IRS Needs Better Controls over Partial Payment Agreements
The Internal Revenue Service is not always properly monitoring or establishing the partial payment installment agreements it enters into with taxpayers, according to a new government report.
The report, by the Treasury Inspector General for Tax Administration, noted that taxpayers who enter into a partial payment installment agreement will not fully pay all of their delinquent tax liability, so it is important that PPIAs are carefully and accurately administered. If the IRS does not effectively pursue collection of unpaid tax through the use of PPIAs, it could create an unfair burden on the majority of taxpayers who fully pay their taxes on time, the report noted.
When establishing a PPIA, the IRS is required to complete a financial analysis of the taxpayer and assess the financial condition of taxpayers with a PPIA every two years. TIGTA reviewed a random sample of 100 PPIAs and found that the two-year reviews were not always properly performed and that some PPIAs were established without a complete financial analysis and/or manager approval.
To begin the two-year financial assessment, the IRS performs an automated review process of PPIAs at the two-year mark. However, the automated two-year review processes did not occur in eight (or 10 percent) of the 84 PPIAs requiring a two-year review.
If the automated review process determines that the financial condition of the taxpayer may have improved, a manual review is required. However, the manual reviews were not performed properly for 15 (or 52 percent) of the 29 PPIA cases for which a manual review was required. IRS procedures do not require managers to review or approve the results of the two-year review of PPIAs.
In addition, 15 of the 100 PPIAs sampled were established without a complete financial analysis. Without a complete financial analysis, there is a higher risk that the taxpayers are not paying the maximum amount they can afford or that they are unable to afford the amount in the agreement, TIGTA. Furthermore, 34 of the 100 PPIAs did not have evidence that the manager approved the PPIA. The absence of documented manager approval indicated that managers are not reviewing the PPIAs before they are established.
The IRS Collection Process Study report recommended that the IRS expand the use of PPIAs by offering a modified minimum PPIA to all individual taxpayers in uncollectible status. The report estimated that if PPIAs were offered to 230,000 individual taxpayers classified as unable to pay, the collection potential could be as high as $69 million annually. TIGTA was advised that the IRS does not have plans to implement this recommendation due to limited resources, however.
TIGTA made several recommendations to improve controls over the two-year review process and establishment of PPIAs. TIGTA also recommended that IRS management test the viability of expanding the use of PPIAs on a sample of taxpayers in uncollectible status.
In response to the report, IRS officials agreed or partially agreed with six of the seven recommendations. The IRS plans to revise procedures to improve controls over the two-year review process and plans to establish controls to prevent PPIAs from being established without manager review or approval.
The IRS did not agree with the recommendation to test the viability of expanding the use of PPIAs, saying it conducted similar tests with the Offer in Compromise program for taxpayers in currently not collectible status, which did not yield significant results.
TIGTA argued that the IRS’s tests involved taxpayers who were asked to consider applying for an Offer in Compromise, not a PPIA. Because of the differences between the two programs, TIGTA said it does not believe it is appropriate to draw conclusions about taxpayer willingness to establish a PPIA. For example, unlike a PPIA, taxpayers entering into an Offer in Compromise may have to pay 20 percent of their balance due before the IRS will consider their request.
“We are proud of the actions taken to improve the PPIA program,” wrote IRS Deputy Inspector General for Audit Michael R. Phillips in response to the report. “We have enhanced tracking reports for PPIAs, revised notices and improved telephone systems to better serve customers. Through training and Internal Revenue Manual updates, employees are well aware of PPIAs as evidenced by their increased use over the past several years.”
Phillips generally agreed with TIGTA’s recommendations for financial analysis and managerial approval, but said he was concerned that the date ranges chosen for the sample review might have skewed the results of TIGTA’s findings. The sample of reviewed cases only included PPIAs established between Jan. 1, 2008 and July 1, 2009 and did not include any recent agreements, he pointed out.
“While this was necessary for the two-year review portion of the process, your findings may not be indicative of current case work,” he wrote. “In addition, your review did not include any supporting documentation submitted by the taxpayer or any physical supporting documentation associated with a case file when a PPIA was established. Analysis of supporting documentation may provide additional insight into a taxpayer's ability to repay a liability. As such, we will conduct a review of recently established PPIAs and supporting documentation to determine if proper financial analysis, managerial review, and managerial approval are being done.”
He agreed to include PPIAs in campus operational reviews of installment agreements to ensure Internal Revenue Manual procedures were followed, but added that since PPIAs represent less than 2 percent of installment agreements, he did not believe it was appropriate to conduct separate National Quality Review System product line reviews for PPIAs.
With respect to the Collection Process Study recommendation to test the viability of expanding the use of PPIAs on a sample of taxpayers in uncollectible status, he said he did not believe it was an efficient use of the IRS’s limited resources.
“We conducted two similar tests with the Offer in Compromise (OIC) program for taxpayers in currently not collectible (CNC) status,” Phillips noted. “These taxpayers received a letter of solicitation informing them of the OIC program as a viable collection alternative. Even when offered an alternative that would fully resolve their accounts, the response rate was less than 3 percent.”
Based on the assumptions in the report, Phillips agreed with TIGTA’s proposed outcome measures for taxpayers who had their monthly payments reduced. However, he did not agree with the outcome measure for offering a modified PPIA to taxpayers in CNC status, noting that similar tests have not yielded significant results and do not mirror the estimated outcomes identified in the Collection Process Study.