IRS Jumps the Gun on Declaring Back Taxes Uncollectible

The Internal Revenue Service could be missing out on some opportunities to collect delinquent taxes because it is not always completely researching cases before closing them as uncollectible, according to a new government report.

The report, from the Treasury Inspector General for Tax Administration, found that IRS employees did not always complete the required actions before closing cases as uncollectible. Of a sample of 250 cases reviewed, TIGTA found no evidence that IRS employees completed all of the required research steps for 57 percent of the cases prior to closing them. In addition, 7 percent of the cases did not have a Notice of Federal Tax Lien, or NFTL, filed on all delinquent tax periods as required.

Collection Field function employees did not complete all the research in 165 of the 204 field cases, while Automated Collection System function employees did not complete all research in eight of their 38 cases.

If an IRS employee is unable to contact or unable to locate (UTC/UTL) a delinquent taxpayer, the collection case may be closed as currently not collectible (CNC). In fiscal year 2012, the IRS closed 482,611 tax modules involving approximately $6.7 billion as CNC–UTC/UTL, according to TIGTA.

Field employees are required to complete more extensive research than Automated Collection System function employees before they close cases as CNC–UTC/UTL. However, the IRS does not track whether the additional research and time spent is productive.

“If the IRS does not take all of the required research steps prior to closing cases, there is increased risk that the government’s interest may not be protected and that taxpayers will not be treated equitably,” said TIGTA Inspector General J. Russell George in a statement.

TIGTA recommended that IRS management: ensure that employees complete the required research and make NFTL determinations; require managers to document that all case actions have been completed before approving any CNC–UTC/UTL case closures; and, verify that all cases closed as CNC–UTC/UTL with aggregate unpaid assessed balances of more than $10,000 beginning in fiscal year 2012 had an NFTL filed on all applicable tax periods. In addition, TIGTA recommended that an analysis be conducted on the success of the additional research steps taken by field employees prior to closing cases as CNC–UTC/UTL.

IRS officials agreed with TIGTA’s recommendations and plan to take corrective actions, including the development of a checklist and case reviews.  However, TIGTA contended that IRS management’s planned corrective actions for two of the recommendations did not fully address the report’s recommendations. TIGTA said it believes management should completely address both recommendations to ensure that the government’s interest is protected.

“In fiscal year 2012, the IRS closed nearly 500,000 tax modules as currently not collectible-unable to contact/unable to locate (CNC-UTC/UTL),” wrote Karen Schiller, commissioner of the IRS’s Small Business/Self-Employed Division, in response to the report. “After reviewing a sample of these cases, you found some documentation and managerial review shortcomings. We generally agree with your recommendations which should assist in improving our case work and have already initiated some of the recommended actions. We developed a checklist of research requirements for revenue officer and group manager use. The checklist will be incorporated into a group manager Continuing Professional Education (CPE) course that will be delivered this year.”

The IRS also emailed Accounting Today a statement in response to the report. “We have already taken actions to improve verification processes related to closing these cases,” said the IRS. “However, the IRS disagrees with the methodology used by TIGTA, which we believe overstates the amount of potential unprotected revenue. The IRS generally agrees with TIGTA’s recommendations and has already taken action to develop a checklist of research requirements for revenue officers and group managers to verify all necessary actions prior to case closure. We have also updated the Internal Revenue Manual so that cases based on undeliverable mail follow normal collection processing. However, the IRS does not agree with TIGTA’s ‘outcome measure,’ or measurable impact, that its recommended corrective actions will have related to Notice of Federal Tax Liens (NFTLs). We believe TIGTA’s methodology overstates the potential revenue that is not protected when an NFTL is not filed for every delinquent tax module owed by the taxpayer. Additionally, the business cases include assessments resulting from returns prepared by the IRS under IRC 6020(b). These are for people who have not filed a tax return, and the IRS does not have a full picture of their tax situation. In many cases, all or part of the tax assessment may be abated when the taxpayer is located and files a tax return. For these reasons, the amount of unprotected revenue  is significantly less than the potential $55.3 million shown in the report.”