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Research Study #1: The IRS Can Systemically Identify Taxpayers at Risk of Economic Hardship and Screen Them Before They Enter Into Installment Agreements They Cannot Afford

TAS Recommendations and IRS Responses

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TAS RECOMMENDATION RS #1-1

Implement an economic hardship indicator on taxpayer accounts when estimates of a taxpayer’s ALEs and income indicate the taxpayer is not likely to afford a streamlined IA.  If the indicator shows the likelihood of economic hardship, procedures would direct the IRS to perform a basic financial analysis before entering into the IA to ensure the taxpayer can afford it without causing additional financial hardship and potentially triggering unnecessary defaults.

IRS RESPONSE TO RECOMMENDATION: The IRS currently uses analytics (considering factors known through internal sources) when prioritizing and assigning collection work to the optimal work stream. We also offer a wide range of alternatives for taxpayers who may be facing difficult financial circumstances, including Partial Pay Installment Agreements, temporary suspensions of collection activity (for Currently Not Collectible accounts), and Offers in Compromise.

TAS has proposed a computation using the IRS Allowable Living Expenses (ALEs) to attempt to indicate when a taxpayer has income not in excess of their likely basic living expenses. If a likelihood of economic hardship is indicated, TAS further recommends procedures directing the IRS to perform a basic financial analysis before entering into an installment agreement to ensure the taxpayer can afford it without causing additional financial hardship and potentially triggering unnecessary defaults. The concept of making such a computation a part of the installment agreement acceptance decision is an interesting one, and we have explored this concept in the past and have been engaged with TAS on this issue. We appreciate that our feedback has been heard and is reflected in the NTA’s 2020 Annual Report.

We do not believe income and presumed expenses alone would be sufficient to conclusively state that a taxpayer could not meet the proposed agreement, and the TAS recommendation seems to acknowledge that concern. The computation would not dictate the case outcome, but rather would be used to indicate a need for further inquiry into the taxpayer’s financial condition.

One key concern is that such a practice would lead to more taxpayers being subjected to financial analysis interviews, an often lengthy process which could greatly reduce the number of taxpayers the IRS is able to serve. In light of this concern, further research is necessary in order to determine the utility of TAS’s recommendation, including analysis of the results as they relate to the IRS decision on all types of installment agreements and Currently Not Collectible determinations, extending the analysis to determine the long-term performance of installment agreements and Currently Not Collectible determinations, analysis of the costs and savings associated with developing and implementing the change, and analysis of the performance of existing IRS analytics (like the CFO Recovery Model6) in place of creating a new computation.

We will continue to partner with TAS on this issue, but believe further analysis of the concept and its wider impacts is warranted before we can determine whether such a change would benefit taxpayers and the IRS. Accordingly, we decline to implement the TAS recommendation.

CORRECTIVE ACTION: N/A

TAS RESPONSE: The National Taxpayer Advocate appreciates the IRS’s willingness to discuss the possibility of placing a marker on the accounts of taxpayers indicating a taxpayer’s likely ability to afford to pay toward his or her delinquent federal tax liabilities. TAS agrees with the IRS that its proposed algorithm using internal IRS data will not always be sufficient to determine if economic hardship exists. As indicated in this TAS study, IRS systemic data will not always be able to determine if a taxpayer has the ability to pay a federal tax delinquency without incurring economic hardship. For instance, a taxpayer may receive a raise in income, move to a location where expenses are lower, or pay less than the average amount for a necessary living expense, such as housing or transportation. However, as indicated in its study report, the TAS algorithm produced results agreeing with the IRS determination, after conducting a financial analysis, in nearly 82 percent of the nonstreamlined installment agreements entered into by the IRS from October 2016 through July 2020.

Over the past four years, the IRS has entered into nearly 10.5 million IAs, and about 70 percent of these agreements have been streamlined. The IRS agrees to streamlined IAs without conducting any analysis of a taxpayer’s financial condition. TAS understands that requiring the IRS to conduct a basic analysis of a taxpayer’s ability to pay on outstanding federal tax debts will require some additional resources, and the taxpayer may be slightly inconvenienced by providing financial information to the IRS. Nevertheless, the taxpayer has the right to a fair and just tax system. The Internal Revenue Manual states that allowable living expenses are designed to provide for a taxpayer and his or her family’s health and welfare. The IRS’s current procedures do not afford this ability to many taxpayers entering into streamlines IAs each year.

TAS agrees that the IRS offers other collection alternatives to taxpayers who cannot afford to pay, such as temporary delays in collection activity or offers in compromise. Yet, these alternatives generally require the IRS to conduct a financial analysis. Furthermore, taxpayers may not be knowledgeable of these alternatives or may be afraid to inquire about them. Therefore, TAS believes that the IRS should identify taxpayers who do not have the apparent ability to make payments on their outstanding federal tax obligations and be required to verify their ability to pay on these delinquencies while also affording basic living expenses. TAS looks forward to continuing to partner with IRS to develop methods to ensure that taxpayers can afford streamlined IAs, without unduly burdening them or 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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