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MSP #3: IRS STRUCTURE

The IRS’s Functional Structure Is Not Well-Suited for Identifying and Addressing What Different Types of Taxpayers Need to Comply

TAS Recommendations and IRS Responses

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1.

TAS RECOMMENDATION #3-1

Remove service-wide functions from W&I by establishing a new unit that handles service wide functions (e.g., submission processing, media and publications, etc.) so that W&I can focus on providing end-to-end service to W&I taxpayers, as previously recommended.

IRS RESPONSE TO RECOMMENDATION: 

NTA Recommendation not adopted. The IRS stands behind our previous response to this recommendation.   Our current approach to providing service-wide functions from W&I benefits all taxpayers, including the majority of filers who are individual taxpayers with wage and investment income.  This approach provides the most efficiency, benefitting all taxpayers through reduced cost of tax administration, while also providing the greatest consistency and quality of service delivery.  The design and development of the service-wide functions provided by W&I are the result of collaborative efforts involving all operating divisions.

W&I is the largest single customer-facing entity in the IRS. W&I processes tax returns and payments, issues tax refunds, and posts transactions to tax accounts for over 150 million individual and more than 47 million business customers each year. W&I also answers more than 55 million account and tax law inquiries and form requests via telephone and 26 million paper inquiries each year.  W&I also adjusts accounts, provides walk-in appointment service, and updates, prints, and distributes notices, tax forms, instructions, and publications for all tax filers. While W&I is responsible for delivering all of these service-wide functions, we rely on our partnerships with the other operating divisions to ensure that we are ensuring excellent end-to-end service for all customers.

For example, while the design and development of the tax products are housed within W&I, the product ownership is determined based on the primary user of the tax product. W&I collaborates with the operating division owners of the tax products to help identity and improve areas of noncompliance or confusion.  W&I also collaborates form changes with Information Technology (IT) to ensure all necessary programming changes are implemented in order to ensure a successful filing season.

The Online Account team, including members from W&I, Online Services and IT, designed and deployed a consolidated web-based tool providing individual taxpayers with the ability to view their tax information, make payments, and update account information using a single-authentication platform on irs.gov. Development of the tool was performed by corporate stakeholder engagement including IRS employees, taxpayers, and practitioners.

Another example of our internal collaboration is the Customer Early Warning System (CEWS), which brings together feedback received from employees, taxpayers, software partners with contact centers, and social media outlets such as Facebook, Twitter and blogs on forms, procedures and processes, in order to address emerging issues in real time a proactive rather than reactive approach.  Closely associated with this effort is the Contact Center Forum (CCF), an ongoing collaborative effort between the IRS and private tax-related industry members with large taxpayer call center operations, promoting knowledge sharing, and partnership in support of taxpayer service.  This collaborative effort has contributed to reducing taxpayer burden during the filing season.

W&I also collaborates with external partners, such as the Internal Revenue Service Advisory Council (IRSAC), Information Reporting Program Advisory Committee (IRPAC), and the Taxpayer Advocacy Panel (TAP) to improve our services to the American taxpayer. These committees have provided feedback and recommendations on various issues, such as, improvements to our toll-free telephone script the Interactive Tax Assistant tool on irs.gov forms, notices and letters and service provided on the Practitioner Priority Service telephone line. We also review and consider recommendations received through the Taxpayer Burden Reduction Program.

These internal and external team efforts showcase W&I’s ability to coordinate with the other operating divisions and to successfully and efficiently provide service-wide functions that benefit all taxpayers, including end-to-end service to W&I taxpayers.

CORRECTIVE ACTION: N/A

TAS RESPONSE: 

The National Taxpayer Advocate applauds W&I’s efforts to collaborate with internal and external stakeholders. Without this collaboration, most IRS services would not address the needs of taxpayers that other operating divisions are named after.

W&I’s servicewide functions — processing tax returns and payments, posting transactions, answering the phone, and printing and mailing notices, tax forms, instructions, and publications for all tax filers — detract from its focus on the compliance and education needs of taxpayers with wage and investment income. By contrast, if a new back-office function were charged with these tasks, they would no longer distract W&I from the needs of W&I taxpayers.

The IRS response asserts that giving W&I responsibility for servicewide functions results in more efficiency, consistency, and quality than assigning those functions to a new unit.  However, the response provides no support for this conclusion. A new unit focused on servicewide back-office functions seems just as likely to deliver quality, consistency, and efficiency to all IRS operating divisions as W&I, which is trying to provide back-office functions for all of the operating divisions while also providing tailored service to W&I taxpayers.

Similarly, if W&I could focus solely on improving satisfaction and voluntary compliance by W&I taxpayers using both service and enforcement tools, it could use the results of its enforcement activity to identify which W&I taxpayer segments need more proactive individualized services.2 As currently structured, if W&I fails to provide services needed to prevent problems, the result is that another operating division’s exam or collection functions have a larger pool of noncompliant taxpayers to which they must apply their limited enforcement resources. Because W&I has few enforcement resources (other than to address refundable credit claims), it has very little continuing responsibility for most W&I taxpayers. Thus, it is difficult for the IRS or its stakeholders to hold W&I (or any other organizational unit) accountable for voluntary compliance by W&I taxpayers or their overall views of or satisfaction with the IRS.

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 #3-2

Establish cross-functional units that have true end-to-end responsibility and accountability for voluntary compliance (e.g., on-time filing and payment rates), satisfaction with, and trust for the agency by narrow taxpayer segments that they can affect, such as those shown in Figure 1.3.1.

IRS RESPONSE TO RECOMMENDATION:

See IRS Narrative Response.  The IRS continues to recognize and address the unique characteristics of taxpayer populations by tailoring outreach and compliance programs by taxpayer segments.  Refundable tax credits, and specifically the earned income tax credit (EITC), is an example of IRS’s recognition and attention to specific groups of taxpayers. Recognizing the unique challenges we face in administering the EITC for low to moderate income families, the IRS established a centralized function, the EITC Program Office, in 2003 to oversee administration of the program. The mission of the office from its inception was to ensure that all eligible individuals receive the EITC, while reducing the number of erroneous EITC claims. This office developed tailored outreach and compliance programs for EITC. Through the years the office was realigned organizationally, however, it continues to accomplish its mission that now includes all refundable credits.

The new office, the Refundable Credits Administration (RCA) office housed in W&I, takes the unique characteristics of the refundable credits and taxpayer populations into consideration as it coordinates its outreach and compliance programs end-to-end, across the IRS. For example, RCA collaborates with Communications & Liaison, (C&L), Submission Processing, compliance (including return preparer compliance) functions, research functions, and Chief Counsel to ensure strategies and treatments are consistently applied and legally sound.  W&I is also in the process of developing a Refundable Credit Operational Strategy for the IRS. Data is currently being collected on all service-wide treatments, including soft notices, examinations, error correction, and outreach and education.  The treatment streams will be analyzed to better understand their effects on behavior, credit coverage, taxpayer burden, return on investment, addressing fraud, and revenue protection.

Another example that illustrates IRS’s end-to-end accountability for voluntary compliance can be found in our FATCA Compliance Teams, which collaborate to encourage voluntary compliance by all impacted taxpayers including individual taxpayers, U. S. Financial Institutions, and Foreign Financial Institutions (FFIs).  Taxpayers have access to IRS.Gov FATCA website which provides guidance and responses to FAQs.  The FATCA Compliance Teams regularly update IRS.Gov webpages with the most recent guidance and FAQs as they become available. For example, if IRS identifies an issue that is prevalent in the industry or affecting multiple FFIs, an FAQ is published on the FATCA FAQ website. The publication of the question and response provides guidance for other FFIs that may encounter the same issue in the future without the FFIs needing to expend time and resources to research the issue.  FATCA Compliance Teams also collaborate on various compliance initiatives, including Form 1042/1042S initiative which included form changes to make it easier for taxpayers to comply.

CORRECTIVE ACTION: N/A

TAS RESPONSE: The National Taxpayer Advocate commends the IRS for establishing at least two program offices with responsibility for addressing specific tax compliance issues. A program office dedicated to understanding a specific taxpayer population and their compliance challenges should be able to design more effective outreach, education, audit, and collection strategies, informed by the latest behavioral insights applicable to the population in question. The RCA program office may enable W&I to better understand taxpayers who claim refundable credits and address their needs. However, nobody is charged with understanding each of the other populations shown on Figure 1.3.1 or the compliance challenges they face. If the IRS were organized so that some IRS unit had responsibility for each of these groups, the units could be held accountable for a particular taxpayers’ overall voluntary compliance or satisfaction with the IRS.

ADOPTED, PARTIALLY ADOPTED or NOT ADOPTED: Partially Adopted

OPEN or CLOSED: Closed

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

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3.

TAS RECOMMENDATION #3-3

Establish procedures that require the ODs to implement alternative treatments to address the root causes of noncompliance for a segment or issue (e.g., using multi-functional CIPs, campaigns, or similar programs) before applying coercive treatments, except when it is clear that alternative treatments would be ineffective.

IRS RESPONSE TO RECOMMENDATION:

NTA recommendation not adopted as written, but IRS actions taken to address issues raised by the NTA. As part of the Refundable Credit Operational Strategy, we will look at whether certain treatments are better suited to different populations.  We will also look at possibly varying the level of treatments based on intent. For example, we can consider applying a lighter treatment or an educational treatment for those taxpayers that made a mistake versus a stronger treatment for those that exhibited continued non-compliance after receiving previous treatment.  Also, in FY 2016, LB&I adopted the campaign process to address the root causes of noncompliance.  A campaign is a holistic response to an item of known or potential compliance risk. Campaigns apply the proper type and amount of resources and combination of treatment streams to achieve intended compliance outcomes.  For example, a campaign may include examinations and/or some type of alternative treatment such as outreach, form changes, soft letters and/or guidance.

In our Examination functions, Compliance Initiative Projects (CIPs) are frequently used to identify potential areas of non-compliance with the goal being to identify and implement corrective actions.  All CIP authorizations include a section regarding alternative treatments.  Consideration is already given to identify alternative non-enforcement ways to improve voluntary compliance before proceeding with the CIP.  Additionally, alternative treatments are also considered for potential compliance issues that may not be addressed through a CIP such as use of soft notices and outreach efforts/education to industry segments and taxpayers at large (e.g., via irs.gov, industry meetings, practitioner liaison meetings).  Examples of alternative treatment programs include:

  • Soft Notice Automated Underreporter (AUR): Soft notices are issued to select taxpayers in lieu of issuing formal notices proposing a change in tax.
  • Soft Notice Procedures – Tipped Employee: Soft notices are issued to select taxpayers indicating they have not properly reported taxable tipped income based on information submitted by their employer. The notices provide the taxpayer the opportunity to review the information provided to the IRS and either correct or amend their individual tax return(s) or provide information to determine the proper amount of tipped income to include on their individual income tax return.
  • Voluntary Classification Settlement Program (VCSP): The program offers employers a path to obtain certainty and compliance with the issue(s) of worker classification while incurring a significantly reduce tax obligation for resolving this issue.  If the employer meets the requirements and is accepted in the program, the employer/taxpayer can permanently resolve the issue of worker classification.
  • Voluntary Closing Agreement Program (VCAP): This program is designed to offer employers a method of correcting employment tax issues of withholding and or reporting non-compliance.  The taxpayer will come forward to the IRS, fully explaining the errors made regarding payments or benefits provided to their employees.  The employer must show the current procedures available to correct their error(s) would result in an undue burden to the taxpayer, their employees and the IRS/government.  A resolution of the reported errors can result in entering into a Closing Agreement or conducting limited examination procedures to bring the taxpayer into compliance.

Moving from the examination context to the collection sphere, taxpayers who owe money to the IRS can avail themselves of a variety of alternative treatments in the Collection process before progressive treatments are applied.  For example, if taxpayers are unable to pay in full, the IRS offers a variety of installment agreement options, some of which taxpayers may set up online.

Additionally, if a taxpayer is experiencing financial difficulties or an economic hardship, they may ask that their account be determined to be currently not collectible.  Taxpayers also may submit an offer-in-compromise which will allow them to settle their liability for less than the full amount owed if it is accepted.  Finally, in certain cases in which the taxpayer believes the IRS incorrectly determined the tax liability, the taxpayer may request an audit reconsideration.  If the taxpayer is cooperating with the IRS and providing the requested financial information, the taxpayer generally is able to pursue one or more of these alternative treatments, and is entitled to Appeal an unfavorable determination, before Collection takes actions to collect the tax owed.

CORRECTIVE ACTION: N/A

TAS RESPONSE: The National Taxpayer Advocate commends the IRS for making use of soft notices before initiating the Automated Under Reporter (AUR) process and to address tip reporting issues. Its commitment to modify the Refundable Credit Operational Strategy to apply alternative treatments also appears to be a step in the right direction. Reserving the IRS’s most expensive coercive treatments for those who will not respond to alternative treatments makes good sense. However, using alternative treatments in specific situations is not the same as requiring those IRS programs and employees charged with applying coercive treatments to make sure the IRS has actively considered less intrusive alternative treatments before pursuing coercive ones. It appears that the LB&I campaign process is set up to ensure LB&I considers alternative treatments (e.g, soft notices, form changes, and the like) before resorting to exams. However, TAS is unaware of any guidance issued by LB&I or SB/SE that requires employees to ensure the IRS has considered ways to encourage self-correction before initiating an examination or implementing an exam strategy outside of the campaign process. As discussed in the Most Serious Problem, CIPs provide opportunities for exam employees to address reporting compliance problems by identifying alternative treatments, but in practice they use CIPs primarily to identify returns to examine. There is no requirement for exam employees to identify alternative treatments, and if they do there is no requirement for them to follow up to ensure the function charged with implementing the treatment actually did. Similarly, collection employees are not required to discuss alternative treatments such as installment agreements or offers-in-compromise with taxpayers before pursuing liens, levies, and seizures, even if such discussions make sense from both the taxpayer and the IRS’s perspective.

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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