The Treasury Inspector General for Tax Administration (TIGTA) just published an interesting report on tax compliance by federal employees outside the IRS. I read it with interest because I have an article coming out in the forthcoming Pittsburgh Tax Review on Section 1203 of the Restructuring and Reform Act of 1998. The Pittsburg Tax Review edition focuses on RRA 98 looking back on it from the perspective of a quarter century of living with the greatest procedural changes made to the tax code in one piece of legislation. We will have several posts in the next few months to highlight the articles in this edition of the Pittsburgh Tax Review. You can see my article on Section 1203 here.
I chose to write about Section 1203 because I find it to be a misguided piece of legislation that inappropriately targeted IRS employees. This off Code provision creates 10 deadly sins that cause termination of an IRS employee with the only possible reprieve coming from the Commissioner. My concern was not necessarily that IRS employees should not be terminated for committing one of the identified acts but that targeting IRS employees alone served a political rather than logical purpose. The TIGTA report highlights why the narrow scope of Section 1203 misses the mark. My position is that placing the burden of commuting dismissals at the Commissioner level unduly burdens the Commissioner and focusing only on IRS employees too narrowly imposes the basic tax compliance requirements that should exist across federal employment.
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One thing that struck me about the TIGTA report was the number of high-level employees at federal agencies who were non-compliant. One of my biggest criticisms of Section 1203 is that it primarily targets low level IRS employees. If you look at the data displayed in my article (which primarily comes from annual TIGTA reports and one Government Accountability Office report) regarding the IRS employees terminated as a result of Section 1203 you see that failing to timely file a return leads all other categories by a significant margin and that the only other category producing any significant volume of terminations is fraudulent returns.
The terminated IRS employees fall heavily into the lowest grades on the GS scale meaning that these employees generally work at the Service Centers, do not engage with the public and do not do technical tasks involving taxes. These employees should still file their tax returns on time but targeting and terminating employees at this level doesn’t really protect the integrity of the tax system. Section 1203 does not apply to Chief Counsel attorneys; to Treasury Department employees outside the IRS including the Treasury employees who work on tax policy; to Department of Justice attorneys in the Tax Division; to attorneys working on the Joint Committee; or to anyone working in the federal government other than those working for the IRS.
The TIGTA report shows that in other federal agencies employees at high levels on the GS scale are well represented among the non-compliant:
The chart does not display employees in the executive level of service at these agencies. I would like to think it does not display them because they are all compliant, but I doubt there is 100% compliance at that level.
The TIGTA report showed that the IRS was not doing a great job of collecting from federal employees who should be very easy targets for collection:
Further analysis of the status of the more than 61,000 TDI modules, as of May 2021, showed that taxpayers had filed their delinquent returns in approximately 29 percent of these modules and had fully paid balances or had balances that were in the process of being collected by the ACS.38 Another 41 percent of these modules were closed as either unable to locate, not liable, or shelved; were being reviewed in Examination or CI; or were waiting for another tax period to post to the Master File.39 However, about 30 percent (over 18,000) of the 61,000 modules were still in unresolved TDI status.
The TIGTA report also showed that the number of federal employee delinquencies and the amount of dollars was going up rather sharply over the past several years:
Almost 20% of the non-compliant federal employees had income over $100,000:
Federal employees engaged in delivering the mail or in the military or veterans affairs seemed to have the most difficulty complying with their federal tax obligations:
The TIGTA report focuses on what the IRS should do to address the non-compliance of federal employees. Certainly, the IRS could use some of its $80 billion to increase compliance in this easy to target sector, but Congress should rethink section 1203 to broaden it to federal employees generally with respect to the two provisions regarding timely filing and non-fraudulent filing. Tax non-compliance by federal employees should be a basis for removal bypassing normal civil service protections. IRS employees are not the only ones who create a black eye regarding tax compliance when they fail to follow the rules. All federal employees should be fully compliant or face consequences. The IRS should not bear the sole burden to track down these non-compliant federal employees. Other agencies should be helping the IRS by removing them or taking personnel actions that dictate and promote compliance.
In 2014 Congress passed the Consolidated and Further Continuing Appropriations Act prohibiting federal agencies from using appropriated funds to award a contract or grant to a corporation owing any amount of delinquent federal taxes unless it considered suspension or disbarment. A regulation, which goes by the catchy name Federal Acquisition Regulation (FAR), provides definitions and further guidance regarding this requirement. We care because this is an easy way for the IRS to collect money.
This provision follows a host of state and federal provisions linking the receipt of government employment or benefits or services with fulfilling tax obligations. Over the past quarter century many states have passed legislation tying the receipt or continuation of licenses to the payment of taxes. Many of my clinic clients came because the state of Massachusetts revoked their driver’s license due to failure to pay their state taxes. While the revocation of driver’s licenses has the most far reaching impact, states take professional licenses as well.
The federal government does not issue many licenses but it has the ability to exert similar type of pressure for tax delinquency. In 1998, it passed Section 1203 of the Restructuring and Reform Act (RRA 98). This off code provision requires IRS employees to timely file their taxes or be fired. The timely filing provision of Section 1203 is one of the so called 10 deadly sins that cause removal from employment but is by far the most impactful. I will provide some data on this below. Section 1203 is not the only federal provision creating an impact for tax delinquency. Revocation or denial of a passport, passed in 2015 is another example and one which Les wrote about recently. There has also been a movement to check federal employees outside of the IRS for tax delinquency though not as vigorously as might occur given the benefit of federal employment.
On September 12, 2022, the Treasury Inspector for Tax Administration (TIGTA) published a report regarding payments to federal contractors and federal grantees with delinquent tax situations. It makes sense to require contractors and grantees to pay their taxes just as it makes sense for employees to pay their taxes. These entities are receiving a direct benefit from the federal government and in exchange should at least keep current on their tax obligations. The report talks about the problem and the structure for the solution.
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TIGTA found that:
Between October 2018 and December 2019, Federal agencies awarded 2.1 million Federal contracts and grants to more than 83,000 awardees. We identified 3,978 entities that received $32.9 billion in Federal awards while owing $891 million in delinquent Federal taxes. This included 3,040 contractors that received $10.2 billion in Federal contracts while owing $621.8 million in delinquent Federal taxes and 938 grantees that received $22.7 billion in Federal grants while owing $269.2 million in delinquent Federal taxes.
The results can be seen in the following chart:
The TIGTA report indicates that employment taxes constitute most of the unpaid taxes reflected in the chart. This did not surprise me. This has long been a major collection problem for the IRS. The TIGTA report cited to a Government Accountability Office report from 15 years ago discussing the problem. TIGTA produced a chart breaking down the amount of delinquency and the type of entity (corporation or grantee) owing the taxes. It’s hard for me to get too excited about the entities falling in the lowest category and maybe even the next one or two categories but the high dollar categories contain some large amounts of unpaid tax.
These entities have been self-reporting that they have no tax problems. The disclosure laws prevent the IRS from affirmatively going to other government agencies and discussing tax delinquencies. One might hope that the exception to the disclosure law provided by the ability of the IRS to file a notice of federal tax lien might put many of these liabilities into the public sphere but you could see from the TIGTA report I recently wrote about on NFTLs that the IRS does not always file NFTLs on large dollar delinquencies.
Congress appropriated $30 million to the IRS to create an “application through which entities could request from the IRS a certification that the entity did or did not owe seriously delinquent taxes.” Federal agencies could then require that potential contractors or grantees go to the IRS and obtain and include the certification as part of their application process for the contract or the grant. TIGTA recommended in the report that the IRS priorities the development of this application and the IRS agreed. Seems like a simple solution and a way to collect taxes without having to assign scarce Revenue Officer resources chase entities for payment. Of course, nothing is simple and there will necessarily be situations in which entities will be fighting over the delinquent taxes or glitches in information will occur but the basics of the system should provide a simple collection mechanism. Read the TIGTA report if you want more details. This is the type of TIGTA report where I feel like the public is getting its money’s worth.
I mentioned earlier that I would circle back to Section 1203. This is an off code provision and not a section of the IRC. Les and I, through Procedurally Taxing, have partnered with the Pittsburgh Tax Review to create a volume on tax procedure which will be published in 2023. The volume will focus on RRA 98 which will be celebrating its 25th anniversary in that year. I have written an article for that edition on Section 1203 and wanted to give a little preview of the statistics. I am troubled by the aspect of Section 1203 that served as symbolic legislation to punish IRS employees and talk about that in the paper. The legislation, however, was far from symbolic in its impact on IRS employees. TIGTA puts out stats on Section 1203 in its semiannual reports, though the information is fairly cryptic. The statistics show that since enactment, an overwhelming majority of removals and mitigations under Section 1203 have been for late returns (8) or willful understatement (9). Since 2001 (the first year TIGTA published data in a semiannual report), IRS employees have also been removed for civil rights/constructive violations (3), concealed work error (4), assault or battery (5), I.R.C./IRM/Reg violation-retaliation (6) and threat of audit for personal gain (10).
As the table below shows, the removals and mitigations for violations other than late returns (8) or willful understatement (9) are rare. Please note in the table, the years 2001 and 2022 have only one semiannual reports worth of data, and in 2010, 2011, and 2012 the data for deadly sin number 8 and 9 were combined by TIGTA.
Using delinquency to deny employment, or licenses or contracts makes sense as an easy and appropriate way for government entities to ensure that everyone pays their fair share of taxes and particularly those directly benefiting from the government. The use of these mechanisms which deny basic privileges must be accompanied by a robust system that ensures protection of taxpayer rights. If the government uses an alleged delinquency or failure to file to collect, it must have a system that immediately and appropriately responds to concerns raised by the impacted party. I applaud the use of these mechanisms to collect but worry that our broken tax system lacks the ability to fulfill its part of necessary bargain when they are used.
In the Restructuring and Reform Act of 1998 Congress required the Treasury Inspector General for Tax Administration (TIGTA) to conduct annual reviews of certain IRS activities. The law requires TIGTA to annually determine if the notices of federal tax lien (NFTL) the IRS files comply with the requirements of IRC 6320. This year TIGTA had some findings about the IRS lien filing that might be of interest.
I will start with the one TIGTA mentioned last which concerns the liens the IRS chose not to file. The IRS has pegged $10,000 in tax debt as the point at which it will generally file an NFTL. I think that dollar amount is too low and that the IRS should generally not file the NFTL until the amount rises to about $25,000 or more. If the taxpayer owes $10,000 or more the general guidance from the IRM would cause someone at the IRS to trigger the filing of the NFTL unless there is a decision not to do so.
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It could also just be that NFTL filings are down in the year covered by the report because of the pandemic. Almost certainly the pandemic plays a role. Here is a chart showing the number of NFTLs filed in the past five years:
TIGTA created a detailed chart showing the amount owed for the 1,337,932 individual and business taxpayers who owed more than $10,000 at the time of their review.
TIGTA also did a cross reference to cases with balances due where a Form 1098 for mortgage interest was reported since real property ownership is generally where the IRS gets the biggest bang for its buck with the NFTL.
The failure to file the NFTL in these cases, particularly the ones over $100,000, suggest the IRS may lose an easy opportunity to collect on its outstanding debt. The cost of filing and servicing the NFTL is low compared to the possible return on the investment in cases where it is known that the taxpayer owns real property.
Because of the low number of revenue officers, most cases with liabilities below $75,000 or $100,000 are handled by the Automated Call Sites (ACS) and not by Revenue Officers (RO). This means that decisions on many NFTL filings are made by people with less collection experience. It appears that the IRS is failing to make a decision and failing to file the NFTL. The failure to file the NFTL may be good for the first category of cases in the chart. Perhaps this reflects a de facto decision by the IRS that it’s not worth the time and effort to try to file a lien but it could also be bad for the other cases in the chart where there are a decent number of high dollar delinquent accounts where the IRS does not perfect its priority by filing the NFTL. I cannot imagine why the IRS would not file the NFTL on almost all of the 3,000 cases over a million dollars in delinquent debt.
In addition to the finding that the IRS is neglecting to file the NFTL, the report made a few other findings of significance. When the IRS files an NFTL for the first time in a tax year, it must provide the taxpayer with Collection Due Process (CDP) rights. Unlike the notice sent with respect to levies, the notice in lien cases is sent after the filing of the NFTL in order to keep taxpayers from selling or encumbering property before the IRS files the NFTL. TIGTA found that the Collection failed to send the CDP notice to the correct address in 5 of 34 cases in which the notice went undelivered. This makes it hard for taxpayers to contest the filing of the NFTL.
In addition to failing to send the CDP notice correctly to taxpayers, TIGTA found that the IRS did not send the notice to the taxpayer’s representative in six of 57 sample cases – about 11% of the time. The failure to notify the representative severely compromises a taxpayer’s ability to request a CDP hearing within the short 30-day time period provided in the statute. It will be interesting to see how this might play out after Boechler when taxpayers request additional time because of the failure of the representative to receive notification.
The study found that the IRS fails to do the appropriate research to find the taxpayer’s current address and to find information regarding taxpayer’s representatives. These should not be difficult things to fix but these should not be items that need fixing at this point.
In cases where the IRS fails to send the NFTL notice to the taxpayer’s last known address the taxpayer’s ability to get a CDP hearing would be impacted but the validity of the notice would not be impacted. I know of no cases striking down the notice as invalid based on a failure of notice to the taxpayer after the filing of the NFTL.
Once the bad mailing came to light the taxpayer should receive another letter which would trigger CDP rights or should be able to come into the CDP process more than 30 days after the bad mailing. When I say bad mailing I mean a mailing where the notice to the taxpayer of the filing of the NFTL was not sent to the taxpayer’s last known address.
Some of the cases in which the taxpayer did not receive the notice in the TIGTA report may have been situations in which the IRS would win on whether the notice was sent to the taxpayer’s last known address. TIGTA did not get into the weeds on the validity of the notice from that perspective.
If the IRS sent the letter to the taxpayer’s last known address but the taxpayer did not receive the letter, there should be no question about the validity of the NFTL. The ability of the taxpayer in that situation to obtain a CDP hearing might depend on where the equitable tolling case law in CDP cases goes. TIGTA rightly points out that maybe the IRS should try to reach out to taxpayers when it learns that their “last known address” was not in fact their address because the correspondence was returned. Deciding how far to go in these situations has long been a challenge for the IRS.
Maybe the report is good news for those taxpayers who have not had a NFTL filed against them. If they are lucky, the statute of limitations on collection will run before the NFTL is filed or the IRS takes other collection action.
It’s the time of year when the Treasury Inspector General for Tax Administration (TIGTA) starts producing the annual reports required of it by the Restructuring and Reform Act of 1998. It recently produced its report regarding the Collection Due Process program. The report is short.
To produce the report, TIGTA looked at a sample of CDP and Equivalent Hearing cases designed to produce a picture of CDP performance with a 95% accuracy rate. This year it reported that in FY 2021 there were 28,667 CDP and Equivalent Hearing cases closed. It sampled 91 of those cases finding that “Appeals complied with most of the I.R.C. and Internal Revenue Manual 8.22.4, Collection Due Process Appeals Program (May 12, 2022), requirements for processing hearing requests.”
The one area where TIGTA dinged Appeals, an area where it has dinged Appeals before and we have discussed before, here, here and here, concerned the statute of limitations on collection (CSED). TIGTA found that in 20% of the reviewed cases the IRS got the CSED wrong. In 10 of the cases it got the CSED wrong in a way that incorrectly extended the statute of limitations. Based on this sample, it projected that 3,233 of the CDP and Equivalent Hearing cases closed in 2021 would have incorrect CSED in which the IRS sought to collect from taxpayers after the CSED expired. This is way too high an error rate and it’s not the first time a high CSED error rate has been reported. The IRS has got to learn how to calculate the CSED.
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TIGTA found that in 8 cases in its sample the IRS miscalculated the CSED in a way that wrongly reduced the period the IRS had to collect. It extrapolated that this meant 2,586 of the CDP cases closed in 2021 had the CSED shortened. While shortening the CSED does not imping on the taxpayer rights of the individual taxpayer, it does mean that collectively the taxpayers of the United States may not have as much collected from people who owe.
Calculating the CSED is hard with the exceptions that currently exist and the way they operate. If the IRS cannot get this right – and it has demonstrated over a relatively long period of time that it cannot – perhaps Congress should look at simplifying the process. The most obvious place to simplify it would be to do away with the really confusing extension related to installment agreements. Eliminating that statute extension would probably bring the IRS error rate down significantly but TIGTA does not provide us with an analysis of the mistakes that it found. Had it done so, it would have provided the IRS and the public with a better roadmap for pursuing success.
TIGTA found that Appeals correctly classified CDP and Equivalent Hearing requests; however, it did so based on the criteria published in the IRM and not based on case law. TIGTA does not address cases in which a taxpayer sends in a CDP request after the 30 day period based on a good excuse or sends the CDP to the timely but not to the office requested by the IRS. Because it does not look for these types of cases, TIGTA misses an opportunity to assist the IRS in updating its outdated IRM provisions. It audits based on what the IRS says and not what the IRM should say.
TIGTA also does not audit the CDP letter which does a poor job of advising taxpayers of their rights. It might consider in future years looking at why the uptake rate of CDP cases is so low and how that relates to the notice received by taxpayers.
For this year we know that the Appeals, and the IRS generally, struggles with the CSED. Looking for ways to fix that other than continuing to point to IRM compliance might provide an overall benefit to the system.
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Leslie Book
Professor Book is a Professor of Law at the Villanova University Charles Widger School of Law. Read More…
T. Keith Fogg is a Clinical Professor of Law at Harvard Law School where he started a tax clinic in 2015. Prior to joining the faculty at Harvard, he began his academic career at Villanova Law School in 2007 after working for over 30 years with the Office of Chief Counsel, IRS. Read More…
Christine Speidel is Associate Professor and Director of the Federal Tax Clinic at Villanova University Charles Widger School of Law. Prior to her appointment at Villanova she practiced law at Vermont Legal Aid, Inc. At Vermont Legal Aid Christine directed the Vermont Low-Income Taxpayer Clinic and was a staff attorney for Vermont Legal Aid's Office of the Health Care Advocate. Read More…
Stephen J. Olsen’s practice includes tax planning and controversy matters for individuals, businesses and exempt entities for the law firm Gawthrop Greenwood, PC.
Nina E. Olson is the Executive Director of the Center for Taxpayer Rights, a 501(c)(3) organization dedicated to advancing taxpayer rights in the US and internationally. She served as the National Taxpayer Advocate from March 2001 through July 2019. Read More…
Samantha Galvin is a Clinical Professor of Law and the Director of the Federal Tax Clinic at Loyola University Chicago. She previously taught and directed the LITC at the University of Denver for more than nine years. Professor Galvin has taught tax controversy representation, individual income tax, and tax research and writing. In the FTC, she teaches, supervises and assists students representing low income taxpayers with controversy and collection issues. Read More…
Caleb Smith is Associate Clinical Professor and the Director of the Ronald M. Mankoff Tax Clinic at the University of Minnesota Law School. Caleb has worked at Low-Income Taxpayer Clinics on both coasts and the Midwest, most recently completing a fellowship at Harvard Law School's Federal Tax Clinic. Prior to law school Caleb was the Tax Program Manager at Minnesota's largest Volunteer Income Tax Assistance organization, where he continues to remain engaged as an instructor and volunteer today. Read More…
Procedurally Taxing is happy to have frequent guest bloggers who are experts in the area of tax procedure. To read all the posts by our guest bloggers, please click here.
IRS Practice and Procedure (The Thomson Reuters preeminent treatise on tax procedure, originally authored by Michael Saltzman, with Les now the lead successor author and Keith and Stephen contributing chapter authors and all three updating the treatise).
