The Treasury Department’s inspector general is pressing the Internal Revenue Service in a new report to improve its procedures for direct debt installment agreements to avoid taxpayer defaults.
The report, from the Treasury Inspector General for Tax Administration, noted that direct debit installment agreements give taxpayers a convenient way to make payments on their installments while eliminating the need for checks or paper forms and IRS resources to process the payments each month. During fiscal year 2014, more than 500,000 taxpayers entered into such agreements, known as DDIAs, and approximately $2.8 billion was collected. The report argues that revising the existing DDIA procedures to automatically add new liabilities to existing DDIAs could increase revenue collection and reduce taxpayer burden.
Taxpayers are required to remain in tax compliance as a condition of entering into an installment agreement, the report noted, and systemic processes exist to default an installment agreement if a taxpayer incurs and fails to pay a new tax liability. These defaults can occur even if the taxpayer would have preferred adding the new liability to the installment agreement.
DDIAs provide benefits for both the taxpayer and the IRS, TIGTA pointed out. “Taxpayers benefit from establishing DDIAs because they do not have to manually write a check and mail it in order to fulfill their obligations,” said the report. “The IRS benefits because taxpayer payments can be posted faster and do not require IRS employee involvement. In addition, taxpayers who enter into DDIAs are less likely to default on their agreement compared with taxpayers who enter into traditional installment agreements.”
In order to maintain a DDIA, taxpayers need to pay any new tax liability when it’s due or the DDIA will systemically default, the report noted. When defaulted, the IRS stops automatic collection from the taxpayer’s financial accounts. TIGTA found that when DDIA defaults are due to a new tax liability, most taxpayers want to include the new balance due into their existing DDIA. In addition, the IRS has a procedure that eliminates the need to default the DDIA if a taxpayer incurs a new tax liability, but it is only used when taxpayers request it.
“As a result, systemic DDIA defaults increased taxpayer burden because taxpayers incurred additional interest on their unpaid balances,” said the report. “In addition, revenue collection was suspended until the DDIAs were restructured, and some DDIAs were not reestablished.”
TIGTA recommended that the IRS consider establishing systemic programming to allow DDIA taxpayers who incur a new unpaid tax liability to absorb the new liability into the current agreement without stopping the automatic payment in qualifying situations. In the meantime, the report suggested, the IRS should provide taxpayers with information as to how they can avoid a default of their DDIA in the event of a new unpaid liability on Form 9465, Installment Agreement Request, and Form 433 D, Installment Agreement. For taxpayers who cannot absorb their liabilities in existing DDIAs, TIGTA recommended, the IRS should establish procedures so that direct debit payments do not stop while the DDIA is suspended and the IRS actively addresses the new balance due.
In response to the report, IRS management agreed that systemically adding a new tax liability to an existing DDIA could save time and collect additional revenue, but did not commit to ensuring that qualifying new liabilities would be absorbed into existing DDIAs or discontinuing the practice of stopping automatic collection when the DDIA is suspended due to a new liability. However, IRS management did agree to provide taxpayers with more information on how to avoid default. TIGTA said it believes that all of the recommendations in the report would benefit the IRS and taxpayers.
The IRS also disagreed with some of the methods used to compile the report. “Although we generally agree with some of your recommendations, we do not agree with the outcome measures in the report,” wrote Karen Schiller, commissioner of the IRS’s Small Business/Self-Employed Division, in response to the report. “We have concerns with the sample size and extrapolation of the sample results to the population without adjustment for ineligible cases. We also do not agree that it is appropriate to project increased revenue by taking the remaining balance due on the defaulted DDIAs and assuming that all of the balance will be collected by implementing the recommendations.”
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