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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.

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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.

Affordable Care Act: Improvements Needed to IRS’s Medical Device Excise Tax Program

August 28, 2014 Comments off

Affordable Care Act: Improvements Needed to IRS’s Medical Device Excise Tax Program
Source: Treasury Inspector General for Tax Administration

The Internal Revenue Service (IRS) needs to improve its strategy to ensure accurate reporting and payment of the Medical Device Excise Tax, according to a new report publicly released today by the Treasury Inspector General for Tax Administration (TIGTA).

The Affordable Care Act includes an excise tax equal to 2.3 percent of the sales price for medical devices sold beginning January 1, 2013. Manufacturers, producers, and importers are responsible for collecting the excise tax and must file a Form 720, Quarterly Federal Excise Tax Return. The Joint Committee on Taxation estimated revenues from the medical device excise tax of $20 billion for Fiscal Years 2013 through 2019.

The overall objective of TIGTA’s review was to assess the IRS’s processing of tax returns reporting the medical device excise tax and its efforts to identify taxpayer noncompliance.

TIGTA found that both the number of Forms 720 filed reporting the medical device excise tax and the amount of associated revenue reported were lower than estimated.

The IRS is attempting to develop a compliance strategy to ensure that businesses are compliant with the filing and payment requirements and has taken several measures to advise medical device manufacturers of the new excise tax. However, the IRS cannot identify the population of medical device manufacturers registered with the Food and Drug Administration that are required to file a Form 720 and pay the excise tax.

In addition, processing controls do not ensure the accuracy of medical device excise tax figures reported on paper-filed Forms 720. TIGTA’s analysis of 5,107 Forms 720 processed for the first half of 2013 identified discrepancies in the amount of the excise tax and/or taxable sales amount captured from 276 paper-filed tax returns. TIGTA identified medical device excise tax discrepancies totaling almost $117.8 million when comparing the excise tax amount captured by the IRS from the Form 720 to the excise tax amount that TIGTA calculated.

Finally, the IRS erroneously assessed 219 failure-to-deposit penalties totaling $706,753 against businesses filing a Form 720 for the six months ending June 30, 2013, which was designated a penalty relief period. The IRS had reversed 133 of the 219 penalty assessments. When TIGTA alerted the IRS of the remaining 86 penalties, IRS management reversed the penalties and issued apology letters to the affected taxpayers.

“While the IRS has taken steps to educate medical device manufacturers of the medical device excise tax during implementation, it faces challenges to definitively identify manufacturers subject to the medical device excise tax reporting and payment requirements,” said J. Russell George, Treasury Inspector General for Tax Administration.

TIGTA recommended that the IRS continue refining its compliance strategy to include actions that can be taken to identify noncompliant manufacturers. Additionally, TIGTA recommended that the IRS review the 276 tax returns TIGTA identified to determine the proper excise tax owed, establish a process to verify the accuracy of the medical device excise tax amount for paper-filed Forms 720, and initiate a process to correspond with taxpayers to obtain missing taxable sales or tax amounts.

The IRS agreed with TIGTA’s recommendations and plans to consider alternative strategies for identifying noncompliant manufacturers, identify programming changes needed to improve the math verification for paper-filed Forms 720, and implement procedures for corresponding with taxpayers if the changes can be accomplished within budgetary constraints. The IRS also indicated that approximately two-thirds of the paper-filed tax returns TIGTA identified were reviewed.

TIGTA Issues Report on the IRS’s External Leads Program

August 28, 2014 Comments off

TIGTA Issues Report on the IRS’s External Leads Program
Source: Treasury Inspector General For Tax Administration

Participation in the Internal Revenue Service (IRS) External Leads Program is growing, resulting in the receipt of a significantly larger volume of leads about questionable tax refunds, but the IRS is not always verifying the leads timely, according to a new report by the Treasury Inspector General for Tax Administration (TIGTA).

The IRS’s External Leads Program receives leads about questionable tax refunds identified by a variety of partner organizations that include financial institutions, brokerage firms, government and law enforcement agencies, State agencies and tax preparers. The questionable tax refunds include Treasury checks, direct deposits, and prepaid debit cards.

The overall objective of this review was to assess the effectiveness of the IRS’s External Leads Program in recovering questionable tax refunds.

Since taking over the External Leads Program in January 2010, the IRS’s Wage and Investment Division has performed outreach in an effort to continuously increase the number of organizations participating in this program, TIGTA found. Participation and the number of questionable refunds returned and dollars associated have grown significantly. The IRS measures the External Leads Program’s success by volume and dollars associated with questionable returned refunds.

The program has grown from 10 partner financial institutions returning $233 million in 2010 to 258 partner financial institutions and partner organizations returning more than $576 million in 2013.

“The IRS’s External Leads Program has more than doubled the amount of questionable refunds returned over the past three years, thus saving tax dollars,” said J. Russell George, Treasury Inspector General for Tax Administration. “However, opportunities exist to improve the program,” George added.

According to the report, the IRS is not always verifying leads timely, and verification time frame goals differ significantly based on the lead type. The timely verification goals do not take into consideration the burden on legitimate taxpayers whose refund is being held until the verification is completed.

In addition, leads are inconsistently tracked in multiple inventory systems, and the inventory systems do not provide key information such as how the lead was resolved.

TIGTA recommended that the IRS establish more consistent time frames to verify leads; communicate these verification time frames to external partners; develop a process to ensure that leads are verified timely; consolidate the current lead inventory tracking systems into a single tracking system; and ensure that key information is captured as to how each lead is resolved.

The IRS agreed with TIGTA’s recommendations and is evaluating the treatment streams and work processes associated with the various types of referrals received in the External Leads Program to identify appropriate time frames; working to improve the effectiveness of existing reporting capabilities in evaluating program quality and timeliness; and evaluating the feasibility and potential benefits of consolidating the independent inventory tracking databases into one system.

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