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Posts Tagged tax settlement

IRS Collections from their mouth

This is an article taken from the IRS by their own collection team. It seems they are busy at work and crunching numbers to further their collection efforts. IRS Collections is hard at work.

With the onset of 2015, I made a New Year’s resolution to restart my blog and provide periodic insights and observations on U.S. tax administration. The New Year also coincides with the issuance of my Annual Report to Congress. Selecting 20 of the most serious problems of taxpayers for this report is always a challenge, because there are so many things to write about. Each year I establish a theme for the report, which provides a framework for selecting the problems but can exclude many important issues. The blog can help bring some focus on these issues and the work that the Taxpayer Advocate Service (TAS) and others are undertaking in those areas.

My collection advisors and I spend a lot of time dealing with collection issues and analyzing collection data. It is fitting, then, that my first blog of the New Year takes a closer look at the IRS’s collection performance.

The Internal Revenue Service Restructuring and Reform Act of 1998 (RRA 98) provided the IRS Collection operation with a mandate to improve service for taxpayers, and reduce its reliance on liens, levies, and seizures to collect tax debts.

The IRS Collection operation was the subject of considerable attention in the IRS Restructuring and Reform Act of 1998 (RRA 98). Key components of the legislation were designed to enable the IRS to more effectively use collection payment options, such as installment agreements (IAs) and offers in compromise (OICs), to enhance taxpayer compliance, and make it easier for taxpayers to enter into these types of alternative payment arrangements. In regard to OICs, Congress expressed an interest in having the IRS adopt a “liberal acceptance policy” in order to “provide an incentive for taxpayers to continue to file tax returns and continue to pay their taxes.”(1)  In developing the legislation, Congress was clear in its stated belief that “the ability to compromise tax liability and to make payments of tax liability by installment enhances taxpayer compliance.”(2)

Conversely, RRA 98 also addressed reported abuses by the IRS pertaining to the use of its formidable collection enforcement tools, specifically liens, levies, and seizures. The IRS differs from other creditors because it possesses the ability to undertake significant collection actions without the necessity of going to court and seeking a judgment. In the development of RRA 98, Congress expressed the belief that “the imposition of liens, levies, and seizures may impose significant hardships for taxpayers.” (3) Consequently, RRA 98 contained a number of new provisions designed to limit the use of these tools in certain situations, as well as new review and approval requirements for liens and levies. RRA 98 also created new avenues for taxpayers to appeal IRS enforcement actions, most notably through Collection Due Process (CDP) hearings.

The implementation of RRA 98 proved to be a challenge for the IRS, and most notably for the Collection operation. In retrospect, much more attention was afforded to declines in the numbers of IRS enforcement actions than was given to efforts to improve revenue collection and compliance through the expanded availability of payment options. In its May 2002 report, the United States General Accounting Office – now known as the Government Accountability Office (GAO) – commented on the IRS’s decreasing use of enforcement sanctions, noting that the number of liens, levies, and seizures “dropped precipitously” between fiscal years (FY) 1996 and 2000. (4) A commonly held perception following the implementation of RRA 98 was that the reductions in liens, levies, and seizures reflected a general decline in IRS enforcement, particularly with respect to the IRS Collection operation, and that the IRS’s new emphasis on taxpayer service was incompatible with a robust collection program. In fact, later discussions of collection program results commonly compared lien and levy activity with pre-RRA 98 levels, and increased activities in these enforcement areas were cited as improvements in IRS performance. (5)

IRS data reveal a very weak correlation between the raw numbers of collection enforcement actions and the collection of delinquent tax dollars.

As illustrated in the chart below, IRS data reveal that the substantial reductions in liens and levies that the IRS experienced post-RRA 98 had no discernible impact on the collection of delinquent revenue during this period. (6) IRS defines the term “Total Collection Yield” to include dollars collected on unpaid assessments in the notice stream, collections from taxpayer delinquent accounts (“TDAs”, i.e., cases assigned to or awaiting assignment to Collection personnel), installment agreements, deferred accounts, and non-master file accounts. (7)

Graph of Levies Issued, Liens Filed and the collection yield from Fiscal years 1994 to 2001

Unfortunately, the IRS’s preoccupation with the volumes of lien and levy actions hampered efforts to identify the collection treatments that successfully delivered this revenue with the aid of improved taxpayer service, e.g., timely personal contacts and more flexibility in the use of payment options such as installment agreements and offers in compromise.

In FY 2015, the IRS Collection operation faces an environment that is in many ways remarkably similar to the years following the implementation of RRA 98. Severe budget cuts have contributed to reductions in Collection staffing. From the end of FY 2010 to the end of FY 2014, ACS permanent staffing has declined by over 31% and revenue officer staffing has declined by over 27%. (8) Moreover, significant changes in IRS collection policies implemented in FY 2011 and 2012, i.e., the so-called IRS “Fresh Start Initiative,” have placed greater emphasis on more flexible collection decisions, as opposed to increased use of traditional enforcement actions. As a result, from FY 2010 to 2014, levies issued by the IRS decreased by 45%, (9) and lien filings decreased by 51%. (10) Remarkably, Total Collection Yield increased by 14% in nominal dollars during this period, despite the dramatic decreases in traditional enforcement actions. (11)

Graph of Levies Issued, Liens Filed and the collection yield from Fiscal years 2010 to 2014

Even more remarkably, inflation-adjusted Total Collection Yield increased by 1.7% between FYs 2010 and 2014, demonstrating that collection revenue has been relatively stable over time despite significant swings in IRS lien and levy activity. (12)

Graph of total collection yield adjusted for inflation, 2010-2014

As illustrated in the chart below, revenue collected through installment agreements and collection notices was the primary driver for the increase in Total Collection Yield, with increased collections through refund offsets also making some contributions. Notably, collection through initial IRS collection notices is voluntary – albeit late – compliance (i.e., no lien or levy prompted the taxpayer’s payment), and collection by refund offsets is a fully automated approach that does not require IRS lien or levy authority.

Graph of the percent change of the drivers of collection yield from 2010 to 2014

One might attribute the increase in Total Collection Yield to the overall increase in taxpayers. Between FY 2010 and FY 2014, the number of individual taxpayers increased by about 5%, while the number of business taxpayers remained stable. IRS data, however, disproves this assumption. As the chart below shows, the TDA dollars available for collection decreased slightly between FYs 2010 and 2014, from $174 billion to $173 billion. (13) At the same time, the number of liens issued decreased by about 50%, from almost 1.1 million to 536,000. Yet the percentage of dollars available for collection that were actually collected increased from 6.0% to 6.4%. The chart below shows even more dramatically the relationship between liens filed and available dollars collected.

Graph of available dollars, NFTLs file, and percent of available dollars collected from FY 2010-2014

We see the same pattern with levies issued. Specifically, the number of levies declined by 45% from FY 2010 to FY 2014, while the percentage of available dollars collected decreased slightly.

Graph of available dollars, percent of available dollars collected, and levies issued from fiscal years 2010 to 2014

Now, there are many factors that influence Total Collection Yield. But these data certainly indicate that something other than the raw number of lien and levy issuances accounts for the relative stability of collection revenue over time. In my next blog, I’ll explore what that “something” might be.

  1. Senate Committee Report (S. Rep. No. 105-174) at 88 (1998).
  2. H.R. Conf. Rep. No. 105-599 at 287 (1998).
  3. Senate Committee Report (S. Rep. No. 105-174) at 78 (1998).
  4. GAO, Impact of Compliance and Collection Program Declines on Taxpayers, 12 (May 2002).
  5. IRS, Statement by IRS Commissioner Mark W. Everson, IRS Improves Enforcement and Services in 2005 (Nov. 2005). This press release noted that “In our collection activities, levies and liens have recovered to pre-RRA ’98 levels.” (Emphasis added) IRS, Statement by IRS Commissioner Mark W. Everson, Fiscal Year 2006 Enforcement and Service Results (Nov. 2006). This press release noted, “Overall, some of our most common enforcement tools at the IRS also showed increases. In our collection activities, levies and liens continue to top their 1998 levels.” (Emphasis added)
  6. IRS Data Book 1997 to 2001. In FY 1997, the IRS reported a total collection yield of $29,913,365, while also reporting the issuance of 3,659,000 levies and the filing of 544,000 liens. In FY 2000, levy issuances had dropped to 220,000 and lien filings totaled 288,000. However, total collection yield for FY 2000 was reported as $29,935,564 – slightly more than FY 1997. In FY 2001, after several years of reduced lien and levy activity, the IRS reported total collection yield of $32,186,839 – an eight% increase over FY 1997, even though the approximately 674,000 levies issued remained at only 18% of the FY 1997 level.
  7. This blog features the “total collection yield.” The IRS publishes the total collection yield from unpaid assessments in Table 16 of the IRS Data Book. It shows the dollars collected on previously unpaid assessed taxes plus assessed and accrued penalties and interest and includes dollars collected from delinquency notices, TDAs, installment agreements, deferred accounts and non-Master File accounts. Assessed tax may result from voluntarily filed returns, examination of taxpayers’ returns, or a combination of both.
  8. ACS staffing was extracted from the IRS Human Resources Reporting Center as of the last pay period of a fiscal year. We computed Wage and Investment and Small Business and Self-employed ACS staffing from employees in job series 962. We determined revenue office staffing from Small Business and Self-employed employee in job series 1169
  9. IRS, Collection Activity Reports, NO-5000-24, Levy and Seizure Report (FY 2010 to 2014).
  10. IRS, Collection Activity Reports, NO-5000-25, Liens Report (FY 2010 to 2014).
  11. The IRS defines Total Collection Yield for these years as, dollars collected through collection activity on previously unpaid assessed taxes plus assessed and accrued penalties and interest and includes dollars collected from delinquency notices, TDAs, installment agreements, deferred accounts and non-Master File accounts. Assessed tax may result from voluntarily filed returns, examination of taxpayers’ returns, or a combination of both.  Total Collection Yield from FY 2010 through FY 2013 is from the IRS Data Book Table 16. The IRS provided the FY 2014 data in advance of the publication of the FY 2014 Data Book.
  12. Bureau of Labor Standards Consumer Price Index Inflation Calculator, available at:http://www.bls.gov/data/inflation_calculator.htm.
  13. We compute dollars available for collection as the TDA dollars in inventory at the end of the prior fiscal year plus the new TDAs received for collection during the current fiscal year, plus the dollars of accounts in installment agreement inventory for both ACS and revenue officers. However, the dollar amounts of delinquencies closed to installment agreements by ACS and revenue officers during the current fiscal year were removed to prevent double counting of these delinquency amounts.

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IRS Offer in Compromise is ready for you!

Since 2012 the IRS has been much more willing to compromise with taxpayers with overwhelming tax debt than in the prior decade. IRC §7122 permits the IRS to accept offers in compromise in settlement of tax obligations for less than the full outstanding tax liabilities. The willingness of the IRS to exercise this authority has ebbed and flowed through the years. In 2012 as part of its Fresh Start initiatives, the IRS greatly liberalized the standards that it uses for acceptable offers. The statistics for the most recent fiscal years are:

Offers in compromise : 2012 2013 2014
Number of offers received 64,000 74,000 68,000
Number of offers accepted 14,000 17,000 20,000
% accepted 22% 23% 29%

The 2010 Taxpayer Advocate’s report to Congress illustrates the ebbs and flow of the offer environment during the first decade of this century. The acceptance rate went up and down but never reached a 30% acceptance rates and for of the decade was in the 15% to 24% range.

In general, an offer in compromise is an agreement between a taxpayer and the IRS that settles the taxpayer’s tax liabilities for less than the full amount owed. An OIC is generally not accepted if the IRS believes the liability can be paid in full as a lump sum or a through payment agreement. The IRS looks at the taxpayer’s income and assets to make a determination of the taxpayer’s “reasonable collection potential.” OICs are subject to acceptance on legal requirements. To determine the taxpayer’s ability to pay, the IRS determines a value of the taxpayer’s assets and adds the value of his ability to pay in the future. The combined value of those two components is known as “Reasonable Collection Potential”(RCP).
The 2012 Fresh Start changes that caused the upward movement in the number of accepted offers included:

Revising the calculation for the taxpayer’s future income
Allowing taxpayers to repay their student loans as part of her budget
Allowing taxpayers to pay state and local delinquent taxes as part of her budget

But something to keep in mind is that without proper guidance and knowledge of the tax code, doing it alone could result in you being one of the many 70% that get denied. If you say or provide documentation the wrong way, this is irreversible and filing any subsequent filings can be impossible. let the pros handle this process for you. Our acceptance rate is over 70%. Let a tax technician speak to you regarding your personal tax situation and evaluate the best outcome for you.

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MIllions of US Residents fail to file tax returns

About 7 million U. S. Taxpayers fail to file required income tax returns each year, while 146 million Americans dutifully file their returns each year. That means that about 5% of the populace fail to meet their obligations to Uncle Sam. As part of its National Research Program the IRS released a study in 2011 of 2006 returns which found that as result of non-filing, the government loses $28 billion per year. Although the IRS makes efforts to force non-filers into compliance, the continuing improvident cutting of the IRS budget allows more taxpayers to duck their filing obligations because the IRS has fewer resources to pursue non-compliant taxpayers.

As a tax controversy lawyer I frequently meet with taxpayers who have failed to file multiple years of returns. Many of those clients ask, “Should I file the return right now, or wait until I have the money to pay it?” The answer is simple: file it as soon as possible!

If the taxpayer has any money at all available for payment, it should be enclosed with the return. The reason for such advice is that one of the largest penalty rates which the IRS may impose is for late filing of a return. The penalty is five percent per month, up to a maximum of 25%, of the tax due but unpaid by the due date of the return.  This works out to an annualized rate of 60%. Therefore, if one fails to file their return on time, the effective annual rate is over 75% when both interest and late filing and late payment penalties are considered.  The late payment penalty after notice of intent to levy is one percent per month, or an effective rate of 12% per year in addition to statutory interest. In addition to the above considerations a taxpayer might also forfeit refunds due from delinquent returns since any return filed more than 3 years after its due date cannot receive a refund.

One drawback of filing a timely return without remittance is that the IRS will arrive at the taxpayer’s door to collect the liability much sooner than if he or she files a return late. However, the additional cost for penalties incurred to gain this time is prohibitive.

Criminal Prosecution

An additional consideration in advising the taxpayer to file returns, even if he or she does not have money to pay the balance of tax due, is the potential criminal penalties for failure to file a tax return. Therefore, if your client should fail to file a return, and if the Internal Revenue Service should decide that such action constituted willful fail­ure to file, your client might be required to defend against a federal criminal charge.

The chances of prosecution for non-filing are small, but certain groups are targeted by the IRS. Politicians, tax protesters, drug dealers, organized crime figures and high income professionals are prime targets for IRS prosecution. The IRS uses prosecution for its deterrent effect on the general public, and these groups get larger headlines than the average guy on the street. Congress has allocated additional funds to the IRS to pursue drug dealers.

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You have been Audited by IRS, Now What?

The IRS’s recently released Fiscal Year (FY) 2011 Enforcement and Service Results, show some interesting trends in its audit activity. For example, face-to-face audits of individual taxpayers reporting income over $200,000 increased by 34 percent as compared with FY 2010, from 58,521 to 78,392. Also, the IRS is now auditing about one out of every eight taxpayers who reported over $1 million in income.

Overall, with 140,837,499 individual income tax returns filed in the 2010 calendar year, the IRS conducted and closed a total of 1,564,690 audits in FY 2011, for a “coverage” rate of 1.11 percent. This is about the same coverage rate as in the previous fiscal year, but as noted above, the IRS is increasingly focusing its face-to-face audit resources on more affluent individual taxpayers. (I’ll explore the impact of the IRS‟s conducting 78 percent of individual audits by correspondence – as opposed to face-to-face – in future

These statistics, however, only tell a small fraction of the story about the IRS’s compliance contacts with individual taxpayers. As reported in the recently released National Taxpayer Advocate’s 2011 Annual Report to Congress, the IRS not only conducted 1.6 million audits of individual taxpayers in FY 2010; it also reached out and touched an additional 13.5 million individual taxpayers during that year in a way that often felt like audits to the taxpayers impacted, even if the IRS doesn‟t technically classify all those contacts as “audits.”

These non-audit “touches” focus on a very different group of taxpayers in terms of income level. More importantly, non-audit audits (let’s call them “unreal” audits, as opposed to the ones the IRS considers “real”) do not trigger very important taxpayer protections enacted by Congress over the years to ensure that taxpayers are treated fairly in examinations.

Now, a word about IRS numbers. For this blog posting, I asked my research staff to give me a breakdown of FY 2010 “real” and “unreal” audits by income level. To do that, they used the IRS Compliance Data Warehouse, an internal IRS research database that houses taxpayer account information by tax year. The numbers in our breakdown do not exactly mesh with what the IRS reports in its Statistics of Income Data Book. In part, this is because we counted each taxpayer only once. So, for example, the IRS conducted 1.6 million individual audits in FY 2010, but the audits affected only 1.4 million taxpayers; some taxpayers may have been audited for more than one year. Similarly, if a taxpayer was touched by more than one program, we count him or her in just one of the programs, with the order of preference for counting purposes as Examination, Automated Substitute for Return, Automated Underreporter, and Math Error. (I’ll explain these terms below.)

Two more notes on the data. First, for the discussion and table below, we excluded 4.6 million math error notices that the IRS says related to the Making Work Pay credit. The IRS says these notices advised taxpayers who had failed to claim the credit that they were entitled to it. Although we haven’t verified this statement, we agree that if true, giving taxpayers a refund wouldn’t feel like an audit to the taxpayer and therefore should not be included in our totals.

Second, our income breakdown in the chart below is based on each taxpayer’s self-reported Adjusted Gross Income. Because the ASFR program generates returns for taxpayers who have not filed returns on their own, we do not have an AGI breakdown for Automated Substitute for Returns (ASFRs). Therefore, ASFR amounts are listed only in the “Total” row at the bottom and are not included in the column labeled “Combined” or in the percentages in the final column (except for the grand total).

Now to the results. In addition to conducting “real” audits of 1.4 million individual taxpayers in FY 2010, the IRS conducted “unreal” audits of 9.2 million individual taxpayers as follows:

  • 3,911,005 Automated Underreporter (AUR) cases, in which the IRS matches income reported by the taxpayer on his or her return with income reported to the IRS by third-party payers;
  • 4,740,909 math error notices, in which the IRS corrects and assesses mathematical or other inconsistent entries on a return before the taxpayer has a chance to contest the change; and
  • 563,927 Automated Substitute for Returns (ASFRs), in which the IRS creates a substitute return for a nonfiler based on third-party payer information.

As the chart below indicates, the combined impact of “real” and “unreal” audits in terms of coverage by income segment is very different from that of “real” audits alone.

Although the “real” audit coverage rate for individual taxpayers with incomes below $100,000 is about 1 percent, the combined coverage rate balloons to 6.9 percent, an increase of over 600 percent, when we include “unreal” audits in the mix. For individual taxpayers reporting incomes between $100,000 and $200,000, the FY 2010 “real” audit coverage rate is 0.6 percent, but when we include the “unreal” audit contacts, the coverage rate rises to 7.3 percent – an increase of about 1,100 percent. Including “unreal” audits also increases the coverage rate of the wealthiest taxpayers – those reporting incomes over $10 million – from 13.1 percent to 21.4 percent. (And these totals understate the total number of “unreal” audits because the percentages within income categories don’t include ASFRs and because there are a few additional programs that adjust taxpayer liabilities, including some flagged by the Electronic Fraud Detection System, that we have not addressed here.)

Now, why does all this matter? First, because understating the coverage rate actually masks how much work the IRS is doing. Second, and more significantly, because the type of contact – whether it’s a “real” or “unreal” audit – makes a difference in the rights afforded taxpayers and also in the halo, or indirect, compliance impact of that contact. For now, I’ll focus on the taxpayer rights impact and discuss the halo effect in later postings.

The tax law grants the IRS the authority to examine any books, papers, records, or other data that may be relevant to ascertain the correctness of any return. (See IRC § 7602(a)(1).) The IRS has taken the position that an attempt to resolve a discrepancy between the taxpayer’s return and data available from a third party does not constitute an examination because the IRS is not examining books or records but merely asking the taxpayer to explain the discrepancy. (See Rev. Proc. 2005-32, § 4.03, 2005-1 C.B. 1206.)

When the IRS doesn’t classify these tax adjustments as audits, the IRS doesn’t trigger the taxpayer’s right to avoid unnecessary examinations. (See IRC § 7605(b).) This position enables the IRS to later conduct a “real” audit of a taxpayer who already has been subjected to an “unreal” audit of the same return.

From the IRS‟s perspective, it is important to preserve its ability to conduct “real” audits because these “unreal” audits typically focus on limited issues such as an omitted income item. But from the taxpayer’s perspective, being contacted by the IRS more than once about one year’s return can feel like… well… at least one time too many.

This distinction takes on added significance when we consider that the overwhelming majority of taxpayers who are subject to “unreal” audits are low income or middle class, and these taxpayers are least able to afford representation in resolving their disputes. They may not even know when their rights are being violated.

In addition, the IRS is likely to start conducting “unreal” audits of business taxpayers, including self- employed individuals, by matching income reported on tax returns against third-party reports of gross receipts submitted by issuers of credit and debit cards. (See IRC § 6050W.) Any resolution of mismatches will most assuredly require the IRS to review the taxpayer’s books and records. Yet because the IRS doesn’t consider these Automated Underreporter contacts to be “real” audits, the IRS will retain the right to conduct a second review of the taxpayer’s books and records for the same tax year. I cannot believe that Congress, in enacting the protections of IRC § 7605(b), contemplated this result.

In our 2011 Annual Report, we recommended the IRS should, “[i]n light of the information available in the 21st century, review and reassess the audit processes deemed „not an examination‟ and instead use the audit process to protect taxpayer rights, increase compliance, and preserve IRS credibility.” To buttress that recommendation, I issued a Taxpayer Advocate Directive to several key IRS officials during the same week we released our report, directing them, among other things, to conduct a comprehensive review of “unreal” audits and revise the definition of what constitutes an audit to address my concerns about taxpayer rights. These officials can implement my directive or appeal it to the Commissioner or Deputy Commissioner, who have the authority to overturn it. We’ll let you know if we make any progress.

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