with tax problems they have not been able to resolve with the IRS. Generally, TAS can assist taxpayers whose problems with the IRS are causing financial difficulties, who’ve tried but haven’t been able to resolve their problems with the IRS, or believe an IRS system or procedure isn’t working as it should. And our service is free.

Why is TAS holding Problem Solving Days?

Congress created the Office of the National Taxpayer Advocate as we know it today through the IRS Restructuring and Reform Act of 1998 (RRA 98). The law further strengthened the role of TAS and provided for Local Taxpayer Advocates in each state. TAS maintains a geographic presence in each state, the District of Columbia, and Puerto Rico, and continues to look at changing taxpayer demographics to adjust its footprint to meet taxpayer needs. Recognizing the importance of personal contact, we work one-on-one with taxpayers and their representatives within our area to resolve their tax issues.

As the IRS develops its “Future State” plan that focuses on assisting taxpayers digitally rather than in person, the National Taxpayer Advocate continues to elevate her concerns about the plan through her Reports to Congress. Ms. Olson conducted twelve public forums in 2016 to hear from taxpayers throughout the country on their needs and preferences when dealing with the IRS. A consistent concern raised during the forums was IRS’s continuing trend away from person-to-person and face-to-face taxpayer service and compli­ance activities, including audit, collection, and appeals, as well as a declining geographic IRS presence and increased centralization. The National Taxpayer Advocate included her findings in her 2016 Annual Report to Congress Special Focus which discussed her vision for a taxpayer-centric 21st century tax administration.

We are Your Voice at the IRS. Look for a Problem Solving Day event in your community from the list below. Otherwise, you can contact your local TAS office by visiting www.TaxpayerAdvocate.irs.gov/contact-us.

Upcoming Problem Solving Day Events:

Private Debt Collection: Recent Debts (Part 3 of 3)

Taxpayer Advocate - Wed, 2017-07-19 04:37

In an earlier blog I discussed my concern about how the IRS’s private debt collection (PDC) program affects taxpayers who are likely experiencing economic hardship. In this blog, I want to share my concern that the IRS is not making good business decisions as it implements the PDC initiative.

Since 2004, Internal Revenue Code (IRC) § 6306 has authorized the IRS to outsource tax debts to private collection agencies (PCAs). The IRS can pay the PCAs a fee of up to 25 percent of the amount they collect and the IRS itself is permitted to retain up to 25 percent of the amount PCAs collect. In 2015, Congress amended IRC § 6306 to require the IRS to assign “inactive tax receivables” to PCAs. The statute doesn’t require the IRS to assign recent assessments to PCAs, but if the taxpayer already has a debt assigned to the PCA, any new assessments will also be assigned. Here’s an example of how the process will work:

  • A taxpayer owes income taxes for 2012 and the IRS transfers that liability to a PCA on April 10, 2017;
  • The same taxpayer files a return for 2016 on April 15, 2017. The return shows a liability of $5,000 but the liability is not paid with the return;
  • If the taxpayer does not pay the 2016 liability by May 15, 2017, the IRS issues Notice CP 14, a demand for  payment of the $5,000 liability;
  • If payment is not received, the IRS assigns the $5,000 to the PCA, notifies the taxpayer of the assignment, and will pay commissions to the PCA on payments the taxpayer makes with respect to the 2016 liability on or after July 14, 2017.

The taxpayer’s 2016 liability in this example would not be an “inactive tax receivable,” so the IRS is not required by IRC § 6306 to assign it to a PCA, but it will exercise its discretion to do so.

Assigning the recent assessment to PCAs means the taxpayer will not get the usual IRS demands for payment, a process which takes place over about six months and consists of a series of four notices. IRS Notice CP 14 is the first such notice, and is the only notice the IRS intends to issue in the example. In Fiscal Year 2016, the Notice CP 14 resulted in $3.8 billion of payments. Notices generated after the CP 14, however, resulted in $4.7 billion of payments. The IRS plans to suppress those notices, allow the PCAs to solicit payments that might have been made in response to them, and pay the PCAs a commission on the amounts collected. Here is a chart showing the amounts the IRS receives for each of the four notices it issues to taxpayers whose debts are not assigned to PCAs.

I question whether, in light of actual taxpayer behavior, it makes good business sense to treat the same taxpayer’s liabilities differently for purposes of assigning them to PCAs. If the amount of the taxpayer’s recent debt ($5,000 in the example) is less than the older debt that was already assigned to a PCA, the taxpayer might be able to pay the recent tax debt while it is still in the notice stream, which would mean the IRS would not have to pay a commission to a PCA. Moreover, the new $5,000 liability in the example is self-assessed, not the result of an audit or other assessment process. As a recent TAS study demonstrated, the IRS is more likely to collect self-reported liabilities than other types of assessments. For example, it collects self-assessed liabilities at a rate at least twice as great as it collects audit assessments.

So, by bypassing the notice stream, the IRS:

  • Circumvents its normal procedures for collecting new debts which have proven to be effective;
  • Exercises its authority to outsource tax debt to treat taxpayers whose debts were assigned to PCAs differently than taxpayers whose debts were not assigned;
  • Treats the same taxpayer’s tax liabilities differently depending on when and how they arose; and
  • Imposes unnecessary costs on taxpayers and the public fisc in the form of commissions it pays PCAs.

The IRS, however, benefits from this approach because it retains 25 percent of the amount PCAs collect. Thus, the PCAs and IRS benefit from this truncated procedure while the public fisc, on the other hand, does not.

Read more about the NTA's Private Debt Collection blog series:

Additional blogs from the National Taxpayer Advocate can be found at www.taxpayeradvocate.irs.gov/blog.

The views expressed in this blog are solely those of the National Taxpayer Advocate. The National Taxpayer Advocate is appointed by the Secretary of the Treasury and reports to the Commissioner of Internal Revenue. However, the National Taxpayer Advocate presents an independent taxpayer perspective that does not necessarily reflect the position of the IRS, the Treasury Department, or the Office of Management and Budget.

Success Story: TAS Advocates for Return of Levied Proceeds

Taxpayer Advocate - Fri, 2017-07-14 10:00

Every year the Taxpayer Advocate Service (TAS) helps thousands of people with tax problems. This story is only one of many examples of how TAS helps resolve taxpayer issues. All personal details are removed to protect the privacy of the taxpayer.

TAS assisted a taxpayer who had been waiting over two years for the IRS to return levied funds. The IRS levied a large amount of the taxpayer's state refund for balance due amounts from prior year tax returns. TAS assisted the taxpayer with submitting amended tax returns for several years which reduced the balance owed each subsequent year. The case advocate worked diligently for the taxpayer and did not give up until the IRS finally processed the taxpayer’s amended tax returns and returned the levied funds.

When working with the Taxpayer Advocate Service, each individual or business taxpayer is assigned to an advocate who listens to the problem and helps the taxpayer understand what needs to be done to resolve their tax issue. TAS advocates will do everything they can to help taxpayers and work with them every step of the way. Occasionally we feature stories of taxpayers and advocates who work together to resolve complex tax issues. Read more TAS success stories.

Learn more about TAS eligibility.

Private Debt Collection: Hardship (Part 2 of 3)

Taxpayer Advocate - Wed, 2017-07-12 05:23

I have always had concerns about outsourcing tax debts to private collection agencies (PCAs). First, I believe tax collection is an “inherently governmental function” within the meaning of section five of the 1998 FEAR Act that should be performed only by federal employees. Second, as a TAS study of the last private debt collection (PDC) initiative showed, the IRS is more efficient at collecting tax debt than PCAs are. Now that Internal Revenue Code (IRC) § 6306(c) requires the IRS to outsource some tax debt, my job is to ensure that its PDC program operates in accordance with the law and respects taxpayers’ rights. As I described in my 2016 Annual Report to Congress and in my recently released Fiscal Year 2018 Objectives Report to Congress, I believe the new PDC initiative inappropriately burdens taxpayers who are likely experiencing economic hardship, including those with incomes at or below the federal poverty level.

As of May 17, 2017, the IRS had assigned to PCAs the debts of approximately 9,600 taxpayers, approximately 5,900 of whom filed a recent return. The returns show:

  • These taxpayers’ median annual income is $31,689;
  • More than half have incomes below 250 percent of the federal poverty level; and
  • More than a fifth have incomes below the federal poverty level. 

Here is the income distribution of taxpayers whose liabilities were assigned to PCAs as of May 17, 2017, compared to the federal poverty level.

 

As the Figure shows, more taxpayers belong to the income category of less than $10,000 than to any other category. These 1,041 taxpayers comprise 18 percent of the total, and the incomes of all but eight of them are below the federal poverty level. Almost half of the taxpayers – 2,827 or 48 percent – have incomes of $30,000 or less. Of these taxpayers, only 45 percent have incomes equal to or more than 250 percent of the federal poverty level.  

Taxpayers at these low income levels are more likely to be vulnerable – more likely to speak another language, have a disability, be elderly, and have a lower level of education – as compared to taxpayers with higher incomes. They are also more likely to be perplexed or scared and more likely to make unnecessary payments. For this year’s Annual Report to Congress, we’ll be analyzing the accounts of taxpayers who have made payments to PCAs or entered into installment agreements. We’ll see how those arrangements stack up in terms of the federal poverty level and whether they leave taxpayers with less income than their allowable living expenses

Even if the PCA is unsuccessful in collecting from the taxpayer and sends the case back to the IRS, the case will likely sit on the shelf in inactive status. The taxpayer will have to contact the IRS directly and provide financials to get into Currently Not Collectable (CNC) Hardship status. An IRS assistor, on the other hand, is more likely to unearth the fact that the taxpayer would likely meet CNC Hardship status and would then inform the taxpayer of what steps to take to avert enforcement action.

To its credit, at my urging, the IRS agreed to not assign to PCAs the liabilities of taxpayers who receive Social Security Disability Income (SSDI). These taxpayers by definition generally cannot earn more than $1,170 per month ($1,950 if he or she is blind) without having their SSDI payments reduced. Because of the IRS’s earlier refusal to exclude these debts, however, the necessary programming was not in place by the time the IRS began assigning tax liabilities to PCAs. Thus, as of May 17, 2017:

  • The debts of 445 taxpayers who received SSDI in 2016 were assigned to PCAs; 
  • Of these 445 taxpayers, 160 filed recent returns; the median income shown on these returns was less than $10,600.

I also urged the IRS to consider not assigning to PCAs the liabilities of taxpayers who were not subject to levies on their Social Security Administration (SSA) retirement payments pursuant to the Federal Payment Levy Program because their incomes were at or below 250 percent of the federal poverty level (see IRM 5.19.9.3.2.3, Low Income Filter (LIF) Exclusion). The 250 percent measure operates as a proxy for economic hardship. In response, the IRS decided that for the first six months of the PDC program, these taxpayers’ debts would be included in the PCA inventory.  The idea was that during that time, the IRS could explore how to identify taxpayers in this group who also have substantial assets. However, the IRS recently informed us that it intends to continue assigning these taxpayers’ debts to PCAs. As of May 17, 2017:

  • The IRS assigned to PCAs the liabilities of 875 taxpayers who received SSA in 2016;
  • Of these 875 taxpayers, 326 filed recent returns; the median income shown on these returns was less than $13,200.

The liabilities of taxpayers at these low income levels are so likely to be uncollectible that it is shameful the IRS doesn't use this data to place these taxpayers’ accounts in CNC Hardship status instead of sending them to PCAs that cannot place the accounts into CNC Hardship status or assist with any other collection alternative. They will simply solicit payments the taxpayer may not be able to afford.  

In light of the impact the current PDC initiative is having on taxpayers, particularly those experiencing economic hardship, I have determined that a compelling public policy warrants assistance to taxpayers whose debts have been assigned to PCAs. That means that these taxpayers qualify for assistance from TAS even if they don’t meet our usual criteria for case acceptance. In a later blog, I’ll explain why I believe the IRS in implementing the PDC program might also not be making good business decisions.

Read more about the Private Debt Collection (Part 1of 3).
Read more about the Private Debt Collection: Recent Debts (Part 3 of 3).

Additional blogs from the National Taxpayer Advocate can be found at www.taxpayeradvocate.irs.gov/blog.

The views expressed in this blog are solely those of the National Taxpayer Advocate. The National Taxpayer Advocate is appointed by the Secretary of the Treasury and reports to the Commissioner of Internal Revenue. However, the National Taxpayer Advocate presents an independent taxpayer perspective that does not necessarily reflect the position of the IRS, the Treasury Department, or the Office of Management and Budget.

Success story: Victim of Preparer Fraud Receives Refund

Taxpayer Advocate - Fri, 2017-07-07 14:00

Every year the Taxpayer Advocate Service (TAS) helps thousands of people with tax problems. This story is only one of many examples of how TAS helps resolve taxpayer issues. All personal details are removed to protect the privacy of the taxpayer.

TAS advocated on behalf of a taxpayer who was the victim of tax return preparer fraud. The taxpayer was very frustrated, since the first time she became aware of the fraud was when the IRS sent her a balance due notice on her tax return. TAS advocated for her by submitting all of the appropriate documentation to the IRS. It took significant efforts by TAS to get the IRS to recognize the taxpayer as a victim of preparer fraud. Ultimately, TAS was able to get the taxpayer’s account corrected and the balance due amount removed. The TAS office was relentless in making sure the taxpayer received the proper refund and that she was not held responsible for the refund the preparer received.

When working with the Taxpayer Advocate Service, each individual or business taxpayer is assigned to an advocate who listens to the problem and helps the taxpayer understand what needs to be done to resolve their tax issue. TAS advocates will do everything they can to help taxpayers and work with them every step of the way. Occasionally we feature stories of taxpayers and advocates who work together to resolve complex tax issues. Read more TAS success stories.

Learn more about TAS eligibility: https://taxpayeradvocate.irs.gov/about-us/learn-more-eligibility

Private Debt Collection Program

Taxpayer Advocate - Wed, 2017-07-05 10:43

Since 2004, when Internal Revenue Code (IRC) § 6306 was enacted as part of the American Jobs Creation Act, the IRS has had the statutory authority to outsource the collection of tax debt. The IRS exercised this authority in its prior private debt collection program from about 2006 to 2009, but the program was ended due to concerns about its return on investment. Congress amended the statute in 2015, and the IRS is now required to outsource collection of “inactive tax receivables.” Even with this Congressional mandate, as I explained in my 2016 Annual Report to Congress, and my recently released Fiscal Year 2018 Objectives Report to Congress, I believe the IRS has overstepped its statutory authority in implementing its current Private Debt Collection (PDC) initiative.  

As a threshold matter, it was generally agreed, prior to the enactment of IRC § 6306, that the IRS could not use PCAs to collect Federal tax debts without congressional authorization. In its 2004 and 2005 Bluebooks, the Bush administration summarized pre-IRC § 6306 law in a single sentence: “Federal tax liabilities generally must be collected by the IRS and cannot be referred to a private collection agency (PCA) for collection.” The House-Senate conference committee report accompanying the American Jobs Creation Act noted that although 31 U.S.C. § 3718 in general permits federal agency heads to enter into contracts with PCAs to recover debts owed to the United  States, subsection (f) of that statute excludes from this authorization the collection of debts under the Internal Revenue Code. Because congressional authorization was needed for the IRS to outsource the collection of tax debt, it follows that the IRS may only use PCAs to collect Federal tax debts to the extent authorized by Congress. In fact, the Bush administration described its proposed legislation as allowing PCAs “to engage in specific, limited activities to support IRS collection efforts.”

What IRC § 6306 authorizes the IRS to do is enter into “qualified tax collection contracts.” A qualified tax collection contract is a statutorily defined term. It’s an agreement for services: (A) to locate and contact a taxpayer; (B) to request full payment from such taxpayer and, if the taxpayer cannot make full payment, to offer the taxpayer an installment agreement for a period not to exceed five years; and (C) to obtain financial information with respect to such taxpayer.

Under the current program, the IRS is not restricting the activities of private collection agencies (PCAs) to these statutory terms. It is allowing PCAs to set up installment agreements of up to seven years. Under procedures described in the IRS’s PCA Policy and Procedures Guide, when PCAs contact taxpayers, they will first solicit full payment of the debt. If that is not forthcoming, the PCA will propose an installment agreement, which can be for as long as seven years. The only qualifier is that if the installment agreement is for more than five years, the PCA is required to obtain approval from an IRS technical analyst. This is the first obvious departure from the terms of IRC § 6306. But even worse, the IRS is allowing PCAs to monitor these six- or seven-year installment agreements and to receive commissions on payments taxpayers make pursuant to those agreements. This is not authorized by IRC § 6306.  

Maybe these monitoring arrangements could be viewed as “back room” operations the IRS could contract for, like Lockbox collection services, but they cannot be grafted onto IRC § 6306.  My view is that paying PCAs commissions with respect to payments made on installment agreements in excess of five years, absent a separate contract and fee schedule for these “backroom operations,” is an improper payment and misuse of funds.

Part of the explanation for why the IRS would want to proceed in this manner could be that the statute authorizes the IRS to retain up to 25 percent of the payments taxpayers make pursuant to installment agreements PCAs set up. Unlike other collected amounts, the IRS doesn’t have to deposit those amounts into public coffers. So the more debts PCAs collect, the more the IRS retains for itself.  The statute also authorizes paying PCAs commissions of up to another 25 percent of the amount collected, so up to 50 cents of every dollar collected by a PCA are diverted from public coffers. By enacting IRC § 6306, Congress sanctioned this outcome, but within clearly defined limits. One of those limitations is that PCAs may only offer taxpayers, and receive commissions with respect to, installment agreements of up to five years.    

Allowing PCAs to set up, monitor, and receive commissions on installment agreements in excess of five years is not the only example of the IRS’ interpretation of IRC § 6306 that I question. IRC § 6306(c) requires the IRS to assign tax receivables that are included in “potentially collectible inventory.” The term is undefined in the statute or in any other IRS guidance, which suggests that the IRS has some discretion to decide which debts fall within that category. In fact, the IRS has determined that the term does not include liabilities designated as Currently Not Collectible due to the economic hardship of the taxpayer. The IRS also agrees that the debts of Social Security Disability Income recipients and Supplemental Security Income recipients should not be assigned to PCAs, nor should open TAS cases. But the IRS includes in “potentially collectible inventory” other debts that should be excluded – for example, debts of taxpayers whose Social Security retirement benefits are not subject to Federal Payment Levy Program levies because their incomes are less than 250 percent of the federal poverty level. I believe the IRS has discretion to exclude these taxpayers’ debts from assignment to PCAs.

As another example of how I believe the IRS is misinterpreting the statute, the IRS is not requiring PCAs to solicit financial information from taxpayers, even though the definition of a “qualified tax collection contract” includes this element. That means PCAs will not collect financial information that could be shared with the IRS to determine whether a taxpayer can pay the debt and still pay for basic living expenses. This is in contrast with how the prior PDC program was managed, in which PCAs were allowed to collect such financial information and then turn it over to the IRS to make a determination regarding a taxpayer’s ability to pay. The calling scripts for one of the PCAs instruct the employee to “suggest that liquidating assets or borrowing money may be advantageous” and to “give the Taxpayer ideas on where/how to borrow,” even providing a laundry list that includes borrowing from a retirement plan or taking out a second mortgage on a home. The IRS might make a similar suggestion, but the difference is that IRS employees gather financial information which reveals when a taxpayer is in economic hardship, and they have no financial incentive to ignore indications of financial hardship. PCAs do not gather financial information, and their incentive structure doesn’t prod them to look for economic hardship.  

To try and alert PCA employees of their obligation to respect taxpayers’ rights under the Taxpayer Bill of Rights, such as the right to a fair and just tax system which requires considering facts and circumstances that might affect taxpayers’ ability to pay, I taped a 45-minute video explaining how the Taxpayer Bill of Rights applies to PCA employees and activities. Using the video and other material, in January of 2017 my staff trained PCA managers and requested that all PCA employees be required to view the video as part of their training. The IRS has refused to impose this training requirement.

In an upcoming blog, I’ll describe the effect of the IRS’s PDC initiative on taxpayers and its disproportionate impact on taxpayers whose incomes are less than 250 percent of the federal poverty level and those who are at or below the federal poverty level.  

Read more about the Private Debt Collection: Hardship (Part 2 of 3)
Read more about the Private Debt Collection: Recent Debts (Part 3 of 3)

Additional blogs from the National Taxpayer Advocate can be found at www.taxpayeradvocate.irs.gov/blog.

The views expressed in this blog are solely those of the National Taxpayer Advocate. The National Taxpayer Advocate is appointed by the Secretary of the Treasury and reports to the Commissioner of Internal Revenue. However, the National Taxpayer Advocate presents an independent taxpayer perspective that does not necessarily reflect the position of the IRS, the Treasury Department, or the Office of Management and Budget.

Success story: NBC12 helps taxpayer get TAS assistance

Taxpayer Advocate - Fri, 2017-06-30 11:50

Every year the Taxpayer Advocate Service (TAS) helps thousands of people with tax problems. This story is only one of many examples of how TAS helps resolve taxpayer issues. All personal details are removed to protect the privacy of the taxpayer.

A cancer patient says she tried numerous times to find out what happened to her missing tax return, but she says she could not get an actual person on the phone at the Internal Revenue Service (IRS) to check on the status of her money. Find out how Taxpayer Advocate Service provided assistance to this taxpayer in need. Read the full story on NBC12: Woman calls 12 On Your Side about delayed tax refund (NBC12).

When working with the Taxpayer Advocate Service, each individual or business taxpayer is assigned to an advocate who listens to the problem and helps the taxpayer understand what needs to be done to resolve their tax issue. TAS advocates will do everything they can to help taxpayers and work with them every step of the way. Occasionally we feature stories of taxpayers and advocates who work together to resolve complex tax issues. Read more TAS success stories.

Learn more about TAS eligibility: https://taxpayeradvocate.irs.gov/about-us/learn-more-eligibility

TAS Focus Groups on Installment Agreements and TAS Services at 2017 Tax Forums

Taxpayer Advocate - Thu, 2017-06-29 10:57

Each year the IRS sponsors the Nationwide Tax Forums, a three-day series of tax education and networking conferences for tax professionals in cities around the country.

These events feature the latest information from the IRS, news about tax law changes, the chance to meet with software vendors and the opportunity to attend nearly 50 seminars presented by IRS employees and members of professional associations.

We’ve already written about the seminars TAS will offer. Now, we’re pleased to announce this year's focus groups.

TAS holds focus groups at the forums to hear the practitioners’ perspective and gain valuable insights on trending problems or issues where we’ve heard concerns from the public. The focus group topics for 2017 are:


Installment Agreements: Are they working?


TAS wants to hear your thoughts, experiences and ideas about IRS installment agreements and the way the IRS determines the allowable living expenses considered in a payment plan.  This includes current practices and operations determining collection potential.

TAS wants to know what your expectations are when:

  • Applying for streamline and non-streamline agreements;
  • How you handle an impasse on the payment agreement; and
  • How you use the different types of agreements and other issues.

What’s the Taxpayer Advocate Service?


TAS values your opinion and wants to hear your thoughts and experiences, as well as your ideas about the services offered by TAS, such as:  

  • How best to raise awareness of TAS services;
  • How you report issues affecting multiple taxpayers; and
  • Suggestions for improvement.  

TAS works to assist taxpayers by resolving long-standing issues, and educating the public on taxpayer rights.  We want to hear your thoughts on how TAS is doing and how TAS can better help you.

TAS will hold the focus groups during the lunch break so you will not miss any continuing education credits. To sign up and attend the focus groups, please look for the TAS recruiters at the focus group booth near the registration area at the forums.  SPACE IS LIMITED, so sign up early.

2017 Tax Forum Dates

Location Dates Hotel Orlando, FL July 11-13 Hilton Orlando Dallas, TX  July 25-27 Hilton Anatole National Harbor, MD (DC area) August 22-24 National Harbor Las Vegas, NV August 29- 31 Rio All Suites San Diego, CA September 12-14 Town & Country


   
   
 
   
   
   

NTA releases FY2018 Objectives Report

Taxpayer Advocate - Wed, 2017-06-28 12:37

Today the National Taxpayer Advocate released her Fiscal Year (FY) 2018 Objectives Report to Congress, identifying the priority issues she and TAS will address during FY 2018.

In her preface to the report, the National Taxpayer Advocate praised the IRS for a generally successful filing season, but indicated that taxpayers who require assistance from the IRS are continuing to face significant challenges obtaining service. While taxpayer services and enforcement activities are both essential for effective tax administration, the National Taxpayer Advocate says taxpayer services require more emphasis than they are currently receiving. She points out that more than 60 percent of the IRS budget is allocated to enforcement activities while only about 4 percent is allocated for taxpayer outreach and education. The report elaborates on taxpayer service limitations, particularly involving outreach and education:

“As of September 30, 2016, the IRS dedicated only 98 employees to conducting education and outreach to the 62 million small business and self-employed taxpayers, and only 365 employees to conducting education and outreach to the nearly 125 million individual taxpayers.  There are 14 states that have no Stakeholder Liaison employees who conduct outreach to small business and self-employed taxpayers.  The number of TACs is declining each year, and because of the IRS’s new appointment-only system, taxpayers who show up without an appointment are routinely turned away.  The TACs have completely stopped offering free tax preparation for low income, elderly, and disabled taxpayers and . . . [they] will not answer “out-of-scope” tax law questions during the filing season and will not answer any tax law questions outside the filing season.”

The National Taxpayer Advocate recommends that the IRS expand its outreach and education activities and improve its telephone service and that Congress provide the IRS with sufficient funding to do so.

Priority Issues for FY 2018

The statutorily mandated mid-year report also identifies and discusses 13 priority issues that TAS will address during the coming FY, including Private Debt Collection Implementation, U.S. Passport Revocations and Denials, Transparency in the Offshore Voluntary Disclosure Programs, IRS’s approach to international tax administration, options to improve the administration of the Earned Income Tax Credit, the IRS’s continuing information technology challenges, particularly in developing an enterprise-wide case management case and other priorities.  

The full Objectives Report explores these and other issues that the National Taxpayer Advocate intends to address in the coming year.

Volume Two

Volume Two of the report contains the IRS’s responses to the administrative recommendations the National Taxpayer Advocate made in her 2016 Annual Report to Congress, along with additional TAS comments.  

“Both people who work in the field of tax administration and taxpayers generally can benefit greatly from reading the agency responses to our report,” Ms. Olson said.  “Tax administration is a complex field with many trade-offs required.  Reading both my office’s critique and IRS’s responses in combination will provide readers with a broader perspective on key issues, the IRS’s rationale for its policies and procedures, and alternative options TAS recommends.”

You can read more thoughts from National Taxpayer Advocate Nina Olson on her personal blog about the 2018 Objectives Report.

A Few Thoughts About The National Taxpayer Advocate’s Fiscal Year 2018 Objectives Report

Taxpayer Advocate - Wed, 2017-06-28 07:48

Today’s blog is short and sweet because . . . well, because today we are releasing the 295-page National Taxpayer Advocate’s Fiscal Year 2018 Objectives Report to Congress, and that’s enough reading for anyone! By way of background, in IRC § 7803(c)(B), Congress required the National Taxpayer Advocate to submit two reports to the Committee on Ways and Means of the House of Representatives and the Committee on Finance of the Senate before any officer or employee of the IRS, the Treasury Department, or the Office of Management and Budget sees them. Most readers are familiar with the report due on December 31 of each year, which includes discussions of twenty of the most serious problems facing taxpayers, as well as legislative and administrative recommendations. But there is another report – the Objectives Report – that is due on June 30th of each year.

Unlike the December report, about which Congress listed eleven different items for inclusion (including my all-time favorite – “such other information as the National Taxpayer Advocate may deem advisable”), the instructions for the Objectives Report are remarkably concise: “the National Taxpayer Advocate shall report . . . on the objectives of the Office of the Taxpayer Advocate for the fiscal year beginning in such calendar year. Any such report shall contain full and substantive analysis, in addition to statistical information.” IRC § 7803(c)(2)(B)(i).

It has taken us a while to hit upon the right balance of topics, because there is always a risk that objectives reports turn into a “to do” list with dry, bureaucratic language. A good starting point for navigating the report is my Preface, which sets the theme of the report and highlights the things that keep me up at night worrying. Next, we’ve decided that given the timing of the report (mid-year), one of the most helpful things we can do is provide a review of the most recent filing season, and then lay out areas of tax administration on which TAS will focus its advocacy efforts. Thus we have thirteen Areas of Focus, including the following topics: Private Debt Collection, Passport Denial or Revocation; Offshore Voluntary Disclosure Programs; International Tax Administration; Online Accounts; Earned Income Tax Credit Administration; Individual Taxpayer Identification Numbers; Allowable Living Expense Standards; Retirement Account Levies; Tax-Related Identity Theft; Affordable Care Act; Third Party Contacts; and Enterprise Case Management.

Additional sections include discussions of our plans to improve our advocacy on behalf of taxpayers – both in terms of operations and information technology. Much of this is operational, but it is interesting if you are curious about the inner workings of government and organizational behavior. And we have a section discussing our research initiatives for the next fiscal year. I’m enormously proud of my small but impressive research staff. They produce very valuable studies that provide important information the IRS can and should use to improve its programs.

Which brings me to the final section of the Objectives Report – the Volume 2!  This second volume contains a summary of the Most Serious Problems we identified in the National Taxpayer Advocate’s 2016 Annual Report to Congress, along with our recommendations. Under IRC §7803(c)(3), the Commissioner has to establish procedures to formally respond to all of the National Taxpayer Advocate’s recommendations within 3 months of submission to the Commissioner. Thus, our second volume also includes the Commissioner’s formal response to my recommendations, and TAS’s response to the IRS response.

Over the past years, on average the IRS has agreed with about fifty to sixty percent of our administrative recommendations. This year, for some reason, the IRS has only agreed with 38 percent. That drop is notable, and I personally think it reflects the retrenchment of the IRS in light of budget constraints – it is more and more often saying that it can’t do things that make perfect sense in a normal world. I also think we are seeing the surfacing of a tax administration philosophy that is much less taxpayer-facing and interacting, which is problematic on many fronts. But the IRS and TAS back-and-forth is definitely worth reading. It is rare to get this level of dialogue and transparency in government operations. That is one of the benefits of the Annual Reports to Congress and the result of a well-crafted statutory provision establishing these reports.

And speaking of transparency, recall that IRC § 7803(c)(2)(B)(i) requires the National Taxpayer Advocate to include “statistical information.” Every year, we in TAS come up against some data the IRS does not want us to publish. Usually the reason given is that it is for “Official Use Only” and therefore not subject to disclosure under the Freedom of Information Act. In most instances, we are able to work through the concerns and reach agreement about what to disclose and what not to. But this year we weren’t able to reach agreement on one important item. We wanted to publish some “statistical information,” per my statutory mandate, in our Area of Focus about the IRS’s Offshore Voluntary Disclosure initiatives. The IRS likes to make public the amount of dollars these programs have brought in, but other than that, it provides very little information. In light of the paucity of “statistical information,” we find it very difficult to assess the effectiveness of these programs.

The IRS informed us that we could not publish any statistical information about these programs more detailed “than those provided by the Commissioner in press releases.” On its face, this position is ludicrous and, carried to its logical conclusion, would mean neither the National Taxpayer Advocate, nor the Treasury Inspector General for Tax Administration, nor the Government Accountability Office would be able to do their respective jobs. I am required by Congress to provide statistical information: “Any such report shall contain full and substantive analysis, in addition to statistical information.” To fulfill this statutory requirement, I have included the statistical information in the report. But to keep my job, since the IRS is amorphously arguing I cannot publish it, I have redacted this information; we will be glad to provide it to Congress upon request.

Next week we will begin a three-part discussion of the IRS Private Debt Collection program. In the meantime, happy reading of the report, and Happy Independence Day!

Additional blogs from the National Taxpayer Advocate can be found at www.taxpayeradvocate.irs.gov/blog.

The views expressed in this blog are solely those of the National Taxpayer Advocate. The National Taxpayer Advocate is appointed by the Secretary of the Treasury and reports to the Commissioner of Internal Revenue. However, the National Taxpayer Advocate presents an independent taxpayer perspective that does not necessarily reflect the position of the IRS, the Treasury Department, or the Office of Management and Budget.

Success Story: TAS helps locate missing passports filed with Individual Taxpayer Identification Number (ITIN) request

Taxpayer Advocate - Mon, 2017-06-26 11:50

Every year the Taxpayer Advocate Service (TAS) helps thousands of people with tax problems. This story is only one of many examples of how TAS helps resolve taxpayer issues. All personal details are removed to protect the privacy of the taxpayer.

A taxpayer  who was experiencing a family emergency and needed to travel out of the country with his children contacted TAS for assistance. He sent in his children’s passports to the IRS with his 2015 tax return, along with Form W-7, Application for IRS Individual Taxpayer Identification Number (ITIN), requesting ITINs be assigned for his children. The IRS processed his return without considering his ITIN request and did not allow his dependency exemptions, causing a balance due on his return. TAS checked the return information and found that the passports were attached to the back of the return. TAS contacted the IRS to show them the return so they could see that the ITIN application requests had not been processed and the passports had not been returned. TAS explained the urgency of overnighting the passports by 2:00 p.m. that same day. The IRS expedited the ITIN request and manually assigned the ITINs by noon that same day, so the passports could be overnighted to the taxpayer. The taxpayer received the passports in time to travel for his family emergency. TAS then advised the taxpayer to file an amended return to claim the children now that ITINs were assigned, which would eliminate the balance due on the taxpayer's 2015 return.

When working with the Taxpayer Advocate Service, each individual or business taxpayer is assigned to an advocate who listens to the problem and helps the taxpayer understand what needs to be done to resolve their tax issue. TAS advocates will do everything they can to help taxpayers and work with them every step of the way. Occasionally we feature stories of taxpayers and advocates who work together to resolve complex tax issues. Read more TAS success stories.

Learn more about TAS eligibility: https://taxpayeradvocate.irs.gov/about-us/learn-more-eligibility

Appeals Should Facilitate Mutual Respect and Trust by Allowing Taxpayers a Choice in the Expanded Participation of Counsel and Compliance in Appeals Conferences

Taxpayer Advocate - Wed, 2017-06-21 13:59

I have written a lot about my concerns regarding Appeals’ independence over the years. Most recently, in my 2016 Annual Report to Congress, I discussed Appeals’ reluctance to collaborate with taxpayers to design a “Future State” that takes taxpayers’ and tax practitioners’ concerns into account. Now, there is another development in the continuing erosion of taxpayers’ right to appeal an IRS decision in an independent forum. (IRC § 7803(a)(3)).

Effective October 2016, Appeals implemented a number of changes to its conference procedures, including guidance in its IRM explicitly allowing Hearing Officers to invite Counsel and Compliance to participate in Appeals conferences. (IRM 8.6.1.4.4) If a Hearing Officer decides that the presence of Counsel or Compliance will improve the quality of an Appeals conference, taxpayers cannot disagree and insist upon holding a conference with Appeals alone.  

The ability of Appeals to involve Counsel and Compliance in such conferences has historically existed and occasionally has been used in selected cases by Hearing Officers.  (Rev. Proc. 2012-18) The IRM changes, however, are part of “a more concerted effort” by Appeals to expand participation by IRS personnel. (Appeals Quarterly Newsletter, Vol. 3 Issue 1) Donna Hansberry, Chief of Appeals, has explained this new emphasis on the basis that “the purpose of having both parties in the room is to aid case resolution.” (2017 TNT 53-4) As the Chief, Appeals, recently explained to me, at the conference Compliance would explain its understanding of the facts and the law, and the taxpayer would do the same.  The Appeals Officer would ensure that everyone understands the other partys’ position. Compliance would not be present at settlement discussions between Appeals and the taxpayer.

Mutual understanding is, of course, a laudable goal. The problem with the proposed approach, however, is that it ignores the reality of what often transpires between the taxpayer and Compliance in the pre-Appeals phase of a dispute. First, for the vast majority of taxpayers whose disputes are in Correspondence Examination or the Automated Collection System, they have virtually no contact with Compliance personnel. They receive poorly worded, poorly explained letters; they never talk to the same employee twice; they often submit documentation only to have it ignored. For these taxpayers, they choose to come to Appeals precisely because there is no one in Compliance who has personally paid attention to them, and their negative feelings about their Compliance experience does not bode well for a conversation. It is not even clear who in Compliance would show up at an Appeals conference, since no one employee is accountable for the taxpayer’s case.

Second, with respect to cases involving sophisticated or large-entity taxpayers, by the time a case reaches Appeals, it is clear to everyone what Compliance’s and the taxpayer’s respective positions are. The taxpayer is coming to Appeals for a fresh look. Under Appeals Judicial Approach and Culture (AJAC), Appeals should receive a fully-developed case file from Compliance. If that isn’t happening, well, that’s a different sort of problem. The solution to that problem is not granting Compliance the opportunity to make an oral argument before an Appeals Office at the conference. If Compliance makes its oral argument, then the taxpayer’s representative will want to present his or her oral argument at the conference, and all this will increase the time and cost of Appeals.

Thus, this change in conference procedures could well have far-reaching negative consequences for Appeals’ effectiveness in resolving cases with taxpayers. Among other things, Appeals’ emphasis on expanding participation of Counsel and Compliance in Appeals conferences will fundamentally change the nature of conferences in which this approach is adopted. According to one tax practitioner, “Adding IRS employees to the Appeals conference turns the Appeals conference into more of a trial setting as opposed to the historic conduct of most Appeals conferences.” (2017 TNT 53-4)

Further, inviting Counsel and Compliance to join in on Appeals proceedings jeopardizes Appeals’ independence, both real and perceived, and likely will generate additional costs for the government and taxpayers in the form of fewer case resolutions, increased litigation, and reduced long-term compliance. I am aware of taxpayer and tax practitioner concerns that “…allowing Compliance to be present during the Appeals conference could upset the dynamic of the discussion between the taxpayer and Appeals.” (www.Law360.com, Oct. 26, 2016) These problems are magnified with unrepresented taxpayers, who may not know the distinction between Compliance and Appeals, and will see the presence of Compliance (who ignored them) as a sign that Appeals is all one and the same as Compliance. Or, it could be seen as favoritism toward Compliance, which gets two bites at the apple. These circumstances undermine the core independence and mission of Appeals.

The entire purpose of Appeals is to provide a taxpayer with a venue for obtaining an independent review of an IRS decision. The inability to obtain such a review without the presence of Counsel and Compliance makes the deck look stacked against the taxpayer—three IRS functions versus one taxpayer. This presence of additional IRS personnel when their attendance is unwanted by taxpayers effectively aligns Appeals with the IRS and is not conducive to settlement, only to intimidation and more litigation. Independence is an essential aspect of an effective decision-maker, and Appeals has undermined its independence over the last few years—first, by becoming more bureaucratic through the AJAC project, and second, by putting barriers up between it and the taxpayer via reducing opportunities for face-to-face meetings and eliminating its presence in at least twelve states.

The new approaches being put into place by Appeals make it appear as though Appeals no longer trusts its own Hearing Officers and that these Hearing Officers require the guidance and oversight of Counsel and Compliance to reach the correct determinations. As a former practitioner, I would think long and hard before bringing a case to Appeals under these new rules. This attempt to be more “quasi-judicial” makes going to Appeals more like going to court, so, if my client could afford it, I would ask, “Why not just go straight to court?” Of course, all those taxpayers who cannot afford to go to court or who do not want to go court and just want an independent administrative appeal will be forced into a trial-like setting—three against one.

My concerns have been echoed by a number of practitioner groups, including the American Bar Association. (2017 TNT 89-10) The IRS has acknowledged many of these issues, but has not yet committed to make any meaningful changes in the policy it has adopted. (2017 TNT 114-3)
 
I am very troubled by this effort on the part of Appeals and fear that, in the long run, it will harm both taxpayers and the government. A taxpayer’s right to appeal an IRS decision in an independent forum should be available in a non-adversarial environment that encourages negotiated case resolutions free from the involvement of IRS personnel who have already formed and expressed a view regarding the taxpayer’s case. (IRC § 7803(a)(3)) There are other ways to achieve the mutual understanding Appeals desires, starting with letting the taxpayer decide whether it would be helpful to have Compliance participate in the conference. Placing the decision in the hands of the taxpayer respects the taxpayer’s right to an appeal and to a fair and just tax system. It signals trust of the taxpayer, and may actually result in the taxpayer’s willingness to meet with Compliance. Thus, under my suggested approach, Appeals’ independence is strengthened, taxpayers are treated like adults and with respect, Compliance provides fully-developed case files, and tax administration is improved. It’s a win-win for everyone.

At any rate, the Taxpayer Advocate Service will continue to carefully monitor the expanded participation of these personnel in Appeals conferences, paying particularly close attention to the impact it has on case resolutions and taxpayer rights. We will inform both taxpayers and Congress about our findings.

Additional blogs from the National Taxpayer Advocate can be found at www.taxpayeradvocate.irs.gov/blog.

The views expressed in this blog are solely those of the National Taxpayer Advocate. The National Taxpayer Advocate is appointed by the Secretary of the Treasury and reports to the Commissioner of Internal Revenue. However, the National Taxpayer Advocate presents an independent taxpayer perspective that does not necessarily reflect the position of the IRS, the Treasury Department, or the Office of Management and Budget.

Success Story: TAS helps taxpayer receive timely refund claim

Taxpayer Advocate - Fri, 2017-06-16 08:45

Every year the Taxpayer Advocate Service (TAS) helps thousands of people with tax problems. This story is only one of many examples of how TAS helps resolve taxpayer issues. All personal details are removed to protect the privacy of the taxpayer.

A taxpayer came to Taxpayer Advocate Service (TAS) in April 2016 for help getting a refund from his 2012 tax return that was filed late. Although the return was filed late, it was nonetheless a timely claim for refund. The case was assigned to a TAS case advocate who reviewed the taxpayer’s account information and was able to confirm that the taxpayer faxed his 2012 original tax return to the IRS in April 2014. However, the tax return was never processed, even though the account history indicated that it was being processed. TAS provided a copy of the 2012 return and asked the IRS to process the return using the April 2014 received date, which would allow a refund of the prepaid credits reported on the return.

The IRS employee stated he could only stamp the return using the current received date. TAS advocated for the taxpayer using the April 2014 date, based on the account history notes, which established that the IRS had received the return, but failed to process it timely. After several contacts with multiple departments, the case advocate was successful in advocating for the taxpayer and got the taxpayer’s return processed with the correct date. The taxpayer received a refund of the prepaid credits plus interest.

When working with the Taxpayer Advocate Service, each individual or business taxpayer is assigned to an advocate who listens to the problem and helps the taxpayer understand what needs to be done to resolve their tax issue. TAS advocates will do everything they can to help taxpayers and work with them every step of the way. Occasionally we feature stories of taxpayers and advocates who work together to resolve complex tax issues. Read more TAS success stories.

The IRS’s New Passport Program: How Lack of Notice Harms Taxpayers (Part 2 of 2)

Taxpayer Advocate - Wed, 2017-06-14 12:37

In my first blog on passport issues, I discussed the importance of providing notice to taxpayers prior to certifying their seriously delinquent tax debts to the Department of State (DOS). Once the IRS makes the certification, the DOS must deny the person’s passport application and it may revoke their passport, except in certain emergency and humanitarian situations. Under the IRS’s current policy, the only direct notice prior to the certification is through language buried in the middle of the CDP notice, which was not included at all for taxpayers who received their CDP notices prior to January 2017. This policy impairs due process rights and the taxpayer’s right to be informed and right to challenge the IRS’s position and be heard.

As the IRS begins certifications in the coming months, there will most certainly be taxpayers who are caught unaware when the IRS certifies their seriously delinquent tax debts to the DOS. At the start of the implementation, the DOS will only be denying passport applications and will implement the revocation program at a later date. Although the DOS will hold an applicant’s passport application open for 90 days to allow the taxpayer to resolve the tax debt, taxpayers may need their passports immediately for travel, such as upcoming business travel, which would not fall under the DOS’s discretion to grant a waiver for emergency or humanitarian reasons.   

Today, I’d like to look at some examples of how the passport certification process will operate. These examples show how unnecessary certifications and reversals are inefficient for the IRS and burdensome to the taxpayer when prior notice to the taxpayer could have resulted in resolution of the tax debt. In the first set of examples, we see that simply paying the tax debt to decrease it to or below $50,000 (adjusted for inflation) is not enough to reverse the certification. However, if the IRS reverses the certification for another reason (for example the taxpayer enters into an IA), then the IRS cannot recertify the debt if it is currently at or below the $50,000 (adjusted for inflation) threshold.

Example 1: Paying Liability to or Below $50,000 (adjusted for inflation)

  1. Taxpayer owes $45,000 for combined assessments for tax years 2013, 2014, and 2015. After the IRS assesses his 2016 return, the Taxpayer’s total assessed liability for all years is $55,000. The IRS has filed a Notice of Federal Tax Lien (NFTL) and the time period for requesting a Collection Due Process (CDP) hearing has lapsed.  The IRS certifies the Taxpayer’s seriously delinquent tax debt to the DOS.  The DOS denies the Taxpayer’s passport application. The Taxpayer pays $20,000 of his tax debt, bringing the total assessed liability down to $35,000. The Taxpayer needs his passport to travel for work, but the IRS is not required to reverse the certification because the Taxpayer does not meet one of the statutory or discretionary criteria for reversal.

  2. Taxpayer owes $45,000 for combined assessments for tax years 2013, 2014, and 2015.  After the IRS assesses his 2016 return, the Taxpayer’s total assessed liability for all years is $55,000. The IRS has filed an NFTL and the time period for requesting a Collection Due Process (CDP) hearing has lapsed. The IRS certifies the Taxpayer’s seriously delinquent tax debt to the DOS. The DOS denies the Taxpayer’s passport application. The Taxpayer enters into an IA with the IRS. The IRS reverses the certification and notifies the DOS. The Taxpayer defaults on the IA once the total assessed liability falls to $49,000 and makes no more payments. The IRS cannot recertify the Taxpayer at this time because the Taxpayer’s assessed tax liability is below the $50,000 threshold. The Taxpayer applies for and receives a passport from the DOS.

TAS will assist certified taxpayers in resolving their tax debts and correcting their accounts. While virtually all passport cases will meet TAS’s financial or systemic burden case criteria, I have also designated all passport denial and revocation cases as meeting TAS Case Criteria 9, Public Policy. However, the IRS has rejected my repeated requests to exclude already open TAS cases from passport certification. By definition, taxpayers who are working with TAS are working to resolve their seriously delinquent tax debts. The next set of examples demonstrates the harm to taxpayers caused by the IRS’s decision not to exclude open TAS cases from certification as part of its discretionary authority. 

Example 2: TAS Case Opened

  1. Taxpayer has a total assessed tax liability of $40,000, for which the IRS has filed an NFTL and the period for requesting a CDP hearing has lapsed. Taxpayer’s identity is stolen and the identity thief’s fraudulent return results in a balance due of $15,000. The IRS assesses this amount and files an additional NFTL. The Taxpayer does not timely respond to the CDP notice. The Taxpayer contacts TAS for assistance in having his account corrected. Before TAS is able to have an ID theft indicator placed on the account, the IRS certifies the seriously delinquent tax debt. Through TAS’s assistance, the IRS places an identity theft transaction code on the Taxpayer’s account while the Taxpayer works with TAS to come up with documentation to prove the ID theft. Because the IRS treats identity theft as a discretionary exception to the passport provisions, upon the placement of the ID theft transaction code, the IRS reverses the certification. The Taxpayer is able to apply for and receive a passport once the DOS receives notification of the reversal.

  2. Taxpayer has a total assessed tax liability of $40,000, for which the IRS has filed an NFTL and the period for requesting a CDP hearing has lapsed. Taxpayer uses a return preparer to prepare his current return. The Taxpayer signs the return, but the return preparer alters the information on the return after the Taxpayer signs.  The fraudulent return results in a balance due of $15,000. The IRS assesses this amount and files an additional NFTL. The Taxpayer does not timely request a CDP hearing. The Taxpayer contacts TAS for assistance in having his account corrected per IRM 25.24.2, Return Preparer Misconduct Victim Assistance Specialized Accounts Management, which provides procedures for removing the debt attributable to return preparer fraud.  However, before TAS is able to have the account corrected, the IRS certifies the seriously delinquent tax debt. Unlike the identity theft victim, the Taxpayer is unable to apply for and receive a passport during the time he is working with TAS to have his account corrected. Once the Taxpayer finally succeeds in having his account corrected, and the total assessed liability returns to $40,000, the IRS reverses the certification because the certification is found to be erroneous.  

Although the taxpayers in these examples ultimately have their certifications reversed, the IRS’s failure to exclude taxpayers from the certification list during the time their cases are open in TAS results in burden and harm to these taxpayers. This approach also results in extensive and unnecessary work for both TAS and the IRS. TAS has developed a process for excluding open TAS cases from the Private Debt Collection initiative, and it is baffling why the IRS will not adopt that procedure for passport certification cases.

The final example set shows the difference between a taxpayer who pays the tax debt below the $50,000 threshold while temporarily meeting one of the certification exclusions (in this case CNC status) and a taxpayer whose tax debt remains above the threshold.

Example 3: CNC status

  1. Taxpayer’s total assessed tax liability is $55,000. The IRS certifies the seriously delinquent tax debt to the DOS. The Taxpayer requests and receives Currently Not Collectible (CNC) hardship status for the tax years comprising the liability. The IRS reverses the seriously delinquent tax debt certification. The IRS offsets the Taxpayer’s current refund in the amount of $6,000, reducing the liability to $49,000. The Taxpayer begins a new job, raising his income, and prompting the IRS to terminate the CNC status. The IRS cannot recertify the Taxpayer’s tax debt because it is currently below $50,000.

  2. Taxpayer’s total assessed tax liability is $55,000. The IRS certifies the seriously delinquent tax debt to the DOS. The Taxpayer requests and receives Currently Not Collectible (CNC) hardship status for the tax years comprising the liability. The IRS reverses the seriously delinquent tax debt certification. The Taxpayer begins a new job, raising his income, and prompting the IRS to terminate the CNC status. The IRS recertifies the seriously delinquent tax debt. The Taxpayer makes payments to reduce his tax debt to $45,000. However, the IRS will not reverse the certification unless the Taxpayer receives CNC status again, or meets another statutory or discretionary criterion for reversal.

I believe that in many cases, a certification could be avoided by providing the taxpayer with a stand-alone notice prior to the certification. This notice would alert the taxpayer to the specific harm that will occur if he or she doesn’t resolve the tax debt and provide an opportunity to resolve the debt or challenge the determination. However, because the IRS does not currently provide such a notice, taxpayers will continue to be certified and will not resolve their tax debts until after the certification. This process burdens the taxpayer and causes extra work for the IRS, who must process the certification and reversal of the certification, when an adequate warning of the certification may have been enough to spur the taxpayer to resolve the debt.  

The IRS’s approach ignores the entire reason for the notice (and for taxpayers’ right to be informed), which is to motivate the taxpayer to take action. Merely placing a random paragraph among many other pieces of important information may not be sufficient to put a person on notice such that they have the necessary knowledge and take the desired action. If the IRS really wants the taxpayer to resolve the tax debt, it would design its notices to prompt the taxpayer to take action. The notice sent contemporaneously with the certification is too late. This brings into question whether the IRS is actually trying to give the taxpayer notice and encourage the resolution of the tax debt.

Additional blogs from the National Taxpayer Advocate can be found at www.taxpayeradvocate.irs.gov/blog.

The views expressed in this blog are solely those of the National Taxpayer Advocate. The National Taxpayer Advocate is appointed by the Secretary of the Treasury and reports to the Commissioner of Internal Revenue. However, the National Taxpayer Advocate presents an independent taxpayer perspective that does not necessarily reflect the position of the IRS, the Treasury Department, or the Office of Management and Budget.

NTA Nina Olson discusses TBOR with Private Debt Collectors

Taxpayer Advocate - Mon, 2017-06-12 08:17

The National Taxpayer Advocate reviewed the Taxpayer Bill of Rights with the four private collection agencies selected for the Private Debt Collection program under the Fixing America’s Surface Transportation Act (FAST Act). The National taxpayer Advocate recorded a training video for all employees of the four Private Debt Collection agencies on protecting taxpayer rights under the Taxpayer Bill of Rights (TBOR). This video is now available for the public to view. The online training provides examples of how taxpayer rights are to be respected throughout the collection process and reminds the private collection agency employees that  the Taxpayer Advocate Service is an available resource when help is needed.  

Learn more about the Taxpayer Bill of Rights

Watch the TBOR training video for private collection agencies.

Tax Term of The Week

Software Developer - Develops software for the purposes of (1) formatting electronic tax return information according to IRS specifications, and/or (2) transmitting electronic tax return information... More...