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MSP #10: COLLECTION

IRS Collection Policies and Procedures Negatively Impact Low-Income Taxpayers.

 

TAS Recommendations and IRS Responses

1
1.

TAS RECOMMENDATION #10-1

Defer collection activity until 45 days after the IRS addresses the merits of a taxpayer’s request or response to an adjustment, an assessment, or proposed liability.

IRS RESPONSE TO RECOMMENDATION: ​Processing all correspondence in a timely manner is always our goal. We agree that taxpayers should be protected from collection actions while there is a claim or correspondence still under consideration, and we have procedures in place that are designed to fully resolve correspondence before moving forward with the collection process. In addition, as part of ongoing efforts to provide additional help for people during this period of historic backlogs, the IRS has temporarily paused automated collection notices normally issued when a taxpayer owes additional tax or has no record of filing a tax return. (See also our responses to MSP 1-8 and 5-2).

CORRECTIVE ACTION: N/A

TAS RESPONSE: The IRS’s pause on automated collection notices is a welcome development, especially as the IRS’s processing backlog persists. However, even in a post-pandemic environment, when the processing backlog is reduced or eliminated, automated collection notices should be suspended for enough time not only to allow the IRS to process taxpayer correspondence, but also to allow taxpayers to receive and react to the IRS’s response to their return or correspondence.

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 #10-2

If requested, provide a six-month hold on collection matters while the taxpayer’s correspondence, amended return, or other request is pending.

IRS RESPONSE TO RECOMMENDATION: ​IRS does not agree to implement TAS recommendation.

Processing all correspondence in a timely manner is always our goal. We agree that taxpayers should be protected from collection actions while there is a claim or correspondence still under consideration, and we have procedures in place that are designed to fully resolve correspondence before moving forward with the collection process. Moreover, in the event that collection action is begun prematurely, there are established procedures throughout the Internal Revenue Manual (IRM) to delay collection activity. For instance, IRM 5.19.1.4.3(4) instructs Collection employees to input a stay on the account if the employee determines the tax liability is questionable. This stay will suspend further notices for 45 days while the inquiry is being resolved. In addition, as part of ongoing efforts to provide additional help for people during this period of historic backlogs, the IRS has suspended automated collection notices normally issued when a taxpayer owes additional tax or has no record of filing a tax return. (See also our responses to MSP 1-8, 5-2 and 10-1).

CORRECTIVE ACTION: N/A

TAS RESPONSE: This maximum hold periods on collection notices or enforcement provided in the IRM is nine weeks, which is inadequate based on the extended processing delays experienced by taxpayers. For some taxpayers, the maximum hold period may also be insufficient post-pandemic, once the IRS is current in processing taxpayer correspondence, and these taxpayers should be able to request a six-month hold.

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 #10-3

Wait for 120 days (rather than 105 days) after issuing a notice of deficiency before assessing additional tax (i.e., amend the IRM to extend the suspension period from 15 days to 30 days).

IRS RESPONSE TO RECOMMENDATION: ​IRS does not agree to extending the suspension period after the issuance of a notice of deficiency an additional 15-days to complete assessment processing. Although data are not available to systemically determine whether, or not, extending the suspension period would reduce the volume of premature assessments, the IRS has several procedures in place to prevent premature assessments. When unforeseen events occur, for example the pandemic or a backlog in the U. S. Tax Courts, standard procedures are adjusted to ensure we continue to prevent premature assessments.
Due to the pandemic and the resulting closure of the U.S. Tax Court, temporary guidance was issued during 2020-2021 to decrease the number of premature assessments. Below is some of the guidance issued.

Per the Temporary Relief for Taxpayers – Postponement of Certain Compliance Activity During the COVID-19 Pandemic memo, Technical Services (TS) was instructed to pause the default/closure of cases to Centralized Case Processing (CCP) until the United States Tax Court reopened. The only exception were default cases with imminent statutes (60 days or less from expiration) where a quick assessment was required to protect the government interest.

To temporarily prevent premature assessments on cases where a taxpayer’s timely filed petition with the U.S. Tax Court had not been timely processed, “Temporary Interim Guidance on Petitioned Cases without a Docket Number” memorandum was issued. The memo provides guidance to TS on how to identify defaulted protested cases identified by Counsel in Master File. Counsel updated the protested taxpayer’s module with a freeze and transaction code. TS holds these cases until a docket number is assigned by the U.S. Tax Court. We plan to keep this guidance in place until we are assured the courts are current.

When a taxpayer files a valid protest after the statutory notice of deficiency has been issued, TS refers the case to the Office of Appeals per Internal Revenue Manual (IRM) 4.8.9.23, Protests, Correspondence and Waivers Received After Issuance of Notice of Deficiency. TS must ensure Internal Revenue Code Section 7803(e)(5), Limitation On Designation of Cases As Not Eligible For Referral To Independent Office Of Appeals is followed.

When TS becomes aware a taxpayer has petitioned the U.S. Tax Court after the statutory notice of deficiency defaulted, the case was closed to CCP but not yet assessed, TS follows IRM 4.8.9.25.6, Unlocatable Docketed Case Files. Once the case is located, TS puts a freeze on the taxpayer’s module to prevent a premature assessment.
Per IRM 4.8.9.26, Defaulted Notices, TS has a process to ensure the taxpayer has not petitioned U.S. Tax Court prior to closing the case to CCP for assessment.

The Service plans to continue the above interim procedures until it is determined the U.S. Tax Court is caught up in processing petitions. In addition, we will continue the standard practice of issuing a deviation when events occur that warrant deviating from the standard procedures to prevent premature assessments.

CORRECTIVE ACTION: N/A

TAS RESPONSE: The National Taxpayer Advocate applauds the IRS for working with her to develop procedures to reverse the premature assessments and to prevent continued premature assessments caused by the Tax Court’s backlog. However, the IRS’s response does not address the fact that premature assessments existed pre-pandemic. The National Taxpayer Advocate takes exception to the IRS’s observation that “data are not available to systemically determine whether, or not, extending the suspension period would reduce the volume of premature assessments” in view of the data TAS presented that shows increasing the suspense period from 15 to 30 days would have prevented 90 percent of the premature assessments identified in FY 2020.

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 #10-4

Revise Notice CP 15 and any other correspondence to taxpayers that in the IRS’s view constitutes “an opportunity to dispute such liability” for purposes of IRC § 6330(c)(2)(B) to include detailed information about taxpayers’ rights and consequences of an administrative appeal, to explain that the notice constitutes their only “opportunity to dispute” the liability, and to explain that the taxpayer will not be permitted to dispute the merits of the liability at a future CDP hearing or before the U.S. Tax Court.

IRS RESPONSE TO RECOMMENDATION: ​The IRS does not agree with the recommendation to revise CP15/CP215 or other related notices of penalty assessment with the suggested language. As required for a notice of penalty under Internal Revenue Code (IRC) Section 6751(a), the CP15/CP215 contains the name of the penalty, the section under which it was imposed, and an explanation of how it was calculated.

Programming for the CP15/CP215, or other related notices of penalty assessment, have certain hard coded paragraphs for each penalty reference number (PRN) which explains appeal rights available for that specific penalty assessment. Depending on the type of penalty assessed, the notice gives options for requesting penalty relief for reasonable cause, protesting the penalty for other reasons, and next steps if the IRS denies a claim. The CP15/CP215 is the first notice of penalty assessment and is not proposing enforced collection action; therefore, language regarding CDP hearings is best included in related notices referencing enforced collection action (i.e., lien, levy).

The IRS continuously updates Notices, publications, and form instructions to address penalty relief and options available if a taxpayer disagrees with the penalty. In addition, for fiscal year 2022, the Office of Servicewide Penalties (OSP) is working on a project to revise penalty relief pages in IRS.gov to give more guidance and information about the penalty relief process.

OSP understands the importance of ensuring taxpayers are timely and well informed of their appeal rights specific to the penalty being assessed and will continue notice improvements. For example, OSP is currently working to standardize timeframes for responses to penalty assessments in the CP15 notice. Review of the Programming Requirements Package (PRP) for current penalty notices will continue, which will allow OSP to identify and make needed changes to ensure the text is informative and accurate for each penalty type.

CORRECTIVE ACTION: N/A

TAS RESPONSE: The National Taxpayer Advocate appreciates the efforts the IRS is making to improve notices of penalty assessments. While the CP 15 and similar notices are not proposing enforced collection action, by the time the IRS proposes enforced collection action of these assessable penalties, it will be too late for the taxpayer to obtain administrative review of the assessment, and Tax Court review is unavailable. For this reason, the CP 15 and similar notices should more explicitly explain taxpayers’ options in response to the notice.

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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5.

TAS RECOMMENDATION #10-5

Adopt procedures that allow the IRS to consider changes in taxpayers’ circumstances when determining the applicable IA user fee, similar to procedures in place for considering whether a taxpayer qualifies for an OIC fee waiver.

IRS RESPONSE TO RECOMMENDATION: ​IRS does not agree to implement TAS recommendation.

The requirements in the Bipartisan Budget Act of 2018 specify the tax return indicator (Adjusted Gross Income) to use as the deciding factor for the low-income decision for installment agreements. Keeping the low-income determination as it is for installment agreements, based on a simple return indicator, allows IRS to provide better service to taxpayers and does not require the IRS to collect financial information to make a subsequent determination. Adopting the recommendation would require resources to be redirected that are currently used to help provide service to other taxpayers.

CORRECTIVE ACTION: N/A

TAS RESPONSE: In relevant part, IRC § 6159(f)(2) provides for a fee waiver “In the case of any taxpayer with an adjusted gross income, as determined for the most recent year for which such information is available, which does not exceed 250 percent of the applicable poverty level (as determined by the Secretary).” (Emphasis added.) The statute does not specify or require the IRS to use any “tax return indicator.” The IRS’s insistence on using a tax return indicator, which may not reflect a taxpayer’s current economic condition, although more convenient for the IRS, undermines Congress’s intent in providing for relief from installment agreement user fees. Moreover, the IRS interprets a virtually identical statute differently. IRC § 7122(c)(2)(3) provides for a fee waiver for offers in compromise “with respect to a taxpayer who is an individual with adjusted gross income, as determined for the most recent taxable year for which such information is available, which does not exceed 250 percent of the applicable poverty level (as determined by the Secretary).” (Emphasis added.) For offers in compromise, the IRS allows taxpayers to demonstrate eligibility for a fee waiver with current financial information. See IRM 5.19.7.2.1.1(3), OIC Application Fee (July 9, 2020) (explaining that a taxpayer whose gross monthly income multiplied by 12 months falls at or below 250 percent of the Federal Poverty Level does not need to pay an OIC user fee). See also IRM 5.8.2.4.1(3), Determining Processability (Sept. 22, 2020) (explaining the taxpayer may qualify for an OIC fee waiver under two different methods: AGI or under monthly income and household size).

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 #10-6

Change IAs to incorporate user fees into the agreed-upon payments over the life of the agreement rather than requiring taxpayers to pay the user fee in the first month.

IRS RESPONSE TO RECOMMENDATION: ​IRS agrees to implement TAS recommendation in part.

An installment agreement will not default for an unpaid user fee regardless of a taxpayer’s income level. IRS already has options for low-income taxpayers to mitigate the potential financial burden of the user fee, including user fee waivers, reductions, and/or reimbursements. However, we will work with the Taxpayer Advocate Service to explore this concept further.

CORRECTIVE ACTION: The IRS will collaborate with the Taxpayer Advocate Service to explore whether it is feasible administratively and would provide substantial relief to a population of taxpayers to spread installment agreement user fees over the life of the agreement.

TAS RESPONSE: The National Taxpayer Advocate appreciates the IRS’s willingness to work with us to explore this change in the way user fees are collected. We note that a Direct Debit Installment Agreement may default if there are not enough funds available to cover the fee upon the first draft. For example, if a taxpayer with a DDIA agrees to a monthly payment of $50 and the user fee is $107, the IRS will attempt to withdraw $107 from the taxpayer’s bank account in the first month of the agreement. If the funds are insufficient, the bank will reject the draft. According to IRM procedures (IRM 5.14.11.3(2), Reasons for Proposing Termination (Defaulting) of Installment Agreements (Jan. 1, 2015)), non-receipt of the installment payment is grounds for proposing default. We welcome the opportunity to explore this concept further.

ADOPTED, PARTIALLY ADOPTED or NOT ADOPTED: Partially Adopted

OPEN or CLOSED: Open

DUE DATE FOR ACTION (if left open): 3/31/2023

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7.

TAS RECOMMENDATION #10-7

Allow taxpayers to request CNC-Hardship consideration either online or by submitting a standardized form.

IRS RESPONSE TO RECOMMENDATION: ​IRS does not agree to implement TAS recommendation.

Procedures already exist for the taxpayer to contact us if they are unable to pay their tax liability. The best way for a taxpayer to achieve an appropriate resolution of their tax liability is for them to engage with us with regard to their financial condition and ability to pay. The IRS will work collaboratively with the taxpayer to find the case disposition method that most appropriately fits their circumstances. A currently not collectible determination is temporary, allows interest and penalties to continue to accrue, and does not in itself provide a path toward resolution. The IRS offers a variety of payment options that result in the liability eventually being paid in full, and our employees are skilled at helping the taxpayer work through those options.

CORRECTIVE ACTION: N/A

TAS RESPONSE: It has been almost impossible for taxpayers to “engage with” the IRS – meaning speak to an IRS representative by phone – in recent years, yet taxpayers need relief from collection action, even if the relief is temporary. In many other areas of tax administration, the IRS seeks to move taxpayers to online channels. The National Taxpayer Advocate is puzzled by the IRS’s insistence that taxpayers must request CNC-Hardship status by calling the IRS, when allowing them to submit a form or make the request online would likely be more efficient and thus conserve resources.

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 #10-8

Analyze information from submitted OICs and develop a more nuanced outreach to encourage low-income taxpayers to consider OICs when appropriate.

IRS RESPONSE TO RECOMMENDATION: ​We agree to collaborate with the Taxpayer Advocate Service (TAS) to develop an outreach project to encourage potentially qualifying low-income taxpayers to consider an offer in compromise (OIC). In conjunction with the TAS, we determined the most effective way to identify and target the low-income audience is to utilize compliance data warehouse information and allowable living expenses in lieu of using previously submitted offers in compromise data.

CORRECTIVE ACTION: The IRS will collaborate with TAS to develop an outreach project to encourage potentially qualifying low-income taxpayers to consider an OIC by analyzing data warehouse information and allowable living expenses.

TAS RESPONSE: The National Taxpayer Advocate welcomes the IRS’s willingness to collaborate with TAS in exploring ways to encourage low-income taxpayers to consider offers in compromise.

ADOPTED, PARTIALLY ADOPTED or NOT ADOPTED: Adopted

OPEN or CLOSED: Open

DUE DATE FOR ACTION (if left open): 3/31/2023

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9.

TAS RECOMMENDATION #10-9

Continue the practice of processing OICs when the IRS has not yet processed a required return when the taxpayer sends a copy of the return while the COVID-19 processing challenges linger and until the IRS returns to a normal level of inventory backlog.

IRS RESPONSE TO RECOMMENDATION: IRS agrees to implement TAS recommendation in part.

​On December 22, 2021, the IRS reissued Interim Guidance Memorandum Extension of Temporary Deviation on Offers in Compromise (OICs) Involving Delayed Processing of Individual Master File (IMF) & Business Master File (BMF) Tax Returns. The guidance states that if a Tax Year 2020 IMF or BMF return is not located, the offer will be processed. Our decision as to when this temporary deviation should end will be based on our determination that doing so is justified to promote the efficient and effective operation of the program.

The Interim Guidance Memo described above expires on April 30, 2022. We will evaluate the need to extend this guidance further prior to its expiration.

CORRECTIVE ACTION: On December 22, 2021, the IRS reissued Interim Guidance Memorandum Extension of Temporary Deviation on Offers in Compromise (OICs) Involving Delayed Processing of Individual Master File (IMF) & Business Master File (BMF) Tax Returns. The guidance states that if a Tax Year 2020 IMF or BMF return is not located, the offer will be processed. Our decision as to when this temporary deviation should end will be based on our determination that doing so is justified to promote the efficient and effective operation of the program.

The Interim Guidance Memo described above expires on April 30, 2022. We will evaluate the need to extend this guidance further prior to its expiration.

TAS RESPONSE: The National Taxpayer Advocate commends the IRS for extending the Interim Guidance Memo referenced above to September 30, 2022 by issuing Memo SBSE-05-0422-0025.

ADOPTED, PARTIALLY ADOPTED or NOT ADOPTED: Adopted

OPEN or CLOSED: Open

DUE DATE FOR ACTION (if left open): 9/30/2022

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10.

TAS RECOMMENDATION #10-10

Allow IRS employees to freeze refunds while a taxpayer’s request for an OBR is under consideration.

IRS RESPONSE TO RECOMMENDATION: ​The IRS disagrees with the TAS recommendation to allow IRS employees to freeze refunds while a taxpayer’s request for an Offset Bypass Refund (OBR) is under consideration.

For original returns, an OBR must be issued before the posting date of the original return for which the overpayment was claimed. Current programming would release any refund freeze input by an assistor once the return posts, resulting in a release of the overpayment. As such, the recommendation is not viable and would provide no benefit to taxpayers.

CORRECTIVE ACTION: N/A

TAS RESPONSE: The IRS is correct, as our Most Serious Problem narrative explains, that the timeframe within which OBRs can be obtained is short, and current programming does not allow the IRS to freeze refunds while it considers an OBR request. Additional programming would be needed to implement our recommendation; the IRS does not explain what impedes it from making this adjustment, especially where freezing the claimed refund would allow the taxpayer and the IRS more time to make a considered decision.

ADOPTED, PARTIALLY ADOPTED or NOT ADOPTED: Not Adopted

OPEN or CLOSED: Closed

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

11
11.

TAS RECOMMENDATION #10-11

Make OBRs systemically available to taxpayers to the extent their allowable EITC claims exceed the current year’s tax liability where the taxpayer has only federal tax liabilities.

IRS RESPONSE TO RECOMMENDATION: ​The IRS disagrees with the TAS recommendation to make Offset Bypass Refunds (OBR) systemically available to taxpayers to the extent their allowable Earned Income Tax Credit (EITC) claims exceed the current year’s tax liability where the taxpayer has only federal tax liabilities.

Taxpayers receiving an EITC may prefer to apply any overpayment on a return to an existing Federal tax liability debt rather than receive a refund. Systemically bypassing an offset does not eliminate the debt owed and penalty and interest will continue to accrue, which could cause harm.

CORRECTIVE ACTION: N/A

TAS RESPONSE: The IRS is correct that a taxpayer may prefer to apply an overpayment to an existing tax liability, but a taxpayer can opt to do so whether or not the IRS issues a refund. While interest and penalties continue to accrue on unpaid tax debts, the National Taxpayer Advocate believes that taxpayers are harmed more when they are deprived of the economic assistance Congress intended them to receive.

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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