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TIGTA Report Reminds That IRS Regularly Misclassifies CDP Requests Impacting Taxpayer’s Ability to Obtain a CDP Hearing and the Statute of Limitations

Posted on Dec. 5, 2019

When Congress passed the Restructuring and Reform Act in 1998, it demonstrated significant concern about the performance of the IRS in the collection area. The law made significant changes to the way the IRS collects as well as to oversight of the IRS collection activity. The principal oversight imposed involves annual reviews by the Treasury Inspector General for Tax Administration (TIGTA) of several aspects of IRS collection actions. We have written about these reports many times because they can contain rich sources of information about what is happening inside of the IRS.

TIGTA usually produces the bulk of these annual reports in September. On September 6, 2019, TIGTA produced its annual report regarding Collection Due Process (CDP), and it points to continued problems two decades after creation of the CDP program. Since TIGTA’s job involves identifying problems, the fact that it found some problems does not come as a surprise. The problems that it identified fit nicely with some of the initiatives of the ongoing CDP summit as well as some of the problems we have discussed before. I will focus on the two main problems identified by TIGTA.

Misclassifying CDP Requests

Here’s what TIGTA found:

We found that the IRS misclassified nine of the 140 CDP and Equivalent Hearing cases we reviewed. As a result, these taxpayers did not receive the hearings to which they were entitled or incorrectly received a hearing when they should not have. By comparison, we identified eight misclassified CDP and Equivalent Hearing cases in our prior year review. Based on our sample results, we estimate that 1,402 of 35,850 taxpayer cases closed in FY 2018 were misclassified by Appeals and, as a result, taxpayers did not receive the type of hearing to which they were entitled.

The results suggest a relatively significant error rate in classifying CDP requests. When the IRS misclassifies the request of a pro se taxpayer, many will not have the tools to contest that misclassification and will accept the equivalent hearing instead of the CDP request to which they were entitled. One of the suggestions made to the IRS regarding the making of the request for a CDP hearing is to make it simpler. The IRS could create one fax number or one snail mail address to which all CDP requests could be sent. Instead it has a confusing fabric of places to which a CDP request may need to be sent in order for the IRS to consider it mailed to the right place. It also uses the CDP notice as a collection tool rather than just as a tool to notify taxpayers of their right to a CDP hearing. By using the notice primarily as a collection tool, the hearing opportunity not only gets lost in translation but so does the address. The TIGTA report identifies cases in which the IRS timely receives a CDP request but receives it at the wrong location. Many other taxpayers might make a timely request if the CDP notice provided more notice and less collection information.

The TIGTA report notes that misclassification of the CDP request impacts the hearing the taxpayer receives and the notice following that hear but it does not address the jurisdictional arguments the IRS makes if the taxpayer petitions the Tax Court. For a more extensive discussion of the issues raised by misclassification, see prior discussions here and here (this links to a Tax Notes article available only to subscribers.)

Statute of Limitations

With respect to the statute of limitations on collection, TIGTA found a significant number of errors here as well:

We found that eight of the 140 cases reviewed had an incorrect CSED. In comparison, we identified nine cases with CSED errors in our prior year review. We identified:

  • Five CDP cases for which the CSED was incorrectly extended. As a result, the IRS had more time to collect delinquent taxes than it was authorized. Based on our sample results, we estimate that the IRS may have incorrectly extended the CSED in 2,183 of 35,850 CDP and Equivalent Hearing cases closed in FY 2018.
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  • Three CDP and Equivalent Hearing cases for which the CSED was incorrectly shortened. As a result, the IRS had less time to collect any outstanding balance from the taxpayer than it was authorized. Based on our sample results, we estimate that the IRS incorrectly reduced the CSED in 588 of 35,850 CDP and Equivalent Hearing cases closed in FY 2018.
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  • The suspension of the CSED is systemically controlled by transaction codes on the Integrated Data Retrieval System. One code is entered to start the suspension, and another code is entered to stop the suspension and restart the statute period. Generally, the code to suspend the collection statute, along with the date the suspension should begin, is input by the Collection function. However, in certain instances, Appeals personnel are responsible for inputting the suspension code and start date. Upon completion of the CDP hearing, Appeals is responsible for entering the code to remove the suspension of the statute period along with the hearing completion date. The Integrated Data Retrieval System will systemically recalculate the CSED based on the dates entered for the two codes (which generally reflect the length of the Appeals hearing or the exhaustion of any rights to appeal following judicial review). We found that Collection function and Appeals personnel did not enter the correct date to start the suspension of the collection statute. In addition, Appeals personnel did not enter the correct date to end the suspension of the collection statute. Appeals management agreed with all but *1* of the errors we identified.

     

The fact that the IRS improperly extended the statute of limitations on collection in over 2,000 cases in one year should give any practitioner pause to rely on the statute of limitations calculated by the IRS. Calculating the statute of limitations on collection has become very complicated. See our prior discussion here. Relying on the IRS to properly compute the statute of limitations seems risky given the over 5% error rate suggested by this report.

The IRS does not bring many suits to reduce an assessment to judgment, but when these suits occur, the Department of Justice seems to file them right at the statute of limitations deadline. This TIGTA report provides strong support for the practice of carefully reviewing the statute of limitations determination by the IRS.

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