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MSP #17: Installment Agreements (IAs)

The IRS Is Failing to Properly Evaluate Taxpayers’ Living Expenses and Is Placing Taxpayers in IAs They Cannot Afford

TAS Recommendations and IRS Responses

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1.

TAS RECOMMENDATION #17-1

Modify the allowable living expenses (ALEs) in accordance with the recommendations in the Most Serious Problem on ALEs.

IRS RESPONSE TO RECOMMENDATION: The IRS strives to make Allowable Living Expense computation data-driven and fair to taxpayers by using regularly-updated, generally-accepted government survey data. We undertake periodic reviews or redesigns of our methodology and regularly update the data to ensure that our computation of the Allowable Living Expense aligns with the current external environment and taxpayer needs. See the IRS response to the MSP #13 recommendations regarding Allowable Living Expense (ALE) Standards for more information about IRS actions. 

CORRECTIVE ACTION: N/A

TAS RESPONSE: The National Taxpayer Advocate remains concerned about the current state of ALEs, particularly the decrease in certain ALEs and the non-inclusion of other basic items. For a full response to the IRS, please see the response associated with Most Serious Problem #13, Allowable Living Expense (ALE) STANDARD: The IRS’s Development and Use of ALEs Does Not Adequately Ensure Taxpayers Can Maintain a Basic Standard of Living for the Health and Welfare of Their Households While Complying With Their Tax Obligations.

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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2.

TAS RECOMMENDATION #17-2

Develop an internal ability-to-pay estimator that will populate with the most current taxpayer income information for use by all employees offering IAs.

IRS RESPONSE TO RECOMMENDATION: Creation of an internal ability-to-pay calculator would rely on IRS income data that is eight to 19 months old and would require contact with the taxpayer to determine current expenses.  Presently, the IRS has an ability to pay estimator (the Streamlined Installment Agreement Calculator) that uses current income and expense information from the taxpayer.  However, the Streamlined Installment Agreement Calculator or a Collection Information Statement  is required to be used only if the taxpayer has defaulted an Installment Agreement in the past 12 months for failure to make payments timely or does not meet streamlined or guaranteed installment agreement criteria. Taxpayers who meet the Streamlined Installment criteria and have not defaulted, self-assess their financial situation to determine if the monthly payment amount under the installment agreement is achievable. This approach allows taxpayers to examine their own financial situations and consider their personal needs while decreasing taxpayer burden. In FY 2016, 84% of taxpayers met streamlined criteria (where no financial information was required). To require the use of the Streamlined Installment Agreement Calculator or a Collection Information Statement in all Installment agreement cases will significantly increase the burden on the taxpayer, reduce efficiencies and increase costs for the IRS and the taxpayer.  With default rates on installment agreements down 26% since 2012, the benefits of the Online Payment Agreement Application and the current Streamlined Installment Agreement procedures outweigh the cost of requiring the Streamlined Installment Agreement Calculator or Collection Information Statement on every case.

CORRECTIVE ACTION: N/A

TAS RESPONSE: Currently, individual taxpayers with balances due of $50,000 or less do not need to provide any financial information to the IRS to qualify for an IA. The taxpayer must simply propose to meet their obligation in 72 payments or less. The National Taxpayer Advocate is recommending the creation of an internal ability to pay estimator for use by employees in granting any type of IA, including streamlined IAs. The estimator would pre-populate with the most recent tax return information available to the IRS. While the IRS is correct that this information would not be the most current information, the purpose would not be to determine the amount the taxpayer should pay, but rather, if based on the information available to the IRS the taxpayer can even pay the amount proposed or anything at all. If the estimator revealed an inability to pay the proposed amount, the Customer Service Representative would then be prompted to raise concerns to the taxpayer before granting the IA. Or, if the taxpayer proposed the streamlined IA via the IRS website, the employee reviewing the proposed IA would run the estimator before granting the proposed IA, and if the estimator showed an inability to meet the terms proposed, the employee would be required to send a notice to the taxpayer to prompt the taxpayer to call the IRS regarding the proposed IA. With a pre-populated estimator, the initial employee granting the IA would need only look at the available information to ensure the IRS is granting IAs that have a chance at succeeding from the beginning.

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 #17-3

Revise IRMs and employee training to require use of the estimator even in streamlined IA applications and provide employees with a decision tree indicating where other collection alternatives are more appropriate than IAs.

IRS RESPONSE TO RECOMMENDATION: IRS procedures currently require the use of the Streamlined Installment Agreement Calculator only in cases where the taxpayer defaulted an installment agreement for failure to make payments in the past 12 months.  Installment Agreement default rates are currently lower than when the Streamlined Installment Agreement Calculator was required on all streamlined installment agreements between $25,000 and $50,000.  Therefore, we have no plans to change the criteria for using the Streamlined Installment Agreement Calculator or to update the Internal Revenue Manual/Training material for Streamlined Installment Agreements. We believe that our current procedures and available tools are sufficient to direct employees to the appropriate collection alternative, either the application of streamlined criteria or the analysis of the Collection Information statement to determine the course of the case resolution.  IRS employees have access to tools that calculate a payment amount based on income and expenses or may update the appropriate currently-not-collectible code if the taxpayer’s financial situation suggests that they can’t make a monthly payment.

Update: IRS developed and posted a SERP Alert #17A0173 to remind all employees to use the Streamlined Installment Agreement Calculator or a Collection Information Statement in cases where the taxpayer has defaulted on an installment agreement in the past 12 months.

CORRECTIVE ACTION: Collection will issue a reminder to employees to use the Streamlined Installment Agreement Calculator or a Collection Information Statement in cases where the taxpayer has defaulted an installment agreement in the past 12 months.

TAS RESPONSE: The National Taxpayer Advocate appreciates that the IRS will issue a reminder to use the calculator where taxpayers have previously defaulted on a streamlined IA. However, while the overall default rate for IAs has decreased, the National Taxpayer Advocate remains concerned that certain types of IAs and IAs granted by certain IRS functions have substantially higher default rates and urges the IRS to study and address the causes of these higher default rates. Providing an estimator to use for all employees who grant IAs will allow a quick check as to the reality of the payment the taxpayer has proposed in streamlined IAs as well as to confirm whether the payment is realistic for taxpayers in other types of IAs. Its use can prompt the IRS employee to ask additional questions and may identify cases of economic hardship. As detailed in the previous response, the National Taxpayer Advocate is not proposing a calculator to determine the proper payment, but rather an estimator that would provide employees with a quick way to raise any potential issues regarding affordability of the proposed payments. In this way, an estimator will reduce IRS re-work and taxpayer burden. A decision tree pointing to other potential collection alternatives will allow employees to craft the most appropriate solution for the taxpayer, which may not be a drawn-out IA.

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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