2011 IRS REPRESENTATION UPDATE

By: Robert E. McKenzie

1. A CHANGING IRS

Custom Search

More Compliance Centers to Cease Processing Returns:

1.10 Because of electronic filing the IRS is gradually eliminating its return processing centers. The closure schedule is as follows.

Philadelphia, Memphis & Holtsville no longer process
Andover10-09
Atlanta10-11

As of October, 2011 there will be 2 returns processing centers for business returns and 3 returns processing centers for individual returns. Each of the remaining compliance centers will continue performing correspondence audits and collection activities.

IRS Workforce

1.15 As a result of Congressional cuts in IRS budgets its workforce continued to shrink until 2008. In 2009 and 2010 the IRS has had its budgets grow and its workforce is now growing.

Table 30. Internal Revenue Service Personnel Summary, by Employment Status,Budget Activity, and Selected Type of Personnel, Fiscal Years 2008 and 2009
Employment status, budget activity, and selected personnel type	Average positions realized [1]		Number of employees at close of fiscal year

	2008	2009	2008	2009
	(1)	(2)	(3)	(4)
Internal Revenue Service, total	90,647	92,577	90,210	93,337
Employment status [2]:
Full-time permanent	[r] 88,121	90,446	[r] 87,728	91,082
Other	[r] 2,526	2,131	[r] 2,482	2,255
Budget activity:
Examinations and Collections	41,095	41,950	42,123	45,248
Filing and Account Services	25,785	26,530	23,568	23,544
Information Services	6,507	6,392	6,814	6,706
Prefiling Taxpayer Assistance and Education	5,995	6,233	6,394	6,324
Shared Services and Support	5,571	5,710	5,816	5,792
Investigations	4,162	4,228	4,178	4,345
Regulatory activities	1,175	1,202	1,212	1,295
Business Systems Modernization	347	322	95	73
Health Insurance Tax Credit Administration	10	10	10	10
Selected personnel type:
Customer Service Representatives	17,736	18,200	18,316	19,544
Revenue Agents	12,587	12,948	12,951	14,264
Seasonal employees	10,025	10,875	8,422	7,517
Revenue Officers	5,493	5,451	5,481	6,142
Special Agents	2,590	2,610	2,617	2,725
Tax Technicians	1,496	1,539	1,538	1,725
Attorneys	1,397	1,459	1,429	1,602
Appeals Officers	768	785	781	858

Staffing for Key Enforcement Occupations

	FY 2006	FY 2007	FY 2008	FY 2009	FY 2010
Revenue Officers	5,627	5,662	5,492	5,451	6,042
Revenue Agents	12,778	12,816	12,599	12,958	13,888
Special Agents	2,780	2,709	2,631	2,650	2,780
Total	21,185	21,187	20,722	21,059	22,710

Preparer Regulation

1.20 In January, 2010 based on the results of the Return Preparer Review, the IRS recommended a number of steps that it planned to implement for future filing seasons. These steps did not be in effect for the current 2010 filing season. As of the 2011 filing season all paid preparers were required to register for an PTIN.

New Regulatory Requirements

1.30 Registration: Paid tax return preparers had no registration requirement with the IRS, but they were required to sign the returns they prepare and provide either their Social Security Number or a Preparer Tax Identification Number (PTIN). The PTIN has been an optional number a preparer can apply for if they prefer not to disclose their SSN.

The IRS now requires individuals who are required to sign a federal tax return as paid return preparer to register with the IRS and pay a user fee. Also, the use of PTINs is mandatory instead of optional.

All preparers must have registered by January 1, 2011 for a PTIN

This included those who already have PTIN
Preparers include even those who prepare claims for refunds
Beginning in 2011, those preparers who are not EA’s, CPA’s or attorneys must pass competency tests w/i 3 years
There is a fee to register $64.25
Began registration in September 2010

Competency Testing

1.35 Paid tax return preparers who are not attorneys, certified public accountants or enrolled agents will have to take a competency test. Currently any person may prepare a federal tax return for any other person for a fee. There are no minimum competency standards. The IRS plans to require that paid tax return preparers who are not attorneys, certified public accountants, or enrolled agents pass an IRS competency test. It should be noted that certified public accountants, attorneys and enrolled agents already take competency tests. However, in the future the IRS will study tax return accuracy of attorneys and certified public accountants to ensure that this exemption to testing requirements is warranted.

Transition Rules

1.40 To avoid business interruption for existing preparers and clients, a transition rule gave existing preparers approximately three years to meet the competency testing requirement. The IRS plans to monitor the testing process during the implementation period to study whether additional tests are necessary and feasible.

The IRS plans to allow preparers who test during the initial three-year implementation period to sit for the examination as often as the examination is offered until they pass the examination provided the applicable fee is paid for each attempt.

After passing the test, the individual is officially a “Registered Tax Return Preparer”

No Grandfather Claus

1.50 Contrary to the position taken by organizations like NATP the IRS does not intend to “grandfather” any tax return preparer from the testing requirement based on return preparation experience. Once testing is available, the IRS plans to require unregistered individuals who want to become preparers to pass the competency test prior to registration and issuance of a PTIN. The IRS recommends that enrolled actuaries and enrolled retirement plan agents be required to pass one of the IRS competency tests if they intend to prepare Form 1040 series returns.

Continuing Education

1.60 Paid preparers who are not attorneys, certified public accountants, enrolled agents, enrolled actuaries, or enrolled retirement plan agents are required to complete 15 hours of continuing education annually once they pass the test. The 15 hours must include three hours of federal tax law updates, two hours of tax ethics, and 10 hours of other federal tax law topics.

The IRS intends to have paid preparers self-certify completion of continuing education requirements during registration renewal. The IRS plans to conduct periodic checks to ensure compliance with the requirements.

Exemption for CPA’s, EA’s & Lawyers

1.70 While attorneys, certified public accountants, enrolled agents, enrolled actuaries, and enrolled retirement plan agents are not subject to IRS continuing education requirements or self-certification during the registration renewal process, they generally must complete continuing education to retain their professional credentials. If data is collected in the future that identifies a need for educational requirements for these individuals, the IRS will consider expanding the continuing education requirements to them.

Public Database

1.80 The IRS will develop a searchable database of tax return preparers that have registered and passed the competency examination. This will allow the public to see whether a preparer has taken appropriate tests and has registered with the IRS.

Compliance Checks

1.90 The IRS plans to require all signing paid tax return preparers be subject to verification of personal and business tax compliance every three years. During the initial three-year implementation period, the IRS plans to conduct the tax compliance checks after registration and prior to the required renewal date. After the three-year phase-in period, the IRS intends to require tax compliance as a condition of registration and PTIN issuance.

For those individuals who are registered and have a PTIN, the IRS intends to refer potential tax compliance violations discovered at renewal to the IRS Office of Professional Responsibility for investigation and possible disciplinary sanctions.

Ethical Standards

1.100 The IRS has issued proposed regulations making all signing and non-signing tax return preparers subject to the provisions of Treasury Department Circular 230, which will make them subject to discipline for unethical and unprofessional conduct. The authority granted to those individuals who either do not have professional licenses or and who are not enrolled agents, enrolled actuaries or enrolled retirement plan agents will be limited to preparing tax returns and representing their clients as currently permitted during the examination of any return prepared by that tax return preparer.

Enforcement

1.110 The IRS will implement a comprehensive enforcement strategy that includes applying significant examination and collection resources to tax return preparer compliance. The IRS will also take steps during the 2011 filing season to increase education and enforcement of return preparers.

Evaluation

1.120 The IRS will study how to enhance the effectiveness of traditional enforcement tools and incorporate new non-traditional enforcement tools, such as directed notices and targeted site visits, into the enforcement activities directed at tax return preparers. The IRS will study the impact an enhanced return preparer enforcement strategy has on taxpayer compliance and consider further changes to the IRS enforcement strategy dependent on the outcomes realized. The IRS will increase the coordination among its operating divisions and increase the staffing of the Office of Professional Responsibility to allow for increased investigations of practitioners, including tax return preparer misconduct.

Why is the Return Preparer Review and resulting new regulatory requirements important?

1.130 Use of paid preparers has grown steadily in recent decades. Today, a majority ofU.S. taxpayers rely on a paid preparer to assist them in meeting their federal tax filing obligation. A federal tax return is one of the most important financial documents that many individuals or families deal with in a given year. It is unclear exactly how many paid return preparers there are in theU.S. The IRS estimates the number to be between 900,000 and 1.2 million.

Preparer Oversight

1.140 All preparers are subject to some oversight but it varies greatly depending on their professional affiliations and which state they practice in. Many preparers do not have to pass any government or professionally mandated competency requirement before charging to prepare tax returns. Taxpayers need and deserve return preparers who are ethical, fully qualified and able to provide the best possible service. In addition, unethical or incompetent preparers are the most likely to make mistakes or file incorrect returns, adding to non-compliance. Public comments received by the Return Preparer Review overwhelmingly expressed support for increased oversight of paid preparers, particularly those who are not attorneys, certified public accountants or others authorized to practice before the IRS.

IRS Tax Preparer Visits Include All Types of Practitioners,

1.150 During the 2011 preparation the IRS continued a program of 10,000 visits to preparers. The Internal Revenue Service did not targeting any one type of tax preparer in visits to their offices. Their professional designation—whether certified public accountant, attorney, or enrolled agent—was not a factor in determining who would be visited or in deciding who would receive one of 10,000 letters that IRS sent out beginning in January. The letters reminded certain tax preparers with high error rates that they need to be more careful. In-person visits lasted up to three hours and while some preparers have complained that the visits are occurring during the busiest time of the year, IRS said they are an important part of the agency’s new outreach efforts in conjunction with the upcoming registration of all tax preparers who sign a return. The Service needs to meet with tax preparers at the beginning of the season, it said.

Who received the letter?

1.160 The preparers receiving the letters are among those with large volumes of specific tax returns where the IRS typically sees frequent errors. The letters are intended to remind preparers to be vigilant in areas where the errors are frequently found.

Specifically, the letters encouraged return preparers to:

Review pertinent books and records of Schedule C filers.
Determine the correct itemized deductions of Schedule A filers.
Make sure those who claim dependents and the EITC are entitled to do so.
Ask first-time homebuyers the right questions to make sure they qualify for the First Time Homebuyer Credit to review their obligations.

PTIN’s

1.170 March 24, 2010 the IRS issued proposed regulations under IRC §6901 setting forth registration and testing rules. All preparers of returns and claims for refund must apply for a PTIN. After testing begins to obtain a PTIN an individual will have to be a CPA, attorney, enrolled agent or registered return preparer under the proposed return preparer registration plan. As the IRS revealed when it first proposed mandatory registration of return preparers, under the proposed regulations, applying for a PTIN may subject a return preparer to a tax compliance check, which could include a review of whether the individual has timely filed his or her personal and business tax returns and paid all tax due.

Penalties

1.180 Under the proposed regulations, failure to include a PTIN on a return could subject a return preparer to penalties under IRC § 6695(c). That penalty is $50 for each failure to furnish a required identifying number, up to $25,000 in each calendar year.

Background Checks

1.190 Fingerprint checks will potentially be implemented in mid-2011 for individuals who are not attorneys, CPAs, or enrolled agents.

User Fees

1.200 Tax return preparers will be required to pay a user fee of $64.25 when first applying for a PTIN and at every renewal. There will also be user fees for CPE providers and for testing.

E-file Mandate

1.210 Tax return preparers who prepare 100 or more individual or trust returns in 2011 will be required to e-file. Tax return preparers who prepare 10 or more individual or trust returns in 2012 will be required to e-file. The IRS has created form 8948 to states reasons a form must be filed in paper format.

2. TAXPAYER ADVOCATE

National Taxpayer Advocate Releases Report to Congress

2.10 In January 2011 National Taxpayer Advocate Nina E. Olson released a report to Congress. Internal Revenue Code (IRC) § 7803(c)(2)(B)(ii)(III) requires the NTA to describe at least 20 of the most serious problems encountered by taxpayers. Each of the most serious problems includes the NTA’s description of the problem, the IRS’s response, and the NTA’s final comments and recommendations. This format provides a clear picture of which steps have been taken to address the most serious problems and which additional steps the NTA believes are required. The problems described in the report are as follows:

1. The most serious problem facing taxpayers – and the IRS – is the complexity of the Internal Revenue Code.

Analysis

A TAS analysis of IRS data shows that taxpayers and businesses spend 6.1 billion hours a year complying with tax-filing requirements. To place this in context, it would require more than three million full-time employees to work 6.1 billion hours, making “tax compliance” one of the largest industries in theUnited States.

Tax law complexity imposes monetary costs on taxpayers as well. About 60 percent of individual taxpayers pay practitioners to prepare their returns, and another 29 percent use tax software to assist them. According to IRS researchers, the annual monetary compliance burden of the median individual taxpayer (as measured by income) came to $258 in 2007.

Perhaps most troubling, tax law complexity leads to perverse results. On the one hand, taxpayers who honestly seek to comply with the law often make inadvertent errors, causing them to either overpay their tax or become subject to IRS enforcement action for mistaken underpayments. On the other hand, sophisticated taxpayers often find loopholes that enable them to reduce or eliminate their tax liabilities. Taxpayers have developed a sense of cynicism about the tax system, and compliance takes a hit.

IRS data show that when taxpayers have a choice about reporting their income, voluntary tax compliance rates are disturbingly low. Among self-employed workers whose income is not subject to tax withholding, reporting compliance rates are 43 percent for the business income of non-farm sole proprietors and 28 percent for unincorporated farming businesses.

Although there are multiple causes of noncompliance, tax law complexity plays a significant role. No one wants to feel like a “tax chump” – paying more while suspecting that others are taking advantage of loopholes to pay less. Because of tax complexity, taxpayers often suspect that the “special interests” are receiving tax breaks while they themselves are paying full freight.

Tax simplification would go a long way toward addressing these concerns. The most promising approach would involve reducing tax preferences (often referred to as “broadening the tax base”) in exchange for lower rates. However, it is essential that the taxpaying public have a realistic sense of the difficult trade-offs involved. Tax breaks created for narrow “special interests” receive considerable attention, which shapes a perception that these “special interests” receive a large share of tax benefits. While narrow tax breaks certainly do exist, the reality is that the biggest “special interests” are us – the vast majority ofU.S.taxpayers.

Virtually all of us benefit from certain exclusions from income, deductions from income, or tax credits (collectively known as “tax expenditures”). Among the largest are the exclusion for employer-provided health care, the exclusion for retirement plan contributions and earnings, and the mortgage interest deduction. The Joint Committee on Taxation (JCT) estimates that tax expenditures total about $1.1 trillion a year. As compared with the 138 million individual tax returns filed in 2010, that translates to an average reduction in tax per return of about $8,000. Moreover, tax is computed as a percentage of income. Therefore, for example, a taxpayer who pays a 25 percent tax rate may be benefiting from deductions or exclusions from income worth $32,000 (i.e., a reduction in taxable income of $32,000 produces a reduction in tax of $8,000 when the tax rate is 25 percent).

If tax preferences are to be eliminated in order to reduce tax rates, we cannot pretend that broadening the tax base means eliminating someone else’s tax break while preserving our own. Everything must be put on the table, and we must understand that, in exchange for lower rates, some tax breaks will be eliminated immediately and others will be phased out. If tax reform proceeds on a revenue-neutral basis, however, the average taxpayer’s liability will not change, and we will end up with a tax system that is simpler, more transparent, and easier and cheaper for taxpayers to navigate.

The question of whether and to what extent to raise revenue is extremely contentious, and we are concerned if structural tax reform and revenue levels are considered together as a package, the debate over revenue levels could overshadow and derail meaningful tax reform. Therefore, we suggest that Congress consider addressing these issues separately. First, Congress could enact structural tax reform on a revenue-neutral basis. Second, Congress could decide on appropriate revenue levels and adjust the tax rates accordingly.

Recommendations

The NTA recommends that Congress substantially reform and simplify the Internal Revenue Code (see accompanying legislative recommendation later in this report). The NTA further recommends that, to enhance taxpayer awareness of the connection between taxes paid and benefits received, Congress direct the IRS to provide all taxpayers with a “taxpayer receipt” showing how their tax dollars are being spent.

2. The IRS Mission Statement Does Not Reflect the Agency’s Increasing Responsibilities for Administering Social Benefits Programs

Problem

The IRS’s current mission statement does not reflect the significant role the IRS is now playing in the administration of social benefits. From an organizational standpoint, there are substantial differences between benefits agencies and enforcement agencies in terms of culture, mindset, and the skills sets and training of their employees. As the IRS prepares to administer large portions of the health care legislation, it will have to shift from being an enforcement agency that primarily says, in effect, “you owe us” into an agency that places much greater emphasis on hiring and training caseworkers to help eligible taxpayers receive benefits and work one-on-one with taxpayers to resolve legitimate disagreements. Finally, from a budgetary standpoint, the IRS will require additional resources if it is expected to administer benefits programs without undermining its ability to perform its critical tax collection role.

Recommendations

The NTA recommends that the IRS revise its mission statement to reflect two distinct administrative roles of traditional tax collection and delivery of social benefits, an effort which should also include the following steps: (1) revising Revenue Procedure 64-22 to include the IRS’s responsibility as social benefit administrator; (2) creating a program office and new deputy commissioner position to provide strategic direction for all social benefits programs; and (3) conducting a comprehensive evaluation of the administration of previous and existing social programs to aid in the planning and implementation of existing and future social programs.

3. IRS Performance Measures Provide Incentives That May Undermine the IRS Mission

Problem

The IRS employs an extensive set of performance measures. However, a TAS analysis found that the IRS measures place disproportionate emphasis on cycle time. An overemphasis on cycle time creates incentives for IRS employees to take actions quickly, even where doing so produces inaccurate results or delays the final resolution of problems. As a consequence, taxpayers may face inaccurate audit determinations or unwarranted collection actions. As a separate matter, the IRS measures the return on investment (ROI) of its enforcement activities, but not its taxpayer service activities. Under congressional budget scoring rules, funding for new IRS initiatives is exempt from otherwise applicable spending caps if an initiative is projected to produce an ROI of greater than 1:1. Therefore, because the IRS measures the ROI for enforcement activities but not services, the IRS receives disproportionate funding for enforcement activities. As Congress has given the IRS more benefits programs to administer in recent years (e.g., Economic Stimulus Payments, First-Time Homebuyer credits, Making Work Pay credits, and health care reform), the effects of this incentive are reflected in a decline in critical taxpayer service functions, as discussed elsewhere in this report.

Recommendations

The NTA recommends the IRS develop (1) ROIs for its taxpayer service initiatives and (2) measures that create better incentives for IRS leaders to adopt procedures that prevent delinquencies and promote voluntary compliance.

4. The Wage & Investment Division Is Tasked With Supporting Multiple Agency-Wide Operations, Impeding its Ability to Serve its Core Base of Individual Taxpayers Effectively

Problem

As the largest IRS operating division, Wage and Investment (W&I) supports servicewide operations such as submission processing, toll-free telephones, accounts management, and electronic services. These servicewide responsibilities interfere with W&I’s ability to meet the needs of individual taxpayers, who are W&I’s core customers. Particularly as the IRS gears up to administer health care reform, W&I’s ability to focus on its core mission of serving individual taxpayers must be strengthened. Additionally, we are concerned that the structure of the IRS budget masks the relatively small amount of money spent on taxpayer service activities.

Recommendations

The NTA recommends that the IRS create a new division under the Deputy Commissioner for Services and Enforcement to coordinate servicewide customer account services; remove funding for Submission Processing from the Taxpayer Services budget and place it in the Operations Support budget account instead; and divide the budget for Accounts Management, Field Assistance, and other similar organizations that perform both service and compliance activities on the basis of the percentage of their activities that constitute assistance, outreach, and education as opposed to enforcement or operations support.

5. IRS Policy Implementation through Systems Programming Lacks Transparency and Precludes Adequate Review

Problem

The IRS needs automation to administer tax laws and tax-based social programs efficiently. Automation can enhance speed, accuracy, and comprehension while promoting consistency and fairness. To be effective, tax policies and procedures administered through automated systems and software applications require transparency, and employee guidance embedded in systems must be reviewed and continually analyzed for proper application. However, not all IRS systems utilize a continuous feedback cycle to assess and update embedded policies. As a result, they may be programmed with incorrect, incomplete, or outdated guidance that harms taxpayers. Further, the IRS may not be fulfilling its duty to update or publish instructions or procedures affecting taxpayers under the Freedom of Information Act (FOIA) and Electronic FOIA (E-FOIA).

Recommendations

The NTA recommends that the IRS expand the SPDER clearance process to systems that include embedded policy decision tools; require artificial intelligence and continuous feedback in new systems to continually assess and improve programming; plan and allocate funding for information technology hardware, software, and support of artificial intelligence and continuous feedback; and provide for public disclosure of embedded policy required for transparency.

6. IRS Collection Policies and Procedures Fail to Adequately Protect Taxpayers Suffering an Economic Hardship

Problem

Last year, in Vinatieri v. Commissioner, the Tax Court held that the IRS abused its discretion by proposing to levy on a taxpayer with unfiled returns who had shown that she was in economic hardship. More than a year has passed since the Vinatieri decision, yet IRS guidance still does not adequately explain procedures for placing an account with unfiled returns into currently not collectible (CNC) status rather than proceeding with a levy. Thus, vulnerable taxpayers are still exposed to potentially devastating levies.

Recommendations

The NTA recommends that the IRS work with TAS to revise the IRM and other procedural guidance to clarify that all collection employees can place an account into CNC status solely because of economic hardship even when the taxpayer has unfiled returns, independent of any other criteria; that the IRS work with TAS to train collection employees about how to manage taxpayer accounts when taxpayers are facing economic hardship and submit its 2011 collection CPE training materials on this issue to TAS for review; and that the IRS revise its quality review procedures to measure whether employees considered the possibility that a taxpayer was in economic hardship and managed the account appropriately.

7. The IRS Does Not Know the Impact of Ignoring a Non-IRS Debt When Analyzing a Taxpayer’s Ability to Pay an IRS Debt

Problem

When a taxpayer is unable to pay a tax debt in full, the IRS computes how much it believes the taxpayer can reasonably pay. As part of this computation, the IRS compares the taxpayer’s income with the taxpayer’s “allowable” expenses and requires the taxpayer to pay the excess, if any. In computing the taxpayer’s “allowable” expenses, however, the IRS does not make allowance for taxpayers to pay other debts for which they remain liable. As a result, taxpayers may be required to commit to making payments to the IRS in excess of what they can afford, thereby prolonging unresolved delinquencies, creating hardships, and leaving the taxpayers less able to pay taxes due in future periods.

Recommendations

The NTA recommends the IRS (1) test the effect of more realistic collection financial analysis on taxpayer hardship, installment agreement defaults, and future compliance, and (2) seek public comments on its collection financial analysis policies (such as the disallowed debt rule) and publish the reasons for them.

8. The Failure of the Office of Appeals to Document Prohibited Ex Parte Communications May Violate Taxpayer Rights and Damage the Public’s Perception of its Independence

Problem

The IRS Office of Appeals (Appeals) was created to give taxpayers facing adverse IRS actions an opportunity to obtain an independent review of their cases. Taxpayers understandably may question whether an Appeals function within the IRS that consists largely of former audit and collection employees will treat them fairly. Largely because of that concern, Congress prohibited one-sided communications between Appeals and other IRS functions that appear to compromise Appeals’ independence (i.e., “ex parte communications”). However, less than two-thirds of taxpayers surveyed are satisfied with Appeals’ independence, and one in four attorney practitioners surveyed reports an ex parte violation in Appeals. The perception that Appeals tolerates these violations erodes public trust in its independence. Yet Appeals has no method of tracking ex parte violations to determine to what extent they occur. Without this data, Appeals cannot take the steps necessary to reduce ex parte violations and increase public confidence in its independence. In addition, current ex parte guidance takes the form of a Revenue Procedure instead of a Treasury Regulation and does not provide a public notice-and-comment period, thereby denying taxpayers the opportunity to weigh in on rules that are supposed to protect their rights.

Recommendations

The NTA recommends that the IRS track ex parte violations to reduce any public misperception of Appeals’ independence and, ultimately, the number of actual violations. Appeals should redesign its quality review procedures so that they separate any review of ex parte violations from other elements. The IRS should take the necessary procedural steps to publish ex parte guidance as a Treasury Regulation, ensuring that any new regulation upholds taxpayer rights. Appeals should take the initiative to assist other IRS functions with ex parte compliance through joint training.

9. The IRS’s Failure to Provide Timely and Adequate Collection Due Process Hearings May Deprive Taxpayers of an Opportunity to Have Their Cases Fully Considered

Problem

Congress established Collection Due Process (CDP) hearings to provide taxpayers with an opportunity to have IRS lien filings or proposed levy actions reviewed by an independent Office of Appeals (Appeals), to ensure that “any proposed collection action balances the need for the efficient collection of taxes with the legitimate concern of the person that any collection action be no more intrusive then necessary.” In practice, the IRS frequently issues CDP notices without verifying the taxpayer’s liability or adequately analyzing his or her ability to pay. In addition, the IRS routinely asks taxpayers to withdraw their CDP hearing requests upon resolution of their cases, which imposes pressure on taxpayers and may cause them to forfeit their judicial review rights if their problems are not ultimately resolved. The IRS has no measures to determine whether delays or inadequate CDP hearings increase the IRS’s downstream costs of collecting taxes, or impair future taxpayer compliance.

Recommendations

The NTA recommends that the IRS require its employees to make substantial efforts at telephone or in-person contact before proposing levies or filing liens to identify taxpayers who are able to pay; that Appeals should be the point of contact for all CDP hearing requests, should route cases to IRS Collection when necessary to attempt resolution, and should issue agreed decisions or determinations, rather than obtain withdrawals, to preserve the taxpayers’ judicial review rights; that Appeals revise its notices and procedures to clearly inform taxpayers about the types and alternative locations of hearings; and that Appeals track CDP sustention and taxpayer default rates following CDP determinations.

10. Third-Party Reporting of Cancellation-of-Debt Events Is Not Always Accurate, and the IRS’s Reliance on Such Reporting May Burden Taxpayers

Problem

When a lender cancels a debt, the lender must report the amount of the canceled debt to the IRS and the borrower is generally required to include the reported amount in gross income. As a general matter, the IRS assumes that when a creditor files a Form 1099-C, Cancellation of Debt, the creditor is reporting the actual cancellation of a debt and the amount shown on the form is correct. The IRS’s document-matching system may generate notices, proposing additional tax due, to taxpayers who fail to report these amounts as income. However, the IRS’s assumptions that a debt was canceled and the amount reported by lenders is accurate may be incorrect for any of these reasons:

Creditors sometimes issue a Form 1099-C because Treasury regulations provide an incentive to do so or as a means of pressuring a debtor to pay – even where they are not canceling the debt;

Creditors sometimes make errors on the form that debtors then may have to wage an uphill battle to correct; or

IRS automated systems cannot distinguish taxpayers with canceled debts who have additional income and owe additional tax from taxpayers with canceled debts who are insolvent, have no additional income, and do not owe additional tax. As a consequence, the IRS may sometimes deny legitimate Earned Income Tax Credit (EITC) claims because it believes the taxpayer’s income is too high.

Recommendations

The NTA recommends that the IRS revise its regulations to better align the Form 1099-C reporting requirements with actual cancellation of debt; modify Form 1099-C to provide information about why the creditor is issuing it and whether a debt was actually canceled; send taxpayers an insolvency worksheet with the letter that proposes additional tax due; and adjust its computerized document-matching program to identify taxpayers that are likely insolvent and therefore not required to include in gross income amounts shown on a Form 1099-C.

11. The IRS’s Failure to Track and Analyze the Outcomes of Audit Reconsiderations and Inconsistent Guidance Increase Taxpayer Burden and Inflate IRS Audit Results and Cost Effectiveness Measures

Problem

The IRS uses the audit reconsideration process to reevaluate the results of previous audits where additional tax was assessed and remains unpaid or a tax credit was reversed. Although the number of audit reconsiderations and tax abatements has significantly increased over the past three years, the IRS does not measure the impact of the growing number of audit reconsiderations and does not use the outcomes to improve procedures for original audits. Moreover, the IRS’s failure to adjust its audit data to reflect the results of audit reconsiderations has served to inflate audit results and cost effectiveness measures. Audit reconsideration results differ from original audit results for a variety of reasons, including more automated processes with less human interaction, mail handling delays, and inconsistent, ambiguous, and often contradictory forms, publications, and IRM provisions.

Recommendations

The NTA recommends that the IRS develop a method to control and track audit reconsideration results including the cycle time from all assessment sources; institute a program of reviewing representative samples of audit reconsiderations to analyze the reasons for and the outcomes of audit reconsiderations; clarify guidance in publications and instructions that taxpayers can use Form 12661, Disputed Issue Verification Resolution, to request audit reconsideration in writing; revise publications to provide clear, noncircular instructions for appealing an audit reconsideration denial and a mailing address to submit requests for audit reconsideration and appeal; and clarify guidance regarding collection holds during an audit reconsideration.

12. Persistent Breakdowns in Power of Attorney Processes Undermine Fundamental Taxpayer Rights

Problem

The Internal Revenue Code provides taxpayers with the right to designate a representative to represent the taxpayer in dealings with the IRS. Yet IRS processes and systems designed to recognize and record power of attorney (POA) form information continue to frustrate taxpayers and their representatives when attempting to comply with filing and payment responsibilities. Problems associated with POA processing can lead to a lack of representation, adverse IRS action (i.e., unnecessary liens and levies), and lengthy delays in processing tax returns and refunds.

Recommendations

The NTA recommends that the IRS establish a process for gathering and tracking taxpayer and POA complaints on direct contact violations; provide mandatory annual training for all contact employees; implement a “paperless fax” imaging system to prevent lengthy CAF delays and potential adverse actions; acknowledge receipt of a taxpayer POA in the CAF unit to prevent costly rework; create a POA form for use by school-based LITCs so an LITC director may substitute one student name for another when a new semester begins and a new group of students takes over cases; and implement dual address change letters in cases where a third-party payor has access to a client-employer’s funds, alerting the employer that a third party has initiated a change of address.

13. IRS Collection Policies Channel Taxpayers into Installment Agreements They Cannot Afford

Problem

If a taxpayer owes $25,000 or less and agrees to pay the liability in full within five years (and before the collection expiration date), the IRS may accept a “streamlined” installment agreement (IA) without regard to the taxpayer’s ability to pay. Streamlined IAs are an appropriate tool for resolving many delinquencies. However, an IRS study found that more than a quarter of taxpayers requesting streamlined IAs could not afford them. Moreover, the IRS sometimes places taxpayers into streamlined IAs without their consent – a practice that may violate the law. As a result, some taxpayers may be unable to meet basic living expenses or fall behind on their tax payments in the future.

Recommendations

The NTA recommends the IRS discontinue the legally questionable practice of placing taxpayers into streamlined IAs with higher payments than they have agreed to make. She also recommends the IRS research why taxpayers default on streamlined IAs and the impact of streamlined IAs (and other collection alternatives) on future tax compliance.

14. The IRS’s Over-Reliance on Its “Reasonable Cause Assistant” Leads to Inaccurate Penalty Abatement Determinations

Problem

The IRS requires employees to use the Reasonable Cause Assistant (RCA), an interactive decision support program, to evaluate taxpayers’ requests for abatement of certain penalties. However, a study conducted by the IRS itself found that RCA determinations were accurate in only 45 percent of the cases examined, even though all employees thought their determinations were correct. In other words, a coin flip would have produced nearly the same level of accuracy as the RCA. The NTA believes RCA determinations are inaccurate for the following reasons: (1) RCA users are not properly trained in tax law, (2) IRS policies do not encourage employees to override incorrect recommendations by the computer, (3) the RCA has no feedback system to improve employee knowledge of reasonable cause and programming accuracy, and (4) taxpayers must initiate contact with the IRS to receive a First-Time Abatement (FTA), even though the IRS can grant the FTA automatically.

Recommendations

The NTA recommends the IRS improve RCA user and manager training in tax law (including case studies), encourage use of the override feature when the RCA recommendation is inappropriate, incorporate a corrective feedback system in the RCA to improve knowledge of reasonable cause and incorporate “lessons learned” from override cases, and program IRS computers to automatically grant FTA waivers for eligible taxpayers considering the compliance histories of individual spouses.

15. State Domestic Partnership Laws Present Unanswered Federal Tax Questions

Problem

Various states have recognized hundreds of thousands of domestic partnerships, civil unions, or marriages between individuals of the same gender. However, the specifics of these provisions vary considerably among the states, and to complicate matters, the federal Defense of Marriage Act prohibits recognition of same-gender marriages for federal purposes. The interaction of these provisions and their interpretation for federal tax purposes is ambiguous in several key areas, requiring taxpayers to file tax returns without clear guidance and potentially subjecting them to audit adjustments in the future.

Recommendation

To enable taxpayers to comply with the tax laws, the NTA recommends that the IRS create and publish guidance answering relevant questions.

16. The IRS Has Not Studied or Addressed the Impact of the Large Volume of Undelivered Mail on Taxpayers

Problem

The IRS mails over 200 million pieces of correspondence to taxpayers each year, including refunds, notices, and other official correspondence. A relatively large volume of this mail never reaches the intended taxpayer. Although the IRS does not itself track how much mail is returned as “undeliverable as addressed,” a Treasury Inspector General for Tax Administration (TIGTA) audit estimated that during FY 2009, approximately 19.3 million pieces of mail, or 10 percent of the total, were returned to the IRS at an estimated cost of $57.9 million. Undeliverable mail can have a significant adverse impact on taxpayers.

Recommendations

The NTA recommends that the IRS study its problems with undelivered mail and address perfection (including the establishment of baseline data and periodic data reporting); consider designating one enterprise-level organization to coordinate policy, procedures, and the protection and maintenance of taxpayer addresses, including one-stop processing of undelivered mail; use full-service intelligent bar coding on all outgoing mail to allow mail tracking and electronic file exchanges with the U.S. Postal Service; and use its existing address research (ADR) system for all undelivered mail.

17. The IRS Does Not Process Vital Taxpayer Responses Timely

Problem

The IRS receives more than 11 million pieces of taxpayer correspondence each year. It is critical that taxpayer correspondence be timely processed, because delays can lead to erroneous tax assessments, improper collection actions, and additional penalties and interest for taxpayers or additional refund interest costs to the government. Yet taxpayers and practitioners express frequent complaints about processing delays, and in one study, the IRS found that more than 75 percent of mail addressed to two campus collection sites took longer to process than the 14-day goal. In fact, nearly 40 percent of this correspondence took more than 30 days to process. Despite this strong evidence of significant processing delays, the IRS does not measure the accuracy or timeliness with which it handles taxpayer correspondence, and it lacks any comprehensive, reliable data to help it understand the sources or causes of misrouted mail. Moreover, because the IRS does not measure the time between first receipt of correspondence and its receipt by the correct technical operation or function, the IRS does not know whether the taxpayer response timeframes built into automated processes are sufficient.

Recommendations

To improve the timely and accurate processing of correspondence, the NTA recommends that the IRS track and assess the timeliness and accuracy of mail routing to each campus operation; revise timeframes for automated assessment processes so they provide sufficient time for the IRS to receive taxpayer responses and update its systems; and test the use of technology such as Intelligent Bar Coding on envelopes to improve routing of incoming mail.

18. The IRS Should Accurately Track Sources of Balance Due Payments to Determine the Revenue Effectiveness of Its Enforcement Activities and Service Initiatives

Problem

IRS procedures generally require employees to code the source of subsequent, postassessment tax payments it receives on balance due accounts. Knowing the source of tax payments serves important purposes. It enables the IRS to assess which activities are most effective at collecting revenue. It also enables the IRS to better comply with statutory requirements to properly record and account for the funding it receives in order to prepare reliable reports and measure tax enforcement results. However, a TAS study has found that the IRS cannot accurately identify the source of the significant majority of subsequent tax payments it receives on balance due accounts. Among the key factors that contribute to coding problems are a lack of meaningful transaction codes to identify received payments; deficient Internal Revenue Manual guidance for employees; and insufficient training and oversight of IRS employees and vendors involved in coding payments.

Recommendations

The NTA recommends that the IRS revise its guidance to require specific designated payment codes on all balance due payments; provide clear and specific guidance for the limited circumstances where employees can enter a miscellaneous DPC; implement a quality review of payment coding; and, in consultation with TAS and IRS research functions, review and revise DPCs and TCs to link each subsequent payment to specific enforcement and service activities.

19. The IRS Has Been Reluctant to Implement Alternative Service Methods That Would Improve Accessibility for Taxpayers Who Seek Face-to-Face Assistance

Problem

Taxpayer Assistance Centers (TACs) are the main form of face-to-face IRS customer service available to taxpayers. However, the IRS’s 401 TACs are within a 30-minute drive of only 60 percent of the taxpaying population. TACs remain out of reach for many rural taxpayers as most are located in more populous areas and only 55 percent are open 36 to 40 hours per week.

Recommendations

The NTA recommends the IRS test a program of using mobile vans to increase face-to-face service; pilot a program to collaborate with state and local agencies to increase face-to-face service; and test telepresence in remote areas.

20. The S Corporation Election Process Unduly Burdens Small Businesses

Problem

The IRS rarely denies applications for S corporation status based on a failure to meet the election criteria. However, many S corporation returns remain unprocessed for years because of missing or late elections, IRS errors in recognizing or processing valid elections, and an absence of effective relief procedures. The IRS does not provide examples of scenarios that meet the criteria for reasonable cause relief in its published guidance, nor does the IRS always fully inform taxpayers of their options for relief under five available Revenue Procedures. Challenges in the S election process for taxpayers include the complexity of relief procedures for a late S corporation election; the often prohibitive cost of retroactive relief via a private letter ruling (PLR); the IRS’s inability to verify the receipt and acceptance of S corporation returns and election applications; and the downstream burdens on shareholders of the conversion of S corporation returns to regular, taxable corporate returns.

Recommendations

The NTA recommends that the IRS expedite the issuance of a consolidated revenue procedure for late election relief; immediately identify and correct accounts where tax was assessed without following deficiency procedures; expand IRS outreach efforts to include a simple and complete guide to the late election relief process; develop an administrative appeal process for taxpayers whose elections are denied; and allow electronic filing of the S corporation election form.

21. The Combined Annual Wage Reporting Program Continues to Impose a Substantial Burden on Employers

Problem

The purpose of the Combined Annual Wage Reporting (CAWR) program is to ensure that employers pay and withhold the proper amount of tax. The program accomplishes this task by comparing the data on wage and information reporting forms submitted to the Social Security Administration (SSA) with the amounts reported to the IRS on employment tax forms. This process enables the IRS and SSA to identify potentially missing or incorrect tax and wage data. The IRS then contacts employers to resolve any discrepancies. However, IRS notices to employers are frequently misrouted, causing delays and potentially causing penalty assessments. Further, the IRS often does not respond to employers’ correspondence within established timeframes and is reluctant to abate penalties.

Recommendations

The NTA recommends that the IRS expand its First-Time Abatement policy to include late filing and intentional disregard penalties and upgrade its systems to allow correspondence to be sent to the appropriate corporate address.

Status Updates

2.20

1. The IRS Has Been Slow to Address the Adverse Impact of its Lien Filing Policies on Taxpayers and Future Tax Compliance

Problem

As described in detail in our 2009 Annual Report to Congress, a notice of federal tax lien (NFTL) filed against a taxpayer can severely damage the financial welfare of the taxpayer and his family and reduce federal revenue for years to come. Despite the NTA’s specific concerns and actionable recommendations, the IRS has not altered its lien filing policies. To the contrary, the IRS filed liens against 1.1 million taxpayers last year, a 14 percent increase over the prior year, in the midst of the worst economy in a generation. The IRS also continues to file many liens automatically, without substantive human review. As a result, NFTL filing practices continue to harm millions of taxpayers, especially low income and minority families. These policies also risk undermining future tax compliance and may be wasting millions of taxpayer dollars on potentially unnecessary lien filing fees.

Recommendations

The NTA reiterates her previous recommendations that the IRS immediately rescind its policy of automatically filing liens, based on an unpaid balance threshold, against accounts designated as “currently not collectible” due to economic hardship; require managerial approval for NFTL filings in all cases where the taxpayer has no significant equity in assets; base lien filing determinations on a thorough review of information including the taxpayer’s assets, the taxpayer’s income, and the value of the taxpayer’s equity in the assets; and determine after weighing all the facts and circumstances whether (i) the lien will attach to property, (ii) the benefit to the government from the NFTL filing outweighs the harm to the taxpayer, and (iii) the filing will jeopardize the taxpayer’s ability to comply with the tax laws in the future. To reverse the damage to a taxpayer’s credit rating, the IRS also should develop and issue guidance allowing, upon the request of the taxpayer, the withdrawal of an NFTL where the statutory withdrawal criteria are satisfied.

2. Despite Program Improvements, the IRS Policy of Processing Most ITIN Applications with Paper Returns During Peak Filing Season Continues to Strain IRS Resources and Unduly Burden Taxpayers

Problem

In prior reports, the NTA expressed significant concerns about IRS processing of applications for Individual Taxpayer Identification Numbers (ITIN) and associated tax returns. The IRS has made improvements to its processes and procedures, but considerable problems continue to arise from the IRS’s policy of declining to process most ITIN applications unless they are attached to paper tax returns. This policy results in recurring seasonal bottlenecks of ITIN applications that strain IRS resources and delay in processing hundreds of thousands of tax returns and refunds.

Recommendation

The NTA commends the IRS for working closely with TAS to improve many ITIN processes and procedures, but reiterates her recommendation to streamline the ITIN application process by assigning ITINs throughout the year upon proof of employment or self-employment. This change would allow new ITIN applicants to file returns electronically and reduce the backlogs that delay both ITIN applications and refunds for many taxpayers.

3. The IRS’s Handling of Collection Statute Expiration Dates Continues to Adversely Affect Taxpayers

Problem

By statute, the IRS generally has ten years from the date it assesses a tax liability to collect the amount due. The collection statute expiration date (CSED) is sometimes difficult to track because the collection period may be extended by taxpayer agreement or suspended by certain provisions of the tax code. As a result, the IRS sometimes miscalculates CSEDs, subjecting taxpayers to unlawful collection. According to a TAS analysis of IRS data, more than 4,600 taxpayers have accounts with CSED extensions or waivers that would violate IRS policy if entered into today.

Recommendation

The NTA renews her recommendation that the IRS designate a centralized function to identify and resolve CSED problems.

The Most Litigated Tax Issues

2.30 IRC§7803(c)(2)(B)(ii)(X) requires the NTA to identify the ten tax issues most often litigated in the federal courts and to classify those issues by the category of taxpayer affected. The following is a table the most litigated as determined by TAS:

Most Litigated Issues

Outcomes for Pro Se and Represented Taxpayers

Issue

Pro SE

Represented

	Total Cases	TP Prevailed	%	Total Cases	TP Prevailed	%
Collection Due Process	123	7	6%	47	7	15%
Summons Enforcement	115	1	1%	43	4	9%
Trade or Business Expense	80	28	35%	32	11	34%
Gross Income	74	1	1%	35	5	14%
Accuracy-Related Penalty	60	10	17%	41	7	17%
Frivolous Issues Penalty (and analogous appellate-level sanctions)	55	4	7%	7	0	0%
Civil Actions to Enforce Federal Tax Liens or to Subject Property to Payment of Tax	36	4	11%	25	6	24%
Failure to File and Estimated Tax Penalties	46	7	15%	14	2	14%
Family Status Issues	45	9	20%	3	0	0%
Joint and Several Liability	24	7	29%	18	12	67%
Total	658	78	12%	265	54	20%

Table 20. Taxpayer Advocate Service: Postfiling Taxpayer Assistance Program, by Type of Issue and Relief, Fiscal Year 2010
Type of issue and relief	Number	Percentage of total
Applications for taxpayer assistance received, by type of issue
Total	298,933	100.0
Processing amended returns	30,891	10.3
Open examination	26,182	8.8
Unpostable and rejected returns	22,341	7.5
Levies	18,015	6.0
Stolen identity	17,291	5.8
Examination reconsideration	12,843	4.3
Processing original returns	11,997	4.0
Expediting refund requests	11,755	3.9
Earned Income Tax Credit	11,198	3.7
Injured spouse claims	7,777	2.6
IRS offset to IRS tax liabilities	6,865	2.3
Other refund inquiries/issues	6,707	2.2
Closed Automated Underreporter Program [2]	6,137	2.1
Returned and stopped refunds	6,115	2.0
Installment agreements	6,039	2.0
All others	96,780	32.4
Applications for taxpayer assistance closed, by type of resolution
Total	286,298	100.0
Relief provided to taxpayer, total	210,867	73.7
Taxpayer Assistance Order issued [3, 4]	48	[5]
No Taxpayer Assistance Order issued [3]	210,819	73.6
Full relief	197,399	68.9
Individual taxpayer issue [6]	176,380	61.6
Systemic issue [7]	21,019	7.3
Partial relief	13,420	4.7
Individual taxpayer issue [6]	12,101	4.2
Systemic issue [7]	1,319	0.5
No relief provided to taxpayer, total	75,431	26.3
Taxpayer Assistance Order rescinded [3, 4]	8	[5]
No Taxpayer Assistance Order issued [3]	75,423	26.3
No response from taxpayer	36,656	12.8
Relief provided prior to Taxpayer Advocate Service intervention	17,926	6.3
Taxpayer withdrew application for assistance	3,884	1.4
Tax law precluded relief	1,605	0.6
Hardship not related to revenue laws	1,008	0.4
Hardship not validated	810	0.3
All others	13,534	4.7

3. ENFORCEMENT

Highlights of 2010 Enforcement

3.10 The IRS continues increase its enforcement activities. the IRS enforcement efforts increased again in fiscal year 2010. For instance, during 2010 the IRS audited over 80% percent more returns of individuals with incomes of $1 million or more than during 2006. Overall, enforcement revenue reached $57.6 billion, IRS collected $48.9 billion in enforcement revenue in 2009, Audit enforcement revenue increased from $12.60 billion to $16.90 billion; and Collection enforcement revenue increased from $26.90billion to $29.10 billion from 2009 to 2010.

FISCAL YEAR 2010 ENFORCEMENT RESULTS

Enforcement Revenue Collected

(Dollars in Billions)	FY 2001	FY 2002	FY 2005	FY 2006	FY 2007	FY 2008	FY 2009	FY 2010
Collection	$24.30	$24.40	$26.60	$28.20	$31.80	$31.10	$26.90	$29.10
Exam	$5.60	$5.70	$13.80	$13.00	$15.20	$15.80	$12.60	$16.90
Appeals	$2.30	$2.20	$3.90	$4.30	$8.30	$4.80	$4.80	$6.70
Document Matching	$1.60	$1.80	$3.10	$3.30	$3.90	$4.70	$4.60	$4.90
Total(3)	$33.80	$34.10	$47.40	$48.80	$59.20	$56.40	$48.90	$57.60

Individual Enforcement

3.20 The total number of audits of individual returns increased in 2010. Those who earned less than $200,000 had about a 1 percent chance of being audited. Those with incomes of $200,000 and more had about a 3 percent chance of being audited.

Total Individual Returns
	FY 2001	FY 2002	FY 2005	FY 2006	FY 2007	FY 2008	FY 2009	FY 2010
Field	202,515	205,134	247,235	302,785	311,339	310,429	326,249	342,762
Corres-pond	529,241	538,747	968,073	981,165	1,073,224	1,081,152	1,099,639	1,238,632

Total
Exam	731,756	743,881	1,215,308	1,283,950	1,384,563	1,391,581	1,425,888	1,581,394

Cover-age	0.58%	0.57%	0.93%	0.97%	1.03%	1.01%	1.03%	1.11%

Income Under $200,000

	FY 2006	FY 2007	FY 2008	FY 2009	FY 2010
Field	266,726	267,699	256,854	269,865	284,241
Correspondence	929,666	1,011,315	1,003,976	1,010,870	1,144,178
Total Examinations	1,196,392	1,279,014	1,260,830	1,280,735	1,428,419
Returns Filed in Prior year	128,875,395	130,600,177	133,407,479	133,924,956	137,892,685
Coverage	0.93%	0.98%	0.95%	0.96%	1.04%

Income $200,000 and Higher

	FY 2006	FY 2007	FY 2008	FY 2009	FY 2010
Field	36,059	43,640	53,575	56,384	58,521
Correspondence	51,499	61,909	77,176	88,769	94,454
Total Examinations	87,558	105,549	130,751	145,153	152,975
Returns Filed in Prior CY*	3,400,435	3,942,702	4,442,156	5,024,714	4,930,420
Coverage	2.57%	2.68%	2.94%	2.89%	3.10%

Millionaires

3.30 Meanwhile, taxpayers with incomes of more than $1 million had a 8.36 percent chance of being audited, up from 6.42 percent the year before. The number of audits for millionaires increased to 32,494 from 21,874 in 2008. The ranks of millionaires decreased by nearly 50,000 taxpayers in 2010 to 388,763 taxpayers.

Income $1 Million and Higher

	FY 2004	FY 2005	FY 2006	FY 2007	FY 2008	FY 2009	FY 2010
Field	5,857	7,166	9,459	12,259	12,233	15,730	16,509
Correspondence	3,719	5,669	4,728	10,941	9,641	12,619	15,985
Total Exams	9,576	12,835	14,187	23,200	21,874	28,349	32,494
Returns Filed in Prior	190,372	210,280	270,161	339,138	392,776	441,715	388,763
Coverage	5.03%	6.10%	5.25%	6.84%	5.57%	6.42%	8.36%

Businesses

3.40 On the business front, the overall number of audits decreased slightly, and dropped as a percentage of businesses that submitted a tax return. More emphasis was placed on medium and large corporations, as audit rates decreased slightly for those companies with more than $10 million in assets and increased slightly for those with less than $10 million in assets. According to 2010 IRS enforcement data released by the IRS it audited 14.16% of returns of corporations with assets of $10 million or more. That is the lowest audit coverage level since 2003 and down from a 20% coverage rate in 2005.

The tax audit rates of the largest companies are less than half what they were 20 years ago while more small and mid-size businesses are coming under scrutiny, according to an organization that monitors the Internal Revenue Service. The Syracuse University-based Transactional Records Access Clearinghouse has described a “historic collapse” in audits for corporations holding assets of $250 million or more. About 26 percent of them were audited in the 2007 budget year compared with 34 percent in 2006 and 43 percent in 2005.

Examination –Business Return Closures and Coverage Rates (1)

	FY 2001	FY 2002	FY 2006	FY 2007	FY 2008	FY 2009	FY 2010
Total Returns Examined	40,557	40,287	52,149	59,516	59,823	58,144	58,067
Returns Filed in Prior	7,384,600	7,576,681	8,722,410	9,072,828	9,530,662	9,951,648	9,949,946
Coverage	0.55%	0.53%	0.60%	0.66%	0.63%	0.58%	0.58%

Small Corporation Returns
(Assets Under $10 Million)	FY 2001	FY 2002	FY 2006	FY 2007	FY 2008	FY 2009	FY 2010
Returns Examined	14,332	14,655	17,849	20,020	20,580	18,298	19,127
Returns Filed in Prior CY*	2,372,900	2,329,479	2,230,024	2,171,144	2,166,197	2,146,400	2,039,625
Coverage	0.60%	0.63%	0.80%	0.92%	0.95%	0.85%	0.94%

Large Corporation Returns
(Assets $10 Million and Higher)	FY 2001	FY 2002	FY 2006	FY 2007	FY 2008	FY 2009	FY 2010
Returns Examined	8,718	8,443	10,578	9,644	9,406	9,536	10,207
Returns Filed in Prior CY*	57,800	59,602	56,847	57,357	61,641	65,546	72,076
Coverage	15.10%	14.20%	18.60%	16.80%	15.26%	14.55%	14.16%

Subchapter S Returns
Form 1120-S	FY 2001	FY 2002	FY 2006	FY 2007	FY 2008	FY 2009	FY 2010
Returns Examined	12,437	11,646	13,970	17,657	16,634	17,455	16,327
Returns Filed in Prior CY*	2,887,100	3,022,589	3,715,249	3,909,730	4,155,830	4,390,857	4,414,662
Coverage	0.43%	0.39%	0.38%	0.45%	0.40%	0.40%	0.37%

Partnership Returns
(Form 1065)	FY 2001	FY 2002	FY 2006	FY 2007	FY 2008	FY 2009	FY 2010
Returns Examined	5,070	5,543	9,752	12,195	13,203	12,855	12,406
Returns Filed in Prior CY*	2,066,800	2,165,011	2,720,290	2,934,597	3,146,994	3,348,845	3,423,583
Coverage	0.25%	0.26%	0.36%	0.42%	0.42%	0.38%	0.36%

Examination – Large Corporation Return Closures and Coverage Rates

	FY 2001		FY 2002	FY 2005	FY 2006	FY 2007	FY 2008	FY 2009	FY 2010
Total Returns Examined		8,718	8,443	10,829	10,578	9,644	9,406	9,536	10,207
Returns Filed in Prior CY		57,800	59,602	54,091	56,877	57,357	61,641	65,546	72,076
Coverage		15.10%	14.20%	20.00%	18.60%	0.66%	0.63%	0.58%	0.58%


By Asset Class
		FY 2001	FY 2002	FY 2005	FY 2006	FY 2007	FY 2008	FY 2009	FY 2010
$10 Million < $50 Million
Returns Examined		3,071	2,540	3,535	4,218	4,473	3,833	3,473	4,307
Coverage		9.70%	7.80%	12.30%	14.20%	15.00%	11.70%	10.10%	10,95%
$50 Million < $100 Million
Returns Examined		973	865	1,148	999	801	893	1,158	1,259
Coverage		12.30%	10.70%	16.40%	13.80%	11.40%	11.70%	14.30%	14.02%
$100 Million < $250 Million
Returns Examined		1,369	1,289	1,287	1,085	946	1,026	1,134	1,191
Coverage		17.60%	16.00%	17.50%	14.00%	12.10%	12.80%	13.60%	13.15%
$250 Million and Higher
Returns Examined		3,305	3,749	4,859	4,276	3,424	3,654	3,771	3,450
Coverage		32.10%	34.40%	44.10%	35.20%	27.20%	27.40%	25.70%	23.44%

Collection Enforcement

3.50 Overall, some of our most common enforcement tools at the IRS also showed increases:

The IRS filed 3.4 million levies in 2009 and 3.6 million in 2010. It filed 683,659 liens in 2007, 768,168 liens during 2008, 965,618 in 2009 and 1,096376 in 2010, a dramatic increase over a 4 year period.

Collection Stats
[amounts are in thousands of dollars.]
Activity	2007	2008	2009	2010
Enforcement activity:
Number of notices of Federal tax liens filed	683,659	768,168	965,618	1,096,376
Number of notices of levy served on third parties	3,757,190	2,631,038	3,478,181	3,606,818
Number of seizures	676	610	581	605

Table 16. Delinquent Collection Activities, FY 2007–2010

Activity

2007

2008

2009

2010

(1)

(2)

(3)

(4)

Returns filed with additional tax due:

Total yield from unpaid assessments [1]

43,318,830

46,446,261

40,520,516

44,173,492

Credit transfers

11,366,431

17,980,613

13,324,478

14,343,418

Net total amount collected

31,952,399

28,465,648

27,196,038

29,830,074

Taxpayer delinquent accounts (thousands):

Number in beginning inventory

7,074

8,240

9,232

9,667

Number of new accounts

7,146

7,099

6,821

7,994

Number of accounts closed

5,980

6,107

6,385

7,269

Ending inventory:

Number

8,240

9,232

9,667

10,391

Balance of assessed tax, penalties, and interest [2]

83,488,988

94,357,717

103,241,178

114,235,064

Returns not filed timely:

Delinquent return activity:

Net amount assessed [3]

30,287,802

24,888,918

33,413,470

29,108,690

Amount collected with delinquent returns

3,968,163

3,773,528

3,204,391

2,353,832

Taxpayer delinquency investigations (thousands) [4]:

Number in beginning inventory

3,874

3,732

3,433

3,530

Number of new investigations

2,587

1,972

2,211

2,273

Number of investigations closed

2,729

2,271

2,113

2,103

Number in ending inventory

3,732

3,433

3,530

3,700

Offers in compromise (thousands) [5]:

Number of offers received

Number of offers accepted

Amount of offers accepted

228,975

200,103

157,261

129,668

Electronic Filing IRS Webpage

3.60 More taxpayers chose to file electronically in 2010 than during the prior year, with 69% of individual tax filers choosing to e-file in 2010, up from 58 percent in 2008.

Electronic Filing (e-File) Rate – -Individual Returns
	FY 2001	FY 2002	FY 2003	FY 2004	FY 2005	FY 2006	FY 2007	FY 2008	FY 2009	FY 2010
	31%	36%	40%	47%	51%	54%	57%	58%	66%	69%

Web Page Visits on IRS.Gov (in millions) Calendar Years
	2001	2002	2003	2004	2005	2006	2007	2008	2009	2010
	n/a	n/a	102.6	152.7	176.5	197.1	217.8	329.4	266.7	304.8

Table 30. Personnel Summary, by Employment StatusFiscal Years 2009 and 2010
Employment status, budget activity, and selected personnel type	Average positions realized [1]		Number of employees at close of fiscal year
	2009	2010	2009	2010
	(1)	(2)	(3)	(4)
Internal Revenue Service, total	92,577	94,711	93,337	94,346
Employment status:
Full-time permanent	90,446	93,027	91,082	92,148
Other	2,131	1,684	2,255	2,198
Budget activity:
Examinations and Collections	41,950	44,802	45,248	46,667
Filing and Account Services	26,530	25,592	23,544	22,877
Information Services	6,392	6,432	6,706	6,774
Prefiling Taxpayer Assistance and Education	6,233	6,076	6,324	6,361
Shared Services and Support	5,710	5,862	5,792	6,018
Investigations	4,228	4,364	4,345	4,270
Regulatory	1,202	1,234	1,295	1,295
Business Systems Modernization	322	337	73	70
Health Insurance Tax Credit Administration	10	12	10	14
Selected personnel type:
Customer Service Representatives	18,200	18,582	19,544	21,057
Revenue Agents	12,948	13,879	14,264	14,588
Seasonal employees	10,875	11,158	7,517	6,943
Revenue Officers	5,451	6,042	6,142	5,922
Special Agents	2,610	2,739	2,725	2,751
Tax Technicians	1,539	1,720	1,725	1,909
Attorneys	1,459	1,571	1,602	1,610
Appeals Officers	785	847	858	902

Type and size of return

Returns filed in
Calendar

Returns examined in Fiscal Year 2010 [1]

All returns

Total

Field [3]

Corres-
pondence

(1)

(2)

(3)

(4)

(5)

United States, total

[4] 187,124,450

1,735,083

0.9

462,131

1,272,952

Taxable returns:

► Individual income tax returns, total

142,823,105

[6] 1,581,394

1.1

342,762

1,238,632

► Returns with total positive income under $200,000 [8]:

► Nonbusiness returns without Earned Income Tax Credit:

Without Schedules C, E, F, or Form 2106

80,254,935

363,424

0.5

34,682

328,742

With Schedule E or Form 2106 [10]

16,052,553

190,746

1.2

61,268

129,478

► Business returns without Earned Income Tax Credit:

Nonfarm business returns

Under $25,000

10,736,434

132,584

1.2

47,260

85,324

$25,000 under $100,000

3,136,694

79,389

2.5

47,784

31,605

$100,000 under $200,000

893,707

42,403

4.7

30,333

12,070

$200,000 or more

705,877

23,569

3.3

21,627

1,942

Farm returns

1,367,656

4,921

0.4

2,122

2,799

► Business and nonbusiness returns

Under $25,000

22,910,578

[13] 556,809

2.4

17,472

539,337

$25,000 or more

1,591,972

[13] 28,393

1.8

15,894

12,499

► Returns with total positive income of at least $200,000 and under $1,000,000 [8]:

Nonbusiness returns

3,109,116

78,859

2.5

21,043

57,816

Business returns

1,432,541

41,622

2.9

20,969

20,653

► Returns with total positive income of $1,000,000 or more [8]

388,763

32,494

8.4

16,509

15,985

► Corporation income tax returns, except Form 1120–S, total

2,143,808

29,803

1.4

28,601

1,202

► Small corporations [17]

2,041,474

19,127

0.9

18,258

869

No balance sheet returns

453,583

2,016

0.4

1,800

216

Balance sheet returns by size of total assets:

Under $250,000

1,031,229

8,423

0.8

7,935

488

$250,000 under $1,000,000

351,196

4,783

1.4

4,741

$1,000,000 under $5,000,000

175,221

3,011

1.7

2,932

$5,000,000 under $10,000,000

30,245

894

3.0

850

► Large corporations [18]

61,570

10,207

16.6

9,934

273

Balance sheet returns by size of total assets:

$10,000,000 under $50,000,000

32,107

4,307

13.4

4,231

$50,000,000 under $100,000,000

7,756

1,259

16.2

1,232

$100,000,000 under $250,000,000

8,094

1,191

14.7

1,166

$250,000,000 under $500,000,000

4,688

754

16.1

735

$500,000,000 under $1,000,000,000

3,396

615

18.1

581

$1,000,000,000 under $5,000,000,000

3,943

1,127

28.6

1,060

$5,000,000,000 under $20,000,000,000

1,139

516

45.3

498

$20,000,000,000 or more

447

438

98.0

431

► Form 1120–C returns [16]

8,657

0.4

► Form 1120–F returns [16]

32,107

437

1.4

380

► Estate and trust income tax returns

3,095,891

5,298

0.2

801

4,497

► Estate tax returns, total

42,366

4,288

10.1

4,288

► Size of gross estate:

Under $5,000,000

33,803

2,206

6.5

2,206

$5,000,000 under $10,000,000

5,550

1,154

20.8

1,154

$10,000,000 or more

3,013

928

30.8

928

Nontaxable returns [22]:

► Partnership returns

3,423,583

12,406

0.4

8,300

4,106

► S corporation returns [23]

4,414,662

16,327

0.4

15,146

1,181

► Estate and trust returns

[5]

1,063

[5]

165

898

Table 9b. Examination Coverage: Individual Income Tax Returns Examined, by Size of Adjusted Gross Income, Fiscal Year 2010
Size of adjusted gross income	Returns filed in Calendar Year 2009 %	Examination coverage in FY 2010 %
All returns [4]	100.00	1.11
No adjusted gross income	2.11	3.19
$1 under $25,000	39.62	1.18
$25,000 under $50,000	23.96	0.73
$50,000 under $75,000	13.41	0.78
$75,000 under $100,000	8.21	0.64
$100,000 under $200,000	9.64	0.71
$200,000 under $500,000	2.41	1.92
$500,000 under $1,000,000	0.41	3.37
$1,000,000 under $5,000,000	0.20	6.67
$5,000,000 under $10,000,000	0.01	11.55
$10,000,000 or more	0.01	18.38

Table 17. Civil Penalties Assessed and Abated, by Type of Tax and Type of Penalty, Fiscal Year 2010
[Money amounts are in thousands of dollars.]
Type of tax and type of penalty	Civil penalties assessed		Civil penalties abated [2]
	Number	Amount	Number	Amount
	(1)	(2)	(3)	(4)
Civil penalties, total	37,055,841	28,055,115	4,874,920	10,025,544
Individual income tax:
Civil penalties, total [3]	27,106,767	14,525,188	3,039,087	4,109,484
Accuracy [4]	469,321	1,069,785	58,107	241,645
Bad check	152,225	14,212	6,770	4,791
Delinquency	3,529,203	5,871,164	804,058	2,195,182
Estimated tax	7,412,249	1,617,298	263,299	267,794
Failure to pay	15,538,896	5,828,731	1,901,839	1,346,024
Fraud	2,218	123,458	236	48,255
Other [5]	2,655	539	4,778	5,794
Business income tax:
Civil penalties, total	1,145,931	1,770,628	263,261	776,088
Accuracy [4, 6]	3,640	334,558	146	47,625
Bad check [6]	1,826	164	111	137
Delinquency [6]	639,251	758,432	173,326	421,878
Estimated tax [6]	213,035	231,940	12,349	106,221
Failure to pay [6]	269,950	374,144	72,123	183,134
Fraud [6]	161	14,334	7	662
S corporation/partnership information [7]	18,022	54,685	1,607	8,611
Other [6]	46	2,371	3,592	7,819
Employment taxes:
Civil penalties, total [8]	7,838,423	5,778,753	1,376,063	2,477,757
Accuracy [4]	1,786	8,827	218	529
Bad check	33,613	2,199	1,476	194
Delinquency	1,646,392	1,461,043	292,063	524,462
Estimated tax	3,688	12,723	726	6,680
Failure to pay	4,135,675	1,176,674	672,498	316,886
Federal tax deposits	2,016,966	3,108,562	409,049	1,628,555
Fraud	290	8,137	28	445
Other	13	587	5	6

Table 18. Criminal Investigation Program, by Status or Disposition, Fiscal Year 2010
Status or disposition	Total	Legal source tax crimes	Illegal source financial crimes	Narcotics-related financial crimes
Investigations initiated	4,706	1,948	1,903	855
Investigations discontinued	1,291	698	408	185
Referrals for prosecution	3,034	1,035	1,340	659
Indictments and informations [4]	2,645	812	1,302	531
Convictions	2,184	726	1,010	448
Sentenced	2,172	696	971	505
Incarcerated	1,770	559	763	448
% of those sentenced who were incarcerated	81.5	80.3	78.6	88.7

State Information Sharing

3.70 The IRS is engaged in extensive information sharing with state tax authorities which allows it to more effectively discover nonfilers and other tax omissions. The IRS Fed/State Program saves government resources by partnering with state government agencies to enhance voluntary compliance with tax laws. This includes facilitating the exchange of taxpayer data, leveraging resources, and providing assistance to taxpayers to improve compliance and communications.

The IRS also assists state agencies by identifying and reporting information on emerging tax administration issues. This is accomplished through the IRS entering into agreements to share information with the state agencies. There are more than 900 joint efforts underway. Examples include the sharing of examination reports, abusive scheme data, and licensing verification.

Federal Tax Returns and Return Information.

3.80 “Tax returns” include Form 1040, U.S. Individual Income Tax Return, as well as other income tax and information returns, such as Form 941, Employer’s Quarterly Federal Tax Return; Form 730, Tax on Wagering; Form 1120, U.S. Corporation Income Tax Return; various Forms 1099, U.S. Information Returns; and Form W-2, Wage and Tax Statement. The states in turn share similar return information with the IRS. Since states have extensive information on business revenue on sales tax returns that info is a valuable resource for discovering nonfiling and underreporting.

Return Information

3.90 “Return information” includes everything else that has anything to do with a person’s potential tax liability. Examples are any information extracted from a return like names of dependents, business location, or bank account information; the taxpayer’s name, mailing address, or identification number; information on whether a return has been or will be examined or subject to any other investigation; information contained on transcripts of accounts or on IRS computer systems; the fact of filing a return; and whether a taxpayer has a balance due account.

IRS Study Provides Tax Gap Estimate

3.100 Internal Revenue Service officials have announced that they have updated their estimates of the Tax Year 2001 tax gap based on the National Research Program (NRP). The updated estimate of the overall gross tax gap for Tax Year 2001 – the difference between what taxpayers should have paid and what they actually paid on a timely basis – comes to $345 billion

Sources of Misreporting

3.110 Though the net misreporting percentage varies by category of income, the rates reflect that compliance is highest where there is third-party reporting or withholding. Simply stated, compliance is highest where there is third-party reporting.

For example, one percent of all wage, salary, and tip income is misreported, contributing an estimated $10 billion to the tax gap. In contrast, nonfarm sole proprietor income, which is reported on a Schedule C and is subject to little third-party reporting or withholding, has a net misreporting percentage of 57 percent, contributing about $68 billion to the tax gap.

Understanding the Tax Gap

3.120 The Internal Revenue Service developed the concept of the tax gap as a way to gauge taxpayers’ compliance with their federal tax obligations. The tax gap measures the extent to which taxpayers do not file their tax returns and pay the correct tax on time. The Internal Revenue Service (IRS) collects 96 percent of the government’s total receipts, approximately $2.7 trillion in FY 2008. The vast majority of those revenues come from taxpayers who voluntarily report and pay the taxes that they owe. The IRS has estimated the overall voluntary compliance rate to be approximately 84 percent.

Components of the Tax Gap

3.130 Despite the voluntary compliance rate and vigorous enforcement by the IRS, a significant amount of revenue remains unreported and unpaid. In 2005, the IRS estimated this gross tax gap to be approximately $345 billion. After subtracting revenue obtained through enforcement actions and other late payments, the IRS estimated the net tax gap to be approximately $290 billion.

Source: Who Cheats on Their Taxes? By Oscar Vela

Increased Funding

3.140 As a result of an increase in funding included in the IRS FY 2009 and FY 2010 budgets, the IRS has recently initiated intensive efforts to update the estimate of the tax gap on an ongoing basis, which will permit more regular and effective assessments. Consistent with its commitment to long-term fiscal soundness, the Administration is committed to working closely with Congress to narrow the tax gap, which imposes an unfair burden on every American who pays taxes in full. Ongoing updates of the tax gap estimate starting in 2011 will form the basis for regularly assessing progress towards that goal.

2010 Budget

3.150 The FY 2010 Budget for the IRS increased funding as part of a strategy to improve compliance by focusing on the following priorities:

Improving voluntary compliance and reducing the tax gap by:
Increasing front-line enforcement resources,
Improving taxpayer service options,
Enhancing research, and
Implementing legislative and regulatory changes.
Maintaining balance between taxpayer service and enforcement.
Investing in technology to improve infrastructure, modernize, and increase the productivity of existing resources.

2011 Budget

3.160 The deal reached by House Republicans and President Obama in April, 2011 comes perilously close to actually increasing the deficit. The IRS allocation is about $500 million below Obama’s request and is frozen at last year’s level of $12.1 billion. This is, to be sure, better than an additional $600 million in cuts that Republicans originally pushed for, and which IRS Commissioner Doug Shulman said would rob the Treasury of $4 billion in revenue. But the cut still looks costly.

Overview – Abusive Return Preparer

3.170 The IRS continues to expand and enhance its abusive preparer program. The program was developed to enhance compliance in the return-preparer community by engaging in enforcement actions and/or asserting appropriate civil penalties against unscrupulous or incompetent return preparers. Bad preparers are a significant problem for both the IRS and taxpayers.

Return preparer fraud generally involves the preparation and filing of false income tax returns by preparers who claim inflated personal or business expenses, false deductions, unallowable credits or excessive exemptions on returns prepared for their clients. This includes inflated requests for the special one-time refund of the long-distance telephone tax. Preparers may also manipulate income figures to obtain tax credits, such as the Earned Income Tax Credit, fraudulently.

In some situations, the client (taxpayer) may not have knowledge of the false expenses, deductions, exemptions and/or credits shown on their tax returns. However, when the IRS detects the false return, the taxpayer — not the return preparer — must pay the additional taxes and interest and may be subject to penalties.

Abusive Preparer Prosecutions

	FY 2010	FY 2009	FY 2008
Investigations Initiated	397	224	214
Prosecution Recommendations	202	129	134
Indictments/Informations	182	149	142
Convictions	145	115	128
Sentenced	132	136	124
Incarceration Rate*	88.6%	85.3%	81.5%
Avg. Months to Serve	24	24	18

Audits of 30 Clients

3.180 Another aspect of the IRS preparer program is identifying suspect preparers and audited their clients. If during an examination a revenue suspects that some of the deficiencies on a return were caused by the preparer she can refer the matter to an area coordinator. After review the coordinator can initiate a project on the preparer. The preparer is sent a letter notifying her that she has been selected for a project and 30 of her client’s returns are audited. If significant deficiencies are found then the IRS may choose one of several courses of action including:

Referral to Criminal investigation
Referral to the office of professional liability
Preparer penalties
Referral to Department of justice to seek an injunction ordering the preparer to cease filing tax returns.

Promotion of Form to Report Abusive Preparers

3.190 The IRS website now directs taxpayers and others who spot abusive preparers to file Form 3949-A with the Service.

4. EXAMINATION

Examination Using Social Media

4.10 News reports in the spring of 2010 that the IRS is now training its revenue agents to gather information on Facebook and other social media sites. The IRS documents clearly state that employees are not allowed to use false identities to scour social networking accounts while conducting a probe into a taxpayer. Social networks can also be used to “provide location information,” to “prove and disprove alibis” or to “establish crime or criminal enterprise.” Some people disclose a surprising amount of information about there finances on the sites including employment and income info.

IRS Guidelines

4.20 The IRS has set up the following guidelines for internet research on taxpayers:

You are required to conduct internet searches to determine taxpayer ecommerce activities.

Generally, you are allowed to review information from publicly accessible, unrestricted websites.

You are not permitted to:

Disclose sensitive information, such as a TlN, without authorization from your manager .

Misrepresent your identify or obtain information from a website using a fictitious identíty to register .

Sign contracts on behalf of the government by assenting to online agreements.

The Dirty Dozen

4.30 Each year the IRS announces its Dirty Dozen and urges people to avoid these common schemes: The 2011 list is as follows:

1. Hiding Income Offshore The IRS aggressively pursues taxpayers involved in abusive offshore transactions as well as the promoters, professionals and others who facilitate or enable these schemes. Taxpayers have tried to avoid or evadeU.S. income tax by hiding income in offshore banks, brokerage accounts or through the use of nominee entities. Taxpayers also evade taxes by using offshore debit cards, credit cards, wire transfers, foreign trusts, employee-leasing schemes, private annuities or insurance plans.

In early February, the IRS announced a special voluntary disclosure initiative designed to bring offshore money back into theU.S.tax system and help people with undisclosed income from hidden offshore accounts get current with their taxes. The new voluntary disclosure initiative will be available through Aug. 31, 2011. The IRS decision to open a second special disclosure initiative follows continuing interest from taxpayers with foreign accounts. In response to numerous requests, information about this initiative is available on IRS.gov in eight different languages, including: Chinese, Farsi, German, Hindi, Korean, Russian, Spanish, and Vietnamese.

2. Identity Theft and Phishing Identity theft occurs when someone uses an unsuspecting individual’s name, Social Security number, credit card number or other personal information without permission to commit fraud or other crimes. For example, a criminal can use someone else’s information to run up bills on that person’s credit card, empty that person’s bank account or take out a loan in that person’s name. And when it comes to taxes, a criminal with someone else’s personal information can file a fraudulent tax return and collect a refund.

Phishing is one tactic used by scam artists to trick unsuspecting victims into revealing personal or financial information online. Phishing involves the use of phony e-mail or websites — even social media. A scammer may pose as an institution such as the IRS. IRS impersonation schemes flourish during tax season. Spyware, which can be loaded onto an unsuspecting taxpayer’s computer by opening an e-mail attachment or clicking on a link, is another tool identity thieves use to steal personal information.

Identity theft is a major problem that affects many people each year. That’s why it’s important that taxpayers protect their personal information. Anyone who believes his or her personal information has been stolen and used for tax purposes should immediately contact the IRS Identity Protection Specialized Unit at 1-800-908-4490. More information on identity theft and taxes is available on the IRS website.

A suspicious e-mail or an “IRS” Web address that does not begin with http://www.irs.gov should be forwarded to the IRS at phishing@irs.gov.

3. Return Preparer Fraud While most return preparers are professionals who provide honest and excellent service to their clients, some make basic errors or engage in fraud and other illegal activities.

Dishonest return preparers can cause big trouble for taxpayers who fall victim to their ploys. These fraudsters derive benefit by skimming a portion of their clients’ refunds, charging inflated fees for return preparation services and attracting new clients by making false promises. Taxpayers should choose carefully when hiring a tax preparer. Federal courts have issued hundreds of injunctions ordering individuals to cease preparing returns, and the Department of Justice has pending complaints against dozens of others.

To increase confidence in the tax system and improve compliance with the tax law, the IRS is implementing a number of requirements for paid tax preparers, including registration with the IRS and a preparer tax identification number (PTIN), as well as competency tests and ongoing continuing professional education.

The new regulations require paid tax preparers (including attorneys, CPAs, and enrolled agents) to apply for a Preparer Tax Identification Number (PTIN) before preparing any federal tax returns in 2011.

Higher standards for the tax preparer community will result in greater compliance with tax laws, increase confidence in the tax system and ultimately lead to a better experience for taxpayers.

4. Filing False or Misleading Forms IRS personnel are seeing various instances in which scam artists file false or misleading returns to claim refunds to which they are not entitled. In one variation of this scheme, a taxpayer seeks a refund by fabricating an information return and falsely claiming the corresponding amount as withholding. Phony information returns, such as a Form 1099 Original Issue Discount (OID), which claims false withholding credits, are usually used to legitimize erroneous refund claims. One version of the scheme is based on the bogus theory that the federal government maintains secret accounts for its citizens and that taxpayers can gain access to funds in those accounts by issuing 1099-OID forms to their creditors, including the IRS.

The IRS continues to see instances in which people file false or fraudulent tax returns to try to obtain improper tax refunds. The IRS takes refund fraud seriously, has programs to aggressively combat it and stops the vast majority of incorrect refunds.

Because scammers often use information from family or friends in filing false or fraudulent returns, beware of requests for such data. Don’t fall prey to people who encourage you to claim deductions or credits you are not entitled to or willingly allow others to use your information to file false returns. If you are a party to such schemes, you could be liable for financial penalties or even face criminal prosecution.

5. Frivolous Arguments Promoters of frivolous schemes encourage people to make unreasonable and outlandish claims to avoid paying the taxes they owe. The IRS has a list of frivolous legal positions that taxpayers should avoid. These arguments are false and have been thrown out of court. While taxpayers have the right to contest their tax liabilities in court, no one has the right to disobey the law or IRS guidance.

6. Nontaxable Social Security Benefits with Exaggerated Withholding Credit The IRS has identified returns where taxpayers report nontaxable Social Security Benefits with excessive withholding. This tactic results in no income reported to the IRS on the tax return. Often both the withholding amount and the reported income are incorrect. Taxpayers should avoid making these mistakes. Filings of this type of return may result in a $5,000 penalty.

7. Abuse of Charitable Organizations and Deductions The IRS continues to observe the misuse of tax-exempt organizations. Abuse includes arrangements to improperly shield income or assets from taxation and attempts by donors to maintain control over donated assets or income from donated property. The IRS also continues to investigate various schemes involving the donation of non-cash assets including situations where several organizations claim the full value for both the receipt and distribution of the same non-cash contribution. Often these donations are highly overvalued or the organization receiving the donation promises that the donor can repurchase the items later at a price set by the donor. The Pension Protection Act of 2006 imposed increased penalties for inaccurate appraisals and set new definitions of qualified appraisals and qualified appraisers for taxpayers claiming charitable contributions.

8. Abusive Retirement Plans The IRS continues to find abuses in retirement plan arrangements, including Roth Individual Retirement Arrangements (IRAs). The IRS is looking for transactions that taxpayers use to avoid the limits on contributions to IRAs, as well as transactions that are not properly reported as early distributions. Taxpayers should be wary of advisers who encourage them to shift appreciated assets at less than fair market value into IRAs or companies owned by their IRAs to circumvent annual contribution limits. Other variations have included the use of limited liability companies to engage in activity that is considered prohibited.

9. Disguised Corporate Ownership Corporations and other entities are formed and operated in certain states for the purpose of disguising the ownership of the business or financial activity by means such as improperly using a third party to request an employer identification number.

Such entities can be used to facilitate underreporting of income, fictitious deductions, non-filing of tax returns, participating in listed transactions, money laundering, financial crimes and even terrorist financing. The IRS is working with state authorities to identify these entities and to bring the owners of these entities into compliance with the law.

10. Zero Wages Filing a phony wage-or-income-related informational return to replace a legitimate information return has been used as an illegal method to lower the amount of taxes owed. Typically, a Form 4852 (Substitute Form W-2) or a “corrected” Form 1099 is used as a way to improperly reduce taxable income to zero. The taxpayer may also submit a statement rebutting wages and taxes reported by a payer to the IRS.

Sometimes, fraudsters even include an explanation on their Form 4852 that cites statutory language on the definition of wages or may include some reference to a paying company that refuses to issue a corrected Form W-2 for fear of IRS retaliation. Taxpayers should resist any temptation to participate in any of the variations of this scheme. Filings of this type of return may result in a $5,000 penalty.

11. Misuse of Trusts For years, unscrupulous promoters have urged taxpayers to transfer assets into trusts. While there are many legitimate, valid uses of trusts in tax and estate planning, some highly questionable transactions promise reduction of income subject to tax, deductions for personal expenses and reduced estate or gift taxes. Such trusts rarely deliver the tax benefits promised and are used primarily as a means to avoid income tax liability and hide assets from creditors, including the IRS.

IRS personnel have recently seen an increase in the improper use of private annuity trusts and foreign trusts to shift income and deduct personal expenses. As with other arrangements, taxpayers should seek the advice of a trusted professional before entering a trust arrangement.

12. Fuel Tax Credit Scams The IRS receives claims for the fuel tax credit that are excessive. Some taxpayers, such as farmers who use fuel for off-highway business purposes, may be eligible for the fuel tax credit. But other individuals are claiming the tax credit for nontaxable uses of fuel when their occupations or income levels make the claim unreasonable. Fraud involving the fuel tax credit is considered a frivolous tax claim and can result in a penalty of $5,000.

5. APPEALS

Strategic Priorities:

5.10 Appeals has set forth the following as its strategic priorities for 2011:

►Increase taxpayer awareness of the Appeals process and their rights within the process

►Increase taxpayer awareness of alternative dispute resolution programs

►Improve our processes to meet customer needs and expectations and to reduce the length of the Appeals process while spending the right amount of time with each taxpayer

►Promote employee productivity, engagement, and satisfaction

Campus Appeals Program

5.20 The campus appeals program diminishes taxpayer rights. Any appeal from a compliance generated notice is assigned to the campus appeals program. The campus appeals personnel are poorly trained and lack field experience. Their incompetence starkly contrasts with the well trained experienced former revenue agents and revenue officers assigned to the local appeals offices. When your client receives a notice from a campus allowing an appeal your protest should always request that your client be given a face to face conference in your local office.

In October, 2010 TIGTA issued the following findings:

Campus Strategies – The shifting of work from field operations to campus operations appears to affect the quality of Appeals decisions due to the reduced number of face-to-face conferences, a campus environment is less conducive to a careful, candid assessment of the case, and taxpayers assigned to Appeals campus sites might perceive they are receiving second-class treatment.

Fast Track Settlement (Small Business and Self-Employed Taxpayers)

5.30 Fast Track Mediation (FTM) gives Small Businesses, Self-Employed (SE/SE) taxpayers and the IRS the opportunity to mediate disputes through an IRS appeals officer, who acts as a neutral party. In this program, most tax disputes are resolved within 40 days compared to several months though the regular appeal process. IRS offers this new service designed to expedite case resolution on disputes that arise from examination or collection actions.

Refer to the following for more information:

IRS Issues “Fast Track” Guidance to Help Taxpayers

Rev. Proc. 2003-41

IRM 8.26.3

Fast Track Mediation (Small Businesses and Self-Employed Taxpayers)

5.40 Fast Track Mediation (FTM) gives Small Businesses, Self-Employed (SE/SE) taxpayers and the IRS the opportunity to mediate disputes through an IRS appeals officer, who acts as a neutral party. In this program, most tax disputes are resolved within 40 days compared to several months though the regular appeal process. IRS offers this new service designed to expedite case resolution on disputes that arise from examination or collection actions.

Early Referral

5.50 Taxpayers whose returns are under the jurisdiction of Examination or Collection may request the transfer of a developed but unagreed issue to Appeals. Examination or Collection will continue to develop those issues not referred to Appeals. The early resolution of a key issue may encourage taxpayers and the Service to agree on other issues in the case. Early referral can also be requested with respect to issues regarding an involuntary change in method of accounting, employment tax, employee plans and exempt organizations. Regular Appeals procedures apply, including taxpayer conferences.

Refer to the following for more information:

Revenue Procedure 99-28

IRM 8.26.4

Post Appeals Mediation

5.60 Mediation is available for certain cases that are already in the Appeals process only after Appeals settlement discussions are unsuccessful and, generally, when all other issues are resolved but for the issues for which mediation is being requested. Mediation is a non-binding process that uses the services of a mediator, as a neutral third party, to help Appeals and the taxpayer reach their own negotiated settlement. To accomplish this goal, the mediator will act as a facilitator; assist in defining the issues; and promote settlement negotiations between Appeals and the taxpayer. The mediator will not have settlement authority in the mediation process and will not render a decision regarding any issue in dispute.

Refer to the following for more information:

Revenue Procedure 2009-44

Update for Exhibit 1, Area Director Mailing Addresses, Revenue Procedure

2009-44

Announcement 2008-111

IRM 8.26.5

Arbitration

5.70 Arbitration is available for certain cases within Appeals jurisdiction that meet the operational requirements of the program. Generally, this program is available for cases in which a limited number of factual issues remain unresolved following settlement discussions in Appeals. Appeals and the taxpayer will be bound by the arbitrator’s findings. The arbitration procedure uses the services of an arbitrator either from Appeals or from an outside organization.

Refer to the following for more information:

IRS Formalizes Appeals Arbitration Process

Revenue Procedure 2006-44

Announcement 2008-111

IRM 8.26.6

IRM 35.5.5

Publication 4167 – Appeals – Introduction to Alternative Dispute Resolution

Table 21. Appeals Workload, by Type of Case, Fiscal Year 2010
Type of case	Cases received	Cases closed	Cases pending September 30, 2010
Type of case	(1)	(2)	(3)
Total cases	135,755	133,090	72,779
Collection Due Process	49,049	46,941	25,754
Examination	42,144	41,943	28,057
Penalty Appeals	10,918	11,910	5,028
Offers in Compromise	11,043	11,149	5,182
Innocent Spouse	5,341	4,610	2,988
Industry Cases	2,099	1,698	1,991
Coordinated Industry Cases	330	319	716
Other	14,831	14,520	3,063

6. USEFUL INFORMATION FOR PRACTITIONERS

Whistleblower Reforms

6.10 The IRS Whistleblower Office pays money to people who blow the whistle on persons who fail to pay the tax that they owe. If the IRS uses information provided by the whistleblower, it can award the whistleblower up to 30 percent of the additional tax, penalty and other amounts it collects.

Who can get an award?

6.20 The IRS may pay awards to people who provide specific and credible information to the IRS if the information results in the collection of taxes, penalties, interest or other amounts from the noncompliant taxpayer. The IRS is looking for solid information, not an “educated guess” or unsupported speculation. We are also looking for a significant Federal tax issue – this is not a program for resolving personal problems or disputes about a business relationship.

What are the rules for getting an award?

6.30 The law provides for two types of awards. If the taxes, penalties, interest and other amounts in dispute exceed $2 million, and a few other qualifications are met, the IRS will pay 15 percent to 30 percent of the amount collected. If the case deals with an individual, his or her annual gross income must be more than $200,000. If the whistleblower disagrees with the outcome of the claim, he or she can appeal to the Tax Court. These rules are found at Internal Revenue Code IRC Section 7623(b) – Whistleblower Rules.

Awards for Lower Dollar Amounts

6.40 The IRS also has an award program for other whistleblowers – generally those who do not meet the dollar thresholds of $2 million in dispute or cases involving individual taxpayers with gross income of less that $200,000. The awards through this program are less, with a maximum award of 15 percent up to $10 million. In addition, the awards are discretionary and the informant cannot dispute the outcome of the claim in Tax Court. The rules for these cases are found at Internal Revenue Code IRC Section 7623(a) – Informant Claims Program, and some of the rules are different from those that apply to cases involving more than $2 million.

If you decide to submit information and seek an award for doing so, use IRS Form 211. The same form is used for both award programs

Misclassified Workers

6.50 Employees working for employers who failed to withhold Social Security and Medicare taxes should use new Form 8919 to report and pay their share of these taxes. This includes section 530 employees — that is, people who work for employers claiming relief from federal payroll taxes under section 530 of the Revenue Act of 1978. It also includes employees who are treated as independent contractors but who have received a determination letter from the IRS which states they are employees.

Workers who believe they are misclassified as independent contractors can file Form SS-8 with the IRS and request a determination of their worker classification. For employees, the Social Security tax rate is 6.2 percent and the Medicare tax rate is 1.45 percent. Normally, employers withhold these taxes from workers’ pay, match these amounts and turn over the combined amounts to the IRS. Workers, properly classified as independent contractors, should not use Form 8919 but instead, continue to use Schedule SE. IRS Publication 1779 has further details on employee versus independent contractor status.

Misclassification

6.60 A 2009 TIGTA report says IRS still needs to do more to identify misclassified workers [Audit Report No. 2009-30-035]: The Treasury Inspector General for Tax Administration (TIGTA) has issued an audit report that evaluates the effectiveness of IRS actions with respect to identifying misclassified workers. The report notes that the “misclassification of employees as independent contractors is a nationwide issue affecting millions of workers that continues to grow and contribute to the tax gap.” Workers are frequently misclassified for a variety of reasons, either intentionally to save costs, or unintentionally because of a lack of knowledge. Some independent contractor misclassifications occur because certain employers are protected from potentially large employment tax assessments by Section 530 of the Revenue Act of 1978. The report notes that the IRS’ interest in this issue is not to reclassify workers from independent contractors to employees. Rather, it is to ensure that employers are making the proper determinations and that workers are being treated appropriately. The report states that while the IRS has done a great deal to educate employers about proper classification of workers, much more needs to be done. For example, studies of the impact of misclassification on the tax gap are more than twenty years old. Therefore, it is difficult for the IRS to estimate the size of the problem today, or the overall effectiveness that its actions to date are having. The most recent IRS estimate of the tax gap is $345 billion, with an estimated $1.6 billion resulting from worker misclassification. However, the $1.6 billion figure is based on 1984 data, and is likely to be a great deal higher now.

Recommendations

6.70 TIGTA recommends that the IRS develop an agency-wide employment tax program to coordinate the decision-making process and efforts among its business divisions. The report also recommends that the IRS Deputy Commissioner for Services and Enforcement (DCSE) conduct a formal compliance study to measure the current impact of worker misclassification on the tax gap. The IRS concurred with the findings in the audit report. DCSE will coordinate an agency-wide employment tax program. The Director of Specialty Programs for the IRS Small Business/Self-Employed Division will coordinate a study in fiscal year 2009 on worker classification and other employment tax issues. The planning for this project has already begun.

NRP Audits

6.75 In February 2010, the Internal Revenue Service began its first Employment Tax National Research Project in 25 years. Business practices regarding employment tax issues may have changed significantly since the last IRS employment tax study in the 1980s, necessitating the need for this study. Examinations comprising the study will be conducted to collect data that will allow the IRS to understand the compliance characteristics of employment tax filers. The results will allow the IRS to gauge more accurately the extent to which businesses properly comply with employment tax law and related reporting requirements. When completed, this information will help the IRS select and audit future employment tax returns with the greatest compliance risk.

The main goals for the ET NRP:

To secure statistically valid information for computing the Employment Tax Gap, and
To determine compliance characteristics so IRS can focus on the most noncompliant employment tax areas.
To determine the level of employment tax compliance by businesses

The IRS will randomly select 2,000 taxpayers each year for the next three years. The examinations will be comprehensive in scope. The IRS will review employee compensation issues, employee and executive benefits, backup withholding and the proper characterization of employees vs. independent contractors.

Offshore Accounts

6.80 On February 18, 2009 UBS AG, Switzerland’s largest bank, IRS announced that it had entered into a deferred prosecution agreement on charges of conspiring to defraud the United States by impeding the Internal Revenue Service (IRS),.

Agreement

6.90 As part of the deferred prosecution agreement and in an unprecedented move, UBS, based on an order by the Swiss Financial Markets Supervisory Authority (FINMA), has agreed to immediately provide theUnited States government with the identities of, and account information for, certainUnited States customers of UBS’s cross-border business. Under the deferred prosecution agreement, UBS agreed to expeditiously exit the business of providing banking services toUnited States clients with undeclared accounts. As part of the deferred prosecution agreement, UBS further agreed to pay $780 million in fines, penalties, interest and restitution.

Many Taxpayers and Bankers Criminally Charged

6.95 Since the announcement of the UBS plea bargain the IRS has indicted many taxpayers from all parts of the country for not reporting their offshore accounts. To date most have pleaded guilty and been sentenced. Taxpayers with unreported foreign accounts continue to face prosecution absent a voluntary disclosure of the accounts to the IRS.

New Offshore Voluntary Disclosure Program

6.100 The IRS, February 8, 2011, announced a new 2011 Voluntary Disclosure Initiative (OVDI) for taxpayers to disclose their unreported offshore accounts. To participate in the OVDI, taxpayers must file or amend their tax returns and Form TD F 90-22.1 (Report of Foreign Bank and Financial Accounts (FBAR)) and pay all delinquent taxes, interest and penalties by August 31, 2011. The initiative covers tax years 2003 through 2010.

Avoid Criminal Charges

6.110 In exchange for participating in the OVDI, taxpayers with undisclosed offshore accounts can avoid criminal prosecution for their unpaid taxes and may be subject to significantly reduced penalties. [Generally, the civil penalty for willfully failing to file an FBAR can be as high as the greater of $100,000 or 50 percent of the total balance of the foreign account per violation. See 31 U.S.C. § 5321(a)(5).]

Penalties

6.115 Under the OVDI, taxpayers will be subject to a 25 percent penalty on the highest aggregate account balance on their undisclosed account(s) between the 2003 and 2010. If the value of the undisclosed account(s) was less than $75,000 at all times during the tax years in question, the penalty is reduced to 12.5 percent. Moreover, in limited situations, a penalty of 5% may be imposed.

Prior Program

6.120 This is the second amnesty offer from the IRS for taxpayers with unreported income from offshore accounts. The first amnesty period ended on October 31, 2009, and produced roughly 15,000 disclosures to the IRS. Participants were subject to a 20 percent penalty rate covering a six-year window. IRS Commissioner Shulman has described the 2011 OVDI as “the last, best chance for people to get back into the system.”

Eligibility

6.125 The OVDI is open to taxpayers, including individuals, corporations, partnerships and trusts. Taxpayers under examination or under criminal investigation, however, are ineligible to participate in the program.

Quiet Disclosures

6.130 Taxpayers that have made “quiet disclosures” by filing amended returns and paying related tax and interest for previously unreported offshore income without otherwise notifying the IRS are encouraged to participate in the OVDI. Taxpayers that make quiet disclosures without seeking the protection of the OVDI run the risk of being examined and potentially criminally prosecuted for all applicable years.

Deadline

6.135 The OVDI will be available to taxpayers that come forward and complete all requirements on or before August 31, 2011. Therefore, taxpayers looking to take advantage of the amnesty period should act quickly as it likely will take some time to obtain the requisite documentation from offshore financial institutions and to prepare an accurate disclosure to the IRS.

VITA Grant Program

6.140 Since December 2007, Congress has appropriated funds to the IRS to establish and administer a one-year matching grant program, in consultation with the Taxpayer Advocate Service, for the Community Volunteer Income Tax Assistance Program. The Report to Congress provides more information on the design plan.

This grant program is intended to provide direct funds to organizations to:

Enable VITA Programs to extend services to underserved populations in hardest-to-reach areas, both urban and non-urban

Increase the capacity to file returns electronically

Heighten quality control

Enhance volunteer training

Significantly improve the accuracy rate of returns prepared at volunteer sites

Identity Theft

6.150 Identity theft is becoming a huge problem for the tax system. The IRS has established a new office for reporting. identity theft using stolen SSN’s. Their employers report that income to the IRS on W-2’s and the income is attributed to the theft victim. Two scenarios are most common:

The taxpayer receives an audit notice from the IRS showing that he is working several jobs in many states or;
The taxpayer attempts to file a return and it is rejected by the IRS because someone has already filed a return using the taxpayers SSN.

The IRS website now gives taxpayers who are the victims of identity theft the following advice:

Identity Theft and Your Tax Records

The IRS does not initiate communication with taxpayers through e-mail. Before identity theft happens, safeguard your information.

What do I do if the IRS contacts me because of a tax issue that may have been created by an identity theft?

If you receive a notice or letter in the mail from the IRS that leads you to believe someone may have used your Social Security number fraudulently, please respond immediately to the name, address, and/or number printed on the IRS notice.

Be alert to possible identity theft if the IRS issued notice or letter:

states more than one tax return was filed for you, or
indicates you received wages from an employer unknown to you.
An identity thief might also use your Social Security number to file a tax return in order to receive a refund. If the thief files the tax return before you do, the IRS will believe you already filed and received your refund if eligible.

If your Social Security number is stolen, it may be used by another individual to get a job. That person’s employer would report income earned to the IRS using your Social Security number, making it appear that you did not report all of your income on your tax return.

If you have previously been in contact with the IRS and have not achieved a resolution, please contact the IRS Identity Protection Specialized Unit, toll-free at 1-800-908-4490.

What do I do if I have not been contacted by IRS for a tax issue but believe I am a victim of identity theft?

If your tax records are not currently affected by identity theft, but you believe you may be at risk due to a lost/stolen purse or wallet, questionable credit card activity, credit report, or other activity, you need to provide the IRS with proof of your identity.

You should submit a copy, not the original documents, of your valid Federal or State issued identification, such as a social security card, driver’s license, or passport, etc, along with a copy of a police report or Federal Trade Commission Identity Theft Affidavit. If the FTC Affidavit is not notarized, a witness (non-relative) must sign it.

Please send these documents using one of the following options:

Mailing address:

Internal Revenue Service

P.O. Box9039

Andover,MA01810-0939

FAX: Note that this is not a toll-free FAX number

1-978-247-9965

For your convenience, Form 14026 is available as a cover sheet for submitting your documentation.

You may also contact the IRS Identity Protection Specialized Unit, toll-free 1-800-908-4490 for guidance.

Hours of Operation: Monday – Friday, 8:00 a.m. – 8:00 p.m. your local time (Alaska&Hawaiifollow Pacific Time).

IRS Hotlines and Toll-Free Numbers
IRS Telephone Lines and Hours of Operation
Service	Telephone number	Hours of operation
Practitioner Priority Service	(866) 860-4259	M–F, 8:00 a.m.–8:00 p.m., local time
IRS Tax Help Line for Individuals	(800) 829-1040	M–F, 7:00 a.m.–10:00 p.m., local time
Business and Specialty Tax Line	(800) 829-4933	M–F, 7:00 a.m.–10:00 p.m., local time
e-Help (Practitioners Only)	(866) 255-0654	M–F, 6:30 a.m.–6:00 p.m., CT (non-peak period)M-F, 6:30 a.m.–10:00 p.m, CT (1/12/2007 – 4/27/2007)and Saturdays 6:30 a.m. – 4:00 p.m., CT (1/12/2007 – 4/27/2007)
Identity Protection Specialized Unit	1-800-908-4490	M – F, 8:00 a.m. – 8:00 p.m. local time
Refund Hotline	(800) 829-1954	Automated service is available 24/7
Forms and Publications	(800) 829-3676	M–F, 7:00 a.m–10:00 p.m., local time
National Taxpayer Advocate Help Line	(877) 777-4778	M–F, 7:00 a.m.–10:00 p.m., local time
Telephone Device for the Deaf (TDD): Forms, Tax Help, TAS	(800) 829-4059	M–F, 7:00 a.m.–10:00 p.m., local time
Electronic Federal Tax Payment System	(800) 555-4477	24/7
Government Entities (TEGE) Help Line	(877) 829-5500	M–F, 8:30 a.m. – 4:30 p.m., ET
TeleTax Topics and Refund Status	(800) 829-4477	24/7
Forms 706 and 709 Help Line	(866) 699-4083	M–F, 7:00 a.m.–7:00 p.m., local time
Employer Identification Number (EIN)	(800) 829-4933	M–F, 7:00 a.m.–10:00 p.m., local time
Excise Tax and Form 2290 Help Line	(866) 699-4096	M–F, 8:00 a.m.–6:00 p.m., ET
Information Return Reporting	(866) 455-7438	M–F, 8:30 a.m.–4:30 p.m., ET

7. COLLECTION

New Collection Procedures Announced

7.10 On February 24, 2011 IRS announced new policies and programs to help taxpayers pay back taxes and avoid tax liens. IRS’s stated goal is to help individuals and small businesses meet their tax obligations, without adding an unnecessary burden to taxpayers.

Over the past several years as taxpayers have endured the Great Recession the IRS has escalated the number of federal tax liens filed against delinquent taxpayers. The IRS aggressive use of liens has been criticized by the National Taxpayer Advocate in her annual report to congress and the IRS Advisory Council in its annual report to the Commissioner.

More Flexible Attitude

7.15 The newly announced policy represents a new, more flexible attitude by the IRS. The IRS making important changes to its lien filing practices that will lessen the negative impact on taxpayers. The changes include:

• Significantly increasing the dollar threshold when liens are generally issued, resulting in fewer tax liens.

• Making it easier for taxpayers to obtain lien withdrawals after paying a tax bill.

• Withdrawing liens in most cases where a taxpayer enters into a Direct Debit Installment Agreement.

•Creating easier access to Installment Agreements for more struggling small businesses.

• Expanding a streamlined Offer in Compromise program to cover more taxpayers.

Higher Lien Thresholds

7.20 The IRS stated that it will significantly increase the dollar thresholds when liens are generally filed. The new dollar amount is in keeping with inflationary changes since the number was last revised. Currently, liens are automatically filed at certain dollar levels for people with past-due balances. The IRS did not publicly disclose the new lien thresholds. The IRS plans to review the results and impact of the lien threshold change in about a year.

Easier Lien Withdrawals

7.25 The IRS will also modify procedures that will make it easier for taxpayers to obtain lien withdrawals. Liens will now be withdrawn once full payment of taxes is made if the taxpayer requests it. The IRS has determined that this approach is in the best interest of the government. In order to speed the withdrawal process, the IRS will also streamline its internal procedures to allow collection personnel to withdraw the liens.

Direct Debit Installment Agreements and Liens

7.30 The IRS is making other fundamental changes to liens in cases where taxpayers enter into a Direct Debit Installment Agreement (DDIA). For taxpayers with unpaid assessments of $25,000 or less, the IRS will now allow lien withdrawals under several scenarios:

• Lien withdrawals for taxpayers entering into a Direct Debit Installment Agreement.

• The IRS will withdraw a lien if a taxpayer on a regular Installment Agreement converts to a Direct Debit Installment Agreement.

• The IRS will also withdraw liens on existing Direct Debit Installment Agreements upon taxpayer request.

Liens will be withdrawn after a probationary period demonstrating that direct debit payments will be honored. Taxpayers can use the Online Payment Agreement application on IRS.gov to set-up with Direct Debit Installment Agreements.

Taxpayer Beware

7.35 A direct debit is not without risks to the taxpayer. If the IRS should make an error in placing a direct debit the taxpayer will find that it is almost impossible solve problems via the IRS 800 numbers. The National Taxpayer Advocate has noted in her last several reports to Congress that many taxpayers are placed on hold for interminable times and many calls are dropped. Even those lucky enough to navigate through IRS voicemail Hell find that those answering the phone are less than helpful. Therefore even with the new relaxed rules for liens for those accepting a direct debit alternative one must balance that benefit with the potential that an IRS error may prove almost impossible to resolve. The only thing that could be worse than the current IRS help lines would be if it contracted its phone services toIndia like many large American corporations.

Relaxed Rules For Installment Agreements For Small Businesses

7.40 The IRS will also make streamlined Installment Agreements available to more small businesses. The payment program will raise the dollar limit to allow additional small businesses to participate. Small businesses with $25,000 or less in unpaid tax can participate. Currently, only small businesses with under $10,000 in liabilities can participate. Small businesses will have 24 months to pay.

The streamlined Installment Agreements will be available for small businesses that file either as an individual or as a business. Small businesses with an unpaid assessment balance greater than $25,000 would qualify for the streamlined Installment Agreement if they pay down the balance to $25,000 or less.

Offers in Compromise

7.45 The IRS is also expanding a new streamlined Offer in Compromise (OIC) program to cover a larger group of struggling taxpayers. This streamlined OIC is being expanded to allow taxpayers with annual incomes up to $100,000 to participate. In addition, participants must have tax liability of less than $50,000, doubling the current limit of $25,000 or less.

OICs are subject to acceptance based on legal requirements. Generally, an offer will not be accepted if the IRS believes that the liability can be paid in full as a lump sum or through a payment agreement. The IRS looks at the taxpayer’s income and assets to make a determination regarding the taxpayer’s ability to pay.

Past Promises

7.50 In 2009, the IRS announced lien relief for people trying to refinance or sell a home. In 2010, the IRS announced new flexibility for taxpayers facing payment or collection problems. Unfortunately those announced changes did not result in a relaxation of IRS enforced collection efforts. During both 2009 and 2010 the IRS increased the number of liens and levies it served against taxpayers.

New Form 12153

7.55 In March, 2011 the IRS issued a new Form 12153 for collection due process appeals. It is formatted to assist taxpayers with determining defenses to IRS enforced collection measures.

Taxpayer Advocate’s Report On Enforced Collection

7.60 The Taxpayer Advocate has issued the following report to Congress:

“While the history of the partial-payment installment agreement program is much briefer, the aggregate data indicate that it, too, is not widely utilized. Indeed, most taxpayers and many practitioners are not even aware it exists. What has the IRS done instead with respect to taxpayers with delinquent accounts? In FY 2008, it placed one million taxpayers into “currently not collectible” status – meaning that the IRS is collecting nothing at all30 – and it took traditional enforcement actions about 3.4 million times, imposing 2,631,038 levies, placing 768,168 liens, and conducting 610 property seizures. In 2009 the imposed 3,478,361 levies, placed 965,618 liens and conducted 581 seizures. Those numbers rose once more in 2010 to 3,606,376 levies, 1,096,376 liens and 605 seizures.

IRS data show that greater use of traditional enforcement tools like liens and levies does not have a significant impact on overall collection. IRS collection yield has risen on a slow, relatively consistent and gradual path over that period of time with no discernable revenue loss resulting from the post-RRA ’98 reduction in levies, as shown by the following chart.

Help for People Who Owe Taxes

7.65 With many people facing additional financial difficulties, in February 2009 the IRS is taking several additional steps to help people who owe back taxes.

On a wide range of situations, IRS employees have flexibility to work with struggling taxpayers to assist them with their situation. Depending on the circumstances, taxpayers in hardship situations may be able to adjust payments for back taxes, avoid defaulting on payment agreements or possibly defer collection action.

Flexibility

7.70 Among the areas where the IRS can provide assistance:

Postponement of Collection Actions: IRS employees will have greater authority to suspend collection actions in certain hardship cases where taxpayers are unable to pay. This includes instances when the taxpayer has recently lost a job, is relying solely on Social Security or welfare income or is facing devastating illness or significant medical bills. If an individual has recently encountered this type of financial problem, IRS assistors may be able to suspend collection without documentation to minimize burden on the taxpayer.

Added Flexibility for Missed Payments: The IRS is allowing more flexibility for previously compliant individuals in existing Installment Agreements who have difficulty making payments because of a job loss or other financial hardship. The IRS may allow a skipped payment or a reduced monthly payment amount without automatically suspending the Installment Agreement. Taxpayers in a difficult financial situation should contact the IRS.

Additional Review for Offers in Compromise on Home Values: The equity taxpayers have in real property can be a barrier to an OIC being accepted. With the uncertainty in the housing market, the IRS recognizes that the real-estate valuations used to assess ability to pay may not be accurate. So in instances where the accuracy of local real-estate valuations is in question or other unusual hardships exist, the IRS is creating a new second review of the information to determine if accepting an offer is appropriate.

Prevention of Offer in Compromise Defaults: Taxpayers who are unable to meet the periodic payment terms of an accepted OIC will be able to contact the IRS office handling the offer for available options to help them avoid default.

Expedited Levy Releases: The IRS will speed the delivery of levy releases by easing requirements on taxpayers who request expedited levy releases for hardship reasons. Taxpayers seeking expedited releases for levies to an employer or bank should contact the IRS number shown on the notice of levy to discuss available options. When calling, taxpayers requesting a levy release due to hardship should be prepared to provide the IRS with the fax number of the bank or employer processing the levy.

IRS Outlines Additional Steps to Assist Unemployed Taxpayers and Others

7.75 The Internal Revenue Service announced on March 9, 2010 several additional steps it is taking this tax season to help people having difficulties meeting their tax obligations because of unemployment or other financial problems.

The steps –– an expansion of efforts that began more than a year ago –– include additional flexibility on offers in compromise for struggling taxpayers, a series of Saturday “open houses” offering taxpayers extra opportunities to work out tax problems face to face with the IRS, special outreach with partner groups to unemployed taxpayers and the availability of more information on a special section of the IRS Web site.

New Flexibility for Offers in Compromise

7.80 For some taxpayers, an offer in compromise –– an agreement between a taxpayer and the IRS that settles the taxpayer’s debt for less than the full amount owed –– continues to be a viable option. IRS employees will now have additional flexibility when considering offers in compromise from taxpayers facing economic troubles, including the recently unemployed.

Specifically, IRS employees will be permitted to consider a taxpayer’s current income and potential for future income when negotiating an offer in compromise. Normally, the standard practice is to judge an offer amount on a taxpayer’s earnings in prior years. This new step provides greater flexibility when considering offers in compromise from the unemployed. The IRS may also require that a taxpayer entering into such an offer in compromise agree to pay more if the taxpayer’s financial situation improves significantly.

These immediate steps are part of an on-going effort by the IRS to ensure the availability of the Offer in Compromise program for taxpayers.

Special Outreach Efforts to Unemployed

7.85 The IRS is working and coordinating with state departments of revenue and state workforce agencies to help taxpayers who are having problems meeting their tax liabilities because of unemployment or other financial problems.

These coordinated efforts may include opportunities for taxpayers to make payment arrangements and resolve both federal and state tax issues in one place.

Other Options Available for Taxpayers

7.90 The IRS will continue to offer other help to taxpayers, including:

Assistance of the Taxpayer Advocate Service for those taxpayers experiencing particular hardship navigating the IRS.
Postponement of collection actions in certain hardship cases.
Added flexibility for missed payments on installment agreements and offers in compromise for previously compliant individuals having difficulty paying.
Additional review of home values for offers in compromise in cases where real-estate valuations may not be accurate.
Accelerated levy releases for taxpayers facing economic hardship.

In addition, the IRS will accelerate lien relief for homeowners if a taxpayer cannot refinance or sell a home because of a tax lien. As previously announced, a taxpayer seeking to refinance or sell a home may request the IRS make a tax lien secondary to the lien by the lending institution that is refinancing or restructuring a loan. The taxpayer may also request the IRS discharge its claim if the home is being sold for less than the amount of the mortgage lien under certain circumstances.

Online Payment Agreement (OPA)

7.95 The Internal Revenue Service introduced several new features to the interactive Online Payment Agreement application, which will make it easier for taxpayers and their authorized representatives to make changes to existing installment agreements.

The system will now permit:

Individuals to revise their payment due dates and/or amounts on existing agreements.
Individuals to revise existing extensions to regular installment agreements and direct debit installment agreements.
Individuals to revise existing regular installment agreements to a payroll deduction installment agreement or a direct debit installment agreement.

Practitioners with valid authorizations to use the signature date found on their approved Form 2848, Power of Attorney and Declaration of Representative, or the caller ID as an alternate way to authenticate when requesting agreements for clients.

More than 75 percent of those eligible for an installment agreement can establish one using the online application, according to the IRS. Since launching in October 2006, more than 30,000 taxpayers have successfully used it to set up a payment agreement. Eligible taxpayers who owe $25,000 or less in combined tax, penalties and interest can self-qualify, apply and receive immediate notification of approval for installment agreements – including pre-assessed agreements on tax year 2008 Form 1040 liabilities and paperless direct debit agreements.

NOTE: For security purposes, you will automatically be logged out of OPA after 20 minutes of inactivity per page. Be sure to gather all the necessary information so that you are not automatically logged out of OPA before completing the required information. If you have difficulty entering the data required, please call the IRS at the number listed under “When should I call the toll-free number. “

http://www.irs.gov/individuals/article/0,,id=149373,00.html

Guaranteed Availability of Installment Agreements

7.100 The Internal Revenue Service Restructuring and Reform Act of 1998 requires the Secretary to grant an installment agreement, at the taxpayer’s option, if:

the liability is $10,000, or less (excluding penalties and interest);
within the previous 5 years, the taxpayer has not failed to file or to pay, nor entered an installment agreement under this provision;
if requested by the Secretary, the taxpayer submits financial statements, and the Secretary determines that the taxpayer is unable to pay the tax due in full;
the installment agreement provides for full payment of the liability within 3 years; and
the taxpayer agrees to continue to comply with the tax laws and the terms of the agreement for the period (up to 3 years) that the agreement is in place.[Act § 3467; IRC § 6159)

<$25,000 Liabilities

7.110 The IRS has chosen to create a more liberal system that allows installment agreements of up to 5 years for balances of less than $25,000.

New More Onerous Allowable Expense Standards

7.120 In March, 2011 the IRS again revised the standards. Instead of establishing national standards which recognized the need for higher living expense for higher income families it began a system of one size fits all. It continued to fail to recognize the varying cost of living in different regions and communities and eliminated differentials forHawaii andAlaska. It also added a new category of expenses for out-of-pocket health care expenses.

Total allowable expenses include those expenses that meet the necessary expense test. The necessary expense test is defined as expenses that are necessary to provide for a taxpayer's and his or her family's health and welfare and/or production of income. The expenses must be reasonable. The total necessary expenses establish the minimum a taxpayer and family needs to live.

There are four types of necessary expenses:

National Standards
Out-of-Pocket Health Care
Local Standards
Other Expenses

National Standards: These establish standards for reasonable amounts for five necessary expenses. Four of them come from the Bureau of Labor Statistics (BLS) Consumer Expenditure Survey: food, housekeeping supplies, apparel and services, and personal care products and services. The fifth category, miscellaneous, is a discretionary amount established by the Service. It is $87 for one person up to $235 for 4 persons. The IRS allows a total of $262 per month for each member of the household above 4.

Note: All five standards are included in one total national standard expense.

Out-of-Pocket Health Care Expenses: Out-of-pocket health care expenses include medical services, prescription drugs, and medical supplies (e.g. eyeglasses, contact lenses, etc.). Elective procedures such as plastic surgery or elective dental work are generally not allowed. Taxpayers and their dependents are allowed the standard amount monthly on a per person basis, without questioning the amounts they actually spend. If the amount claimed is more than the total allowed by the health care standards, the taxpayer must provide documentation to substantiate those expenses are necessary living expenses. Generally, the number of persons allowed should be the same as those allowed as exemptions on the taxpayer’s most recent year income tax return. The out-of-pocket health care standard amount is allowed in addition to the amount taxpayers pay for health insurance.

Local Standards: These establish standards for two necessary expenses: housing and transportation. Taxpayers will be allowed the local standard or the amount actually paid, whichever is less.

A. Housing - Standards are established for each county within a state. When deciding if a deviation is appropriate, consider the cost of moving to a new residence; the increased cost of transportation to work and school that will result from moving to lower-cost housing and the tax consequences. The tax consequence is the difference between the benefit the taxpayer currently derives from the interest and property tax deductions on Schedule A to the benefit the taxpayer would derive without the same or adjusted expense. Housing costs include rent and/or house payments, taxes, repairs and utilities the IRM provides as follows:

The utilities include gas, electricity, water, fuel, oil, bottled gas, trash and garbage collection, wood and other fuels, septic cleaning, and telephone. Housing expenses include: mortgage or rent, property taxes, interest, parking, necessary maintenance and repair, homeowner's or renter's insurance, homeowner dues and condominium fees. Usually, this is considered necessary only for the place of residence. Any other housing expenses should be allowed only if, based on a taxpayer's individual facts and circumstances, disallowance will cause the taxpayer economic hardship. [ IRM 5.15.1.9

B. Transportation - The transportation standards consist of nationwide figures for loan or lease payments referred to as ownership cost, and additional amounts for operating costs broken down by Census Region and Metropolitan Statistical Area. Operating costs were derived from BLS data. If a taxpayer has a car payment, the allowable ownership cost added to the allowable operating cost equals the allowable transportation expense. If a taxpayer has no car payment only the operating cost portion of the transportation standard is used to figure the allowable transportation expense. Under ownership costs, separate caps are provided for the first car and second car. If the taxpayer does not own a car a standard public transportation amount is allowed.

Vehicle insurance, vehicle payment (lease or purchase), maintenance, fuel, state and local registration, required inspection, parking fees, tolls, driver's license, public transportation. Transportation costs not required to produce income or ensure the health and welfare of the family are not considered necessary. Consider availability of public transportation if car payments (purchase or lease) will prevent the tax liability from being paid in part or full. Public transportation costs could be an option if it does not significantly increase commuting time and inconvenience the taxpayer.

Note: If the taxpayer has no car payment, or no car, question how the taxpayer travels to and from work, grocer, medical care, etc. The taxpayer is only allowed the operating cost or the cost of transportation. [ IRM 5.15.1.9 ]

C. Other Expenses. Other expenses may be considered if they meet the necessary expense test – they must provide for the health and welfare of the taxpayer and/or his or her family or they must be for the production of income. This is determined based on the facts and circumstances of each case. If other expenses are determined to be necessary and, therefore allowable, document the reasons for the decision in your history.

D. Conditional expenses. These expenses do not meet the necessary expenses test. However, they are allowable if the tax liability, including projected accruals, can be fully paid within five years.

E. National and local expense standards are guidelines. If it is determined a standard amount is inadequate to provide for a specific taxpayer’s basic living expenses, allow a deviation. Require the taxpayer to provide reasonable substantiation and document the case file.

F. Generally, the total number of persons allowed for national standard expenses should be the same as those allowed as dependents on the taxpayer’s current year income tax return. Verify exemptions claimed on taxpayer’s income tax return meet the dependency requirements of the IRC. There may be reasonable exceptions. Fully document the reasons for any exceptions. For example, foster children or children for whom adoption is pending.

G. A deviation from the local standard is not allowed merely because it is inconvenient for the taxpayer to dispose of valued assets.

H. Length. Revenue officers should consider the length of the payments. Although it may be appropriate to allow for payments made on the secured debts that meet the necessary expense test, if the debt will be fully repaid in one year only allow those payments for one year. [ IRM 5.15.1.7 ]

Five Year Test

7.30 The amount allowed for necessary or conditional expenses depends on the taxpayer’s ability to full pay the liability within five years and on the taxpayer’s individual facts and circumstances. If the liability can be paid within 5 years, it may be appropriate to allow the taxpayer the excessive necessary and conditional expenses. If the taxpayer cannot pay within 5 years, it may be appropriate to allow the taxpayer the excessive necessary and conditional expenses for up to one year in order to modify or eliminate the expense. (See IRM 5.14, Installment Agreements) [ IRM 5.15.1.10 ]

8. OFFER IN COMPROMISE

Number of Offers

8.10 The total number of proposed offer has more than halved from 128,000 in FY 2001 to 52,000in FY 2009. The number of proposed offers rose from about 42,000 in 2008. The number of OICs accepted declined from 38,643 (or 34 percent) in FY 2001, 12,000 in FY 2007 (or 24%):10,677in 2008 (or 24%). and went down to 10,665.(about 20%) in 2009. In 2010 the number of accepted offers rose for the first time in a decade to 14,000 acceptances. The increased number of acceptances resulted primarily from an increase in submission and not as a result of any increased flexibility by the IRS.

Offers in compromise (thousands)	2007	2008	2009	2010
Offers received	46	44	52	57
Offers accepted	12	11	11	14
Offers accepted	228,975	200,103	157,261	129,668

Securing an Offer in Compromise

8.15 The IRS has made it so difficult to secure an offer in compromise that many taxpayers and their representative no longer choose to propose a compromise.

Future Income for Offers in Compromise

8.20 The Internal Revenue Service on March 10, 2011 revised its guidance to employees on figuring the value of a taxpayer’s future income in evaluating an offer in compromise, with specific instructions to consider a variety of issues for unemployed or underemployed workers. The memorandum (SBSE 05-0310-012) noted that future income is defined as an estimate of the taxpayer’s ability to pay based on an analysis of gross income, less necessary living expenses, for a specific number of months into the future.

As a general rule, the guidance said, the taxpayer’s current income will be used in the analysis of future ability to pay. “Consideration should be given to the taxpayer’s overall general situation, including such factors as age, marital status, number and age of dependents, level of education or occupational training, and work experience,” the document said.

Agency Notes Variety of Situations

8.25 IRS noted there are situations that may warrant placing a different value on future income than on current or past income. Such situations include those where income will increase or decrease, or current necessary expenses will increase or decrease, the agency said.

Other situations may include those where a taxpayer:

is temporarily or recently unemployed or underemployed,
is unemployed and is not expected to return to a previous occupation or previous level of earnings,
is long-term unemployed,
is long-term underemployed, has an irregular employment history or fluctuating income,
is in poor health and the ability to continue working is questionable,
is close to retirement and has indicated he or she will be retiring, or will file for bankruptcy.

Income Averaging Addressed

8.30 IRS told its field personnel that judgment should be used in determining the appropriate time to apply income averaging on a case-by-case basis. “All circumstances of the taxpayer should be considered” in making this decision, the agency said.

Further, IRS said, in situations where the taxpayer’s income does not appear to meet stated living expenses, the difference should not be included as additional income to the taxpayer. Such inclusion should only be done if there are clear indications that the taxpayer is receiving, and will continue to receive, additional income not included on the collection information statement, according to the document.

As a general rule, the guidance said, “Employees need to exercise good judgment when determining future income.” The history must be clearly documented and support the known facts and circumstances of the case, and include analysis of the supporting documents, IRS noted.

Facts and Circumstances Approach Directed

8.35 The memo directed IRS workers to evaluate each case on the facts and circumstances, and said the history “must clearly explain the reasoning behind our actions.”

The agency said there are cases where it may be appropriate to use the taxpayer’s current income and secure a future income collateral agreement, particularly in cases where the future income is uncertain, but where it is reasonably expected that the income will increase.

Tax Increase Prevention and Reconciliation Act of 2005

8.40 The Tax Increase Prevention and Reconciliation Act of 2005 (TIPRA), section 509, made major changes to the IRS OIC program. These changes affect all offers received by the IRS on or after July 16, 2006..TIPRA section 509 amends IRC section 7122 by adding a new subsection (c) “Rules for Submission of Offers-in-Compromise.”

Payments With Offers

8.50 A taxpayer filing a lump-sum offer must pay 20% of the offer amount with the application (IRC 7122(c)(1)(A)). A lump-sum offer means any offer of payments made in five or fewer installments. A taxpayer filing a periodic-payment offer must pay the first proposed installment payment with the application and pay additional installments while the IRS is evaluating the offer (IRC section 7122(c)(1)(B)). A periodic-payment offer means any offer of payments made in six or more installments.

Failure to Make Deposit

8.60 Taxpayers can avoid delays in processing their OIC applications by making all required payments in full and on time. Failure to pay the 20 percent on a lump-sum offer, or the first installment payment on a periodic-payment offer, will result in the IRS returning the offer to the taxpayer as nonprocessable (IRC section 7122(d)(3)(C) as amended by TIPRA).

Not Refundable

8.70 The 20 percent payment for a lump-sum offer and the installment payments on a periodic-payment offer are “payments on tax” and are not refundable deposits (IRC section 7809(b) and Treasury Regulation 301.7122-1(h)).

Taxpayer Advocate Research

8.80 In 2007, the Taxpayer Advocate Service conducted a research study to assess the impact of the down payment requirement. The study analyzed a representative sample of more than 400 offers that the IRS accepted in the months just before the 20 percent requirement took effect. Among the principal findings were that 56 percent of taxpayers whose offers were accepted and who made lump-sum payments obtained the funds from family members and friends. While family and friends may be willing to help a taxpayer get straight with the IRS, they are probably much less willing to provide funds for taxpayers to make down payments on offers that are unlikely to be accepted – and fewer than one in four offers is, in fact, accepted. Thus, not surprisingly, the number of offers received by the IRS fell by 21 percent from FY 2006 to FY 2007 as the down payment requirement took effect.

Failure to Make Installment Payments

8.90 Taxpayers failing to make installment payments on periodic-payment offers after providing the initial payment will cause the IRS to treat the offer as a withdrawal. The IRS will return the offer application to the taxpayer (IRC section 7122(c)(1)(B)(ii)).A lump-sum offer accompanied by a payment that is below the required 20 percent threshold will be deemed processable. However, the taxpayer will be asked to pay the remaining balance in order to avoid having the offer returned. Failure to submit the remaining balance will cause the IRS to return the offer and retain the $150 application fee.

Taxpayers filing periodic-payment offers must submit the full amount of their first installment payment in order to meet the processability criteria. Otherwise, the IRS will deem the offer as unprocessable and will return the application to the taxpayer along with the $150 fee.

Low Income Taxpayers

8.100 Under the new law, taxpayers qualifying as low-income or filing an offer solely based on doubt as to liability qualify for a waiver of the new partial payment requirements. Taxpayers qualifying for the low-income exemption or filing a doubt-as-to- liability offer only are not liable for paying the application fee, or the payments imposed by TIPRA section 509. A taxpayer seeking a waiver must submit Form 656-A with the offer. The monthly income levels to qualify are listed below:

RS OIC Low Income Guidelines

Size of Family Unit	48 Contiguous States and D.C.	Hawaii	Alaska
1	$2,256	$2,596	$2,819
2	$3,035	$3,492	$3,794
3	$3,815	$4,388	$4,769
4	$4,594	$5,283	$5,744
5	$5,373	$6,179	$6,719
6	$6,152	$7,075	$7,694
7	$6,931	$7,971	$8,669
8	$7,710	$8,867	$9,644
For each additional person, add	$779	$896	$975

Interim Guidance Released for Low-Income Cases

8.105 The Internal Revenue Service March 1, 2010 posted to its website a memorandum (SBSE-05-0210-006) that provides reissued interim guidance for low-income processability procedures. The original guidance explained that the revised procedures will require a review of the Form 433-A, Collection Information Statement, on any offer that is received without a Form 656-A, Income Certification for Offer in Compromise Application Fee and Payment, and meets certain criteria. Based upon a review, if the offer meets IRS low-income guidelines, the offer will be considered processable.

Background

8.110 An offer in compromise is a settlement of a delinquent tax account for less than the full amount due. Sec. 7122 states that the IRS may compromise any civil or criminal case arising under the Internal Revenue Laws prior to reference to the Department of Justice for prosecution or defense

Supporting Documents

8.120 The financial statements require the proponent to supply documentation for each item on the forms, i.e. pay stubs, car payment book, mortgages, pay stubs, charge account statements, and bank statements. The IRS considers smaller liability offers without conducting a field investigation, therefore it is requiring the proponent to supply all the info to make a decision without field verification.

$150 Processing Fee

8.130 The Internal Revenue Service now charges a $150 application fee for the processing of offers in compromise. The IRS expects that this fee will help offset the cost of providing this service, as well as reduce frivolous claims. The law authorizes federal agencies to charge fees to defray the costs of providing certain services. Guidelines encourage such fees for benefits beyond those provided to the general public. The IRS anticipates the fee also will reduce the number of offers that are filed inappropriately — for example, solely to delay collection — enabling the agency to redirect resources to the processing of acceptable offers. Offers based solely on hardship may seek a fee waiver.

Determining Processability

8.140 The IRS campuses do an intensive review of each offer to determine if it is processable. The author believes that the IRS makes a concerted effort to return most offers to avoid the effort of performing a substantive consideration. An offer in compromise will be deemed not processable if one or more of the following criteria are present:

A. Taxpayer Not in Compliance – All tax returns for which the taxpayer has a filing requirement must be filed. This rule applies even if a Service employee previously decided not to pursue the filing of the return under the provisions of Policy Statement P-5-133, because it was believed to have “little or no tax due” . In-business taxpayers must have timely deposited, filed and paid all required employment tax returns for the two (2) preceding quarters prior to filing the offer, and must be current with federal tax deposits for the quarter in which the offer was submitted.

Note: Generally speaking, IRM 5.1.11.1.3(2) only requires employees to conduct a compliance check, confirm and document all tax periods were filed for the preceding 6 year period. The only exception would be if fraud were discovered during the course of the investigation. Even then it should be extremely rare to go beyond 6 years. IRM 5.1.11.4 discusses enforcement criteria, which states that if the taxpayer refuses to file, neglects to file, or indicates an inability to file, then the employees should determine to what extent enforcement should be used (e.g. summons, 6020(b), referral to Exam, or field, etc.). Filing requirements will normally be enforced for a 6 year period, which is calculated by starting with the tax year that is currently due, and going back 6 years.

B. Taxpayer in Bankruptcy - An offer will not be considered during a bankruptcy proceeding.

Note: IRM 25.17.4.7, Offers-in-Compromise and Bankruptcy (07-01-2002), states that “[t]oo many administrative and legal problems would be created if a tax liability was simultaneously the subject of a court-supervised bankruptcy case and the administrative offer-in-compromise process.” Therefore, it is the policy of IRS that an offer will not be considered if a taxpayer is in bankruptcy.

C. Taxpayer did not submit the offer on the current revision of Form 656 - The offer must be submitted on the most current revision of the Offer in Compromise Form 656.

D. Taxpayer did not submit the most current revision of Forms 433-A and/or 433-B – The most current revision of the Collection Information Statement Forms 433-A and/or 433-B must be submitted with the offer.

E. Taxpayer did not submit the application fee with the offer – The application fee of $150 or the signed Form 656-A, Income Certification for Offer in Compromise Application Fee, must be submitted with each Form 656 (Form 656-A applies to individual taxpayers only).

Note: The application fee is not required if the offer is filed solely on the basis of Doubt as to Liability.

An offer cannot be returned for the sole reason that the cost of an investigation may exceed the amount offered. [IRM 5.8.3.4.1]

Full Pay Processing

8.150 The IRS is always looking for where it believes the taxpayer has the ability to full pay the liability. Its manual provides as follows:

Taxpayers may submit an offer to compromise the liabilities based on Doubt as to Collectibility, yet indicate on their application an ability to pay the account in full. These cases, once determined to be processable, will be screened out. Absent any special circumstances they will be rejected with no further investigation or verification. The taxpayer will be directed toward the appropriate resolution for the delinquency. The rejection letter will be the first communication with the taxpayer. A decision to reject with appeals rights is adequately justified by the taxpayer’s self-disclosed ability to pay in full.

Initial Review

8.160 For processable offers one of the first considerations is to determine if the taxpayer can pay in full. The following initial review will be conducted on all processable offers to make that determination.

Complete the Full Pay worksheet using the taxpayer’s figures only, as reflected on the CIS.

Do not adjust any asset values or apply necessary expense standards. [IRM 5.8.3.12]

Computation of Offer Amount

8.170 The IRS uses three different methods for determining the adequacy of an offer depending on the period of time the taxpayer proposes for payment of the offer amount. The methods are:

Cash (paid in 5 installment or less), or

Deferred Payment (paid in more than 5 installments), or

Deferred Payment (offers with payment terms up to the remaining statutory period for collecting the tax.).

NOTE: In all three cases, the IRS will release any filed Notice of Federal Tax Lien once you have fully paid the offer amount and any interest that has accrued.

Cash Offer

8.180 You must pay cash offers in 5 installments or less after acceptance. You should offer the realizable value of your assets (quick sale value) plus the total amount the IRS could collect over forty-eight months of payments represent value of income). When the ten-year statutory period for collection expires in less than forty-eight months, you must use the Deferred Payment Chart shown in the instructions to Form 656. The Internal Revenue Service’s method of determining the adequacy of an offer could be best expressed by:

Quick Sale Value Plus Present Value of Income Equals Offer In Compromise (QSV + PVI = OIC)

In applying this formula, the IRS determines the Quick Sale Value of all of the client’s assets and then adds the amount of the present value of the taxpayer’s ability to pay. It aggregates the two numbers to arrive at an Offer in Compromise amount.

Show Deferred Payment Offer

8.190 This payment option requires you to pay the offer within two years of acceptance. The offer must include the realizable value of your assets in addition to the total amount the IRS could secure over sixty months (or the remainder of the ten-year statutory period for collection, whichever is less) through monthly payments. The IRS may file a Notice of Federal Tax Lien on tax liabilities compromised under short-term payment offers.

Deferred Payment Offers

8.200 This payment option requires you to pay the offer amount up to the remaining statutory period for collecting the tax. The offer must include the realizable value of your assets plus the amount the IRS could collect through monthly payments during the remaining life of the collection statute. The deferred payment option itself has three payment options:

Option One is: Full payment of the realizable value of your assets within 90 days from the date the IRS accepts your offer and Your future income in monthly payments during the remaining life of the collection statute;

Option Two is: Cash payment for a portion of the realizable value of your assets within 90 days from the date the IRS accepts your offer and Monthly payments during the remaining life of the collection statute for both the balance of the realizable value and your future income;

Option Three is: The entire offer amount in monthly payments up to the life of the collection statute.

Corporate Trust Fund Liabilities

8.210 The IRS has. recently changed its rules with respect to in business offers in compromise. It now requires that each potentially responsible officer of the company sign an agreement to assessment of the trust fund recovery penalty in advance of consideration of any corporate or LLC offer. The new system is extremely unfair because the IRS is requiring even those who should not be held liable for the TFRP to agree to liability and assessment. Only after the liability has been assessed against a non-responsible person may she file a claim for refund and defend against the penalty. The system is extremely unfair and represents an attempt to deprive officers of their statutory due process rights.

Pursuit of Officers After Compromise.

8.220 Under this new system the IRS could compromise with the corporate entity based upon its ability to pay and then continue to pursue responsible officers for the remaining trust fund liability. The owners and officers would face continuing economic risk. The system also makes it impossible for a company that had a change in leadership to propound an offer in compromise. Prior officers would probably refuse to consent to the demands of the IRS that they waive their TFRP appeal rights thereby negating any opportunity for the company to have its offer considered by the IRS.

Promote Effective Tax Administration

8.230 As part of the IRS Restructuring and Reform Act of 1998 (RRA 98), Congress added section 7122(c) to the Internal Revenue Code. That section provides that the Service shall set forth guidelines for determining when an offer in compromise should be accepted. Congress explained that these guidelines should allow the Service to consider:

Hardship,
Public policy, and
Equity

Treasury Regulation 301.7122-1 authorizes the Service to consider offers raising these issues. These offers are called Effective Tax Administration (ETA) offers.

Encourage Compliance

8.240 The availability of an Effective Tax Administration (ETA) offer encourages taxpayers to comply with the tax laws because taxpayers will:

Believe the laws are fair and equitable, and
Gain confidence that the laws will be applied to everyone in the same manner.

The Effective Tax Administration (ETA) offer allows for situations where tax liabilities

The tax is legally owed, and
The taxpayer has the ability to pay it in full

Only Available If There Is No Doubt As to Liability Or Collectibility

8.250 An Effective Tax Administration (ETA) offer can only be considered when the Service has determined that the taxpayer does not qualify for consideration under Doubt as to Liability (DATL) and/or Doubt as to Collectibility (DATC). The taxpayer must include the Collection Information Statement (Form 433-A and/or Form 433-B) when submitting an offer requesting consideration under Effective Tax Administration (ETA). Economic hardship standard of § 301.6343-1 specifically applies only to individuals. [IRM 5.8.11.1]

Rules for Evaluating Offers to Promote Effective Tax Administration

8.260 The determination to accept or reject an offer to compromise made on the ground that acceptance would promote effective tax administration within the meaning of this section will be based upon consideration of all the facts and circumstances, including the taxpayer’s record of overall compliance with the tax laws.

Factors

8.270 Factors supporting (but not conclusive of) a determination of economic hardship include:

Taxpayer is incapable of earning a living because of a long term illness, medical condition, or disability and it is reasonably foreseeable that taxpayer’s financial resources will be exhausted providing for care and support during the course of the condition;

Although taxpayer has certain assets, liquidation of those assets to pay outstanding tax liabilities would render the taxpayer unable to meet basic living expenses; and

Although taxpayer has certain assets, the taxpayer is unable to borrow against the equity in those assets and disposition by seizure or sale of the assets would have sufficient adverse consequences such that enforced collection is unlikely Temp Reg 301.7122-1T(b)(4)(iv)(B)]

Undermine Compliance

8.280 Factors supporting (but not conclusive of) a determination that compromise would not undermine compliance by taxpayers with the tax laws include:

Taxpayer does not have a history of noncompliance with the filing and payment requirements of the Internal Revenue Code;

Taxpayer has not taken deliberate actions to avoid the payment of taxes; and

Taxpayer has not encouraged others to refuse to comply with the tax laws.[Temp Reg. 301.7122-1T(b)(4)(iv)(C)]

Exceptional Circumstances

8.290 The following examples illustrate cases where exceptional circumstances exist such that collection of the full liability will be detrimental to voluntary compliance by taxpayers; and compromise of the liability would not undermine compliance by taxpayers with the tax laws.

Portions Reprinted from

“REPRESENTING THE AUDITED TAXPAYER BEFORE THE IRS”

AND

REPRESENTATION BEFORE THE COLLECTION DIVISION OF
THE IRS

Robert E. McKenzie

WITH PERMISSION FROM

THOMSON WEST
Rochester, NY

Arnstein Links

2011 IRS REPRESENTATION UPDATE

1. A CHANGING IRS

More Compliance Centers to Cease Processing Returns:

IRS Workforce

Preparer Regulation

New Regulatory Requirements

Competency Testing

Transition Rules

No Grandfather Claus

Continuing Education

Exemption for CPA’s, EA’s & Lawyers

Public Database

Compliance Checks

Ethical Standards

Enforcement

Evaluation

Why is the Return Preparer Review and resulting new regulatory requirements important?

Preparer Oversight

IRS Tax Preparer Visits Include All Types of Practitioners,

Who received the letter?

PTIN’s

Penalties

Background Checks

User Fees

E-file Mandate

2. TAXPAYER ADVOCATE

National Taxpayer Advocate Releases Report to Congress

Status Updates

The Most Litigated Tax Issues

3. ENFORCEMENT

Highlights of 2010 Enforcement

Individual Enforcement

Millionaires

Businesses

Collection Enforcement

Electronic Filing IRS Webpage

State Information Sharing

Federal Tax Returns and Return Information.

Return Information

IRS Study Provides Tax Gap Estimate

Sources of Misreporting

Understanding the Tax Gap

Components of the Tax Gap

Increased Funding

2010 Budget

2011 Budget

Overview – Abusive Return Preparer

Abusive Preparer Prosecutions

Audits of 30 Clients

Promotion of Form to Report Abusive Preparers

4. EXAMINATION

Examination Using Social Media

IRS Guidelines

The Dirty Dozen

5. APPEALS

Strategic Priorities:

Campus Appeals Program

Fast Track Settlement (Small Business and Self-Employed Taxpayers)

Fast Track Mediation (Small Businesses and Self-Employed Taxpayers)

Early Referral

Post Appeals Mediation

Arbitration

6. USEFUL INFORMATION FOR PRACTITIONERS

Whistleblower Reforms

Who can get an award?

What are the rules for getting an award?

Awards for Lower Dollar Amounts

Misclassified Workers

Misclassification

Recommendations

NRP Audits

Offshore Accounts

Agreement

Many Taxpayers and Bankers Criminally Charged

New Offshore Voluntary Disclosure Program

Avoid Criminal Charges

Penalties

Prior Program

Eligibility