IRS Skirted Procedures for Determining Ability to Collect Tax Debts

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Internal Revenue Service examiners did not always follow procedures for weighing which tax debts could actually be paid by delinquent taxpayers, according to a new report.

The report, from the Treasury Inspector General for Tax Administration, found that employees who work for the IRS Examination function did not always follow the right procedures or coordinate with the IRS’s collection function for determining the collectibility of tax debts. On top of that, the IRS Examination function does not track or measure the collectibility of assessments. During an IRS tax examination, IRS examiners are supposed to follow the procedures outlined in the Internal Revenue Manual to consider a taxpayer’s ability to pay a potential assessment.

Taxpayers who have financial problems and can’t afford to pay their taxes are burdened more heavily if the IRS audits them for additional assessments they cannot pay. Taxpayers may be treated inconsistently when IRS examiners don’t follow the right procedures to consider a taxpayer’s ability to make payments, the report pointed out.

In fiscal year 2015, half of all IRS field collection closures and 19 percent of all IRS Automated Collection System closures of taxpayer delinquent accounts resulting from an examination were closed as currently not collectible, according to the report. IRS examiners did not follow collectibility procedures in 62 of 110 cases sampled by TIGTA (or 56 percent), which involved 101 separate instances in which they did not follow procedures. The IRS examiners did not always consider collectibility, document their evaluations, or discuss collectibility issues with their managers. Examiners did not always contact the IRS’s Collection function as required by the examination function procedures, nor did they refer the required cases to the collection function or complete the financial information needed for future collection efforts.

TIGTA estimates there were 1,731 office examination cases and 1,445 field examination cases in which IRS employees did not follow the established collectibility procedures and the collection function later worked and closed the cases as currently not collectible—with the IRS having received no taxpayer payments. While examiners “survey” cases for some reasons (that is, they close a case without conducting an examination), examiners rarely survey cases because of collectibility concerns.

TIGTA determined the IRS’s Examination function has no reports or measurement systems related to the collectibility of examiner assessments. Without such information, the report noted, IRS management does not have complete information to make changes or improvements to meet its goals.

“Adherence to collectibility procedures and coordination between the IRS Examination and Collection functions helps ensure that the IRS is using its limited resources efficiently,” said TIGTA Inspector General J. Russell George in a statement. “The failure to do so can result in tax assessments that will never be collected.”

From fiscal years 2010 to 2015, gross accounts receivable increased from $138 billion to $171 billion (or 24 percent), while the amount written off as uncollectible receivables increased from $103 billion to $130 billion (26 percent). IRS Examination management told TIGTA they were not aware that the Enforcement Revenue Information System permitted them to track collectibility data, so it was not being used for that purpose.

TIGTA recommended the IRS take several corrective actions to improve collectibility determinations and communication between the Examination and Collection functions and use the data resources it has available to measure and track collectability as it relates to examination assessments.

IRS management agreed with all of TIGTA’s recommendations and plans to take action to correct the problems.

“We are committed to considering collectibility throughout the course of our examination process beginning at the pre-audit phase, continuing through the examination, and ending at the conclusion of the examination when we solicit payment and assist taxpayers with their payment options,” wrote Karen Schiller, commissioner of the IRS’s Small Business/Self-Employed Division. “Internal Revenue Manual (IRM) procedures make it clear that the purpose of considering collectibility before and during all examinations is to promote quality assessments and decrease the IRS’s Accounts Receivable Dollar Inventory. We agree that opportunities exist to improve our examiners’ understanding of the important role they play in improving collectibility, as well as the importance of documenting their decisions. We will revise affected IRMs and our training, and improve coordination with Collection.”

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Tax practice