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MSP #11: NOTICES OF FEDERAL TAX LIEN (NFTL)

The IRS Files Most NFTLs Based on Arbitrary Dollar Thresholds Rather Than on a Thorough Analysis of a Taxpayer’s Financial Circumstances and the Impact on Future Compliance and Overall Revenue Collection

TAS Recommendations and IRS Responses

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1.

TAS RECOMMENDATION #11-1

Revise the IRM to require employees to make multiple attempts to initiate a meaningful personal contact with the taxpayer by phone or through mailing notices, instead of filing a NFTL after just one attempt. The IRS should adopt an early intervention policy similar to the new standard in the mortgage industry that requires two contacts, one of which is a person-to-person attempt, rather than simply mailing a letter.

IRS RESPONSE TO RECOMMENDATION: The IRS’s procedures on NFTL determinations adhere to Policy Statement 5-47, which states:

A notice of lien shall not be filed, except in jeopardy assessment cases, until reasonable efforts have been made to contact the taxpayer in person, by telephone or by a notice sent by mail, delivered in person or left at the taxpayer’s last known address, to afford him/her the opportunity to make payment. All pertinent facts must be carefully considered as the filing of the notice of lien may adversely affect the taxpayer’s ability to pay and thereby hamper or retard the collection process.

In practice, the IRS usually does not file a NFTL after just one attempt at contact.  Prior to a NFTL filing determination being made, taxpayers generally are provided two to four notices of the balance due, attempts are made to contact the taxpayer by phone when a phone number is available and, if assigned to a Field Revenue Officer (RO), additional personal contact may be attempted. Mandating additional contact attempts would inappropriately reward taxpayers actively avoiding the IRS.

The process used by the mortgage industry, as alluded to by the NTA, is not relevant as it pertains to situations where the mortgage company has already filed notice of the mortgage and is foreclosing as a secured creditor. The analogous situation for the IRS would be when seizure or judicial foreclosure is instigated after the NFTL had been filed.

CORRECTIVE ACTION: N/A

TAS RESPONSE: TAS remains concerned that the IRS continues filing NFTLs based on an arbitrary threshold amount with little management review rather than on focusing on “meaningful” contact with the taxpayer.

IRM 5.12.2.2(1) instructs employees to make “reasonable efforts” when contacting the taxpayer before filing an NFTL which includes the issuance of the statutory assessment notice and the balance due notices sent during the collection process.  The IRM does not require a “live” contact with the taxpayer. As a result, many NFTL determinations may be perceived as “checking the box,” without actually attempting meaningful contact to resolve the tax liability.  In FY 2015, the IRS filed approximately twenty-one percent of NFTLs automatically without human involvement in determining lien filings,28  and, contrary to congressional intent, the IRM only requires managerial approval when requesting an NFTL deferral and not filing of an NFTL.

Meaningful and personal contact, such as a “soft” letter followed by a telephone call, sends a timely message to a taxpayer.  Often a reminder is all that is necessary to resolve past-due debts prior to placing them in full collection.  It would be beneficial for the IRS, in terms of saving NFTL filing fees and promoting taxpayer rights and future compliance, to make multiple attempts to contact taxpayers by phone and through mailing monthly reminder notices (or SMS) instead of filing an NFTL after just one attempt.  In addition, the TAS research study confirms that a contact early in the collection process provides the best results and improves the collection of revenue.  We believe that requiring a “live” contact with the taxpayer will not inappropriately reward taxpayers actively avoiding the IRS but instead facilitate voluntary compliance and promote taxpayer rights.

TAS disagrees with the IRS’s statement that the process used in the mortgage industry as irrelevant because it demonstrates that early intervention proves to be successful and efficient method of collection.  The NFTL is akin to a notice of default on mortgage, not a filing of a secure interest in property, and it negatively affects the taxpayer’s financial viability and the ability to borrow to pay off the tax debt.

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 #11-2

The IRS should increase the ten-day timeframe for filing an NFTL to enable taxpayers to reach out to the IRS and provide financial information.

IRS RESPONSE TO RECOMMENDATION: There is no ten-day requirement in which a NFTL must be filed.  For cases assigned to ACS, the NFTL filing determination decision is generally made at the point of case disposition or when the taxpayer defaults on an agreed plan of action. For cases assigned to Field Collection, the RO has ten days after the initial contact attempt, which occurs within 45 days of case receipt, to make a NFTL filing determination. That determination can be to file, not file, or defer filing the NFTL and is made on a case-by-case basis.

CORRECTIVE ACTION: N/A

TAS RESPONSE: TAS is concerned that the IRM generally requires an NFTL filing determination to be made within ten calendar days from the initial attempted contact or initial actual contact date, whichever date is earlier. Thus, many determinations to file NFTLs may be made without a full financial information and evaluation of the ability or consideration of collection alternatives. TAS’s analysis of IRS data in this MSP confirms that only about one in three taxpayers can get through to the IRS to make payment arrangements prior to the NFTL filing.  Because of the low Level of Service, the IRS may view taxpayers as being unwilling to pay, when in fact they are trying to reach the IRS.  Thus, given the short timeframes for taxpayer response, an NFTL may then be filed against taxpayers who are trying to reach the IRS and cannot.  This situation not only harms the taxpayer but also erodes trust in fair tax administration and can undermine future compliance.

In its response to a TAS information request in conjunction with this Most Serious Problem, the IRS has provided that “lien filing determinations are not tracked.”  As such, the IRS does not know the number of NFTL determinations that are made, and of that number, how many resulted in an NFTL actually being filed, and the length of time between the determination and filing.  TAS believes that the rights to challenge the IRS and be heard and to a fair and just tax system are jeopardized when the IRS fails to consider the taxpayer’s specific facts and circumstances.

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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3.

TAS RECOMMENDATION #11-3

The IRS should continue to mail monthly notices to the taxpayers while the account is in the queue, ACS, or the field.

IRS RESPONSE TO RECOMMENDATION: NTA Recommendation Not Adopted as Written, but IRS Actions Taken to Address Issues Raised by NTA.  The IRS currently does not mail monthly notices on collection status accounts.  This recommendation will be evaluated in the ACS “Lien Pilot” currently in process.  Outside of the pilot, resource limitations make the recommendation impractical and could compromise the IRS’s ability to provide timely, quality service to taxpayers.

CORRECTIVE ACTION: Notices for the pilot have been approved and issuance began in April 2016. The pilot is scheduled to last 9-12 months or possibly longer. After the pilot has concluded and results analyzed, a determination on the recommendation will be made.

TAS RESPONSE: The National Taxpayer Advocate is looking forward to evaluating the results of the Lien Pilot and is pleased that the notices for the pilot have been approved.  TAS also acknowledges the IRS’s budget limitations.  However, when looking at this recommendation, the IRS should consider the cost-benefit analysis, as this relatively low-cost investment may result in a significant improvement in taxpayer service, voluntary compliance, and revenue collection.  As stated in the MSP, tax administration agencies around the world, including Sweden, Australia, Norway, and New Zealand, successfully use reminders, specifically “gentle” reminders, to increase tax payment compliance and prevent enforcement measures. For example, New Zealand saw an increase of on-time payments by 12.6 percent between 2010 and 2013 by simply using SMS to provide real-time reminders of key payments to a targeted group of taxpayers.

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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4.

TAS RECOMMENDATION #11-4

In collaboration with TAS, develop criteria for conducting the lien pilot as agreed upon with the National Taxpayer Advocate and refrain from decreasing the NFTL filing monetary threshold until the results of the lien pilot can be examined and discussed.

IRS RESPONSE TO RECOMMENDATION: The IRS has been actively collaborating with the NTA on the Lien Pilot criteria since January 2015.  No changes have been made to the systemic NFTL filing threshold.  Notices for the pilot have been approved and issuance began in April 2016. The pilot is scheduled to last 9-12 months or possibly longer. After the pilot has concluded and results have been analyzed, a decision will be made on the NFTL determination threshold.

CORRECTIVE ACTION: N/A

TAS RESPONSE: The National Taxpayer Advocate is pleased that the IRS has not made changes to the systemic NFTL filing threshold.  As stated above, TAS appreciates the IRS’s willingness to proceed with the Collection Lien Pilot based on the four treatment groups plus a control group, as the National Taxpayer Advocate recommended. TAS is looking forward to working with Collection on the pilot.

ADOPTED, PARTIALLY ADOPTED or NOT ADOPTED: Adopted

OPEN or CLOSED: Closed

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

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5.

TAS RECOMMENDATION #11-5

Amend the IRM and related e-Guides and training materials to incorporate rules for NFTL filing determinations. The rules should specify that the following items are needed prior to filing: “meaningful contact;” analysis of the taxpayer’s financial situation, including a hardship determination if needed; consideration of collection alternatives; application of the balancing test, which is to balance the need for efficient collection of the tax with legitimate concerns of the taxpayer that actions be no more intrusive than necessary; and the impact on future compliance.

IRS RESPONSE TO RECOMMENDATION: Current NFTL filing determination guidance is sufficient and effective.  All IRMs containing guidance on NFTL filing determinations were cleared through TAS.  Training material and the ACS e-Guides are based on the IRM and used in conjunction with it.  They do not establish guidance that is not in the IRM.  E-guides and training material related to NFTL filing determinations are routinely updated to conform with their respective IRMs (5.12.2 for Field Collection; 5.19.4 for ACS).

CORRECTIVE ACTION: N/A

TAS RESPONSE: The National Taxpayer Advocate is disappointed that the IRS has refused to adopt this recommendation. TAS respectfully disagrees that current IRS guidance is sufficient and effective as written.  Current guidance does not require the employees to attempt meaningful contact, to analyze the taxpayer’s financial situation, including a hardship determination, to consider collection alternatives, and to apply the balancing test prior to filing the NFTL.  As stated above, this results in automatic NFTL filing based on the fact that the liability is assessed, notice and demand is sent, and the taxpayer has not responded for whatever reason, even if he or she could not reach the IRS because of the low LOS.  In addition, considering factors provided in the recommendation will result in the IRS not filing unproductive liens, i.e., those that would not attach to any tangible assets, harm the taxpayer’s creditworthiness, and cost the government a substantial filing fee.

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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6.

TAS RECOMMENDATION #11-6

Incorporate credit scoring and automated asset verification into financial analysis for making NFTL filing determinations in ACS, with the provision to elevate close call and complex cases to a manager.

IRS RESPONSE TO RECOMMENDATION: Collection cases are analyzed systemically prior to assignment either to ACS or Field Collection. Current financial information is requested from taxpayers and considered when available. Accessing taxpayer credit records is restricted by policy to protect taxpayer privacy. Establishing credit score thresholds for NFTL determinations would result in inequitable treatment of taxpayers.

CORRECTIVE ACTION: N/A

TAS RESPONSE: The National Taxpayer Advocate is disappointed about the IRS’s unwillingness to use automated financial analysis and risk-scoring mechanisms to make NFTL determinations and to periodically monitor the risks associated with a particular taxpayer.  These tools are broadly used in the private sector and assist creditors in effectively managing collections.  The IRS’s resistance to innovation is baffling.

At the very least, the IRS could replace the mandatory NFTL filing on currently not collectible (CNC) taxpayers and on taxpayers with no assets with a system of automated subsequent filing determinations. These automated subsequent filing determinations would be based on periodic monitoring of whether the taxpayers have acquired assets or their financial situations have improved by developing software that can incorporate analysis of information from Accurint® and IRS internal databases.  This type of analysis would enable the IRS to continue to protect the government’s interest in any future assets without unnecessarily harming taxpayers.

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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7.

TAS RECOMMENDATION #11-7

For accounts moving from ACS to the queue, revise the IRM to require employees to conduct a limited financial analysis based on a Form 433-F and refrain from filing an NFTL, if the employee has determined there are no assets or reasonable expectation of the taxpayer to acquire assets in the future.

IRS RESPONSE TO RECOMMENDATION: Current financial information is requested from taxpayers and considered when available. On manual transfers to the queue, the employee makes a NFTL determination that could include non-filing of the NFTL.

CORRECTIVE ACTION: N/A

TAS RESPONSE: The Queue is an administrative remedy used for inventory management. The National Taxpayer Advocate remains extremely concerned that there is no attempt to contact the taxpayer prior to assignment to the Queue.  IRM 5.19.4.5.3.2(4) specifically states: “Reassignments to the Queue (TFQU) — File a NFTL when the aggregate assessed balance is $10,000 or more, excluding any individual Shared Responsibility Payment (SRP) balances.”  This statement does not include any reference to individual consideration of the taxpayer’s facts and circumstances other than the dollar amount of the lien.  TAS is concerned about the harm to the taxpayer prior to the IRS considering whether the NFTL would attach to tangible assets or rights to property.  IRS employees should be instructed not to file a lien if they are unable to locate assets and to refrain from filing an NFTL within the ten-day period if no concerted effort is made to contact and speak directly with taxpayer.

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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8.

TAS RECOMMENDATION #11-8

Update the e-Guides with a series of questions determining if the taxpayer has or is likely to have assets to which an NFTL can actually attach.

IRS RESPONSE TO RECOMMENDATION: ACS e-Guides are based on the IRM and used in conjunction with them. E-guides do not establish guidance that is not in the IRM.

CORRECTIVE ACTION: N/A

TAS RESPONSE: The IRS should not automatically file NFTLs without a meaningful contact, an analysis of the taxpayer’s financial situation, consideration of collection alternatives, application of the balancing test, which is to balance the need for efficient collection of the tax with legitimate concerns of the taxpayer that actions be no more intrusive than necessary, and the impact on future compliance. As stated above, this approach will improve voluntary compliance, promote taxpayer rights to privacy and to fair and just tax system, and save government resources used for filing unproductive liens.

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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