The Internal Revenue Service is not making consistent use of the codes that are supposed to indicate which IRS enforcement actions have led to taxpayers paying their outstanding taxes due, according to a new government report.

The report, from the Treasury Inspector General for Tax Administration, examined the use of designated payment codes, or DPCs, by the IRS, and found problems with them. According to the Internal Revenue Manual, the DPCs are supposed to be used to identify IRS enforcement actions or other events that result in taxpayers submitting subsequent payments on their balance due accounts. 

TIGTA conducted its audit to determine whether the IRS is consistent and accurate in applying DPCs to subsequent payments received on balance due accounts.

TIGTA reviewed a statistical sample of 138 subsequent payments that were posted to taxpayers’ balance due accounts. Auditors at TIGTA determined that 106 of the 138 subsequent payments, or 77 percent of them, were processed without the required DPC. In addition, 11 of the 32 subsequent payments, or 34 percent, that had a DPC were not accurate.

However, the IRS rejected TIGTA’s recommendations about how to fix the problems.

“The failure to consistently and accurately apply such codes renders accurate assessment of the effectiveness of IRS collections actions difficult if not impossible,” said TIGTA Inspector General J. Russell George in a statement. “I am troubled not only by these findings, but also by the IRS's rejection of our recommendations.”

The report found that DPCs are not consistently or accurately applied in the majority of cases because the IRS has not established DPCs to account for all types of subsequent payments, including those made in response to an IRS notice. In addition, TIGTA found that DPC procedures are inconsistent in explaining how to process subsequent payments submitted directly to an IRS campus. The format, instructions and processing of the form used to submit subsequent payments do not ensure that DPCs are applied, according to the findings. As a result, DPC data cannot be used to determine the effectiveness of collection actions, and some IRS collection reports that are used to monitor and report collection activities are not accurate, the report noted.

TIGTA also reviewed a random sample of subsequent payments made after the IRS filed Letter 3172, “Notice of Federal Tax Lien Filing and Your Rights to a Hearing under IRC 6320,” and determined that DPCs were not always used.  After the tax liens were filed, it was not always clear why the taxpayer made the payment. In addition, DPC procedures do not address partial subsequent payments submitted due to the filing of a lien.

TIGTA made five specific recommendations to encourage the IRS to make more consistent and accurate use of DPCs. IRS management disagreed with TIGTA’s findings and recommendations, however, and said they plan to complete their own review of DPCs.

Faris R. Fink, the commissioner of the IRS’s Small Business/Self-Employed Division, said in response to the report that TIGTA’s recommendations might unnecessarily increase the burden on taxpayers.

“Care must be taken in the use of DPC data since the taxpayer’s motivation for making a payment can rarely be isolated to a single factor,” he wrote. “The draft audit report cited DPC accuracy findings. The TIGTA audit steps did not include review of the payment source documents, making the determination of accuracy subjective. Based on available information, we do not concur with the accuracy findings outlined in the report.”

He added that the IRS is conducting its own in-depth review to determine the most effective use if DPCs and how DPCs can help the IRS perform additional analyses of collection activities, including an analysis of payment source documents.

TIGTA countered, however, that the IRS has already completed an internal study and did not use its results due to concern over its reliability. It said the IRS took no further action on its report except to initiate another study.

TIGTA said it found the IRS’s reaction troubling. “Management’s unwillingness to commit to any corrective actions for the extensive problems identified in the report is troubling,” said the report. “An internal study is not a substitute for an independent audit conducted in accordance with generally accepted government auditing standards. IRS management has already completed a review of the DPCs, but was not satisfied with how the study was conducted.”

TIGTA said it believes the IRS’s disagreement with its findings is significant and it plans to elevate its concerns to the Department of the Treasury.

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