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TIGTA Releases Annual Report on IRS Compliance Trends

October 13, 2014 Comments off

TIGTA Releases Annual Report on IRS Compliance Trends
Source: Treasury Inspector General for Tax Administration

Despite less funding and fewer employees, the Internal Revenue Service (IRS) increased the total dollars received and collected for the third straight year, according to a new report publicly released today by the Treasury Inspector General for Tax Administration (TIGTA).

However, the IRS conducted fewer examinations, and its Collection Function continued to receive more delinquent accounts than it closed, the report concluded.

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TIGTA — Trends in Compliance Activities Through Fiscal Year 2013

October 9, 2014 Comments off

Trends in Compliance Activities Through Fiscal Year 2013
Source: Treasury Inspector General for Tax Administration

IMPACT ON TAXPAYERS
This report is a compilation of statistical information reported by the IRS. The data presented in this report provide taxpayers and stakeholders with information about how the IRS focuses its compliance resources and the impact of those resources on revenue and compliance over time.

WHY TIGTA DID THE AUDIT
TIGTA conducts this review annually in response to continuing stakeholder interest in the analysis and trending of Collection and Examination function activities. The overall objective was to provide various statistical information regarding Collection and Examination function activities.

WHAT TIGTA FOUND
Between Fiscal Years (FY) 2010 and 2013, the IRS’s appropriated budget decreased 7.4 percent, from $12.1 billion to $11.2 billion after sequestration. Sequestration had a significant impact on the IRS’s FY 2013 budget.

These budget reductions resulted in decreases in the number of employees available to provide services to taxpayers and enforce the tax laws. Specifically, the number of full-time equivalents decreased by nearly 9 percent, from 94,618 at the end of FY 2010 to 86,310 at the end of FY 2013, including a 4 percent reduction between FYs 2012 and 2013. The number of enforcement personnel decreased by more than 1,000 employees during FY 2013.

As resources decreased, the IRS’s responsibilities have expanded. For example, in FY 2013, the IRS continued implementing tax‑related portions of the Affordable Care Act and the Foreign Account Tax Compliance Act.

Despite these challenges, total dollars received and collected (gross collections) increased for the third straight year to $2.9 trillion (a 13 percent increase) in FY 2013. Enforcement revenue collected also increased from $50.2 billion in FY 2012 to $53.3 billion in FY 2013 due, in part, to several large Appeals case settlements. Tax return filings continued to increase as did gross accounts receivable, which increased to $400 billion.

The FY 2013 Collection function activities showed mixed results. The amount collected on delinquent accounts by both the Automated Collection System and Field Collection decreased. The Collection function continued to receive more delinquent accounts than it closed, although the number of delinquent accounts in the Collection queue decreased due, in part, to the removal of millions of accounts that were not resolved. Fewer Notices of Federal Tax Lien were filed, fewer levies were issued, and fewer seizures were made. Meanwhile, taxpayers’ use of payment options such as offers in compromise increased.

The Examination function conducted 6 percent fewer examinations in FY 2013 than in FY 2012. The decline in examinations occurred across all tax return types, including individual, corporation, S corporation, and partnership. Seventy percent of return examinations were conducted via correspondence. While the number of tax return examinations declined, productivity indicators were mixed. The dollar yield per hour for most return types increased. However, the no-change rates increased for some types of examinations (corporations and partnerships), while it decreased for others (individuals and S corporations).

WHAT TIGTA RECOMMENDED
TIGTA made no recommendations in this report. IRS officials were provided an opportunity to review the draft report and did not provide any comments.

See also: Fiscal Year 2014 Statutory Review of Compliance With the Freedom of Information Act

TIGTA – Fiscal Year 2014 Statutory Review of Restrictions on Directly Contacting Taxpayers

September 24, 2014 Comments off

Fiscal Year 2014 Statutory Review of Restrictions on Directly Contacting Taxpayers
Source: Treasury Inspector General for Tax Administration

IMPACT ON TAXPAYERS
The direct contact provisions of Internal Revenue Code Section 7521 generally require IRS personnel to stop a taxpayer interview whenever a taxpayer requests to consult with a representative, and prohibits IRS personnel from bypassing a qualified representative without supervisory approval once a taxpayer authorizes one to act on his or her behalf and informs the IRS of that authorization. A taxpayer can file a civil suit seeking monetary damages against the IRS if an IRS employee intentionally disregards these provisions by denying the taxpayer the right to appropriate representation.

WHY TIGTA DID THE AUDIT
This audit was initiated because TIGTA is required to annually report on the IRS’s compliance with the direct contact provisions of the Internal Revenue Code. The overall objective of this review was to determine whether the IRS complied with legal guidelines addressing the direct contact of taxpayers and their representatives as set forth in Internal Revenue Code Sections 7521(b)(2) and (c).

WHAT TIGTA FOUND
The IRS has a number of policies and procedures in place to help ensure that taxpayers are afforded the right to designate an authorized representative to act on their behalf in dealing with IRS personnel in a variety of tax matters.

Each year, TIGTA focuses on one IRS office or function that interacts with taxpayers and their representatives on a routine basis. For this review, TIGTA analyzed how well the Small Business/Self-Employed Division’s Examination function has ensured that its personnel are appropriately including taxpayers’ representatives in its office audit activities. A review of a statistical sample of 96 tax return audits out of 77,817 office audits closed in Fiscal Year 2013 showed that tax compliance officers are generally involving the authorized representatives in case activities.

TIGTA did find one issue that warrants clarification in the IRS’s procedures. Two Internal Revenue Manual procedures provide slightly different requirements concerning what actions must be delayed while the taxpayer is obtaining representation.

WHAT TIGTA RECOMMENDED
TIGTA recommended that the IRS ensure that consistent guidance is provided in the Examination sections of the Internal Revenue Manual, detailing the procedures for allowing taxpayers adequate time to obtain representation and for documenting case actions.

The IRS agreed with TIGTA’s recommendation and plans to provide consistent guidance in the Small Business/Self-Employed Division’s Examination sections of the Internal Revenue Manual detailing the procedures for allowing taxpayers adequate time to secure representation before taking any follow-up action to schedule an appointment. The guidance will clarify actions the examiner can take during the 10-business-day period and clarify adequate case file documentation.

Fiscal year 2014 statutory audit of compliance with notifying taxpayers Of their rights when requested to extend the assessment statute

September 18, 2014 Comments off

Fiscal year 2014 statutory audit of compliance with notifying taxpayers Of their rights when requested to extend the assessment statute
Source: Treasury Inspector General for Tax Administration

IMPACT ON TAXPAYERS
The IRS is required by law to notify taxpayers of their rights when requesting an extension of the statute of limitations for assessing additional taxes and penalties. Taxpayers might be adversely affected if the IRS does not follow the requirements to notify both the taxpayers and their representatives of the taxpayers’ rights related to assessment statute extensions.

WHY TIGTA DID THE AUDIT
TIGTA is required by law to annually determine whether the IRS complied with Internal Revenue Code Section 6501(c)(4)(B), which requires that the IRS provide notice to taxpayers of their rights to decline to extend the assessment statute of limitations or to request that any extension be limited to a specific period of time or specific issues.

WHAT TIGTA FOUND
TIGTA’s review of a statistical sample of 59 closed taxpayer audit files with assessment statute extensions found that the IRS is generally compliant with Internal Revenue Code Section 6501(c)(4)(B). However, TIGTA identified a few instances in which the taxpayer audit files did not contain documentation to support that the taxpayer or the taxpayer’s representative were properly notified of the taxpayer’s rights.

WHAT TIGTA RECOMMENDED
TIGTA did not make any recommendations in this report because the number of errors was relatively small and the recommendations made in previous TIGTA audit reports are still valid for the issues reported. IRS officials were provided an opportunity to review the draft report and did not provide any comments.

TIGTA: The IRS Needs To Improve its Processing of Complaints Against Tax Preparers

September 8, 2014 Comments off

The IRS Needs To Improve its Processing of Complaints Against Tax Preparers (PDF)
Source: Treasury Inspector General for Tax Administration

The Internal Revenue Service (IRS) is not processing complaints against tax preparers in a timely manner, according to a report publicly released today by the Treasury Inspector General for Tax Administration (TIGTA).

The IRS processed about 77 million individually electronically filed (e-filed) Federal income tax returns prepared by paid tax return preparers in 2013.

Identifying problem preparers through the complaint process is an essential component of the IRS’s oversight responsibilities. Therefore, the IRS developed processes and procedures through which taxpayers can file a complaint with the IRS.

The overall objective of this audit was to determine whether the IRS’s tax return complaint process is effective.

TIGTA’s review of the 8,354 complaints against preparers received by the IRS between October 1, 2012 and September 11, 2013 identified 3,953 (47 percent) for which work on the complaints had yet to be initiated. Of the 3,953 complaints, 1,920 (49 percent) had been in the IRS’s inventory for at least 60 business days with no work initiated.

In addition, IRS processes do not ensure that complaints are accurately and consistently processed. Further, processes have not been established to effectively track complaint referrals to IRS business functions to ensure that the complaints are received for evaluation and track how the referred complaints are ultimately resolved.

TIGTA made eight recommendations to the IRS, including that it establish goals and procedures to ensure that complaints are timely processed; develop a process to ensure that complaints are recorded in inventory records; ensure that criteria for referring complaints to business functions are appropriately applied and that the business functions’ resolution of complaint referrals is tracked; and establish procedures to contact taxpayers for missing information.

TIGTA — Some Contractor Personnel Without Background Investigations Had Access to Taxpayer Data and Other Sensitive Information

September 3, 2014 Comments off

Some Contractor Personnel Without Background Investigations Had Access to Taxpayer Data and Other Sensitive Information
Source: Treasury Inspector General for Tax Administration

IMPACT ON TAXPAYERS
IRS policy requires contractor personnel to have a background investigation if they will have or require access to Sensitive But Unclassified (SBU) information, including taxpayer information. Allowing contractor personnel access to taxpayer and other SBU information without the appropriate background investigation exposes taxpayers to increased risk of fraud and identity theft.

WHY TIGTA DID THE AUDIT
The overall objective of this review was to determine the effectiveness of IRS controls to ensure that background investigations were conducted for contractor personnel who had access to SBU information.

WHAT TIGTA FOUND
Taxpayer and other SBU information may be at risk due to a lack of background investigation requirements in five contracts for courier, printing, document recovery, and sign language interpreter services. For example, in one printing services contract, the IRS provided the contractor a compact disk containing 1.4 million taxpayer names, addresses, and Social Security Numbers; however, none of the contractor personnel who worked on this contract were subject to a background investigation.

In addition, TIGTA found 12 contracts for which IRS program and procurement office staff correctly determined that contractor personnel required background investigations because they would have access to SBU information; however, some contractor personnel did not have interim access approval or final background investigations before they began working on the contracts.

Further, TIGTA identified 20 contracts for which either some or all contractor personnel did not sign nondisclosure agreements. In June 2013, after the period covered by our audit, the IRS issued more explicit guidance requiring the execution of nondisclosure agreements.

WHAT TIGTA RECOMMENDED
TIGTA recommended that the Deputy Commissioner for Operations Support should ensure that the types of service contracts identified in this review have the appropriate security provisions included in the contract and that associated contractor personnel have an appropriate interim access approval or final background investigation prior to beginning work on the contract. In addition, the IRS should use the results of our contract reviews to train program office and procurement office staff on contractor security requirements and the necessity for contractor personnel to sign nondisclosure agreements prior to working on a contract. Finally, TIGTA recommended that the Office of Chief Counsel (Chief Counsel) work with the Department of the Treasury Security Office to review the waiver currently in place that exempts expert witnesses from background investigations and determine if the waiver is still appropriate in the current security environment.

The IRS agreed with four of the five recommendations. The IRS disagreed with our recommendation that the Chief Counsel should work with the Department of the Treasury Security Office to review the background investigation waiver issued in August 2005 to determine if the waiver is still appropriate. TIGTA believes that waiving the requirement for a background investigation presents a security risk.

Some Tax-Exempt Organizations Have Substantial Delinquent Payroll Taxes

September 2, 2014 Comments off

Some Tax-Exempt Organizations Have Substantial Delinquent Payroll Taxes
Source: Treasury Inspector General for Tax Administration

IMPACT ON TAXPAYERS
While tax‑exempt organizations are generally not required to pay income taxes, they are generally required to pay other taxes such as payroll taxes. If tax-exempt organizations do not pay their taxes and thereby abuse the Federal tax system, the Federal Government could lose millions of dollars in revenue.

WHY TIGTA DID THE AUDIT
The overall objectives of this review were to determine if, and to what extent, tax‑exempt organizations have known Federal tax debt and to identify actions the Exempt Organizations function has taken to address this noncompliance.

WHAT TIGTA FOUND
IRS records indicate that the majority of tax‑exempt organizations pay their Federal taxes. However, a small percentage are not paying their taxes. TIGTA determined that more than 64,200 (3.8 percent) tax‑exempt organizations had nearly $875 million of Federal tax debt as of June 16, 2012. While some organizations owed minor amounts, approximately 1,200 tax exempt organizations owed more than $100,000 each. Unpaid taxes were often associated with multiple tax periods. For example, nine organizations each had Federal tax debt spanning 10 or more years that collectively totaled more than $5.5 million.

TIGTA reviewed 25 tax‑exempt organizations – all Internal Revenue Code § 501(c)(3) – that appeared to be among the worst examples involving unpaid Federal tax but are not representative of the population of all tax‑exempt organizations with unpaid tax. TIGTA determined that these organizations generally received government payments over a three‑year period of $148 million, including Medicare, Medicaid, and government grants; had annual revenue of almost $167 million; and owned assets of more than $97 million—but continued to not remit payroll and other taxes, including penalties and interest, totaling more than $25 million. The Internal Revenue Code does not authorize the IRS to revoke tax‑exempt status based on an organization’s failure to pay payroll taxes, and substantially all of the organizations that TIGTA reviewed were still recognized by the IRS as tax‑exempt as of May 2013. The Exempt Organizations function had completed several examinations but was generally not aware of the behavior of the organizations because another IRS business unit is responsible for collecting the delinquent tax debt.

WHAT TIGTA RECOMMENDED
TIGTA recommended that the Director, Exempt Organizations: 1) coordinate with Small Business/ Self‑Employed Division management to receive relevant collection information, 2) periodically complete analyses to identify tax‑exempt organizations that potentially abuse their tax‑exempt status for examination (if necessary), and 3) work with the Department of the Treasury to evaluate whether a legislative proposal is warranted to strengthen the IRS’s ability to enforce payroll tax noncompliance by tax‑exempt organizations.

In their response to the report, IRS management disagreed with the first two recommendations and agreed to apprise the Department of the Treasury of our third recommendation. TIGTA believes that the Exempt Organizations function should do more to oversee tax‑exempt organizations that repeatedly fail to remit payroll taxes, which include Medicare, Social Security, and Federal income taxes withheld from employees. This is particularly important because these organizations have the benefit of charitable status, and the Government has paid them millions of dollars of Medicare and Medicaid funds.

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