The Internal Revenue Service is preparing a legislative proposal for Congress to expand its tax levy authority to include additional income sources, such as rental income and non-employee compensation.
A new government report from the Treasury Inspector General for Tax Administration found that IRS revenue officers took the appropriate actions when issuing levies to collect unpaid taxes, but they still face challenges and delays in bringing taxpayers into compliance.
TIGTA noted that while levy authority is a useful tool, there are limitations and challenges that can diminish its effectiveness for collecting unpaid tax. If the IRS does not effectively pursue its task of collecting unpaid taxes, it could create an unfair burden on the majority of taxpayers who fully pay their taxes on time, TIGTA acknowledged.
Tax levy authority allows IRS revenue officers to work directly with financial institutions and other third parties to seize taxpayer assets. Revenue officers are required to issue the taxpayer a Letter 1058, Notice of Intent to Levy and Notice of Your Right to a Hearing, at least 30 days prior to taking levy action.
Upon receipt of this notice, taxpayers have 30 days in which to pay the tax due or appeal the potential levy action. After the enactment of the IRS Restructuring and Reform Act of 1998, the number of levies issued by revenue officers dropped from more than 473,000 in fiscal year 1998 to approximately 75,000 in fiscal year 2000. However, revenue officers have increased the number of levies in each year since fiscal 2003, including a 73 percent increase from fiscal 2009 to fiscal 2010. During fiscal year 2010, revenue officers issued approximately 667,000 levies.
TIGTA reviewed a statistical sample of 60 cases involving levy actions and determined the actions of the revenue officers were appropriate and complied with IRS procedures and statutory requirements.
However, TIGTA identified several barriers that seem to restrict the impact that levy actions have on taxpayer compliance. Specifically, levy notification and the Collection Due Process can postpone collection actions. Taxpayer privacy rights also limit access by revenue officers to taxpayer financial information.
Strict timing requirements can also result in multiple repeat levy actions; and revenue officers must rely on third parties, such as banks and employers, to comply with levy notices.
"To help improve the process and help taxpayers become compliant, the IRS is preparing a legislative proposal that will expand continuous levies to include additional income sources, such as rental income and non-employee compensation," said the report. That would allow the IRS to regain some of the levy authority that it lost after the 1998 IRS reform legislation.
TIGTA also reviewed a statistical sample of 30 cases in which the taxpayer appealed the levy action and determined taxpayer requests to appeal can be used to delay collection actions. In 28 of the 30 cases (or 93 percent), the revenue officers’ levy action was upheld by the IRS’s Appeals function. In 25 (89 percent) of the 28 cases upheld by the Appeals function, the taxpayers did not follow through with the appeal. Specifically, 16 taxpayers did not provide the appeals officer with additional information that was requested, and nine taxpayers did not participate in their hearing because they withdrew their appeal or did not attend the scheduled Collection Due Process hearing in person or by phone.
While taxpayers are entitled to appeal rights, collection action was suspended in these cases for an average of five months, and the time appeals officers spent preparing for these cases was unproductive.
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