A Recent TIGTA Report on Collection Notices and a Recent GAO Report on the Automated Collection System Provide an In-Depth Look at How the IRS Collection Function Operates

Perhaps the citing of one of the taxpayer rights listed in the Taxpayer Bill of Rights (TBOR) should not receive extraordinary attention.  Still, I was impressed when I found that on the first page of its report about new collection notices, TIGTA cited to the taxpayer’s right to be informed as influencing the new collection notices.  Before I get into the details of these two reports I wanted to make special note of the TBOR sighting which suggests it has some importance in the development of administrative processes within the IRS.  The citation to TBOR also helps me as I prepare to speak on taxpayer rights and collection at the upcoming International Conference on Taxpayer Rights.  Les is also a speaker at the conference.

The TIGTA report discusses the taxpayer right immediately after discussing the statutory requirements.  Getting cited in a report prepared by an arm of the Treasury Department does not carry the same importance as a citation by a Court or independent body as the basis for action but it does signal that the rights are having an impact.  I understand that some states and localities have begun adopting taxpayer rights statements following the lead of the IRS.  Success in advocating based on these rights may yet occur.

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While the citation to the first right listed in TBOR, deserves passing mention, the TIGTA report itself demands attention from those doing collection work not only because it describes the new notices in the collection stream but also because of all of the statistics about the notices that it provides.  The IRS carefully monitors the effectiveness of the letters it sends in the collection notice stream.  Even a 1% change in taxpayer behavior based on these letters can have a significant impact on the number of cases in the IRS collection inventory.  Because of the impact of the language of the notices in effectively collecting revenue, the IRS measures the impact of these notices and tests the results of the chosen language.

When you combine the TIGTA report with the GAO report concerning the automated collection system issued shortly thereafter, it is possible to obtain a very detailed picture of the inner workings of the IRS collection process.  In this post we generally focus on statutory rights taxpayers have in dealing with the collection system but the administrative process provides a far more important topic for most taxpayers because the way the IRS administers the collection of taxes, while guided by the statutes, has a much more practical impact.  Understanding how the IRS guides cases through this process can assist in making decisions about what to do when your client has a problem with the collection system.  As I will discuss further below, understanding the significant problems the IRS now faces in administering the system, may also influence advice to clients on next steps.

If you want to take the time to read the reports, and I recommend reading them if you want to understand how the collection process at the IRS works, read the TIGTA report first because it covers the first part of the life of a case in collection.  This report focuses on the notices that the IRS sends to taxpayers.  It is easy to think of these notices by letter number or to not think of these notices at all but the notices generate a lot of money for the IRS.  The wording of the notices, the timing and everything about them requires careful choreography in order to maximize successful revenue impact.  The TIGTA report provides very granular detail concerning each of the notices and how successfully the notice produces payment.  Because the IRS recently went through a notice revision process, you can see in the report the impact of the changes in the language in the notices on taxpayer behavior.  I cannot say that the new improved notices provide the best way to gently guide taxpayers to compliance but knowing that the IRS pays careful attention to this, while considering taxpayer rights, gives me positive feelings about the tax collection process.

The GAO report essentially picks up where the TIGTA report leaves off.  It describes the three phases of IRS collection as notice, telephone (essentially Automated Call Sites or ACS) and in-person (Revenue Officers.)  Page 9 of the report has one of many helpful charts in the report and lays out this three step process.  Of course, not every collection case will go through this process and, as the report details, the IRS ability to handle the telephone phase is decreasing rapidly.  Its ability to handle the in-person phase, which I sometimes call its collection concierge service, has degraded significantly over the past two decades.  This report focuses on the second phase and does not analyze the in-person phase where I believe the loss of resources would equal or exceed the telephone phase.

While the TIGTA report had some positive numbers for the IRS concerning its success with notices, the GAO report starts off with some stark and troubling numbers for the IRS with respect to the telephone segment of its collection process.  “ACS has experienced significant declines in staffing, with full-time equivalents decreasing by 20 percent (from 3,672 to 2,932) from fiscal years 2012 through 2014.  Over the same period, the number of unresolved collection cases at the end of each year increased by 21 percent (from 4.2 million to 5.1 million).”  As staffing and inventory move in opposite directions at a rapid pace, this creates an interesting quandary for those giving advice to taxpayers who owe federal taxes.  The IRS sends fewer levies because sending levies generates phone calls.  It must monitor the number of levies it sends because of its limited ability to answer the phones in response to the levies.

The GAO report details how the IRS prioritizes the cases in collection.  While the report focuses on the perceived failure of the IRS to have adequate detail in its plan for prioritization and selection of cases, it is clear that the IRS does have a detailed process even if it has not linked that process to its mission.  It is also clear as you read the report who is likely to receive attention.  Nothing in the report is overly surprising, except perhaps the rapid rate in the past three years of the decline in the IRS ACS capabilities but, as with the TIGTA report, the amount of detail and the number of charts provides a significant level of granularity concerning this function of the IRS.  Table 3 on page 43 of the report gives the numbers of the dropping enforcement actions taken by ACS between 2012 and 2014:  Notices of Federal Tax Liens Filed down 11.29%; levies issued down 36.6%; letters sent by ACS down 30.9% and outgoing calls down 40.4%.  In addition to the loss of employees in ACS, some sites were shut down for over a year between 2013-2014 to work identity theft cases.

While I am focusing on the gloomy numbers, the GAO provides much detail on many of the sub-parts of the IRS ACS function.  Taken together these two reports can really instruct anyone interested in knowing about the systems at the IRS for collection as opposed to the statutes that apply.  Understanding the systems and the numbers can help you explain to clients what is happening in their case and why.

 

TIGTA Report on ACS Details the Impact of Shrinking Budget on Tax Collection Efforts

 

On September 18, 2014, the Treasury Inspector General for Tax Administration (TIGTA) issued a report about ACS.  The title gives a good preview of the article, “Declining Resources Have Contributed to Unfavorable Trends in Several Key Automated Collection System (ACS) Business Results.”  The fact that ACS cannot perform as well when it loses a significant percentage of its staff does not rise to the level of shocking news but the report itself provides an interesting insight in the impact of the dwindling resources and how the IRS goes about shuffling the deck chairs in what appears at the moment a losing effort at keeping up with its workload.  The report does not suggest that a tipping point is near when the lack of resources will cause a major shift in voluntary compliance.

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The report does a good job of describing ACS and how it fits into the collection system the IRS has developed. It occupies the second chair in a three part process:  1) the notice stream; 2) ACS; and 3) field collection.  The report talks about how the breakdown in ACS has, and will, continue to impact field collection and it makes some suggestions on how to lessen that impact if no resources appear on the horizon.  The descriptions and the statistics show the tough choices the IRS must make as it tries to meet workload demand in a time of significantly less resources.  Because of the reduction in staff, ACS no longer calls out to taxpayers seeking their compliance; it  has evolved into an organization that responds to calls from taxpayers receiving correspondence from the notice stream.  This description of the change in the work of ACS shows how the original goal of ACS – as a quick point of contact with delinquent taxpayers – no longer exists.  Its mission is to answer as many of the calls as it can but it cannot even cope with that mission.

The report contains several excellent charts displaying statistics on the actions of ACS. It has lost 24% of its workforce in the past three years (see Figure 2 below).  Because of issues with identity theft, the IRS has redeployed its smaller workforce to address that problem instead of using this workforce to cover as many collection cases as possible.  This, in turn, is driving some of the collection decision.  ACS issues less levies (see Figure 10 below) because it knows that when it issues levies the taxpayers will call.  I always thought that the reason for the levy was to get taxpayers to call who did not seem motivated to do so through correspondence.  The problem with having them call is that ACS then becomes overwhelmed.  The report states, “ACS management sometimes scales back issuing levies at a controlled rate in an effort to limit incoming calls to a manageable level.”

The report also details that more cases go into the Queue (see Figure 12 below). The Queue exists to warehouse collection cases no one can work.  Sending a case to the Queue does not mean that the IRS has given up on collecting the liability but just that it cannot pay attention to that case at the moment.  If the taxpayer files a refund return, the IRS will still offset the refund but absent having money fall into its lap or the taxpayer suddenly having a desire to pay the taxes about which many notices were previously sent, the taxpayer will simply not hear from anyone at the IRS while the case sits in the Queue.  A case could sit in the Queue for 10 years and then go away because of the statute of limitations on collection.  The report states that “ACS sent 12 percent more cases to the Queue during F& 2013 than during FY 2012.”

The problems in ACS and its inability to work cases impact field cases adversely simply because cases now take longer to reach the field (see Figure 7 below). I have read studies before finding that once a tax debt goes unpaid for two years the likelihood of the IRS collecting the debt dwindles to about 15%.  Now, cases do not get out of ACS to the filed until they have already aged past that point.

On average, a case is in the notice stream for nearly five months prior to entering ACS inventory. Cases that are not resolved by ACS can remain in ACS inventory for more than two years before being systemically routed to either the CFf (field collection aka revenue officers) or the Queue.  TDAs (tax delinquent accounts) that are routed to the Queue will have aged on average more than three years before being assigned to a revenue officer.  If and when these cases are eventually assigned to the CFf, they have aged and their collection potential has significantly decreased.

If revenue officers do not get cases until three years after assessment, they have a steep hill to climb to obtain payment. The original plan in creating ACS was to have speedy contact with taxpayers because quick collection means a much higher chance of success with collection.  Instead of the original plan, ACS now stands as a bar to quick collection and perhaps a bar to collection at all.  If staffing levels have fallen so far that ACS cannot do what it was designed to do and now serves as a drag on collection rather than a turbo charge, the time has come for redesign.

The report notes that the reduction in the filing of notices of federal tax liens as a result of changes a couple of years ago when the Freshstart initiate took place, may have really helped ACS (see Figure 11). After reading that ACS curtailed levy action to assist ACS responders, I almost got the feeling that those of us who thought we had done a successful job of lobbying for a better notice of lien filing policy only won because the IRS could not keep up with servicing the notices of federal tax lien filed at the lower level.

The report concludes with some dire remarks about the future of collection at the IRS. “[I]nventory continues to be routed to the ACS even when inventory cannot be worked.  When inventory is not worked or not worked timely, case dispositions may be adversely affected.  This may also have a substantial impact on the amount of Federal taxes that remain uncollected.”  The report urges IRS collection officials to align inventory routing with capabilities.  What will this mean?  If a case is headed to the Queue, routing it through ACS does not make too much difference to the action that will occur on that case.  It does not matter much if a case sits in the inventory of ACS or in the Queue if no one seeks to take affirmative action to collect.  From the taxpayer’s perspective, the location of the account between an inactive ACS and the Queue does not matter.

So, the IRS could shoot cases at Queue dollar levels straight to the Queue and not bother to load up the inventory of ACS. Because Queue dollar levels may stand at high levels, this could mean that accounts with less than $50,000 or $75,000 simply go straight to the Queue without sitting in ACS while ACS concentrates on quickly moving the higher dollar cases destined for revenue offices if ACS fails to collect.  To accomplish the direct move into the Queue, the IRS may have to raise to even higher levels the point at which it files the notice of federal tax lien or takes levy action.  Good news if you have a mid-level tax debt amount and bad news if you would like others to pay their fair share.

TIGTA reports often trouble me because they exhort the IRS to work better, faster, smarter and do not look at the system within which the IRS function works to see if better design could solve the problem more effectively. This report seems to acknowledge that the problem does not stem from the ACS not working efficiently and suggests a “better” system by suggesting a system that will move work out of ACS that cannot handle the volume in its current depleted state.  In the roughly 30 years of its existence, ACS has drawn much criticism.  If the IRS continues to shrink, ACS may simply cease to exist because it just gets in the way of collection and no longer has the ability to seek payment of tax from delinquent taxpayers.

 

TITGA ACS Fig 2TITGA ACS Fig 10TITGA ACS Fig 12TITGA ACS Fig 7TITGA ACS Fig 11