IRS Violated Procedures in Trying to Collect from Bankrupt Taxpayers

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The Internal Revenue Service did not always follow established procedures when trying to collect taxes from taxpayers who had declared bankruptcy, according to a new government report.

The report, from the Treasury Inspector General for Tax Administration, found that in a sampling of such cases, IRS specialists did not always follow established procedures in 17 out of 30 Chapter 7 cases (that is, 57 percent), 15 out of 30 Chapter 11 cases (50 percent), and 13 (or 43 percent) of the 30 Chapter 13 cases reviewed by TIGTA. Specifically, IRS the specialists did not always properly conduct the initial case analysis in a timely manner, follow up on scheduled case actions within a reasonable time, or properly close cases in a timely way.

TIGTA also reviewed a random sample of 30 bankruptcy cases with Automated Proof of Claim flag conditions, that is, with errors that need to be resolved by an IRS specialist. In those cases, IRS specialists did not properly resolve the flag conditions, or resolve them in a timely way, in 12 (or 40 percent) of the 30 cases examined.

TIGTA noted that there is a bankruptcy automatic stay provision that prohibits the IRS from taking certain collection actions against a debtor as soon as it learns, or is notified by a U.S. bankruptcy court, that a bankruptcy petition has been filed.

Debtors may also be granted a discharge, which remains after the case is closed and is a permanent injunction order prohibiting the IRS from taking any form of collection action against the debtor personally with respect to discharged debts.

“If the IRS does not observe the automatic stay or the discharge injunction, taxpayers’ rights could potentially be violated and the IRS could be sued for damages,” said the report.

In fiscal year 2012, IRS data showed that the Field Insolvency function received 306,920 bankruptcy cases for taxpayers who owed approximately $2.5 billion in taxes, penalties and interest. TIGTA initiated an audit to determine whether the function has effective controls and procedures in place to take appropriate and timely actions to protect the government’s interest and taxpayers’ rights during bankruptcy proceedings.

However, TIGTA found that the IRS’s Field Insolvency function specialists frequently did not follow the required procedures when working on bankruptcy cases. Although TIGTA did not identify any violations of taxpayers’ rights or failure to protect the government’s interest during its review, the Inspector General’s report said there is a higher risk that this could occur when procedures are not followed.

TIGTA recommended that the director of field collection at the IRS’s Small Business/Self-Employed Division enhance the group’s casework priorities and efficiencies; ensure that specialists are properly conducting the initial analysis and closing actions; ensure that the Automated Insolvency System follow-up tool is the preferred method for creating follow-ups; make sure that case actions are properly documented for Automated Proof of Claim flag conditions; and ensure that the Flagged Cases Report is the preferred method for monitoring cases.

In response to the report, IRS officials agreed with all of TIGTA’s recommendations and plan to take corrective actions.

“This is the first audit of Field Insolvency undertaken by TIGTA,” wrote Karen Schiller, commissioner of the IRS’s Small Business/Self-Employed Division, in response to the report. “We appreciate your acknowledgement that the audit did not find any violations of taxpayer rights or instances where the government's interest had been compromised. We take seriously our obligations to safeguard taxpayer rights and protect the government's interests.”

She added that prior to receiving the draft audit report, the Field Insolvency unit had entered into negotiations with the IRS’s Centralized Insolvency Organization and the National Treasury Employees Union and signed a memorandum of understanding that took effect last July in which changes were made to how bankruptcy cases are assigned.

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