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MSP #17: NOTICES

Refund Disallowance Notices Do Not Provide Adequate Explanations

TAS Recommendations and IRS Responses

1
1.

TAS RECOMMENDATION #17-1

Issue a stand-alone statutory notice of claim disallowance in all cases where the taxpayer does not waive the right to receive one.

IRS RESPONSE TO RECOMMENDATION: These are the existing procedures. If the taxpayer does not waive his right to receive a formal claim disallowance letter, all disallowances are closed with either a 105C Claim Disallowed or 106C Claim Partially Disallowed letter.

CORRECTIVE ACTION: N/A

TAS RESPONSE: The National Taxpayer Advocate is disappointed by the IRS response citing current procedures as adequate, when the Most Serious Problem details how these procedures fall short of congressional intent. The IRS response states it issues a stand-alone statutory notice of claim disallowance in all cases where the taxpayer does not waive the right to receive one. However, per IRM 4.8.9.15.2 (Sept. 9, 2013), the IRS issues combination statutory notices of deficiency and claim disallowance letters. It appears the IRS ignores its own policies. This IRM needs to be revised to instruct employees to issue a Letter 105C in all cases.

ADOPTED, PARTIALLY ADOPTED or NOT ADOPTED: Not Adopted

OPEN or CLOSED: Closed

DUE DATE FOR ACTION (if left open): N/A

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2.

TAS RECOMMENDATION #17-2

Maintain copies of all refund disallowance notices on an electronic database that employees can easily access when working inquiries related to the letters.

IRS RESPONSE TO RECOMMENDATION: ​An electronic database for immediate letter viewing is currently not available. IRS employees who need information to assist taxpayers with questions on claim disallowance can view the paragraph selections on letters generated within the Correspondence Image System, obtain a copy of the letter from Control-D Web Access software that allows for viewing of letters generated electronically, or from Examination work papers as part of the case. When a claim is disallowed, a transaction is input with an appropriate two digit reason code that tells employees the reason why the issue was disallowed. IRS will implement a system where copies of notices are available on demand for all employees if funding and other priorities allow.

CORRECTIVE ACTION: N/A

TAS RESPONSE: The National Taxpayer Advocate is pleased the IRS is willing to implement a system where copies of notices will be available on-demand for all employees and understands the fulfillment of this recommendation is contingent on funding. It is important for IRS employees to have easy access to actual copies with the exact wording used on notices of claim disallowance to address taxpayer concerns and questions.

ADOPTED, PARTIALLY ADOPTED or NOT ADOPTED: Partially Adopted

OPEN or CLOSED: Closed

DUE DATE FOR ACTION (if left open): N/A

3
3.

TAS RECOMMENDATION #17-3

Revise Letter 569 (SC) to clearly explain a taxpayer’s right to challenge the claim disallowance in court and the consequences of waiving the right to receive the statutory notice of claim disallowance.

IRS RESPONSE TO RECOMMENDATION: The Letter 569 (SC) explains that the taxpayer should only complete the Form 2297, Waiver of Statutory Notification on Claim Disallowance, if they agree with our findings. Further, it advises the taxpayer to look in Publication 3498-A for more information on their rights. The letter 569 (SC) is a proposal to disallow the claim, not the formal disallowance. At the point when the Letter 569 (SC) is issued, the taxpayer cannot go to Court of Claims. The final claim disallowance letter explains how to challenge the decision of the IRS.

CORRECTIVE ACTION: N/A

TAS RESPONSE: The IRS’s apparent disregard of the importance of a taxpayer understanding the effect of waiving the statutory notice is unacceptable. Letter 569 and Form 2297 do not provide sufficient information for the taxpayer to understand the consequences of waiving his or her right to receive the final claim disallowance letter. The National Taxpayer Advocate encourages the IRS to test Letter 569 by surveying real taxpayers to determine whether they understand what it means and their comprehension of the consequences of signing the Form 2297. The IRS points out Letter 569 is not a final claim disallowance notice; however, the explanation on the final claim disallowance letter has no importance if the taxpayer never receives it, because he or she waived the right to receive it without understanding the effect. Furthermore, the IRS response overlooks the fact that the taxpayer may be able to file suit in a U.S. District Court at the time of receiving Letter 569 if six months have elapsed since the taxpayer filed his or her claim for refund with the IRS.

ADOPTED, PARTIALLY ADOPTED or NOT ADOPTED: Not Adopted

OPEN or CLOSED: Closed

DUE DATE FOR ACTION (if left open): N/A

4
4.

TAS RECOMMENDATION #17-4

Revise Form 2297 to include further information about the taxpayer’s right to appeal, including the court where the taxpayer may file suit, and a statement that this is the taxpayer’s only opportunity to challenge the disallowance in court.

IRS RESPONSE TO RECOMMENDATION: ​Form 2297, Waiver of Statutory Notification of Claim Disallowance is utilized in all cases in which there is a complete or partial disallowance of a claim. The form includes the taxpayer’s information, tax year, type of tax, amount of the claim and the amount disallowed if appropriate. Information about the taxpayer’s right to appeal a claim disallowance is included in letter 569 and Pub 3498. Additionally, the taxpayer  receives Pub 1 at the beginning of the audit.  Therefore, we do not agree with the recommendation to include information about appeal rights on Form 2297.

CORRECTIVE ACTION: N/A

TAS RESPONSE: The National Taxpayer Advocate reiterates her recommendation to include the information outlined in this recommendation on the Form 2297. Some taxpayers may sign this form without fully understanding their rights and the consequences of signing the form. The IRS’s response refusing to devote a small amount of space on the actual form to provide taxpayers with specific information about their rights calls into question the IRS’s commitment to protecting taxpayer rights.

ADOPTED, PARTIALLY ADOPTED or NOT ADOPTED: Not Adopted

OPEN or CLOSED: Closed

DUE DATE FOR ACTION (if left open): N/A

5
5.

TAS RECOMMENDATION #17-5

Require all letters or notices stating that a claim for refund is being partially or fully disallowed, regardless of whether they start the running of the statute of limitations on filing suit, to explain the specific reasons for the disallowance. This explanation can be included on an attachment, such as Form 886-A attached to Letter 569 (SC).

IRS RESPONSE TO RECOMMENDATION: IRS already has procedures in place which requires all claim disallowance letters issued to contain the specific reason for the claim disallowance. To ensure IRM procedures are followed, managerial, lead, and Program Analysis System reviews are performed to ensure accuracy of the case closure (which includes letter generation). This includes providing feedback on any issue (including letter generation) identified during the review.

CORRECTIVE ACTION: N/A

TAS RESPONSE: Current procedures requiring claim disallowance letters to contain specific reasons for disallowance are deficient or inadequate. As stated in the Most Serious Problem, 92 percent of the sample of 100 letters TAS reviewed did not sufficiently explain the specific reasons for disallowance, were not written in plain language, or did not provide the taxpayer with the information needed to respond.

ADOPTED, PARTIALLY ADOPTED or NOT ADOPTED: Not Adopted

OPEN or CLOSED: Closed

DUE DATE FOR ACTION (if left open): N/A

6
6.

TAS RECOMMENDATION #17-6

Provide training to all employees who create notices of claim disallowance and “No Consideration” letters to reinforce the requirement to provide an explanation of the specific reasons for the disallowance, with detailed guidance on explaining the most common reasons for disallowance, such as the expiration of the refund statute.

IRS RESPONSE TO RECOMMENDATION: IRS provides training to all employees who issue claim disallowance and/or “No Consideration” letters. Various courses are available for the utilization of disallowance letters and “No Consideration” letters. The training lessons include reviewing the applicable sections of the IRM (each lesson includes a list of the  IRM references). The 916C, 105C, and 106C letters are used by various programs in several functions.

CORRECTIVE ACTION: N/A

TAS RESPONSE: It is clear the IRS’s process for providing review and feedback on any issues found in the review is not working.  IRS employees need additional training to reinforce the requirement to provide the specific reasons for disallowance, which should provide detailed explanations of the most common reasons for disallowance.

ADOPTED, PARTIALLY ADOPTED or NOT ADOPTED: Not Adopted

OPEN or CLOSED: Closed

DUE DATE FOR ACTION (if left open): N/A

7
7.

TAS RECOMMENDATION #17-7

Require all notices of claim disallowance and “No Consideration” letters to include the amount of the claim.

IRS RESPONSE TO RECOMMENDATION: IRS employees select available paragraphs in the claim disallowance, partial disallowance, or “no consideration”  (105C/106C/916C) letters to ensure taxpayers are aware of the amount of the claim, when the claim was received, current balance due, penalty and interest for each applicable tax period, and that IRS will continue to charge penalties and interest until the account is fully paid. IRS employees also use “open” paragraphs to provide specific information when issuing no consider or disallowance letters. To ensure letters are complete, managerial, lead, and Program Analysis System reviews  are performed to ensure accuracy of the case closure, including letter generation. This includes providing feedback on any issue (including letter generation) identified during the review.

CORRECTIVE ACTION: N/A

TAS RESPONSE: The National Taxpayer Advocate is pleased the IRS plans to update IRM guidance and notices to include the date of the taxpayer’s claim, but is concerned the IRS will not agree to make the amount of the claim a mandatory part of all notices of claim disallowance and “no consideration” letters. Although the IRS response indicates employees can select an open paragraph to indicate the amount of the claim and other important information, TAS’s review showed employees do not always select a paragraph or may leave the field blank. The paragraph or entry providing the amount of the claim should be mandatory and programmed into the system, ensuring an employee cannot generate a letter without including this information.

ADOPTED, PARTIALLY ADOPTED or NOT ADOPTED: Not Adopted

OPEN or CLOSED: Closed

DUE DATE FOR ACTION (if left open): N/A

8
8.

TAS RECOMMENDATION #17-8

Require all notices of claim disallowance where the reason for disallowance is the expiration of the refund statute of limitations to include the date the return was deemed filed, how the IRS calculated that date, and the date the claim was due.

IRS RESPONSE TO RECOMMENDATION: IRS will update guidance to ensure notices of claim disallowance due to statute issues contain information so the taxpayer understands the dates associated with the return filing and taxes paid time frames.

Update: Accounts Managements is updating the IRM 21.5.3 and 105C Disallowance letters to strengthen the disallowance process to ensure the statute return filing and claim due dates are included in the correspondence to the taxpayer. The IRM will be updated by the end of February 2016 and a Publishing Service Request (PSR) has been submitted to update the English and Spanish 105C Claim Disallowed letters. The letter revisions are required to be reviewed and approved by TAS and Counsel and letters with program tie-ins require additional programming – the target date can change depending on feedback from the stakeholders (approximately July).

CORRECTIVE ACTION: IRM guidance and notices will be updated as appropriate, to reflect the claim dates.

TAS RESPONSE: Although the IRS response indicates that employees can select an open paragraph to indicate the amount of the claim and other important information, our review showed that employees do not always select a paragraph or may leave the field blank. The paragraph or entry providing the amount of the claim should be mandatory and programmed into the system- so that an employee cannot generate a letter without including this information.

ADOPTED, PARTIALLY ADOPTED or NOT ADOPTED: Adopted

OPEN or CLOSED: Closed

DUE DATE FOR ACTION (if left open): N/A

9
9.

TAS RECOMMENDATION #17-9

Require “No Consideration” letters to include an explanation of the specific reason for the disallowance, and if supporting documentation was not accepted, an explanation of why and what the taxpayer can do to cure the claim.

IRS RESPONSE TO RECOMMENDATION: IRS already has procedures in place which require all 916C “No Consideration” letters to advise the taxpayer why the claim is not being considered. To ensure IRM procedures are followed, managerial, lead, and Program Analysis System reviews are performed  to ensure the  accuracy of case closure, including letter generation.  This includes providing feedback on any issue (including letter generation) identified during the review.

CORRECTIVE ACTION: N/A

TAS RESPONSE: The current “no consideration” letters do not require employees generating the letters to provide the specific reasons or a detailed explanation of why documentation was not allowed. Although the IRM does instruct employees to provide a reason, the “no consideration” letters use generic reasons that are hard to understand. Taxpayers may be confused about what was deficient regarding their documentation and how they may correct the problem. The National Taxpayer Advocate encourages the IRS to thoroughly examine the letters it is sending to taxpayers to ascertain whether they actually include adequate explanations of the reasons.

ADOPTED, PARTIALLY ADOPTED or NOT ADOPTED: Not Adopted

OPEN or CLOSED: Closed

DUE DATE FOR ACTION (if left open): N/A

10
10.

TAS RECOMMENDATION #17-10

For notices of disallowance where the taxpayer can challenge the refund disallowance in court, provide details similar to those in Letter 5087C, including where to find more information about filing refund suits.

IRS RESPONSE TO RECOMMENDATION: The disallowance letters (105C/106C) contain paragraphs for the IRS employee to select that explain the reason for the disallowance. Also included is information on how to appeal the decision and file suit to recover tax, penalties, or other amounts, with the United States District Court having jurisdiction or with the United States Court of Federal Claims.  Upon generation of disallowance letters, Publication 1, Your Rights as a Taxpayer, is automatically enclosed with the letter. Publication 1 provides detailed information on additional publications available for requesting an appeal or filing suit.

CORRECTIVE ACTION: N/A

TAS RESPONSE: The disallowance letters (105C/106C) do not provide details similar to those in Letter 5087C or let the taxpayer know where to find more information about filing refund suits as suggested in this recommendation. The IRS should provide the taxpayer instructions on where he or she can find more information about filing refund suits. Taxpayers have the right to be informed, which is a fundamental right, and this right is crucial when the information relates to exercising other taxpayer rights.

ADOPTED, PARTIALLY ADOPTED or NOT ADOPTED: Not Adopted

OPEN or CLOSED: Closed

DUE DATE FOR ACTION (if left open): N/A

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