2007 Annual Report to Congress: The Most Serious Problems

2007 Annual Report to Congress: The Most Serious Problems (MSPs) Encountered by Taxpayers

2007 ARC – MSP Topic #1 – THE IMPACT OF LATE-YEAR TAX-LAW CHANGES ON TAXPAYERS

Problem

In recent years, Congress has made significant changes to the tax code in December that apply to the current tax year

(e.g., the “extenders bill” in December 2006 and the Alternative Minimum Tax (AMT) “patch” in December 2007). The IRS

currently finalizes Form 1040 and its accompanying instructions in early November, and tax software companies finalize

their shrink-wrapped software packages around the same time. If Congress changes the law after those products have

been finalized, significant problems arise. Because of systemic limitations and to minimize taxpayer confusion, the IRS

generally does not update Form 1040 or its accompanying instructions after initial publication. As a result, taxpayers filing

paper returns are particularly likely to complete their returns without taking into account late-year changes. Taxpayers who

purchase shrink-wrapped software have the option of downloading a “patch” to update their software, but some taxpayers

do not do so. As a result, some taxpayers who prepare their returns electronically also do not take late-year changes into

account. In Tax Year 2006, Congress waited until after the Form 1040 package and shrink-wrapped tax software products

had been finalized to “extend” several popular tax deductions. Taxpayers ultimately claimed these deductions about 1.4

million times less frequently than in tax year 2005, when the deductions were included in the Form 1040 instructions and

built into all tax software. Thus, it appears that numerous taxpayers did not claim tax deductions to which they were

entitled simply because they did not know about them.

Late-year tax-law changes also place enormous stress on the IRS’s ability to deliver a successful filing season. The IRS

must develop updated forms, develop training materials for its telephone assistors and field assistance personnel, provide

instruction for Volunteer Income Tax Assistance (VITA) and Tax Counseling for the Elderly (TCE) sites and, most

significantly, write programming code that allows the IRS to accept returns and perform numerous automated reviews of

returns. The programming challenges are particularly time-consuming and have delayed the start of the filing season for

millions of taxpayers. Delays in the filing season can create severe hardships. The overwhelming majority of tax returns

(more than 100 million) result in refunds, and a delay in processing returns means a delay in issuing refunds to taxpayers,

including low income taxpayers who rely on tax refunds to pay essential bills. Among taxpayers claiming refunds and

receiving the Earned Income Tax Credit (EITC), the average refund equals 20 percent of their yearly income. To ensure

that members of Congress better understand the filing-season impact of late tax legislation, the National Taxpayer

Advocate recommends that the Treasury Department and the tax-writing committees create a formal process by which

IRS estimates of the filing-season impact of significant tax legislation are transmitted to the tax-writing committees at

several points during the year, perhaps on June 30, September 30, and monthly thereafter.

IRS Addressed NTA Recommendation IRS Response

Yes/No Date

TAS Assessment

1. To ensure that members

of Congress understand

the filing-season impact

of tax legislation, we

recommend that the

Treasury Department

and the tax-writing

committees create a

formal process through

which IRS estimates of

the filing-season impact

of significant tax

legislation are

transmitted to the tax-

writing committees at

several points during the

year, perhaps on June

30, September 30, and

monthly thereafter. The

estimates should focus

on legislation to extend

expiring tax provisions.

N/A – Congressional Recommendation

2007 ARC – MSP Topic #2 – TAX CONSEQUENCES OF CANCELLATION OF DEBT INCOME

Problem

When a taxpayer is unable to pay a debt and the creditor cancels some or all of it, the amount of the canceled debt is

generally treated as taxable income to the taxpayer. Debt cancellation arises in numerous contexts, such as when a

taxpayer defaults on an automobile loan or a credit card bill, and affects a significant number of taxpayers. In 2006,

creditors issued to borrowers nearly two million Forms 1099-C, Cancellation of Debt, reporting canceled debts. The tax

treatment of canceled debts is extremely complex and poses a significant challenge to affected taxpayers. If the lender

incorrectly values property, the amount of canceled debt it reports will be wrong. If the taxpayer is insolvent (i.e., the

taxpayer’s liabilities exceed the taxpayer’s assets), the canceled debt is excludable from gross income up to the amount

of insolvency. If the debt is nonrecourse (i.e., the lender’s only remedy in case of default is to repossess the property to

which it relates), the canceled debt is not income. Our review of IRS forms, instructions, and publications reveals that the

IRS does not provide adequate guidance to taxpayers or practitioners. The IRS also has declared the subject of canceled

debts “out-of-scope” at its walk-in sites. As a result, IRS personnel at walk-in sites will not answer general taxpayer

questions about the tax treatment or reporting of canceled debts, and IRS personnel will not prepare tax returns for

taxpayers who have received a Form 1099-C even if the taxpayers are otherwise eligible for such assistance. The

National Taxpayer Advocate makes 11 recommendations to provide greater assistance to taxpayers, including a

recommendation that the IRS treat questions about canceled debts as “in scope” at its walk-in sites and a

recommendation that the IRS develop a publication on the tax treatment and reporting of cancellation of indebtedness

income that consolidates all relevant information in one place.

IRS Addressed NTA Recommendation IRS Response

Yes/No Date

TAS Assessment

1. The IRS should

designate the tax

treatment of canceled

debts as "in scope" for

purposes of preparing

tax returns at the

Taxpayer Assistance

Centers (TACs).

As noted in the NTA’s Annual Report,

the IRS has developed and issued

information on home foreclosures and

debt cancellation for taxpayers on

IRS.gov and in multiple publications

and forms instructions. However, the

complexity of the basis issues in

determining the taxable portion of the

1099-C poses issues that in many

cases may exceed the expertise/grade

level of TAC employees. As a result,

we designate certain issues as out of

scope for TAC return preparation

assistance. However, Starting in FY

2009, Field Assistance will bring in

scope return preparation for

Cancellation of Debt (COD) only as it

relates to the forgiveness of qualified

principal residence debt governed by

provision of the Mortgage Forgiveness

Debt Relief Act of 2007. Taxpayers

with COD issues that are out of scope

for return preparation will be offered tax

law assistance.

Yes

2. The IRS should

designate the tax

treatment of canceled

debts as "in scope" for

purposes of answering

general questions at the

TACs.

Cancellation of Debt (COD) will be in

scope for Field Assistance for the

FY2009 filing season for answering

general tax law questions for

individuals. Taxpayers with COD

issues that are out of scope, including

business and farm issues, will be

referred to telephone assistors.

Yes

IRS Addressed NTA Recommendation IRS Response

Yes/No

TAS Assessment

Date

3. IRS should provide

specialized training on

cancellation of

indebtedness issues to a

unit of telephone

assisters and then "gate"

taxpayer calls on these

issues to those assisters.

The IRS’s Account Management office

already has an application (AP135,

Complex Individual Issues) that

receives training and specializes on

answering questions regarding

Cancellation of debt, Form 1099C and

recommended solutions.

Yes

5. The IRS should eliminate

Form 8453-OL from the

electronic return process

and make the personal

identification number

(PIN) process mandatory

because it will increase

security, save money,

and help eliminate

taxpayer burden.

- A PIN will be required to process

electronic returns

Taxpayers filing electronic returns will

no longer be able to submit a hand

written signature using form 8453-OL

-The programming for this process is

complete and the form has been

updated to reflect the changes.

Yes

IRS Addressed NTA Recommendation IRS Response

Yes/No

TAS Assessment

Date

6. The IRS should also give

identity theft victims the

ability to take proactive

measures such as

blocking the e-filing

option on their accounts.

-The IRS is developing proactive

initiatives to enable identity theft

victims to reduce future harm; this

includes the development of a process

for victims to notify the IRS of misuse

of PII

-The IRS is evaluating additional

enhancements to e-file security and

functionality

- The IRS will report back to the

Identity Theft Advisory Committee

(ITIM AC) and the National Taxpayer

Advocate on October 15, 2008 with a

status update on the implementation of

proactive initiatives and

recommendations for additional

enhancements to e-file

Yes

7. The IRS should create a

prefix for IRS numbers

(IRSNs) or some other

system so that it does

not deny tax benefits to

the rightful owner of the

Social Security number

(SSN). While assignment

of IRSNs may be the

only way to isolate the

fraud taking place under

an SSN, it is inequitable

to assign the IRSN to

identity theft victims and

then deny tax benefits

that depend on the SSN.

-The IRS is conducting an in-depth

analysis to identify Scramble process

improvements using lean six sigma

methodologies

-The IRS will define and recommend

solutions to the Scramble process

based upon the analysis

- The IRS will report back to the

Identity Theft Advisory Committee

(ITIM AC) and the National Taxpayer

Advocate on October 15, 2008 with the

recommended Scramble process

solutions.

Yes

IRS Addressed NTA Recommendation IRS Response

Yes/No

TAS Assessment

Date

8. The IRS should plan an

Identity Theft Summit in

FY 2008 to bring

together all IRS functions

that deal with identity

theft issues to discuss

the problems in a

collaborative effort.

-The IRS is hosting an Identity Theft

Forum July 21 – 22, 2008

Yes

2007 ARC – MSP Topic #7 – MORTGAGE VERFICIATION

Problem

When closing on a mortgage, borrowers often must consent to disclose certain tax information in order to verify their

income, including signing a blank copy of Form 4506-T, Request for Transcript of Tax Return, which gives the lender

access to four years of tax information for 60 days from the date on the form. However, the information disclosed is not

subject to the same protection and limits on use as other taxpayer information, which raises numerous privacy concerns.

The IRS should revise Forms 4506, 4506-T, and 8821 (and their instructions) to state in clear and plain language that

taxpayers should not sign a blank or incomplete form. The IRS should also revise the forms to allow a taxpayer to specify

the purpose for which the information can be used by third parties.

IRS Addressed NTA Recommendation IRS Response

Yes/No Date

TAS Assessment

1. The National Taxpayer

Advocate recommends

that the IRS revise Form

8821 and its instructions

to state in clear and plain

language that taxpayers

should not sign a blank

or incomplete form.

The Form 8821 and instructions have

been revised to include the cautionary

statements as recommended.

Yes 12/15/08

2. The National Taxpayer

Advocate recommends

that the IRS revise the

cautionary language on

Forms 4506 and 4506-T

to state in clear and plain

language that taxpayers

should not sign a blank

or incomplete form.

The current versions of Form 4506 and

Form 4506-T contain multiple

cautionary statements on the face of

the forms.

IRS Addressed NTA Recommendation IRS Response

Yes/No

TAS Assessment

Date

3. The National Taxpayer

Advocate recommends

that the IRS revise

Forms 4506, 4506-T and

8821 to allow a taxpayer

to specify the purpose for

which the information he

or she is consenting to

disclose can be used by

third parties.

IRC Section 6103(c) consent-based

disclosures are not subject to third

party use limitations and the civil and

criminal sanctions of the Code do not

apply. Practically, it is beyond the

jurisdiction of the IRS to monitor the

use of information disclosed for non-tax

purposes by third parties.

4. The National Taxpayer

Advocate recommends

that the IRS engage in

an outreach campaign to

advise taxpayers of their

privacy rights and the

importance of not signing

blank forms.

Existing cautionary statements on

Form 4506 and Form 4506-T, with

emphasis, and the revisions to Form

8821 and the instructions to include the

cautionary statements, as

recommended, are satisfactory.

2007 ARC – MSP Topic #8 – TRANSPARENCY OF THE OFFICE OF PROFESSIONAL RESPONSIBILITY

Problem

The IRS’s Office of Professional Responsibility (OPR), which is charged with regulating tax practitioners, has not

published sufficient guidance or procedures to assure the public that it operates fairly and independently. If there is any

question about OPR's independence from the IRS, practitioners (and taxpayers) may fear OPR will serve as an extension

of the IRS enforcement function and arbitrarily target practitioners who are appropriately advocating for taxpayers. This

belief would chill zealous advocacy by practitioners and harm taxpayers as well. OPR should improve both the reality and

perception of its independence and establish reasonable limits on its discretion by issuing guidance on which practitioners

can rely. This guidance should more directly address who is subject to regulation by OPR, what conduct is prohibited, how

OPR follows up on referrals, how OPR will adjudicate an allegation (including policies governing practitioner access to

information that could bear on the result), and what penalties OPR will seek for a given offense. OPR should develop such

guidance quickly using an open process.

IRS Addressed NTA Recommendation IRS Response

Yes/No Date

TAS Assessment

1. The National Taxpayer

Advocate recommends

that the Office of

Professional

Responsibility (OPR)

quickly formalize and

publish a more detailed

description of its

enforcement processes,

including the analysis

OPR employees use to

determine which cases

are worth pursuing or

what sanctions (or range

of sanctions) are

appropriate for a given

offense.

The Office of Professional

Responsibility had already begun

drafting a set of internal operating

procedures to publish in the Internal

Revenue Manual. These procedures

are nearing completion and are

expected to be circulated both within

the Internal Revenue Service and with

the OPR Advisory Group by the fall of

2008. OPR is also working to develop

publishable guidance on the types of

sanctions that are appropriate for given

offenses. We are discussing what

approach(es) may be most appropriate

with our Advisory Committee of tax

practitioners.

Yes

IRS Addressed NTA Recommendation IRS Response

Yes/No

TAS Assessment

Date

2. The National Taxpayer

Advocate recommends

that OPR establish a

timetable for when the

guidance referenced in

Recommendation 1 will

be circulated inside the

IRS and ultimately

published.

The procedures and guidance are

nearly complete as we had begun

working on these before the National

Taxpayer Advocate’s

recommendations were drafted. We

expect to circulate our IRMs within the

IRS in the fall of 2008.

Yes

3. The National Taxpayer

Advocate recommends

that OPR expedite efforts

to publish examples or

other guidance to clarify

important rules,

including:

• How to determine

whether written tax

advice is a "covered

opinion;"

• What constitutes

"willful" conduct for

purposes of Circular 230;

• Whether a statute of

limitations applies to

violations of Circular 230;

and

• What it means to

"practice" before the IRS.

The Office of Professional

Responsibility has wanted for a

considerable period of time to be able

to publish examples and guidance to

clarify important rules. To expedite this

process, we created an OPR Advisory

Group to help us develop scenarios on

issues relevant to the private

practitioner community. We are

looking for the OPR Advisory Group to

help us prioritize the types of guidance

most desired by practitioners and plan

to publish scenarios and guidance on

those topics. OPR has also been

active in speaking to practitioner

groups and using scenarios to illustrate

areas of Circular 230. Furthermore,

recent amendments to Circular 230 will

allow OPR to publish decisions of

Administrative Law Judges in actual

cases, which will provide additional

guidance on interpreting Circular 230.

Yes

IRS Addressed NTA Recommendation IRS Response

Yes/No

TAS Assessment

Date

4. The National Taxpayer

Advocate recommends

that OPR work with the

Department of the

Treasury to amend

Circular 230 to

incorporate guidance

about how the

practitioners may obtain

exculpatory evidence

and how and when they

can obtain "open file"

discovery.

Circular 230 was amended on

September 26, 2007, in section

10.63(d) that requires OPR to provide

evidence to the practitioner when the

complaint is filed. Prior to that time,

OPR routinely turned over information

from OPR’s file to the practitioner upon

request. This step will be part of the

internal OPR procedures that are

published in the Internal Revenue

Manual later this year.

Yes

IRS Addressed NTA Recommendation IRS Response

Yes/No

TAS Assessment

Date

5. The National Taxpayer

Advocate recommends

that OPR establish a

stand-alone advisory

committee under the

Federal Advisory

Committee Act for OPR

so that a diverse array of

tax professionals,

including those with

experience defending

practitioners in

proceedings against

OPR, has an opportunity

to serve.

OPR agrees that an OPR Advisory

Group is a valuable addition. OPR also

agrees that the committee should

consist of a diverse array of tax

professionals, including those with

experience defending practitioners.

OPR created an advisory group in early

2008 that consists of members from

the American Association of Attorney-

Certified Public Accountants, the

American Bar Association, the

American Institute of Certified Public

Accountants, the American Society of

Appraisers, the Council for Electronic

Revenue Communication

Advancement, H&R Block, the National

Association of Enrolled Agents, the

National Association of Tax

Professionals, the National Society of

Accountants, the National Society of

Tax Professionals and the Tax

Executives Institute. OPR has already

held multiple meetings with the OPR

Advisory Group. Rather than a stand

alone committee under the FACA rules,

OPR chose to expedite the process

and created the group as a subgroup of

the IRPAC. We believe the

membership of the OPR Advisory

Group is broad and diverse enough to

sufficiently represent the interests of

the practitioner community.

Yes

IRS Addressed NTA Recommendation IRS Response

Yes/No

TAS Assessment

Date

6. The National Taxpayer

Advocate recommends

that OPR expand the role

of OPR’s advisory

committee so it can

provide advice to OPR

on a broad range of

issues, including

assisting OPR with both

the questions and

answers to be addressed

by hypothetical

examples.

The OPR Advisory Group is already

working with OPR to create scenarios

so that OPR can provide additional

guidance to the practitioner community

on issues of interest.

Yes

2007 ARC – MSP Topic #9 – PREPARER PENALTIES AND BYPASS OF TAXPAYERS’ REPRESENTATIVES

Problem

The IRS should more effectively use the tools at hand to address incompetent or unscrupulous tax return preparers. It has

collected just slightly more than 20 percent of the preparer penalties it has assessed under IRC §§ 6694 and 6695 during

the past six years, and that is inadequate. The IRS also places taxpayers at risk by failing to enforce the civil and criminal

penalties under IRC §§ 6713 and 7213. The IRS should also find a way to systemically check whether all individuals

identified on Electronic Return Originator (ERO) applications as Principals, Responsible Officials, and Delegated Users

have unpaid preparer penalties assessed against them. The IRS’s authority to bypass taxpayer representatives exists to

protect taxpayers against incompetent or unethical practitioners. By not providing proper guidance to employees or

following its own bypass procedures, the IRS risks depriving taxpayers of their fundamental right to representation.

Finally, the National Taxpayer Advocate is concerned about the higher standards of conduct recently added to IRC §

6694, which may affect the way tax preparers dispense advice and create conflicts of interest between preparers and their

clients.

IRS Addressed NTA Recommendation IRS Response

Yes/No Date

TAS Assessment

1. The National Taxpayer

Advocate recommends

that the IRS take the

following step to improve

the enforcement of

preparer penalties: In

connection with the

Servicewide Return

Preparer Strategy, create

a Return Preparer

Executive Steering

Committee to provide an

oversight function as well

as promote coordination

of preparer service and

enforcement programs

throughout the

organization.

The IRS had already identified the

issue and has taken steps necessary to

resolve the problem. Specifically, the

IRS established the Preparer Advisory

Council (PAC) as the governance

mechanism for both the development

and implementation of the Return

Preparer plan. The PAC reports to the

IRS Enforcement Committee. This

executive steering committee was

established by October 1, 2007. The

PAC has conducted regular meetings

beginning in October 2007.

Membership includes representatives

from all of the enforcement divisions as

well as the Taxpayer Advocate Service

and Counsel.

Yes 9/18/08

IRS Addressed NTA Recommendation IRS Response

Yes/No

TAS Assessment

Date

2. The National Taxpayer

Advocate recommends

that the IRS take the

following step to improve

the enforcement of

preparer penalties:

Expend resources to

collect assessed

penalties under IRC §§

6694 and 6695. The IRS

should not focus on the

amount of the penalties,

due to the cascading

effect such collection

efforts have on the

compliance of the

preparers’ present and

future clients.

The IRS had already identified this

problem and had developed a

strategy to resolve the issue by

January 31, 2009. The IRS agrees

that the collection of assessed

penalties under IRC § 6694 and §

6695 have an effect on overall

compliance of the preparers’ clients.

All examiners are instructed to solicit

payment at the conclusion of an

examination. The IRS also employs

an inventory delivery system for

Collection which uses decision

analytics and predictive modeling to

insure that the cases with the best

collection potential are assigned first.

This enables the IRS to maximize

collections in consideration of

allocated resources.

Business rules are also used to identify

areas of special emphasis and return

preparer cases are identified as

“Special Emphasis” because of the

compliance nature of the assessment.

Programming changes are planned

which should allow more preparer

penalty cases to be assigned to

revenue officers in the collection field

function. In accordance with the

Corporate Approach to Collection

Inventory (CACI), penalty cases for

return preparers will be given special

emphasis for Revenue Officer

assignment.

Yes

IRS Addressed NTA Recommendation IRS Response

Yes/No

TAS Assessment

Date

3. The National Taxpayer

Advocate recommends

that the IRS take the

following step to improve

the enforcement of

preparer penalties:

Enforce the penalties

imposed under IRC §§

6713 and 7216. The IRS

should give utmost

priority to the

confidentiality of tax

return information, and

by enforcing these

penalties will ensure that

preparers appropriately

use and disclose such

information. Accordingly,

the IRS should raise

awareness by

incorporating detailed

information into the

appropriate training

materials and IRMs on

the identification of

violations and referrals of

potential violations.

Given the nature of the IRC §6713

penalty, it would be on rare occasions

that our examiners would uncover

situations where this penalty would be

warranted. However, to emphasize the

importance of confidentiality of tax

return information, IRS is taking several

actions.

• Application of the IRC §6713 penalty

is outlined in IRM 20.1.6.7.1 and was

updated in February 2008.

• The IRC §6713 penalty was

discussed during a November 2007

conference call with the SBSE Exam

Area Return Preparer Program

(RPP) Coordinators and Electronic

Return Originator (ERO)

Coordinators.

• The ERO training material will be

updated for the IRC §6713 penalty

during the FY ‘09 season and the

training will be completed by the end

of the first quarter, FY ‘09.

We do not agree with the

recommendation as it relates to IRC

§7216. IRS Criminal Investigation (CI)

historically has not and does not

recommend charges under IRC §7216

because the violation is a

misdemeanor. CI instead routinely

recommends felony charges for return

preparers who improperly disclose or

use taxpayer information while involved

Yes

IRS Addressed NTA Recommendation IRS Response

Yes/No

TAS Assessment

Date

in abusive criminal behavior related to

the preparation of false tax returns or

use of taxpayer information to file

fictitious returns in the attempt to obtain

fraudulent refunds.

4. The National Taxpayer

Advocate recommends

that the IRS take the

following step to improve

the enforcement of

preparer penalties:

Perform tax compliance

checks on all individuals

listed on Electronic

Return Originator (ERO)

applications (including

Designated Users) at the

time of the application as

well as on a periodic

basis. If the IRS finds

outstanding preparer

penalty amounts, even

relatively small ones, it

should deny the

designation or suspend

the individual’s ability to

participate in the e-file

program, as applicable, if

the individual fails to cure

the problem after an

appropriate time. In

addition, the IRS needs

to verify the status of

applicants claiming to be

The IRS had already identified this as

an area of potential abuse; additional

enhancements will be in place by

January 31, 2009. The IRS already

reviews preparer penalties during its

Tax Compliance Checks as part of the

Suitability Check completed on firms,

principals, and responsible officials.

Preparer penalties assessed in the last

three years over a specified amount

and occurring in more than one tax

period are considered in determining

suitability. Assessments and unpaid

balances are identified during

processing of e-file applications and on

a continual basis after acceptance as

an Authorized IRS e-file Provider.

When criteria are met during the

Suitability Check, the information is

reviewed, and appropriate action taken

as warranted including denial, written

reprimand, suspension, or expulsion

from the program. The Automated e-file

Application Processing system

automates the process of checking and

monitoring tax compliance and ensures

applicants and approved e-file

Providers are current with their tax

return filings and tax payments, and

Yes

IRS Addressed NTA Recommendation IRS Response

Yes/No

TAS Assessment

Date

not-for-profit services. those individuals and businesses have

not been assessed fraud and/or

preparer penalties. ETA periodically

reviews suitability criteria.

The IRS will begin validating e-file

applicants that select “Not-for-Profit” on

an e-file application on December 1,

2008, after implementation of the

related work request. The application

will not be approved until an

appropriate IRS validation is

completed.

IRS Addressed NTA Recommendation IRS Response

Yes/No

TAS Assessment

Date

5. The National Taxpayer

Advocate recommends

that the IRS take the

following step to improve

the enforcement of

preparer penalties:

Include the topic of

taxpayer representation

and bypass procedures

in annual mandatory

briefings for all

employees.

The IRS does not agree with the

recommendation that the topic of

taxpayer representation and bypass

procedures be included in annual

mandatory briefings for all employees.

Mandatory briefings generally cover

broad based administrative and

conduct subjects such as safety,

ethics, prevention of sexual

harassment, and others. The issues of

taxpayer representation and bypass

procedures are performance based

issues. These procedures are covered

in employee training materials and are

clearly documented in the IRM.

Adherence of these procedures is tied

to employee critical job elements upon

which they are evaluated. Managerial

approval of bypass letters is required

for any bypass which already ensures

consistency and observation of

taxpayer rights.

2007 ARC – MSP Topic #10 – TAXPAYER SERVICE AND BEHAVIORAL RESEARCH

Problem

The IRS has more quality research on taxpayer service at its disposal than ever before. As part of the Taxpayer

Assistance Blueprint (TAB), the IRS conducted extensive research on taxpayers’ needs, preferences, behavior, and

willingness to use certain services. The National Taxpayer Advocate has also commissioned studies to identify ways to

improve the tax system. The IRS now needs to test and apply the findings of these studies. The IRS should develop a

behavioral research lab that can test and enhance IRS products, thereby improving taxpayer service. By applying existing

findings and developing a better understanding of taxpayer behavior, the IRS can also improve voluntary compliance. This

approach, in the long run, is likely to result in a more fair and balanced system tax administration.

IRS Addressed NTA Recommendation IRS Response

Yes/No Date

TAS Assessment

1. The National Taxpayer

Advocate recommends

that the IRS enhance its

existing research

capacities by developing

an applied research lab

and exploring different

approaches to improving

tax morale.

The Internal Revenue Service

recognizes that there is a need to

improve the quality and quantity of

research into the question of how

service provision affects taxpayer

compliance levels (including both

intentional and unintentional non-

compliance). The Taxpayer Assistance

Blueprint project has begun the

process of assembling what is known

in this area and supplementing that

work with original survey research

focused on the needs/desires

expressed by individual taxpayers

about the services they would like to be

able to access. In the President’s FY

2008 Budget Request, the Internal

Revenue Service included a $5 million

initiative specifically aimed at improving

the understanding between provision of

services to taxpayers and taxpayer

compliance levels. This initiative would

allow the Service to embark on a multi-

IRS Addressed NTA Recommendation IRS Response

Yes/No

TAS Assessment

Date

year research agenda that could

eventually pay large dividends through

improved voluntary compliance levels.

However, at this stage of development,

there is no single approach in this

research area that appears superior to

other possible approaches. The

Internal Revenue Services intends to

use the resources provided under this

initiative (if funded by Congress) to

undertake several research projects in

FY 2008, with the goal of helping to

shape future research endeavors in

this area. It would be premature to

conclude that establishing a cognitive

and applied research lab run by the

Service is the most effective approach

to use the limited resources supplied

by this initiative.

The “tax morale” hypothesis raised by

the Taxpayer Advocate’s report raises

some interesting questions about the

myriad ways that governmental actions

can affect taxpayer compliance levels.

The basic insight in the “tax morale”

literature is the recognition that a

taxpayer’s psychological state might

affect their willingness to comply with

the tax law, and in turn, affect their

actual compliance behavior.

Unfortunately, empirical data on this

linkage is not sufficient to support firm

IRS Addressed NTA Recommendation IRS Response

Yes/No

TAS Assessment

Date

conclusions about steps a tax

administration agency might find

effective. At this point, the work is

merely suggestive of factors that might

come into play and how they could be

manipulated to improve taxpayer

compliance. Much more research in

this area is needed before

policymakers can be confident in the

implications.

In summary, the Service’s response to

the Taxpayer Advocate’s raising of this

issue is to acknowledge that more

research is needed on the link between

provision of taxpayer service and

subsequent levels of taxpayer

compliance. This research will be

carried out if Congress approves the

FY 2008 Budget Initiative in this area.

The results from these research efforts

will shape the future research agenda,

enabling it to concentrate on the most

promising areas. These results may or

may not imply that utilizing a cognitive

and behavioral lab will be an effective

strategy of advancing research in this

area.

2007 ARC – MSP Topic #11 – SERVICE AT TAXPAYER ASSISTANCE CENTERS

Problem

The development of the TAB helped the IRS learn more about taxpayer needs, preferences, and willingness to use

services at the Taxpayer Assistance Centers (TACs or “walk-in sites”). Despite this blueprint and the knowledge that

some taxpayers will always need face-to-face service, taxpayers who visit TACs continue to experience difficulties making

appointments, obtaining return preparation assistance, and making payments. The National Taxpayer Advocate

commends the IRS for a recent change to the Internal Revenue Manual (IRM) allowing any taxpayer visiting a TAC to

receive a copy of his or her account transcript (up to the last three years) regardless of urgency or reason. However, the

National Taxpayer Advocate recommends that the IRS also take other steps to help taxpayers who travel to TACs, such

as providing same-day service and not turning them away or referring them elsewhere.

IRS Addressed NTA Recommendation IRS Response

Yes/No Date

TAS Assessment

1. The National Taxpayer

Advocate recommends

that the IRS conduct a

full-scale survey along

the lines of the Taxpayer

Advocacy Panel (TAP)

survey discussed

previously which includes

responses from

taxpayers who were in

line for, but ultimately

were not served by

Taxpayer Assistance

Center (TAC) personnel.

The IRS already has a process in place

to gauge customer satisfaction. The

current process allows taxpayers to

provide input on the services received -

or not received - at the TAC through

the Customer Satisfaction Survey

Cards available in all TAC offices. The

Customer Satisfaction Survey Card

was redesigned with new questions to

address whether the IRS is resolving

taxpayers’ issues or answering their

questions when they visited a TAC

office. If a taxpayer’s issues are not

resolved, the taxpayer is asked to

identify what they needed that was not

available. The new card also enables

the IRS to determine the time spent to

resolve the taxpayer’s issue. The data

is collected by an outside vendor.

Reports are prepared and sent to IRS

for review and monitoring. In addition,

IRS uses survey results and other

stakeholder feedback to identify and

pursue a variety of TAC improvement

initiatives aimed at enhancing customer

service, reducing wait times, etc. For

example, during the 2008 filing season

IRS’s Field Assistance office

maximized assistance to taxpayers

through additional hiring, use of the

Facilitated Self Assistance Research

Project, and other assistor tools, such

as the Interactive Tax Law Assistant.

IRS Addressed NTA Recommendation IRS Response

Yes/No

TAS Assessment

Date

2. The National Taxpayer

Advocate recommends

that the IRS provide a

specific vehicle or

process for obtaining

stakeholder advice and

best practices. Involve

TAC employees who will

be serving taxpayers in

this process.

Completed 10-1-2007. The IRS

currently utilizes a variety of channels

to secure stakeholder/customer input

and best practices. All taxpayers who

visit a TAC are given opportunities to

provide feedback/suggestions via the

customer satisfaction survey. The IRS

encourages employee feedback via the

formal employee suggestion program

and town hall meetings. Best practices

are identified during routine program

reviews. In addition, the IRS engaged

the Taxpayer Advocacy Panel again in

FY 2008 to provide input and

suggestions on ways to enhance the

TAC return preparation process. TAS

is also a valued stakeholder and

currently has representatives assisting

with the TAC Geographic Coverage

Initiative which includes

analysis/recommendations for service

delivery enhancements/options.

Yes 9/23/08

IRS Addressed NTA Recommendation IRS Response

Yes/No

TAS Assessment

Date

3. The National Taxpayer

Advocate recommends

that the IRS conduct a

full-scale survey to

research population

segments (low income,

elderly, disabled, and

limited English

taxpayers) across the

United States to

determine the particular

face-to-face out-of-scope

service taxpayers need

by geographical location,

such as farmers,

fishermen, foresters and

small business self-

employed.

The IRS agrees with the need for

research and is currently conducting a

thorough analysis of in scope and out

of scope issues. However, the

recommendation to change out-of-

scope issues to in-scope and train

employees accordingly is premature

and we cannot commit to such a

change pending the outcome of our

research. In this regard, input is being

received from both TAC managers and

the Taxpayer Advocate Service. Once

data is analyzed, the IRS will make

recommendations regarding

appropriateness of

localized/geographic based in scope

issues, implementation timelines, and

training as applicable. We expect to

have this analysis completed by

1/15/09.

Completed 4-15-2008. IRS completed

a survey to determine face-to-face out-

of-scope services needed by

geographic locations. IRS made

recommendations based on the

geographic based scope of services

issues, implementation timelines and

training. As a result, two tax law topics,

Cancellation of Debt and Non-resident

Alien issues, were added as in scope

for FY 2009.

Yes 11/19/08

IRS Addressed NTA Recommendation IRS Response

Yes/No

TAS Assessment

Date

4. The National Taxpayer

Advocate recommends

that the IRS change the

tax preparation

appointment process at

TACs to include the

option of scheduling

appointments by phone

or other user-friendly

choices.

The IRS agrees there is a need to

reassess the tax preparation

appointment process. IRS’s Field

Assistance office sought the assistance

of the Taxpayer Advocacy Panel (TAP)

in early 2008 to review current process

and the TAP analysis is underway.

However, pending the conclusion of

that analysis and IRS assessment of

any recommendation or options we

cannot commit to the NTA’s

recommendation to include the option

of scheduling appointments by phone

or other user-friendly choices. We

expected to receive the TAP

recommendations/options for

consideration by 12/31/08 and to make

a determination on any appropriate

changes by 1/15/09.

IRS Addressed NTA Recommendation IRS Response

Yes/No

TAS Assessment

Date

5. The National Taxpayer

Advocate recommends

that the IRS provide

same-day service to

taxpayers traveling to a

TAC and do not turn

them away or refer them

elsewhere.

In October 2007, the IRS issued

guidance stressing the importance of

same day service, utilization of traffic

management best practices and same

day return preparation as available

resources allow. The IRS continues to

maximize assistance, especially during

peak filing season demand, via

additional hiring, pilots such as the

Facilitated Self Assistance Research

Project, and other assistor tools such

as Interactive Tax Law Assistant.

Every effort is made to assist as many

taxpayers as possible on the day they

visit the TAC. However, TAC staffing is

finite and customer demand on peak

days may prevent IRS from servicing

every customer seeking assistance at a

given site or those that choose not to

wait.

Yes 9/23/08

IRS Addressed NTA Recommendation IRS Response

Yes/No Date

TAS Assessment

6. The National Taxpayer

Advocate recommends

that the IRS make it a

priority of answering calls

on published TAC

telephone numbers. The

IRS should also market

telephone numbers to

the community by

methods such as forms

and publications,

television, and radio as

well as the IRS website.

IRS lists TAC telephone numbers in

local telephone directories and on

IRS.gov. These local, non-toll free

telephone lines are intended solely to

assist taxpayers in locating a TAC or to

provide information on other issues,

such as hours of operation, to learn

about available and alternate services,

or to reschedule appointments with IRS

personnel. In situations where

taxpayers have an ongoing, complex

tax account problem or a special need,

such as a disability, an appointment

may be requested. A designated TAC

employee, such as the Initial Account

Representative (IAR), monitors the line

and returns calls when necessary while

also providing face-to-face service to

customers visiting the TAC. The IRS

believes the best telephone service

option for large volumes of callers

seeking tax law, account, or

forms/publications assistance

continues to be via IRS’ toll free

assistance lines. The availability of

these toll free lines are already widely

publicized and very well known by the

public. We believe expanding the

marketing of local telephone service or

expanding its use beyond the limited

purposes outlined above are

unnecessary and, more importantly,

would reduce the ability of TAC

employees to provide face-to-face

service, especially in smaller TACs.

IRS Addressed NTA Recommendation IRS Response

Yes/No

TAS Assessment

Date

7. The National Taxpayer

Advocate recommends

that the IRS provide

small business

representatives at each

larger TAC location.

The IRS already provides assistance to

small business taxpayers on

issues/questions related to Forms 940,

941, 2290 and Schedule C EZ. A core

part of TAC service provides account

assistance including payment and

notices on business returns. We do

not agree that it is necessary for IRS to

have dedicated small business

specialists at each larger TAC location.

8. The National Taxpayer

Advocate recommends

that the IRS accept all

payments presented to

the IRS, understanding

that cash payments must

be converted to money

orders.

The IRS’s TACs have a long standing

practice of accepting all payments

presented at TACs, including cash.

However, there is an approved Internal

Revenue Manual deviation for very

small 1-2 person TACs regarding not

taking cash due to internal control

concerns/segregation of duties as well

as adverse impact on customer service

when an employee in 1-2 persons TAC

must leave the office to convert cash to

money orders. The IRS is currently

exploring the use of courier services to

mitigate the need for employees to

leave the TAC for cash conversion,

which, if successful, will enable IRS to

accept cash payments at all TACs

regardless of staffing.

Yes 9/23/08

IRS Addressed NTA Recommendation IRS Response

Yes/No

TAS Assessment

Date

9. The National Taxpayer

Advocate recommends

that the IRS ensure that

all monies saved from

shifting taxpayers to

electronic services

should be funneled

directly into providing

face-to-face services at

TACs.

The IRS will continue to devote its

resources to providing an array of

taxpayer services through multiple

channels designed to meet the needs

and preferences of our customers. This

ensures all assistance options are

maximized providing optimal taxpayer

assistance whether face-to-face,

telephone, or electronic.

2007 ARC – MSP Topic #12 – OUTREACH AND EDUCATION ON DISABILITY ISSUES FOR SMALL

BUSINESS/SELF-EMPLOYED TAXPAYERS

Problem

People with disabilities have always struggled to find employment, largely because of the numerous barriers facing this

population. Some professionals believe there is an increasing trend among people with disabilities to address these

barriers by becoming self-employed or owning their own small businesses. One of the most significant obstacles facing

these individuals in starting their own businesses is the inaccessibility of business materials and information. Therefore, it

is vital that the IRS take steps to ensure that tax administration is not a barrier to disabled individuals entering business,

but rather, is a resource for these entrepreneurs.

IRS Addressed NTA Recommendation IRS Response

Yes/No Date

TAS Assessment

1. The National Taxpayer

Advocate recommends

that the IRS utilize the

Real Economic Impact

(REI) Tour as a vehicle

to target outreach to self-

employed taxpayers and

entrepreneurs with a

disability and their

community.

Since 0ctober 2007, SB/SE has

partnered with W&I SPEC and the

National Disability Institute in the REI

Tour at the national and local levels by

participating in audio conferences,

formal in-person presentations, and

panel discussions regarding relevant

tax information related to disability

awareness and outreach for the small

business community. IRS has

received positive feedback for this

effort and will continue to participate in

the tour. IRS’s presentation provides

information on the various tax credits

that are offered to those who are

disabled and the employers who hire

them. IRS will continue to enhance its

outreach to include information

designed specifically for self- employed

taxpayers and entrepreneurs with

disabilities which will include various

segments of the business community.

Yes 12/15/08

IRS Addressed NTA Recommendation IRS Response

Yes/No

TAS Assessment

Date

2. The National Taxpayer

Advocate recommends

that the IRS follow up the

REI Tour outreach with

face-to-face live outreach

sessions.

SB/SE continues to focus its outreach

through leveraged delivery methods to

share tax related messages, products

and services. SB/SE will follow-up with

interested associations and

organizations from the REI Tour and

will use those contacts to assist with

identifying other organizations at the

national and local level to broaden the

awareness of key messages and

increase distribution channels. SB/SE

will accomplish this by face to face

contact with these organizations, which

will, in turn, leverage our outreach

efforts though workshops, seminars,

liaison meetings, and other events.

Yes 12/15/08

3. The National Taxpayer

Advocate recommends

that the IRS provide

accessible laptops at live

outreach sessions, rather

than requiring taxpayers

to bring their own.

Due to budget limitations and

competing priorities, SB/SE does not

currently have the financial ability to

support this recommendation due to

the numerous outreach events that are

conducted each year. Although some

partners have the capability to comply

with this recommendation, for others

this may impose a significant burden

and responsibility as they conduct the

workshops. At the current time,

visually impaired taxpayers are

instructed to bring a laptop to external

seminars. In addition, the IRS provides

them with a DVD of the Small Business

Tax Workshop which has features to

accommodate certain taxpayer

disabilities.

IRS Addressed NTA Recommendation IRS Response

Yes/No

TAS Assessment

Date

4. The National Taxpayer

Advocate recommends

that the IRS use the REI

Tour to educate

taxpayers regarding the

accommodations the IRS

provides taxpayers with a

disability.

Regarding our outreach efforts to

individual business owners with

disabilities, IRS currently:

• Provides information on the

leveraged small business

workshop flyer for the business

owner needing assistance to

contact the organizer and

indicate what special assistance

is needed prior to the workshop,

• Provides transcripts of workshop

materials for the hearing

impaired,

• Ensures presentations are 508

compliant, and

• Offers educational opportunities

via the web such as Tax Talk

Today, the Small Business

Workshop Streaming Video

(also available on DVD)

so taxpayers can participate

from their own place of

business or home,

SB/SE will incorporate information on

these opportunities into REI events so

that those audiences will be aware of

opportunities for business owners who

are disabled or who hire disabled

employees.

Yes 12/15/08

5. The National Taxpayer

Advocate recommends

that the IRS include

information regarding

IRS accommodations for

SB/SE is pursuing the recommendation

to include information regarding IRS

accommodations for small business

taxpayers that hire disabled employees

and self-employed taxpayers that are

Yes

IRS Addressed NTA Recommendation IRS Response

Yes/No

TAS Assessment

Date

taxpayers with a

disability in IRS notices.

disabled in appropriate IRS notices.

SB/SE is evaluating and coordinating

this effort with the SPOC office and the

Notice POCs in W&I. SB/SE is

currently working with the BMF Notice

Office to identify the appropriate notice

to include a stuffer. SB/SE

Stakeholder Liaison (SL) is also

working with the business owner of the

appropriate notice to add a narrative in

the text of the notice highlighting the

enclosed stuffer. The stuffer will

provide information on the various tax

incentives and credits that are offered

to small business owners who hire

employees with disabilities. This will

be an annual process that will begin in

September 09.

SL will also make the stuffer available

at all SL external events. In addition,

SB/SE will feature articles in the

SSA/IRS Reporter. The SSA/IRS

Reporter is a quarterly newsletter that

is collaborative effort between the

Social Security Administration, IRS,

and others. It is distributed to millions

of small business owners throughout

the United States. The Reporter

consists of educational news for

employers, with an emphasis on

encouraging electronic filing and

paying of employment taxes, and IRS

and SSA products and services.

IRS Addressed NTA Recommendation IRS Response

Yes/No

TAS Assessment

Date

SL will ensure that the following

information is featured in the articles:

• Tax Incentives and credits for

employers who hire employees that

are disabled.

• SB/SE information on the REI Tour

events.

• Information on educational

opportunities, to include the

leveraged workshops that are taking

place and links to the SB/SE CLD

Calendar of events.

6. The National Taxpayer

Advocate recommends

that the IRS provide

SB/SE’s internet small

business classroom

materials as streaming

translation in American

Sign Language (ASL) for

taxpayers who are deaf

or hard-of-hearing.

SB/SE is customer driven and ensures

our products and services are 508

compliant. In addition, the IRAP Office,

the organization responsible for

ensuring that accessibility is

implemented in the IRS, has provided

guidance indicating captions satisfy the

508 requirements. Transcripts are

available for additional convenience.

Currently, our small business

classroom product is captioned in

English, Spanish, and Mandarin

Chinese. Also, the small business

classroom materials accommodate the

hearing impaired through closed-

captioning technology.

IRS Addressed NTA Recommendation IRS Response

Yes/No

TAS Assessment

Date

7. The National Taxpayer

Advocate recommends

that the IRS redesign

irs.gov so taxpayers

have numerous options

that will allow them to

manipulate the font size

and color, or use a

speech option to meet

their individual needs.

SB/SE is partnering with the Public

Portal Branch, responsible for the IRS

website to implement the

recommended enhancements.

ETA has successfully lobbied to fund

several new initiatives for IRS.gov this

filing season. One of those items is an

effort to enable "scalable fonts" on

IRS.gov, as suggested in this item and

also discussed in the Aging American's

task force. Manipulating IRS.gov

colors is not an issue that will be

addressed. ETA has carefully selected

colors on IRS.gov that are discernable

by color blind individuals, as well as

provide enough contrast to minimize

eye strain.

Yes

2007 ARC – MSP Topic #13 – EXEMPT ORGANIZATION OUTREACH AND EDUCATION

Problem

The U.S. tax-exempt sector consists of more than 1.6 million organizations (not including most churches). These exempt

organizations (EOs) are diverse in size, ranging from large hospitals and universities to small volunteer-run charities.

Approximately half of all EOs have all-volunteer staffs and another third have fewer than ten employees. Smaller EOs

frequently lack professional tax guidance. The IRS has increased enforcement actions against EOs and the resources

dedicated thereto. However, resources devoted to EO education and outreach, which were never adequate, have

continued to decline. Existing IRS outreach and education programs for EOs are beneficial. However, the National

Taxpayer Advocate believes the IRS can and should do more to help EOs, particularly small organizations, comply with

the complex requirements to which they are subject. The National Taxpayer Advocate urges the IRS to conduct research

to assess the service needs and preferences of the spectrum of EOs and to develop a strategic plan to enhance the

scope and effectiveness of its outreach to these organizations.

IRS Addressed NTA Recommendation IRS Response

Yes/No Date

TAS Assessment

1. The National Taxpayer

Advocate recommends

that the IRS conduct an

exempt organization

(EO) Taxpayer

Assistance Blueprint

(TAB), akin to the

servicewide TAB but

tailored to EOs, to study

their service needs and

preferences (by size and

type of organization) and

develop a plan to

improve service to these

organizations. The EO

blueprint should include

a study of the availability

of the Internet, how

exempt organizations

use the Internet.

(particularly small,

volunteer-staffed

entities), and their

willingness and ability to

change how they use the

Internet.

Although TEGE supports this concept,

the recommendation is under

consideration while we evaluate

whether we have the capacity and

resources to undertake this project.

Yes

IRS Addressed NTA Recommendation IRS Response

Yes/No

TAS Assessment

Date

2. The National Taxpayer

Advocate recommends

that after completion of

the EO TAB, the IRS

conduct further research

about the tax-exempt

sector, including annual

focus groups held at Tax

Forums and elsewhere of

EO directors, officers,

staff, volunteers, and

advisors.

EO is conducting focus groups at the

2008 Tax Forums to learn whether the

participants are aware of and use EO

communication products.

Yes 9/24/08

3. The National Taxpayer

Advocate recommends

that the IRS dedicate a

group of employees,

from both outreach and

compliance functions,

entirely to small EOs.

Such entities have very

different needs from mid-

sized and large EOs and

require a different

approach.

Although limited resources do not

permit a group of employees dedicated

solely to small EOs, EO does have

seven employees (from Examination,

R&A and CE&O) whose collateral

duties focus on working directly with

small and mid-size EOs through the

Small and Midsize Workshop program.

An additional 10-12 employees will be

added to this group in September.

Through this program, these

employees are sensitized to the needs

and challenges of these organizations.

They also provide their contact

information, should these organizations

have questions at a later date. In

addition, CE&O is developing a special

resource web page for small EOs.

Yes 9/24/08

IRS Addressed NTA Recommendation IRS Response

Yes/No

TAS Assessment

Date

4. The National Taxpayer

Advocate recommends

that the IRS staff the tax-

exempt telephone line at

sufficient levels to

generate a high level of

service and make

training of the staff a high

priority, with TE/GE

approving the content of

the training.

We note that the Call Center for TEGE

customers is now operated by W&I;

however, TEGE and W&I continue to

coordinate to address operational

concerns, including training materials.

The Call Center has taken many steps

to improve service and, despite an

increase in the number of calls, has

improved the level of service.

Yes 9/24/08

5. The National Taxpayer

Advocate recommends

that the IRS provide a

mechanism for one-on-

one telephone interaction

between the tax-exempt

specialist assigned to an

R-mail and the person

asking the question

before the specialist

begins research, if

desired by the questioner

or the specialist.

EO Determinations contacts taxpayers

by phone in order to answer the R-

mail. In FY 2007, 90% of the R-mail

messages were closed by phone.

Yes 9/24/08

IRS Addressed NTA Recommendation IRS Response

Yes/No

TAS Assessment

Date

6. The National Taxpayer

Advocate recommends

that the IRS develop a

directory of institutions

that offer courses in

nonprofit management

and a teaching toolkit for

the small to medium

nonprofit that instructors

at such institutions can

use.

EO CE&O has developed a directory of

institutions that offer non-profit

management courses and will develop

and offer a teaching toolkit that such

institutions can use.

Yes

7. The National Taxpayer

Advocate recommends

that the IRS make a

sufficient number of a

variety of EOs outreach

materials available in

print (non-electronic

format) to preparers,

Local Taxpayer

Advocates, Stakeholder

Partnerships, Education

and Communication

(SPEC), community

foundations, state

attorneys general and

charities bureaus, and

others for distribution.

These materials are currently provided

and their availability is advertised at

Tax Forums, Workshops and various

speeches. TAS/SPEC offices can

order bulk materials through the IRS

Distribution Center, and external

stakeholders can order them at no

charge through CE&O. Public charities

and private foundations automatically

receive Pub. 4221 when they receive

their determination letters.

Yes 9/24/08

IRS Addressed NTA Recommendation IRS Response

Yes/No

TAS Assessment

Date

8. The National Taxpayer

Advocate recommends

that the IRS develop a

multi-faceted approach to

measure the

effectiveness of

education and outreach

activities and use the

results to modify existing

programs and plan new

initiatives.

This year’s Tax Forum focus groups

will provide valuable feedback on our

educational efforts. This input will

supplement the evaluations EO

receives from StayExempt.org, the Tax

Forums and the Small and Midsize

Workshop program and comments on

educational efforts from ACT members.

In addition, a CE&O representative

participates on the EO Strategic

Planning Working Group where

projects and initiatives are considered

for the workplan.

Yes 9/24/08

9. The National Taxpayer

Advocate recommends

that the IRS permit small

EOs to file the e-

Postcard at Taxpayer

Assistance Centers

(TACs), either on

computers provided for

taxpayer use (if any) or

with the help of TAC

assistors, and publicize

this alternative widely.

E-Postcard has been successfully

rolled out with some assistance from

the TAC. We are unsure whether we

should expand their involvement, and

will re-evaluate and discuss further with

W&I after the end of the filing season.

Yes 9/24/08

10. The National Taxpayer

Advocate recommends

that the IRS train TAC

employees to answer

questions about how to

complete and submit the

new e-Postcard.

CE&O provided training to TAC

employees in 2008.

Yes 9/24/08

2007 ARC – MSP Topic #14 – DETERMINATION LETTER PROCESS

Problem

Unreasonable delays in the processing of applications for exemption from federal income tax have persisted for several

years. Three years after the National Taxpayer Advocate raised concerns about these delays in the 2004 Annual Report

to Congress, the processing time for many organizations’ applications still exceeds the IRS’s goal. These delays can have

a serious, detrimental effect on charitable organizations’ finances and activities. The IRS has employed a number of

measures to fix the problem but must do more to eliminate processing delays and keep organizations informed about the

status of their applications.

IRS Addressed NTA Recommendation IRS Response

Yes/No Date

TAS Assessment

1. The National Taxpayer

Advocate recommends

that the IRS implement

procedures for upper-

level review of cases as

soon as they surpass

120 days, and at regular

intervals thereafter, to

ensure that agents are

properly working cases

and following up with

applicants in a timely

manner.

The age of all open cases in inventory

(both assigned and unassigned) is

reviewed on a weekly basis by the

Manager of EO Determinations. In

addition, with regard to assigned

cases, all EO managers must report

monthly to their area managers all

cases that have been assigned to

specialists for more than 90 days.

Yes 9/24/08

2. The National Taxpayer

Advocate recommends

that the IRS include in

managers’ quality ratings

a measure of their

completion of the 120-

day and other regular

case reviews.

Managers are reviewed annually based

on their performance expectations,

which include their case reviews.

Yes 9/24/08

IRS Addressed NTA Recommendation IRS Response

Yes/No

TAS Assessment

Date

3. The National Taxpayer

Advocate recommends

that the IRS analyze the

120-day review

information to determine

why delays occur and

take the necessary

action to avoid future

delays.

EO is continually looking at ways to

make the determinations process as

expeditious as possible, bearing in

mind that certain areas and types of

organizations warrant in-depth review

to guard against abuse. For example,

EO has implemented an application

screening process and issued guide

sheets to EO Determinations

specialists on how to process certain

applications.

Yes 9/24/08

4. The National Taxpayer

Advocate recommends

that the IRS require

agents to contact the

organizations whose

applications are assigned

to them to establish

regular "next contact

dates" and "follow up

dates" throughout the

application process.

Utilize "next contact

dates" and "follow up

dates" to increase

timeliness and quality of

taxpayer responses and

IRS actions.

The EO Determinations quality

standards presently set forth several

specified time periods that require

agents to contact and follow up with

organizations whose applications are

assigned to them. We will review the

Determination process to ascertain

additional areas where follow up and

contact dates should be incorporated.

Yes

IRS Addressed NTA Recommendation IRS Response

Yes/No

TAS Assessment

Date

5. The National Taxpayer

Advocate recommends

that for applications

where processing has

exceeded 120 days, the

IRS provide applicants a

letter estimating when

they may expect to

receive a determination

and the reason why it is

delayed.

EO Determinations began issuing a

status notice in September 2007 to

organizations whose applications are

scanned into our electronic case

processing system and cannot be

closed through the Screening Program.

In addition, at the “Where Is My

Exemption Application?” page on

irs.gov, EO informs applicants what

month the applications currently being

assigned were received. Because all

applications must be evaluated based

on their unique facts and

circumstances, it is difficult to

accurately predict when any particular

organization will receive a

determination. Applicants are sent a

notice when their applications are

assigned, and the agent communicates

with the applicant while developing the

case.

Yes 9/24/08

IRS Addressed NTA Recommendation IRS Response

Yes/No

TAS Assessment

Date

6. The National Taxpayer

Advocate recommends

that the IRS revise the

application

acknowledgement letter

(Notice 3367), the interim

letter (CP 5104), and the

"Where Is My Exemption

Application?" link and

application process

flowchart on the IRS

website to provide a

timeframe for the

issuance of

determination letters in

cases that require

additional development.

The “Where is My Application” page on

the IRS website provides a detailed

explanation of the Determinations

process, including a description of how

different types of cases are handled. It

also provides current status information

about applications requiring

development.

Applications are processed based on

the facts and circumstances involved in

each application. Complete

development of all of the facts and

circumstances often requires several

rounds of communication with the

applicants, some of whom are less

sophisticated than others and need

more assistance from our staff. For

that reason, we are unable to predict

when the processing of the application

will be completed.

7. The National Taxpayer

Advocate recommends

that the IRS track the

numbers of expedited

requests received,

granted, denied, and not

acted upon; the reasons

they are granted and the

reasons they are denied;

and use the results to

evaluate and improve the

process, and educate

applicants.

While EO tracks some expedite

requests, variations in the processing

of different case types means we do

not track all of them. For example, if a

case can be closed during the

screening process, the expedite

request becomes moot and is never

considered. EO will review a sample of

those expedite requests that are

actually processed and approved or

denied to evaluate and improve the

process and educate applicants and

staff.

Yes

IRS Addressed NTA Recommendation IRS Response

Yes/No

TAS Assessment

Date

8. The National Taxpayer

Advocate recommends

that the IRS evaluate

staffing needs and

maintain a staffing level

commensurate with

application receipts.

EO is constantly evaluating application

receipts and staffing needs and

attempting to strike the proper balance

between workload and resource

availability. It also continually looks for

ways to improve the application

process.

Yes 9/24/08

9. The National Taxpayer

Advocate recommends

that the IRS conduct

training to develop

multiple specialized

agents per specialty

area.

EO Determinations trains designated

agents on identified specialty areas,

and provides guide sheets on some

specialty areas to all agents. Allocation

of staffing to specialty areas is subject

to resource constraints.

Yes 9/24/08

10. The National Taxpayer

Advocate recommends

that the IRS utilize the

TE/GE Advisory

Committee as a resource

to measure customer

needs and preferences

to address concerns of

exempt organizations

(EOs).

TE/GE continues to utilize the TE/GE

Advisory Committee as a resource to

measure customer needs and

preferences and to address concerns

of exempt organizations. Quarterly

face-to-face meetings and monthly

conference calls are held with the EO

committee members.

Yes 9/24/08

2007 ARC – MSP Topic #15 – EITC EXAMINATIONS AND THE IMPACT OF TAXPAYER REPRESENTATION

Problems

Many taxpayers have difficulty navigating the IRS examination process, particularly in regard to the EITC. A study

requested by the National Taxpayer Advocate found that taxpayers retain significantly more of their EITC if they have

representation during the examination. The results suggest the IRS examination strategy is flawed. Changes to the

existing strategy are necessary to ensure that procedural barriers do not prevent taxpayers from receiving the EITC to

which they are entitled. To ease the process, the IRS should increase communication with taxpayers, simplify

correspondence, address the needs of English as a Second Language (ESL) and disabled taxpayers, adopt the use of

affidavits, and improve the process of transferring cases from campuses to field offices. In addition, the IRS should work

to promote available taxpayer services, including the Low Income Taxpayer Clinics (LITCs), TAS, and TACs.

IRS Addressed NTA Recommendation IRS Response

Yes/No Date

TAS Assessment

1. National Taxpayer

Advocate recommends

that the IRS conduct

additional testing on the

use of affidavits in

examinations.

Although the IRS analysis of the three-

year EITC certification test is complete

and under review, the IRS is

conducting further research analysis on

the use of affidavits to determine what,

if any, additional testing may be

necessary. The IRS must review all

research results before making

decisions regarding the need for

additional testing. The IRS maintains

its concern that the IRS testing of

residency affidavits for the certification

test did not replicate “real world”

conditions under which affidavits might

be used.

IRS Addressed NTA Recommendation IRS Response

Yes/No

TAS Assessment

Date

2. The National Taxpayer

Advocate recommends

that the IRS expand the

use of the affidavit to all

Earned Income Tax

Credit (EITC)

examinations.

The 2009 EITC Research Plan

includes a study to expand the use of

affidavits. Upon conclusion the IRS will

determine whether additional testing is

warranted. In addition, prior to any

expansion, it will be necessary to

develop a comprehensive approach to

identify and prevent submission of false

affidavits. Although the residency

affidavit form used in the certification

test is not used in correspondence

examinations, taxpayers can still

submit letters from third parties along

with other documentation to support

their claims. The newly revised Form

886-H-EIC clearly lays out the various

options available for taxpayers to

document that they meet the EITC

requirements.

IRS Addressed NTA Recommendation IRS Response

Yes/No

TAS Assessment

Date

3. The National Taxpayer

Advocate recommends

that the IRS test other

potential methods of

proof in IRS

examinations to

determine which

methods are most

accurate and best suited

for meeting IRS and

taxpayer needs.

The IRS already provides numerous

documentation options to taxpayers

that meet statutory requirements. The

Form 886-H-EIC, newly revised with

input from the Taxpayer Advocacy

Panel (TAP) and other stakeholders,

clearly lays out these various options

available for taxpayers to document

that they meet the EITC requirements.

We implemented the 80/20 concept

that focuses on examining the vital few

issues and making decisions early in

the audit where resolution can be

based on administrative discretion.

And, the use of new examiner

professional decision making authority

makes the documentation process

more flexible and less burdensome for

taxpayers.

IRS Addressed NTA Recommendation IRS Response

Yes/No

TAS Assessment

Date

4. The National Taxpayer

Advocate recommends

that the IRS provide

continual training to

examiners on the topic of

exercising "judgment" in

taxpayer cases using

real case examples.

IRS already provides annual CPE

training on the topic of exercising

professional judgment using practical,

real-life based situations. However we

do not plan to use real case examples

due to the need to safeguard

Personally Identifiable Information (PII)

and the requirement to limit disclosure

of confidential tax information only to

those employees with a need to know.

Nevertheless, our annual training

serves to reinforce the previously

implemented professional decision

making concept, which gives

examiners the latitude and encourages

them to use sound professional

judgment to make decisions on the

adequacy of documentation based on

taxpayers’ unique individual situations

during the audit process. This concept

reduces taxpayer burden and provides

better taxpayer service.

Yes 11/19/08

IRS Addressed NTA Recommendation IRS Response

Yes/No

TAS Assessment

Date

5. The National Taxpayer

Advocate recommends

that the IRS make

additional attempts to

obtain taxpayer

telephone numbers for

follow up contact in

resolving cases.

As the NTA’s report notes, procedures

have already been implemented to

encourage telephone contact to resolve

EITC examination issues. These

procedures have been in place since

January 2004. If a taxpayer does not

provide a telephone number,

examiners already appropriately

research telephone listings and

directory assistance prior to sending

correspondence. Taxpayers also have

the option of initiating a toll-free call if

they have questions or need additional

guidance.

Yes 11/19/08

IRS Addressed NTA Recommendation IRS Response

Yes/No

TAS Assessment

Date

6. The National Taxpayer

Advocate recommends

that the IRS replace

boilerplate language in

correspondence with

taxpayer-specific

information explaining

what that specific

taxpayer needs to do to

resolve his or her case.

The IRS uses standard language in the

initial contact letter with EITC taxpayers

and includes the revised Form 886-H-

EIC, Documents You Need to Prove

You Can Claim an Earned Income

Credit On the Basis of a Qualifying

Child or Children, as an enclosure to

provide all taxpayers with the broadest

set of options to document their

eligibility for EITC. However, if a

taxpayer responds, examiners already

tailor their follow-up letter to the

individual taxpayer’s unique situation.

Additionally, in our continual quest to

improve communications with

taxpayers, we have formed a multi-

functional team, with TAS

representation, to revise Publication

3498-A, The Examination Process

(Examination by Mail), for 2009 to

provide clearer and more focused

information on correspondence

examinations to help taxpayers better

navigate the process. We expect the

revised publication to be ready for

distribution by January 2009.

7. The National Taxpayer

Advocate recommends

that the IRS make IRS

correspondence, forms

and publications

available in languages

besides English and

Spanish.

IRS relies on its Stakeholder

Partnerships, Education and

Communication (SPEC) organization,

which leverages its partnerships with

organizations who provide outreach,

education and assistance to taxpayers

in diverse communities. These

organizations already translate EITC

IRS Addressed NTA Recommendation IRS Response

Yes/No

TAS Assessment

Date

products for their clients into more than

27 languages including Somali,

Bosnian, Russian, East African, and

Vietnamese. SPEC has developed a

Hispanic Limited English Proficiency

(LEP) outreach and education strategy

and is developing a broader strategy

for other LEP communities. For

example, the 2008 EITC Awareness

Day, presented in partnership with

community based organizations

throughout the country, included

expanded efforts specifically designed

to reach and assist English-as-a-

Second-Language (ESL) taxpayers.

IRS also continues to improve and

expand the services it provides for ESL

taxpayers during the correspondence

examination process. For example,

campuses currently maintain listings of

bi-lingual employees who volunteer to

assist with translating written

correspondence when the need arises.

We are also testing an online

translation service in our Kansas City

site for Filing and Payment

Compliance. Although it is too early to

determine if this test will be successful,

this initiative has the potential to

provide yet another option for assisting

ESL taxpayers during correspondence

examinations.

IRS Addressed NTA Recommendation IRS Response

Yes/No

TAS Assessment

Date

8. The National Taxpayer

Advocate recommends

that the IRS expand the

interpretation services

available on the toll-free

telephone lines.

Spanish speaking IRS tax examiners

already assist Spanish speaking

taxpayers under audit and our new

corporate call routing allows for quicker

response times. Our toll free telephone

service also provides assistance in

Spanish. Our efforts and resources

have focused on the Spanish speaking

since they make up the majority of the

ESL population seeking assistance

through these channels.

9. The National Taxpayer

Advocate recommends

that the IRS increase

publicity about the

Alternative Media Center

and taxpayers’ ability to

obtain Braille copies of

forms and publications.

Because the Alternative Media Center

(AMC) could not continue to provide

quality service to taxpayers if demand

rose substantially, IRS does not plan to

increase publicity at this time.

Taxpayers, however, may continue to

request any form, publication, notice or

bill in Braille or alternative format and

IRS employees will continue to refer

taxpayers to the AMC for assistance.

Also, the IRS continues to review its

policies and procedures with regard to

taxpayers with disabilities to identify

opportunities to further assist them.

For example, currently, IRS.gov

provides over 250 forms and

publications in Braille and text formats

for the visually impaired. Other

IRS.gov products, such as the new on-

line searchable version of Publication

17 and “Where’s My Refund” have

been designed specifically to support

the needs of the visually impaired.

IRS Addressed NTA Recommendation IRS Response

Yes/No

TAS Assessment

Date

IRS uses leveraged partnerships to

address the important needs of

disabled taxpayers. As one of IRS

Stakeholders, Partnerships, Education

and Communication’s (SPEC) key

national initiatives, the Disability

Initiative works through national and

local disability organizations and

coalitions to educate taxpayers with

disabilities on available tax credits and

deductions, and provide free tax

preparation. During the 2007 Filing

Season, this initiative was active in 54

cities, engaged 10 national and 355

local partners, produced 36,275 tax

returns, resulted in refunds of

approximately $33 million, and made

over 1 million outreach contacts.

In addition, the IRS has partnered with

advocacy groups to conduct a research

project to further determine the needs

of taxpayers with vision impairments.

The IRS will use the results of the

research project to develop a long-term

strategy, expected in 2009, to assist

the blind or senior taxpayers with vision

impairments.

IRS Addressed NTA Recommendation IRS Response

Yes/No

TAS Assessment

Date

10. The National Taxpayer

Advocate recommends

that the IRS give

taxpayers the option of

specifying that they

would like to receive

correspondence in

Braille, particularly in the

context of IRS

compliance activity.

IRS will continue to provide

correspondence in Braille for specific

individual taxpayer requests. However,

at this time IRS does not have the

capability to provide all subsequent

correspondence in Braille. In addition,

the IRS will continue to review its

policies and procedures to identify

opportunities to assist them. It should

be noted that IRS telephone assistors

who make referrals to our Alternative

Media Center to provide copies of

notices in Braille, also put a hold on

balance due accounts when

appropriate, to allow taxpayers with

disabilities additional time to respond to

IRS. Additionally, IRS provides

assistance to all taxpayers with

compliance issues at our Taxpayer

Assistance Centers, where taxpayers

with disabilities can make

appointments via telephone,

eliminating the burden of waits.

IRS Addressed NTA Recommendation IRS Response

Yes/No

TAS Assessment

Date

11. The National Taxpayer

Advocate recommends

that the IRS reexamine

current guidance

regarding the transfer of

cases from the campus

to field offices to ensure

that in cases where a

face-to-face meeting or

local knowledge is

helpful in resolving the

case, taxpayers’

requests for a transfer

are not ignored due to

resource and statute of

limitations issues.

IRS recently reviewed and updated the

guidance contained in IRM 4.19.13.14,

Transfers to Area Office Examination

or Appeals Office, as of March 27,

2008. The updates clarify procedures

when the statute of limitations is

imminent and provide additional

guidance to examiners when a

taxpayer indicates there are

voluminous records. The update also

includes a newly created Transfer Alert

Checksheet which will enhance

transfer quality and consistency.

Because the campus environment is

generally more conducive to EITC

examinations, examination procedures

continue to direct examiners to call a

taxpayer who has requested a transfer

to ensure the taxpayer understands the

audit issues at hand, including the

documentation needed to substantiate

the issue, and answer any questions.

Generally, issues can be resolved

more expeditiously through

correspondence, however, if a taxpayer

still requests a transfer, we generally

grant the request.

Yes 9/29/08

IRS Addressed NTA Recommendation IRS Response

Yes/No

TAS Assessment

Date

12. The National Taxpayer

Advocate recommends

that the IRS identify

additional publications

and notices that would

benefit from the inclusion

of language related to

the Low Income

Taxpayer Clinics (LITCs)

and Taxpayer Advocate

Service (TAS).

The IRS agrees that taxpayers should

be aware of the services offered by

LITCs and the TAS. Multiple avenues

are already used to disseminate this

important information, including IRS

publications, taxpayer correspondence,

outreach and education efforts, and

irs.gov.

IRS will continue to look for additional

opportunities to include this information

as additional notices and publications

are revised or created. Also, TAS may

refer specific suggestions to IRS.

However, pending identification and

agreement on specifically which

additional notices and publications

would benefit and the exact language

involved, we cannot commit to

implementing this recommendation.

100

IRS Addressed NTA Recommendation IRS Response

Yes/No

TAS Assessment

Date

13. The National Taxpayer

Advocate recommends

that the IRS work with

Field Assistance to

determine when

taxpayers should be

referred to a Taxpayer

Assistance Center (TAC)

in cases where they may

need assistance in

obtaining documentation

necessary to resolve

their cases.

As noted in the response to

Recommendation 15-3, IRS already

provides numerous documentation

options to taxpayers. Form 886-H-EIC,

newly revised with input from the

Taxpayer Advocacy Panel (TAP) and

other stakeholders, clearly lays out

these various options for taxpayers to

document that they meet the EITC

requirements. As noted in the

response to Recommendation 15-5,

taxpayers also have the option of

initiating a toll-free call if they have

questions or need additional guidance.

The IRS agrees that taxpayers should

be made aware of the services offered

at TACs. However, IRS already uses

multiple avenues to disseminate this

important information, including IRS

publications, taxpayer correspondence,

outreach and education efforts, and

IRS.gov. A separate referral process

related to EITC examination

documentation requirements is

unnecessary.

101

2007 ARC – MSP Topic #16 – NONFILER PROGRAM

Problem

In fiscal year (FY) 2006, the IRS established an executive group to oversee an enterprise-wide strategy to address

nonfilers, but it has not implemented sustainable plans to increase filing compliance. The present IRS emphasis on

automated systems and reductions in face-to-face service contributes to high rates of default assessments (in the

Automated Substitute for Return program), low collection percentages, and downstream consequences in the form of TAS

casework. The National Taxpayer Advocate urges the IRS to develop a more balanced strategy of research, service, and

enforcement to increase filing compliance.

IRS Addressed NTA Recommendation IRS Response

Yes/No Date

TAS Assessment

1. The National Taxpayer

Advocate recommends

that the IRS conduct

behavioral research to

assess filing compliance

risks of differing taxpayer

segments and develop

strategies for each

segment.

The IRS already has several efforts

underway that are in line with this

recommendation. Pending the

conclusion and analysis of these

efforts, we do not agree there is a need

for additional behavioral research in

this area. Current efforts include:

Multi-City Study – designed to

examine service usage and the

relationship between service and

compliance in a controlled

environment. The service channels

that will be tested are telephone, walk-

in assistance, and IRS.gov web

assistance. The research will utilize an

experimental design in which

participants will complete a mock tax

return that is similar in content to their

own tax situation. Participants will be

randomly assigned to one of five

groups 1) no assistance, 2) toll-free

assistance, 3) walk-in assistance, 4)

web-assistance, 5) toll-free, walk-in

and web assistance. All participants

102

IRS Addressed NTA Recommendation IRS Response

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TAS Assessment

Date

will have access to publications

applicable to their scenarios.

Participants’ interactions with service

will be recorded in order to better

understand their needs. The

recordings will be analyzed to

determine which questions from the

mock tax scenarios taxpayers ask and

how those questions and answers

relate to taxpayer errors. The objective

of this task is to gather and utilize

accurate and meaningful data from an

experimental design that will allow the

IRS to explore the relationship between

service and compliance and also

examine customer service preference

and usage data.

Uniquely Common Tax Events – This

research will examine how individuals

handle unique or new (for them) but

common tax events, such as buying a

house, moving, having a child, buying

stock, receiving 401k distributions, etc.

The research will examine how

taxpayers handle these tax events,

what services they need and use, and

how these events impact compliance.

We will gather quantitative data using

controlled laboratory studies and

qualitative date through in-depth

structured interviews with taxpayers.

Notice Improvement/Effectiveness

Measures – a multi-faceted approach

that includes: comprehension testing of

103

IRS Addressed NTA Recommendation IRS Response

Yes/No

TAS Assessment

Date

notices and letters; effectiveness

measures; insert effectiveness; and

focus groups. Comprehension testing

includes controlled testing of a

document’s communications goals,

structured interview questions, and

minimal interaction. Effectiveness

measures evaluate a product’s ability

to reach its communications goals, and

aid in better understanding how

taxpayers use and understand

information. Insert effectiveness is a

multi-functional effort designed to

reduce the number of inserts, save

postage, ensure communications

packages are effective and reduce

burden while facilitating compliance.

Focus groups are designed to gather

qualitative data regarding elements of

notices and letters, with the intent to

better understand which

elements increase compliance and

influence behavior.

International Taxpayer Customer

Satisfaction Survey – designed to

identify the needs, preferences, and

behaviors of taxpayers who live outside

the contiguous United States (we refer

to this population as International

Taxpayers). Through this effort, we will

be able to identify barriers International

Taxpayers face in meeting their

compliance responsibilities. Our efforts

begin with conducting Tax Forum focus

104

IRS Addressed NTA Recommendation IRS Response

Yes/No

TAS Assessment

Date

groups with practitioners who service

International Taxpayers so that we may

learn more about this unique

population. Their input will guide the

development of a customer satisfaction

survey we plan to field during the

summer of 2009.

We believe the projects mentioned

above will assist in identifying differing

taxpayer segments and the

development of treatment strategies

designed to facilitate compliance with

Federal tax laws – including filing

compliance.

105

IRS Addressed NTA Recommendation IRS Response

Yes/No

TAS Assessment

Date

2. The National Taxpayer

Advocate recommends

that the IRS launch a

public information

campaign to remind

taxpayers of what taxes

are really about: the price

we pay for a civilized

society.

IRS will continue to focus its efforts on

effective enforcement strategies to

reduce the tax gap, while seeking to

improve and tailor service delivery

channels in a way that reduces barriers

to individuals remaining compliant.

These include expanding taxpayers’

ability to file electronically, providing

them additional methods for making

payments, and making it easier for

them to obtain filing information

through IRS publications, the internet,

and local community partners.

Additionally, we think any such

campaign would have a better chance

of success if sponsored and launched

by the private-sector as a public

service. For the IRS to do so could

possible be viewed as self-serving and,

as a practical matter, would require the

appropriation of significant funds for

creation and product placement that

are not available in the current IRS

budget.

106

IRS Addressed NTA Recommendation IRS Response

Yes/No

TAS Assessment

Date

3. The National Taxpayer

Advocate recommends

that the IRS develop a

tax course for high

school students that

promotes financial

literacy and tax

responsibility.

The IRS already has such a program.

IRS started “Understanding Taxes”

(UT) in 1954. UT is a tax course

designed for middle, high and college

students to promote tax responsibility.

In 2003, UT was converted to an online

product available on irs.gov. The

program features over 1,100 pages for

learning about the history, theory and

application of taxes in the United

States. UT was taken down from

irs.gov in January 2008 due to

technical internet security concerns

related to formatting. However, the site

should be available again by the end of

June 2008. Future plans call for

marketing UT as a financial education

tool for use at all levels of education

(kindergarten thru college). In this

regard, IRS plans to form partnerships

with school boards and community

groups to incorporate UT into

classroom curricula and local financial-

literacy initiatives.

Yes 11/19/08

4. The National Taxpayer

Advocate recommends

that the IRS establish

measurable

achievements such as

number of returns filed,

recidivism rate, and the

effects of outreach and

education efforts on filing

compliance.

We currently have reports to measure

returns filed and recidivism. We do not

have a method to measure the

effectiveness of outreach and

education, but we are working to

increase our outreach and education

particularly with potential refund

nonfilers. The Nonfiler Executive

Steering Committee is also in the

process of developing Corporate

Yes

107

IRS Addressed NTA Recommendation IRS Response

Yes/No

TAS Assessment

Date

measures, including a measure for

returns filed. Stakeholder

Partnerships, education and

Communications (SPEC) also has a

measurable achievement for returns

prepared. Strategy 4 of the Non-filer

Strategy proposes capture of returns

filed using targeted outreach to

individual non-filer taxpayers in

targeted areas. In order to capture the

recidivism rate, it requires a controlled

group, monitored over a period of time.

Strategy 4 will also show the effects of

outreach on the targeted non-filer

group.

SPEC has also proposed changes to

its measures for 2009 - 2010 to ensure

alignment between the W&I Strategy

and Program Plan (SPP), Taxpayer

Assistance Blueprint (TAB) measures

and existing SPEC measures. The

proposal includes eliminating non-

media outreach contacts as part of the

critical measure, introducing a

“taxpayer value” measure, and

procuring contractor support to identify

the impact of outreach on taxpayer

behavior and filing compliance.

108

IRS Addressed NTA Recommendation IRS Response

Yes/No

TAS Assessment

Date

5. The National Taxpayer

Advocate recommends

that the IRS establish a

compliance file marker to

identify single year and

repeat nonfilers, skip

filers, and stop filers who

may require different

treatments to increase

filing compliance.

The IRS had already identified this

problem and had developed a plan to

resolve the problem. We do identify

taxpayers who are single year and

repeat nonfilers, skipfilers and

stopfilers. We segregate these

taxpayers into different categories and

apply different treatments according to

results obtained and measured.

One of the key initiatives included in

our Service-wide Nonfiler Plan is

allocation of resources based on a

Servicewide approach to ensure end-

to-end accountability for nonfiler

treatment decisions. Specific

supporting actions also include:

Implementing the Business Master File

(BMF) Case Creation Nonfiler

Identification Process (CCNIP) in FY

2008. The purpose of this action is to

improve the quality of BMF nonfiler

workload selections. BMF CCNIP is

currently scheduled for production in

December 2008.

Yes

109

IRS Addressed NTA Recommendation IRS Response

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TAS Assessment

Date

6. The National Taxpayer

Advocate recommends

that the IRS re-establish

and promote National

Filing Days to assist

taxpayers with

delinquencies.

We are currently working to determine

appropriate methods to communicate

and educate taxpayers, especially

those who may be due refunds.

The approved Servicewide Nonfiler

Plan includes an action to Implement a

Servicewide Nonfiler Communication

Program that includes an internal and

external focus to address filing

requirements. The Nonfiler Executive

Advisory Council, in which the

Taxpayer Advocate Service

participates, will determine if there is

further need for National Filing Days.

Yes

7. The National Taxpayer

Advocate recommends

that the IRS establish

more corporate

partnerships through

W&I (SPEC) so large

employers provide free

tax return preparation for

their low income,

disabled, elderly, and

limited English

proficiency (LEP)

employees.

The IRS has a Large Employer

Partnership group that works with large

corporate organizations to build

national partnerships based on a

shared mission of serving low-income

clients and/or employees. Our

activities within this existing channel

will be increased as we implement

each of our national initiatives,

including the Rural, Limited English

Proficiency (LEP) and Disability

initiatives. The strategy includes tax

outreach, tax preparation assistance,

and asset-building.

Yes

110

IRS Addressed NTA Recommendation IRS Response

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TAS Assessment

Date

8. The National Taxpayer

Advocate recommends

that the IRS initiate more

partnerships with

industry groups that have

filing compliance issues

and develop strategies to

increase compliance.

Previous nonfiler research has

identified several industries that have

filing compliance issues. These

industries include retail, real estate,

construction, transportation, service,

and businesses with low-profile

income. The Stakeholder Liaison (SL)

organization will pursue new

partnerships with organizations and

associations representing these

industries to jointly address the non-

filing issue. Strategies to increase

compliance will be developed in

partnership with not only these newly

established partners, but also existing

stakeholders in these industry

segments.

Yes

9. The National Taxpayer

Advocate recommends

that the IRS enhance

data sharing with states

when they issue

business and

professional licenses.

Mail new businesses a

"welcome packet" that

describes their

obligations and provides

a contact number for

questions.

The IRS had already identified this

problem and had developed a plan to

resolve the problem. The IRS has

multiple efforts underway that are

directed to informing and educating

new businesses about their federal tax

obligations.

Government Liaison (GL) conducted a

major, nationwide outreach to small

businesses through state business and

professional licensing agencies. The

outreach was completed in May 2007

and resulted in outreach partnering

agreements with 94 agencies in 32

states. A key component of this

Yes 11/24/08

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IRS Addressed NTA Recommendation IRS Response

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Date

outreach was the development of a

new publication designed specifically to

educate new small businesses on their

tax responsibilities. This publication,

Publication 4591, Small Business

Federal Tax Responsibilities, was

provided to agencies for distribution to

new businesses through direct mailing

and electronic delivery with license

issuance and license renewals. Initial

distribution was made to over 200,000

businesses. Partnering agencies were

also given information on how to re-

order Publication 4591 when needed.

Contact numbers were not included in

the publication since it was designed to

refer taxpayers to appropriate IRS.gov

web addresses for information and

current contact information.

Stakeholder Liaison (SL) has

significant interaction with small

businesses and industry groups. From

October 1, 2007 through March 31,

2008, SL participated in 520 industry

events with 24,100 participants.

During this same time period, SL

hosted 52 Small Business Forums with

2,348 participants. A total of 496

leveraged Small Business Workshops

were conducted in 37 states.

Coverage for these workshops

increased from 20 to 37 states this

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IRS Addressed NTA Recommendation IRS Response

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TAS Assessment

Date

fiscal year and will continue to expand.

SL also conducted 187 E-File

Seminars with 9,835 direct participants.

SL also partners with SBA on both

local and National Webinars.

SL created an Industry Team that is

charged with enhancing the focus for

outreach to industry and small

businesses.

SL Industry Liaison Chief led the

development of an educational

outreach strategy for 'First Time

Schedule C Filers' (new businesses or

relatively new businesses). The

strategy has several components and

will kick off in April 2008 during Small

Business Week. This is a very

significant strategy and the outreach

will be implemented over several

months.

113

IRS Addressed NTA Recommendation IRS Response

Yes/No

TAS Assessment

Date

10. The National Taxpayer

Advocate recommends

that the IRS mail "soft"

notices to delinquent

taxpayers and remind

them of their obligations

as well as the opportunity

to file without significant

consequences, and

provide a contact

number.

The Servicewide Nonfiler Executive

Advisory Council (NF EAC) addressed

this recommendation in March 2008. A

decision was made to postpone

sending "soft" notices in order to

mitigate the Economic Stimulus

Package's influence on 2008 data

validity. The Council agrees that soft

notices can be an effective tool and will

revisit the issue for next year.

We also plan to conduct a project to

work with potential refund taxpayers

which is also on hold for a year due to

the impact of Economic Stimulus.

Yes

11. The National Taxpayer

Advocate recommends

that the IRS rigorously

pursue intentional

nonfilers and promoters

who undermine the tax

system and widely

publicize convictions as a

deterrent to others.

IRS does rigorously pursue intentional

nonfilers and promoters who

undermine the tax system. Convictions

of notorious and flagrant nonfilers are

publicized, internally and externally.

Efforts to pursue promoters of illegal

schemes have been undertaken in

every compliance organization.

Emphasis is placed on identification of

fraud, and efforts are continually made

to ensure that cases meeting fraud

criteria are appropriately referred for

applicable fraud penalties or for

criminal investigation. The Servicewide

Nonfiler Plan includes initiatives to

ensure end-to-end accountability for

Nonfiler treatment decisions. This

Servicewide approach has been in

place since 2006.

Yes 11/19/08

114

IRS Addressed NTA Recommendation IRS Response

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TAS Assessment

Date

12. The National Taxpayer

Advocate recommends

that the IRS pursue

authority for voluntary

withholding agreements

between independent

contractors and service

recipients, which will

address one of the

causes for nonfiling,

namely the inability to

pay tax due on the

return.

The IRS does not agree with pursuing

authority for voluntary withholding

agreements in an independent

contractor – service recipient

relationship. We are unaware of any

evidence or study that indicates

independent contractor service

providers would take advantage of

such a voluntary program. Further,

current mechanisms already exist to

enable prepayment of tax by

independent contractors, including the

option to submit estimated tax

payments. The effort required to

develop, administer, monitor, or

enforce such voluntary agreements

also has the potential to be very costly

due to the large number of variables

covering a huge population that would

need to be strictly defined, such as the

types of services, payment thresholds,

etc. Such a program also has the

potential to create a burden for service

recipients who may or may not

understand withholding, filing and/or

reporting requirements.

115

2007 ARC – MSP Topic #17 – AUTOMATED UNDERREPORTER PROGRAM

Problem

The Automated Underreporter (AUR) program plays a critical role in reducing the nation’s tax gap by verifying reporting

compliance for taxpayers who have filed returns and potentially failed to report all income. In FY 2007, AUR closed more

than 4.5 million cases and assessed $5.1 billion in additional tax. Given that AUR maintains an inventory of over 15 million

cases at any given time, it is important for both the IRS and the taxpayer that the program be as accurate and effective as

possible. Yet AUR has the highest rate of abatement of any compliance program and generates large numbers of TAS

cases, most of which result directly from the IRS’s failure to adequately or timely address taxpayer responses to AUR

contacts. The National Taxpayer Advocate recommends that the IRS make every effort to ensure that only those

taxpayers who have underreported income are affected by the program, respond timely to correspondence, promptly

process amended returns, and significantly improve the level of service on the AUR toll-free telephone lines.

116

IRS Addressed NTA Recommendation IRS Response

Yes/No Date

TAS Assessment

1. The National Taxpayer

Advocate recommends

that the IRS revise the

current Automated

Underreporter (AUR)

programming to ensure

taxpayers are not

needlessly affected by

AUR. Take the actions

suggested by the 2007

Government

Accountability Office

(GAO) audit, to begin

obtaining all return line

items when returns are

transcribed to enhance

compliance. This is

especially detrimental in

the AUR process, where

having all the return

information available

would ensure AUR only

includes taxpayers who

have truly underreported

income.

The IRS does not agree that there is a

need to transcribe all line items from

returns and Automated Underreporter

(AUR) procedures are already in place

to ensure taxpayers are not needlessly

affected. AUR inventory is created by

matching filed returns i.e. transcribed

lines, to third party payer documents.

The resulting mismatches make up the

AUR inventory. However, an additional

analysis of the return is conducted in

the analysis phase in AUR processing

to ensure the discrepant income or

credit amount was not incorrectly

reported on a different line of the

return, thereby reducing taxpayer

burden and maximizing the

effectiveness of our limited AUR

resources. AUR also conducts

ongoing analysis of inventory selection

methodology to ensure only bona fide

cases are worked each year.

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IRS Addressed NTA Recommendation IRS Response

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TAS Assessment

Date

2. The National Taxpayer

Advocate recommends

that the IRS enhance

systemic processing to

eliminate the need for tax

examiner screening.

Implement quality review

and measures for the

current AUR manual

screening process in

order to establish

historical data for

program improvement

possibilities.

IRS is already involved in expanding

the automated generation of notices in

the AUR program, which eliminates the

need for tax examiner screening. In

Fiscal Year 2005, AUR began testing

the automated generation of the CP

2000 Notice (Auto Notice) on one

income type, Unemployment, by

identifying approximately 31,000 cases

that could bypass tax examiner manual

screening based on specific

programming criteria. In Fiscal Year

2008, AUR expanded auto notice to

include ten income types and identified

300,000 cases that qualify to receive

an auto notice. IRS already conducts

In-depth analysis of the auto notice

results, business rule enhancements

and programming updates to support

further expansion of auto notice into a

larger percentage of the underreporter

inventory each year. Evaluation of the

quality and effectiveness of manual

screening is already part of this

process. In FY 2009, AUR plans to

increase the number of cases eligible

for an auto notice.

Yes 11/19/08

118

IRS Addressed NTA Recommendation IRS Response

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TAS Assessment

Date

3. The National Taxpayer

Advocate recommends

that the IRS include

Failure to Pay (FTP)

computations in the AUR

notices issued so

taxpayers will not receive

an additional balance

due notice after they

have paid the AUR tax

assessment.

AUR began pursuing the inclusion of a

final balance due amount in the CP

2000 Notice with MITS (Penalty &

Interest Explanation Function (PINEX)

and AUR System Programmers) in FY

2005. Currently the FTP is calculated

on Masterfile after the AUR

assessment (TC 290) posts. In April

2008, AUR HQ, Servicewide Penalty

and PINEX/IDRS analysts reconvened

to discuss the strategy for the

calculation of the FTP penalty and

agreed to submit a Work Request to

allow a Common Service Module

(CSM), a centralized location where all

calculations will be completed and

provided to other systems such as

IDRS and Masterfile, that will allow

AUR to accurately calculate the FTP

penalty for inclusion in AUR notices.

The CSM Module should be functional

by 2010 (TY08) after which AUR will

need to submit a Work Request for

programming for the AUR system to

link with the CSM to calculate the FTP

penalty. AUR could realize this full

capability for TY10.

Yes

119

IRS Addressed NTA Recommendation IRS Response

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TAS Assessment

Date

4. The National Taxpayer

Advocate recommends

that the IRS ensure that

when a taxpayer agrees

to the AUR assessment

and provides the

required tax payment

that the payment will not

refund to the taxpayer

prior to the AUR

assessment on the

account, necessitating

additional contact with

AUR.

Currently, if a taxpayer submits a

payment in reply to a CP 2000 Notice

and includes the Response page, the

payment will post with transaction code

(TC) 640. This transaction code will

freeze the payment until an

assessment is made (TC 300 or TC

290). AUR submitted a Work Request

to MITS in December 2007 to also

freeze any payment made in advance

of an AUR assessment when

accompanied by a new interim letter

(4314C), which would essentially

accomplish what the NTA is

recommending. MITS completed this

programming and it will be available for

FY 2009 AUR processing.

Yes 11/19/08

120

IRS Addressed NTA Recommendation IRS Response

Yes/No

TAS Assessment

Date

5. The National Taxpayer

Advocate recommends

that the IRS provide AUR

assistors with the skills to

establish Installment

Agreements (IA) when

AUR taxpayers call and

request agreements to

resolve their tax debts, or

have a message

directing the taxpayer to

the appropriate toll-free

line to handle an IA.

Since 2003, the CP 2000 Notice has

included Form 9465, Installment

Agreement Request which the taxpayer

may complete if they are in agreement

with the proposed tax change and need

additional time to pay the balance due.

Upon receipt of Form 9456, AUR

forwards the completed form to the

Collection function and sends the

taxpayer Letter 1802C advising of this

action. If a taxpayer opts to call

instead of or prior to mailing the

enclosed a Form 9465, the form

instructions direct them to the 1-800-

829-1040 help line and also references

the option to apply on-line via IRS.gov.

If the taxpayer nonetheless calls the

AUR toll-free number and requests an

installment agreement, they are

directed to call 1-800-829-1040, where

their call will be routed to IRS

employees specifically trained to

handle such requests.

Yes 11/19/08

121

IRS Addressed NTA Recommendation IRS Response

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TAS Assessment

Date

6. The National Taxpayer

Advocate recommends

that the IRS provide AUR

toll-free assistors with the

training to allow

computation of the total

balance due (tax +

penalty + interest) as a

result of the AUR

assessments or program

this information into AUR

notices.

In order for an AUR phone assistor to

accurately compute a full payment

amount, the Failure to Pay (FTP) and

the Estimated Tax (ES) penalties would

need to be accurately calculated.

Currently the FTP is calculated on

Masterfile once the AUR assessment

(TC 290) posts. As noted in our

response to recommendation 17-3, a

Work Request has been submitted to

provide the ability to issue notices with

accurate full pay figures and to

accurately compute the pay off figure

while assisting the taxpayer via

telephone. AUR, however, will not

realize full capability until 2010.

Yes

7. The National Taxpayer

Advocate recommends

that the IRS determine if

the taxpayer has

experienced a tax benefit

as a result of state

refunds through the

systemic process to

exclude AMT filers and

state refund issues when

they have not.

AUR requested programming changes

in a December 2007 work Request to

exclude AMT filers who have not

received a benefit from the Schedule A

deduction for their State Income Tax

Refund. However, due to MITS

programming challenges, systemic

exclusion is not available for working

TY07 cases in AUR during FY 2009.

To minimize adverse taxpayer impact,

an Alert will be issues to the AUR sites

by November 1, 2008, to delete any

State income tax refund issues that

surface based on incorrect

programming. AUR plans to submit a

Work Request for TY08 to request

revised AMT calculations.

Yes

122

IRS Addressed NTA Recommendation IRS Response

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TAS Assessment

Date

8. The National Taxpayer

Advocate recommends

that the IRS include a

total income test when

AUR evaluates reported

income. If the total

income reported on the

return as a whole

matches that reported by

third party Information

Return Processing (IRP)

documents, the IRS

should not pursue the

case. This policy would

ensure that the AUR

program does not

needlessly pick up

taxpayers who simply

report income on

incorrect lines on their

returns.

The IRS disagrees with the

recommendation to compare total

income reported on information returns

to total income reported on the filed

return. To do so would greatly erode

the IRS’ effort to encourage full

compliance. Discrepant income, such

as non-employee compensation

impacts the total amount of self-

employment tax due; premature

retirement plan distributions are subject

to a 10% penalty, and numerous other

underreported income types impact

allowable deduction and credit

amounts. However, during the initial

computer matching of Forms 1040 to

Information Return data, an overall

“offset” of income types (regardless of

where they are reported) is performed

and these receive low or no

consideration for inventory selection. In

addition to the overall computer match,

prior to issuing a CP2000 Notice, AUR

conducts manual screening to review

the entire return to determine if the

discrepancy, including underreported

wages, can be resolved without

taxpayer involvement. Also see our

response to recommendation 17-1.

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IRS Addressed NTA Recommendation IRS Response

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TAS Assessment

Date

9. The National Taxpayer

Advocate recommends

that the IRS provide IRS

data systems with the

same information that

payer forms provide to

taxpayers so the IRS can

avoid taking unnecessary

action on taxpayers’

accounts. This can be

accomplished by

changing programming

to pick up cost basis

when provided by

payers, many of whom

already provide the

required information.

AUR inventory is created by matching

filed returns with related fields on payer

documents. Recent GAO and TIGTA

audits have pointed out the need to

standardize the reporting of the cost

basis for determining the tax amount

associated with stock sale transactions.

Currently stock brokers, the principal

payers involved, are not required to

report the cost basis. Additionally, the

broker oftentimes is not privy to a

stock’s full life cycle to accurately

determine cost basis, which could lead

to erroneous cost basis information

being reported to the Service. As a

result, pending adoption of a

standardized method for computing

and a requirement for reporting cost-

basis, IRS does not agree that we

should reprogram our systems to pick

up cost basis when voluntarily reported

by payers.

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IRS Addressed NTA Recommendation IRS Response

Yes/No

TAS Assessment

Date

10. The National Taxpayer

Advocate recommends

that the IRS take the

necessary steps to

provide and improve toll-

free service for AUR.

AUR should also

consider enhancing and

expanding policy and

procedures to include

oral statement resolution,

making better use of the

resources expended for

toll-free service.

The AUR program currently has Oral

Statement authority to accept the

taxpayer’s explanation why the return,

as filed, is correct. However, if the

taxpayer agrees with the proposed

assessment via a telephone call,

referred to as Oral Agreement, the

taxpayer must send via fax or mail, a

signed statement as proficed on page 2

of the CP 2000 notice.

Yes 11/24/08

11. The National Taxpayer

Advocate recommends

that the IRS establish

universal account access

for the AUR system, thus

providing any AUR toll-

free assistor with the

ability to access and take

appropriate case actions

on taxpayer accounts.

Implementation of

universal access would

improve customer

service, reduce resource

expenditure, and improve

timeliness for AUR.

AUR implemented universal case work

in Fiscal Year 2006. Universal case

work allows any AUR assistor to work a

case to conclusion unless the taxpayer

insists on a transfer, or the content of a

related paper file requires site-specific

handling. With plans to move into

correspondence imaging and increased

e-filing of returns, transfers should be

completely eliminated in the future,

leading to reduced burden for

taxpayers and quicker closures for the

IRS.

Yes 11/24/08

125

IRS Addressed NTA Recommendation IRS Response

Yes/No

TAS Assessment

Date

12. The National Taxpayer

Advocate recommends

that the IRS improve

correspondence, notice,

and return processing to

meet the established

IRM 30-day requirement

to prevent default

assessments and

subsequent

reconsideration in the

AUR program.

Even though the CP 2000 notice states

that the taxpayer has 30 days from the

date on the notice to respond, the AUR

System is currently programmed to

allow the taxpayer a total of 45 days to

respond prior to AUR initiating the

Statutory Notice of Deficiency (Stat

Notice). Once the Stat Notice is issued,

the taxpayer has 105 days from the

date on the Notice to respond prior to a

default assessment, though the Notice

indicates a 90 day response time. The

additional 15 days programmed into

the system allows for mailing and

delivery to AUR.

Yes 11/24/08

126

IRS Addressed NTA Recommendation IRS Response

Yes/No

TAS Assessment

Date

13. The National Taxpayer

Advocate recommends

that the IRS consider

establishing a

consolidated AUR site for

correspondence and

return handling to

improve timeliness and

accuracy.

We do not agree with this

recommendation for several reasons:

1) It would not be cost-effective due to

the fluctuation in correspondence

receipts during the year.

2) AUR inventory is composed of

nearly 45% paper-filed returns that

would require mass transshipment of

files from screening sites to any

centralized correspondence and return

handling site.

3) Consolidation of the distinct W&I and

SB/SE AUR operations would need to

occur prior to any such centralization.

4) The screening phase of AUR

accounts for 40% of the direct time

while 60% goes to the response phase;

i.e. more complex correspondence,

telephones, and reconsideration

issues. Centralization of 60% of the

current staffing at one location would

adversely impact 5 of the 6 existing

AUR sites and likely result in position

management consequences for the

remaining employees that would no

longer be involved in the more complex

aspects of AUR work.

127

IRS Addressed NTA Recommendation IRS Response

Yes/No

TAS Assessment

Date

14. The National Taxpayer

Advocate recommends

that the IRS provide

more clear instructions to

clearly include prior year

state or local tax refunds

to Line 7 of the 1040A

and Line 1 of the 1040EZ

instructions to reduce the

chance of involuntary

noncompliance.

We disagree with this

recommendation. Line 1 of Form

1040EZ and line 7 of Form 1040A are

used SOLELY to report wages and

other compensation. We require state

and local tax refunds, when taxable, to

be reported on line 10 of Form 1040.

They cannot be reported on Form

1040A or 1040EZ. In many cases, the

refund is NOT taxable or only partially

taxable. Taxpayers who did not

itemize in the prior year have no

taxable refund; the vast majority of

Form 1040EZ and 1040A filers fall into

this category. Explaining how to

calculate the taxable part requires a full

page of instructions in the Form 1040

instructions, including a 7-line

worksheet. Adopting the

recommendation would add significant

and unnecessary complexity to Forms

1040EZ and 1040A and likely increase

erroneous reporting by the filers of

these forms.

128

IRS Addressed NTA Recommendation IRS Response

Yes/No

TAS Assessment

Date

15. The National Taxpayer

Advocate recommends

that the IRS provide clear

instruction in the CP

2000 notice such as that

in the soft notice to

include, but not be

limited to:

• Do not file an amended

return for the year in

question. Call or write if

you dispute only the

income attributed to you

in this notice.

• Do file an amended

return if you have

deductions or expenses

that offset the proposed

income item attributed to

you if you agree that

such income is properly

attributed to you. Do not

file an amended return if

you dispute the income

attributed to you in this

notice.

• If the income attributed

to you stems from an

error on your part and

that error has occurred in

other years, file an

amended return for those

tax years for which the

same error occurred.

We disagree with this recommendation.

The CP 2000 Notice currently includes

the following language in the

Frequently Asked Question (FAQ)

section as it relates to filing an

amended return.

“You do not need to file an amended

federal tax return to include the

proposed changes shown on this

notice. We will correct this tax year

when we receive your response. If you

choose to file an amended tax return,

write “CP2000” along the top of the

1040X, attach it behind the Response

Form page and send to the address

shown on this notice.”

The objective of the concise 1040X

information in the FAQ section of the

CP 2000 Notice is to simplify the

instructions for the taxpayer. The

content of the Soft Notice Letter was

drafted with the same intent to reduce

complexity and taxpayer burden.

129

2007 ARC – MSP Topic #18 – THE ACCURACY-RELATED PENALTY IN THE AUTOMATED UNDERREPORTER

UNITS

Problem

The IRS has been increasing its reliance on the AUR program to systemically match payments that third parties report on

Forms W-2s, 1099s, and similar documents against income that taxpayers report on their tax returns. The AUR program

is vital to tax administration and reducing the nation’s tax gap. However, the AUR’s practice of automatically imposing the

negligence penalty without the exercise of discretion by IRS personnel is problematic. The law requires IRS managerial

approval of all penalties before assessment unless the IRS is able to “automatically calculate[e] the penalty through

electronic means.” The IRS takes the position that if within the past three years the taxpayer failed to report amounts from

the same type of information return which is at issue in the current year, the AUR may automatically impute negligence.

This is a per se negligence standard. Negligence is a finding that requires an analysis of the taxpayer’s intent and a

review of whether the taxpayer had reasonable cause. It is doubtful that Congress, which sought to ensure managerial

review for penalty determinations in general, intended to provide a different rule for the negligence penalty. Taxpayers and

the IRS would clearly benefit from some form of human review. Further, data suggests that while the AUR is proposing

negligence penalties more frequently, the AUR experiences a high reversal rate – substantially higher than the IRS

campuses or Field Examination units. The National Taxpayer Advocate urges the IRS to add a level of human review to

the proposed AUR negligence penalty and develop a comprehensive program to review the overall effectiveness of

utilizing the AUR to assess the penalty.

IRS Addressed NTA Recommendation IRS Response

Yes/No Date

TAS Assessment

1. The National Taxpayer

Advocate recommends

that IRS employees

should make individual

determinations when

proposing and assessing

the negligence portion of

the accuracy-related

penalty in the Automated

Underreporter (AUR)

program.

IRS does not concur with this

recommendation – If a taxpayer

responds to an AUR notice, a tax

examiner will manually review the

response and has the authority to

waive penalties if the taxpayer provides

evidence to establish they do not apply.

If the tax examiner believes accuracy-

related penalties should be asserted,

written managerial approval is required

in accordance with the general rule of

section 6751(b)(1).

130

IRS Addressed NTA Recommendation IRS Response

Yes/No

TAS Assessment

Date

2. The National Taxpayer

Advocate recommends

that the IRS should retain

data pertaining to the

AUR negligence

penalties that it proposes

and does not assess,

and the reasons for the

non-assessment.

The IRS already identified this problem

and submitted a Work Request to MITS

in December 2007 to request the ability

to track all cases in AUR on which

accuracy-related penalties have been

waived. MITS completed the

programming of this change and it will

be available beginning with TY07 AUR

inventory worked in FY 2009.

Yes 11/24/08

131

2007 ARC – MSP Topic #19 – AUDIT RECONSIDERATIONS

Problem

In FY 2006, the IRS closed audit reconsiderations of tax assessments exceeding $1.7 billion by abating over $1.2 billion

of those original audit assessments. The audit reconsideration process constitutes rework, since the IRS previously

audited the taxpayers and assessed tax on the same tax period(s). The IRS’s strategic goals of reducing cycle time and

improving detection of noncompliance need to be balanced against taxpayers’ need to receive clear communication and

accurate resolution of tax controversies. The IRS’s failure to convey its goals to employees in a balanced fashion results

in rework in the form of audit reconsiderations. The National Taxpayer Advocate urges the IRS to promote one-stop

customer service among employees and to utilize the most effective means of communication to resolve tax issues in a

timely manner.

IRS Addressed NTA Recommendation IRS Response

Yes/No Date

TAS Assessment

1. The National Taxpayer

Advocate recommends

that the IRS establish a

joint TAS/IRS working

group to study the

correspondence

examination process and

address taxpayer and

practitioner concerns

with premature notices.

SB/SE CRC Examination will form a

joint working group with TAS, W&I

Examination and SB/SE Examination.

We will study the correspondence

examination process and address

taxpayer and practitioner concerns with

premature notices in this collaborative

effort.

Yes

132

IRS Addressed NTA Recommendation IRS Response

Yes/No

TAS Assessment

Date

2. The National Taxpayer

Advocate recommends

that the IRS conduct

research with TAS to

identify effective use of

locator services and

other Internet based

address searches when

taxpayers do not respond

to initial audit contacts.

SB/SE CRC Examination Policy and

Planning/Monitoring will work with TAS

and W&I Examination to identify and

evaluate the additional costs and

related benefits associated

with effective use of locator services

and other Internet based address

searches when taxpayers do not

respond to initial audit contacts. At the

conclusion of the analysis, we will

solicit Counsel advice and make a

business decision as to whether we will

and can legally implement the

recommendation.

Yes

3. The National Taxpayer

Advocate recommends

that the IRS immediately

cease use of the

combination letter except

in the two instances the

National Taxpayer

Advocate agreed to in

2005:

• Tax on premature

withdrawals from an

Individual Retirement

Account; and

• Self-employment tax on

business income.

SB/SE CRC Examination Policy and

Workload Selection and Delivery

(WSD) will study, in conjunction with

W&I Exam, the appropriateness of the

use of the combination letter in all

correspondence examination workload

inventories. We commit to ensuring

consistency between Operating

Units/BODs while protecting taxpayer

rights.

Yes

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4. The National Taxpayer

Advocate recommends

that the IRS survey

taxpayers who

completed the audit

reconsideration process

to determine why the

initial audit process

failed.

SB/SE CRC Examination Policy will

initiate a Research request in

collaboration with W&I Examination

and SB/SE Examination. We will

support Research in a study of survey

results to determine why the initial audit

process failed; requiring an audit

reconsideration to be filed.

Yes

5. The National Taxpayer

Advocate recommends

that the IRS establish a

measure of overall audit

effectiveness that

includes audit

reconsiderations.

SB/SE CRC Workload Selection and

Delivery (WSD) and Planning/

Monitoring will work with W&I

Examination to develop a methodology

(to extent feasible and based on use of

existing systems) to measure overall

audit effectiveness and analyze/

evaluate the types of workloads for

trends which generate audit

reconsiderations. This information will

be considered to effect improvements

in case selection, communications with

taxpayers and procedures with

conducting the audit, as applicable.

This information will also be utilized to

ensure resources are in place to timely

resolve audit reconsiderations.

Yes

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6. The National Taxpayer

Advocate recommends

that the IRS study the

effectiveness of the

mixture of face-to-face

versus correspondence

examination processes

and their related audit

reconsideration requests

to develop the best

approach to maximizing

voluntary compliance.

SB/SE CRC Examination Policy will

initiate a Research request in

collaboration with CRC Workload

selection and Delivery (WSD), W&I

Examination and SB/SE Examination.

We will support Research in a study to

determine the effectiveness of the

mixture of the two examination

processes and their related audit

reconsideration requests, and the

resource impact of using face to face

versus correspondence, to develop the

best approach to maximizing voluntary

compliance.

Yes

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7. The National Taxpayer

Advocate recommends

that the IRS review IRS

procedures for advance

payments and determine

if the IRS is justified in

closing a case agreed

without the taxpayer’s

signature on a report or

other affirmative reply.

W&I has recently sought Counsel

advice on this item. Because a

taxpayer must indicate that a payment

is a cash bond to restrict interest

pending the appeals of the

assessment, the process of treating the

full payment of proposed liability with

no indication of how the payment is to

be applied, will be treated as an

agreement. Currently cases reject

systemically from suspense for closure

when a payment is received. Placing

these cases back into the batch

process is an ineffective rework of

cases.

SB/SE CRC Examination Policy will

work with W&I Examination and SB/SE

Examination to ensure legal and

procedural consistency in closing

cases agreed between Operating

Units/BODs.

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8. The National Taxpayer

Advocate recommends

that the IRS make IRM

21.3 Job Aid, CP2000,

obsolete since it

contradicts IRM

21.3.1.4.4 with regard to

advising a taxpayer to file

an amended return to

claim additional

expenses.

The IRM 21.3.1.4.4 provides CSRs

with instructions to address caller

inquires relating to the CP09 EIC.

CP09 is not related to the CP2000

issued by AUR. A review of the

12/19/07 revision of the 21.3, CP2000

Job Aid does not reveal any statement

instructing the CSR to “direct taxpayers

to agree with the unreported income,

then file an amended return to claim

additional expenses against the

unreported income.” (see page 291 of

the 2007 ARC). The only references to

Form 1040X that appear on the 21.3,

CP2000 Job Aid are as follows: step 6:

Advise not to file a 1040X for changes

they agree with and step 7: Advise to

review subsequent years for potential

changes that may need a 1040X.

These two statements do not contradict

Form 1040X filing information provided

in IRM 21.3.1.4.58(4).

9. The National Taxpayer

Advocate recommends

that the IRS study the

demographics of audit

reconsideration cases to

determine if there are

common issues,

procedures, or taxpayer

characteristics that can

be addressed to relieve

taxpayer burden.

SB/SE CRC Examination Policy will

initiate a Research request in

collaboration with W&I Examination

and SB/SE Examination. We will

support Research in a study to

determine if there are common issues,

procedures, or taxpayer characteristics

that can be addressed to relieve

taxpayer burden. At the conclusion of

the analysis, we will assess feasibility

of implementing the recommendations.

Yes

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2007 ARC – MSP Topic #20 – AUDITS OF S CORPORATIONS

Problem

While the IRS is struggling to develop a comprehensive strategy to address S corporation noncompliance, taxpayers are

burdened by the S corporation election process and K-1 matching program errors. In addition, a significant number of S

corporations classify all payments to their officers as “distributions” rather than “wages,” effectively avoiding employment

tax liabilities. The National Taxpayer Advocate urges the IRS to increase the number of S corporation asset ranges to

improve classification and return selection, and establish a tracking system to assess the final tax effect of S corporation

adjustments and related issues such as employment tax results. The IRS also should establish an outreach campaign and

a soft contact letter test to address the officer compensation issue.

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TAS Assessment

1. The National Taxpayer

Advocate recommends

that the IRS expand

classification criteria to

include high income

individual taxpayers with

flow-through income or

losses.

The IRS had already identified this as a

problem and had developed a plan to

resolve the issue as the IRS currently

does use tools to select high income

individual taxpayers with flow-through

income or losses with the highest audit

potential. For instance, we have

specific projects where we incorporate

yK1 data which considers flow through

entities. LMSB currently has an online

classification system where users have

access to yK1.

IRS does agree that additional

enhancements may be helpful in

identifying and focusing compliance

issues more effectively and we plan to

have these enhancements in place by

July 15, 2009. A Compliance Data

Environment (CDE) in SB/SE is

currently being tested and will

incorporate K-1 data and have yK1

data available for classification of

returns.

Yes

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2. The National Taxpayer

Advocate recommends

that the IRS conduct

additional research at the

Form 1040 level to

assess compliance risk

of tiered entities.

The IRS has previously identified this

issue as a potential problem and has

taken steps to develop a plan to

continue our enhancements of the

1040 National Research Program

(NRP) currently in process which is

assessing risk on taxpayers having

ownership interests in flow through

entities. Data from the 1120S NRP is

also being reviewed for compliance

issues at both the corporate and 1040

levels. Results from both the 1120S

and 1040 NRP studies will be analyzed

to identify compliance risks, and

additional actions that can be taken to

enhance compliance and decrease

taxpayer burden. We plan to have

these enhancements in place by July

15, 2010.

Examination and NRP training

materials continue to be updated to

focus on corporate and shareholder

issues. Continuing professional

education being conducted for

examiners in FY08 also includes

modules on flow through and

enterprise risk issues.

Yes

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3. The National Taxpayer

Advocate recommends

that the IRS establish

cross-functional teams of

revenue agents of

various grade levels to

conduct enterprise

examinations.

We agree that specialization is

beneficial and effective for some

situations and is used in some

situations; however, with competing

Examination priorities, resource and

geographic limitations, a team

approach is not always plausible. We

have made similar attempts in the past

with mixed success.

Flow-through groups in SB/SE have

been established to gain knowledge of

specific issues and to assist with skills

transfer. Although some benefits have

been found, there have also been

challenges since these cases are

highly complex and often result in over-

age and high time compared to general

program groups.

Coordinated Industry Cases are

generally enterprise cases. LMSB

continues to test ways to overcome

limitations in data and case

delivery/management systems in order

to address enterprise cases effectively.

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4. The National Taxpayer

Advocate recommends

that the IRS increase the

number of S corporation

asset range codes to

enhance classification

and return selection.

Because over 78 percent

of S corporation filings

report assets under

$250,000, additional

strata for this segment of

the population could yield

valuable workload

selection information.

The IRS has previously identified this

as a potential issue and we have taken

steps to develop a plan to address a

majority of S-cases that have less than

$250K in assets. But, because they

are not required to file a balance sheet,

this limits the ability to stratify based on

asset size. However, IRS will utilize

NRP compliance results to evaluate

stratification of these entities based

upon “Income/Loss Reconciliation”,

which is the last line of Schedule K

(negative and positive). We plan to

have updated information available by

July 15, 2009.

Yes

5. The National Taxpayer

Advocate recommends

that the IRS validate

Schedules K-1 as returns

are filed to eliminate

unnecessary notices.

The current process does verify that

the payee and payor identification

information matches what is on our

system(s). This automated system

corrects most of the K-1s.

The IRS previously considered

validating payee EINs on the few that

are not corrected by the automated

system and determined that this was

not cost effective and would not

improve notice accuracy, since notices

are not issued related to those

Schedules K-1.

Matching income from the S-Corp K-1

to the shareholder is complex due to

the tax law provisions for flow-through

entities. Often, the K-1 income is

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properly reflected by the individual

shareholder, but it is offset by prior

losses which are suspended due to

passive activity losses, at-risk, or basis.

Verifying that taxpayers are correctly

reporting K-1 income as returns are

being processed is also not possible

given the differences in return due

dates between the Forms 1120S and

1040 (1120S due 3/15 and 1040 due

4/15) as, Forms 1040 are often filed

significantly later than the corporate

return. Verifying that all the K-1

income adds up to what is reported on

the Schedule K is possible—but based

on offsets and other factors, is not

practicable as returns are filed.

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6. The National Taxpayer

Advocate recommends

that the IRS address

disregarded entities by

initiating a Fed-State

initiative for sharing LLC

registrations.

We disagree that there is a need for

the IRS to address disregarded entities

by initiating a Fed-State initiative for

sharing LLC registrations.

Currently the instructions to the

Schedule K indicate that the 1120S

K-1 be issued to the owner of a

Disregarded Entity (DE). In addition,

DEs with TINs generally have a cross

reference to their owner on IDRS.

Most taxpayers do properly reflect the

owner information on the K-1 and for

those that do not, we often have the

data to identify the owner.

LLCs are often created in order to limit

an individual’s potential liability. LLCs

can be created to own property which

may not have any income tax

consequences. To tie down the

owners of all LLCs with each state

would be a labor intensive process in

which the end would not justify the

means.

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7. The National Taxpayer

Advocate recommends

that to address the

shareholder wage issue,

the IRS should initiate an

outreach campaign that

addresses factors

considered in

establishing reasonable

compensation. This

campaign should include

factors such as time

spent working for the

business, minimum

salary versus distribution

ratio, comparable salary

to highest paid

employees, and salary

set by an objective board

of directors.

IRS continues to address significant

issues relative to S corporations as well

as other flow through entities through

research, training, outreach, and other

compliance activities. Guidance has

been issued, both internally and

externally, concerning the shareholder

wage issue. Articles have frequently

been published.

In addition to examination activity, we

had previously utilized a soft letter

approach to resolve this issue, but that

effort was not fruitful. Although we

agree this is a significant compliance

challenge, there is little that can be

done outside of legislative change.

8. The National Taxpayer

Advocate recommends

that the IRS conduct a

"soft contact letter" study

of single shareholder S

corporations with no

officer’s compensation to

test for awareness of the

issue and behavior

changes in future tax

periods.

IRS previously tested a soft letter

approach to resolve this issue, but it

was not productive since the issue is

somewhat subjective. The letters can

only explain that payments for services

should be wages and indicate that the

compensation should be “reasonable”;

we can not give a specific amount or

percentage for the compensation.

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9. The National Taxpayer

Advocate recommends

that the IRS enhance the

reason code tracking

system to assess the

final tax effect of S

corporation adjustments

and related issues (e.g.,

basis, employment tax,

etc.).

The IRS had already identified this as a

problem and had taken necessary

action to address the issue. Our current

reason code tracking system already

assesses the final tax effect of S

corporation adjustments and related

issues.

The use of reason codes, along with

correct disposal codes and related

return information, is being emphasized

through:

o FY08 Revenue Agent and

Tax Compliance Officer

Continuing Professional

Education

o Report Generation Software

(RGS) newsletter

Through RGS, or its successor, the

IRS has plans to make the flow through

reason codes mandatory input when

adjusting items on Schedule E.

Yes 10/1/08

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10. The National Taxpayer

Advocate recommends

that the IRS establish an

enterprise S corporation

"touch" measure to

provide more detailed

coverage data. In

addition, such measure

may have an indirect

effect on compliance

when taxpayers know the

increased risk of

examination at one level

or another.

IRS currently has procedures and

systems in place to emphasize and

indirectly measure enterprise

examinations. The intent of our reason

codes is to capture the impact of flow

through entities adjustments on the

individual taxpayers.

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2007 ARC – MSP Topic #21 – FPLP LEVIES ON SOCIAL SECURITY BENEFITS

Problem

The IRS has a legal right to attach federal payments of taxpayers not meeting their tax obligations through the Federal

Payment Levy Program (FPLP). However, the IRS must employ proper safeguards to ensure that taxpayers with the

greatest potential for hardship are identified and removed from the program before the IRS issues a levy. Although the

IRS agreed to conduct additional research to address the National Taxpayer Advocate’s longstanding concerns with the

FPLP, these efforts are not keeping pace with the rapid increase in FPLP levies on taxpayers’ Social Security benefits. In

FY 2007, the IRS received in excess of 1.74 million levy payments that attached to Social Security benefits – an increase

of almost 24 percent from FY 2006. Yet rather than developing an automated process to screen out low income or other

taxpayers who are experiencing economic hardship, the IRS is actually seeking to expand the FPLP to other federal

payments commonly associated with a taxpayer’s sole or primary source of income. The National Taxpayer Advocate

strongly recommends that the IRS postpone FPLP expansion on any payments associated with retirement income until a

suitable “low income and hardship” filter has been created and successfully tested.

IRS Addressed NTA Recommendation IRS Response

Yes/No Date

TAS Assessment

1. The National Taxpayer

Advocate recommends

that the IRS finalize its

current Federal Payment

Levy Program (FPLP)

research study and move

forward with the

development and

implementation of

suitable controls and

filters to systemically

screen out taxpayers

who depend on Social

Security benefits for their

health and welfare. Once

the study is completed,

the IRS should then

determine if it could then

extend these same

The IRS has always had processes

and procedures in place to provide the

proper relief as warranted for each and

every taxpayer regardless of income

level when a hardship is identified.

Without a filter, however, the

identification of hardship situations can

only be correctly determined by an

appropriate and up to date financial

evaluation of each taxpayer’s individual

claim. The challenge with using any

filter is the necessity to consider non-

income assets owned by the taxpayer.

Since non-income assets are not

identified on tax returns, it has been a

challenge to identify an indicator that

can be used with a high degree of

accuracy to predict financial hardship.

IRS will gladly test any filter identified

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controls and filters to

accurately predict

hardships for all other

FPLP income sources

and apply them

accordingly.

by the Taxpayer Advocate, however, its

reliability must be assured before

implementation. The Research project

concluded in the final report issues

June 24, 2008, that the data available

does not lend itself to provide a model

that has a reasonable degree of

confidence. This project was unable to

identify a method by which SSA

beneficiaries at risk for financial

hardship could be systemically filtered

from the FPLP. Also see our response

to Recommendation 21-3.

2. The National Taxpayer

Advocate recommends

that the IRS postpone

any plans to expand the

FPLP to Railroad

Retirement Benefits

(RRBs) and any other

federal payments related

to retirement income until

a suitable "low income

and hardship" filter has

been created.

IRS worked with the Department of

Defense to include Military Retirement

payments in the FPLP but decided not

to implement Military Retirements

levies at this time. Railroad Retirement

Benefits are on schedule to be included

in FPLP in January 2009. The

taxpayer may resolve the delinquent

account at any time during the notice

process and may stop or prevent the

FPLP levy by contacting IRS. The IRS

also has procedures to provide relief to

taxpayers in hardship situations.

3. The National Taxpayer

Advocate recommends

that the IRS apply its

"low income and

hardship" filter, when

available, to all FPLP

payments commonly

associated with a

IRS Research is attempting to develop

a low income FPLP filter for taxpayers

with Social Security Benefits. This is

very difficult since even if Social

Security or single salary-type payments

appear to be a taxpayer’s sole source

of income, they may very well have

non-income assets not reported to the

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taxpayer’s primary or

sole source of income,

including salary-type

payments. The screen

should also be modified if

necessary.

IRS that can be used to satisfy their tax

delinquency. (See our response to

Recommendation 21-1). IRS cannot

agree to implement a low income and

hardship filter for Social Security or

other sole source types of income

without a reasonable ability to assess

the availability of any non-income

assets. The Research project

concluded in the final report issued

June 24, 2008, that the data available

does not lend itself to provide a model

that has a reasonable degree of

confidence. The project was unable to

identify a method by which SSA

beneficiaries at risk for financial

hardship could be systemically filtered

from the FPLP.

4. The National Taxpayer

Advocate recommends

that the IRS conduct

additional research

regarding how FPLP

notices are issued.

Rather than simply

mailing them to the

taxpayer’s last known

address, the IRS should

consider other options to

ensure that notices of

intent to levy on Social

Security benefits via the

FPLP program are

mailed to the best

Currently when IRS sends Taxpayers a

balance due notice and it is returned

undelivered, the Service conducts

address research and sends a letter to

all potential addresses. The addresses

from the Forms 1099 filed by SSA to

document Social Security payments

are used if different from IRS’s

addresses of record. If the taxpayer

responds, IRS updates the address of

record and sends any additional

mailings to the new address. If the

taxpayer does not respond, IRS

continues to use the address of record

as required by the Internal Revenue

Code.

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address available. At a

minimum, the IRS should

utilize address research

resources that are readily

available via the Internet,

and coordinate with SSA

to determine if the IRS’s

last known address for

the taxpayer matches up

with SSA records.

An IRS/TAS team is already reviewing

alternative solutions when the taxpayer

does not respond to our attempts to

secure a better address.

However, we cannot agree to any

changes in current procedures pending

the successful outcome of this effort.

5. The National Taxpayer

Advocate recommends

that the IRS conduct

outreach efforts that

specifically target

taxpayers receiving

Social Security benefits

or other federal pension

or retirement income.

The IRS identified this issue and is

already engaged in outreach related to

the FPLP. Publication 594, The IRS

Collection Process, that is sent with the

FPLP notice contains FPLP

information, as does IRS.gov. As

noted in the IRS comments included in

the NTA’s Annual Report for Congress,

we are also expanding mass

communications efforts to improve our

ability to reach potentially impacted

taxpayers before a FPLP levy becomes

effective. This communication strategy

includes using disbursing offices to

distribute information directly to their

payees regarding tax obligations for

income received and the potential for

IRS levy action when the proper steps

are not taken to resolve delinquencies.

For example, Defense Finance and

Accounting Service (DFAS), the

agency responsible for Defense

Department federal civil service

employee salaries, agreed to include

Yes 11/24/08

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an alert containing this information in

the leave and earnings statements of

its payees. IRS also piloted a

promotional program aimed at military

retirees that includes a DVD that

explains post-retirement federal tax

obligations. IRS continues to explore

additional outreach efforts along these

lines. However, these efforts are works

in progress and we are not prepared to

commit to specific implementation

dates.

6. The National Taxpayer

Advocate recommends

that the IRS establish

mandatory FPLP training

for all public contact

employees to better

educate them about the

intricacies of the entire

FPLP process (pre- and

post-levy) and deliver

this training by the end of

FY 2008.

ACS and ACSS employees will have

mandatory FPLP training during 2008

Continuing Professional Education.

FPLP training was completed in CPE

by September 30, 2008, for al ACS and

ACSS employees.

Yes 11/18/08

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2007 ARC – MSP Topic #22 – THIRD PARTY PAYERS

Problem

When third party payers do not file required employment tax returns or make required deposits, employers remain liable

for the underlying tax, interest, and penalties and may face significant economic difficulties. The IRS generally has no

recourse other than to initiate collection of unpaid employment taxes from the employers. Not only are employers forced

to pay the amount of their employment tax liability twice (once to the failed third party payer and again to the IRS), but

they may also be liable for interest and penalties. The National Taxpayer Advocate recommends that the IRS assume a

greater role in protecting taxpayers’ interests and assisting taxpayers in third party payer cases by developing “global”

remedies for situations where large numbers of taxpayers share common facts. A global approach would provide a

common starting point for relief, regardless of where the case is worked within the IRS.

IRS Addressed NTA Recommendation IRS Response

Yes/No Date

TAS Assessment

1. The National Taxpayer

Advocate raises

concerns about

misappropriation of

employment taxes by

third party payers and

urges the IRS to assume

a greater role in

protecting the taxpayers’

interests and assisting

taxpayers in third party

payer cases and

recommends defining a

third party payer and

separately defining every

category of payroll

agents and subagents.

The IRS is working to educate

taxpayers to ensure that they have a

better understanding of each type of

Third Party Payer (TPP) and

associated risks. Each type of

authorization or designation form

clearly addresses the specific

authorization being given to the TPP.

IRS will post comparative

information on third party payroll

payers on the IRS.gov website, and

which will reflect the appropriate

designations forms, authorizations,

designations and consequences for

each. The changes to irs.gov have

been submitted and should post in

early November.

Yes

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2. The National Taxpayer

Advocate recommends

creating a separate form

for designating a third

party payer that covers

all types of employment

tax agents and providing

enhanced disclosures

about the consequences

of using a third party

payer.

Each third party payer fulfills a different

role for an employer and follows

different processes. There are different

procedures for each type of TPP

designation along with different IRS

required information because each

TPP is fundamentally different.

Authorizations, responsibilities, and

liabilities for employment taxes may be

different depending on the specific type

of TPP, and the four types can not

realistically be lumped together into

one definition or one-size/form-fits all

approach. IRS will, however, post

comparative information on the

different types of third party payroll

payers to the IRS.gov website, and

which will reflect the appropriate

designations forms, authorizations,

designations and consequences for

each. The changes to irs.gov have

been submitted and should post in

early November. The IRS is working to

educate taxpayers to ensure that they

have a better understanding of each

type of TPP, associated risks and

consequences, and will continue to

enhance our outreach efforts in this

area.

Yes

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3. The National Taxpayer

Advocate recommends

developing additional

communication products

in a brochure format,

including sufficient

disclosures about the

potential risks of using a

third party payer on

appropriate employment

tax forms authorizing the

use of a third party

payer.

Current IRS forms provide specific

authorization given to third party payers

and advise the taxpayer of the

potential risk of using a third party

payer in the event of default. The IRS

had already identified this problem and

developed and distributed outreach

and educational information regarding

the effective use of third party payers.

The IRS plans to continue to work

through outreach and education to

encourage employers to use reputable

TPPs enrolled in and using EFTPS as

part of our normal ongoing activity.

IRS developed information in late FY07

regarding the benefits and convenience

of using EFTPS and posted in to

IRS.gov. The IRS currently provides

many EFTPS circulars and publications

to the public.

Yes 11/24/08

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4. The National Taxpayer

Advocate recommends

discontinuing the practice

of changing the

employer’s address to

that of the third party

payer unless there is

clear authorization from

the employer.

The Internal Revenue Code requires

IRS to use the address of record, which

is the one noted on the last filed return.

Rev-Proc 2001-18 addresses the use

of the address of record and the ability

to use specific returns to make address

changes. IRS Submission Procession

procedures do require that if it can be

determined by the tax return that it was

completed by a TPP, a Form 8822,

Change of Address must be signed by

the taxpayer and submitted to the IRS

prior to the address being changed.

Otherwise, Form 2848, Power of

Attorney and Declaration of

Representative, must be signed by the

taxpayer to give the authority to a TPP

to change the address. IRS will

continue to assess current address

change procedures in place using

Form 8822 to ensure the proper

procedures are being followed.

5. The National Taxpayer

Advocate recommends

providing annual

refresher training for

Submission Processing

employees.

The IRS had already identified this

problem and, in January 2007,

Submission Processing employees

received refresher training on address

change procedures and will continue to

receive annual refresher training in the

future.

Yes 11/24/08

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IRS Addressed NTA Recommendation IRS Response

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6. The National Taxpayer

Advocate recommends

issuing a notice to

taxpayers when making

address changes.

The IRS had already identified this

problem and acknowledges that there

are systemic problems resulting in the

TPPs ability to change the employer’s

address to their own without notifying

the client/employer. The IRS is in the

process of researching the feasibility of

implementing change of address

notices to all business taxpayers that

use a TPP.

Yes

7. The National Taxpayer

Advocate recommends

issuing duplicate

collection notices to

affected employers and

the third party payer.

Preliminary research indicates that it is

not feasible to implement duplicate

collection notices to all business

taxpayers that use a TPP. The IRS

found that there is no way to identify

this population with any degree of

accuracy. Plus, the complexity and

cost of the systemic and process

requirements that would have to be

changed and put in place for a very

small population when compared to the

population of all employers far

outweigh any benefit.

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158

8. The National Taxpayer

Advocate recommends

assuming the

responsibility to notify

affected taxpayers when

the IRS becomes aware

of a defunct third party

payer.

The IRS had already identified this

problem and had developed a plan to

continue to work through outreach and

education to encourage employers to

use reputable TPPs enrolled in and

using EFTPS. The IRS also

encourages employers using TPPs to

verify and confirm timely deposits by

utilizing EFTPS. However, if the

employer is unable to sign up for

EFTPS, the same information is

available to the employer by calling the

toll-free number.

The IRS had developed a plan to

enhance the Early Warning Report to

provide information that is more

accurate and reliable in clearly and

promptly identifying employers who

have outstanding balances. However,

given that the total population of

defunct TPPs is unknown, the IRS

would not have a means to ensure full

compliance with this recommendation.

Additionally, the disclosure issues

inherent in this recommendation would

need to be resolved, or the action

would be prohibited by law.

Assuming this recommended

responsibility and attempting to work

out disclosure issues even for those

that come to the attention of IRS would

require major cost for what would be a

very small population.

IRS Addressed NTA Recommendation IRS Response

Yes/No

TAS Assessment

Date

9. The National Taxpayer

Advocate recommends

establishing procedures

for prompt identification

and notification of

affected employers in

cases involving third

party payer failures.

The IRS had already identified this

problem and developed a plan to

resolve the problem by working to

enhance the Early Warning Report to

provide information that is more

accurate and reliable in clearly and

promptly identifying employers who

have outstanding balances. We are

consistently exploring available

avenues to monitor Federal Tax

Deposits (FTDs) of previously

compliant taxpayers.

However, given that the total

population of defunct TPPs is

unknown, the IRS would not have a

means to ensure full compliance with

this recommendation.

Additionally, the disclosure issues

inherent in this recommendation would

need to be resolved, or the action

would be prohibited by law.

Assuming this recommended

responsibility and attempting to work

out disclosure issues even for those

that come to the attention of IRS would

require major cost for what would be a

very small population.

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10. The National Taxpayer

Advocate recommends

establishing uniform

guidance for using

effective tax

administration offers in

compromise to relieve

affected employers –

victims of third party

payer failures.

The IRS had already identified and

resolved this problem. Guidance for

using effective tax administration offers

in compromise for victims of third party

payer failures was distributed in

December 2007. Additionally, the form

656 (rev 02/2007) was rewritten to

clarify the definition of an ETA offer and

when an ETA offer would be

appropriate. ETA offers are also

discussed on IRS.gov.

Yes 11/24/08

11. The National Taxpayer

Advocate recommends

temporarily suspending

collection of the accounts

of affected employers to

provide them a sufficient

opportunity to explore

payment alternatives.

The IRS had already identified this

problem and resolved it by

acknowledging that the employees

currently have the authority and

discretion to suspend collection on a

case based on the unique facts and

circumstances of each individual case.

Third party payer situations are

addressed based on the unique facts

and circumstances of the case

involved. Each Collection Field Area

has a designated central point of

contact to ensure consistent treatment

of cases with similar circumstances.

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12. The National Taxpayer

Advocate recommends

developing “global”

remedies for situations

where large numbers of

taxpayers share common

facts, to ensure a

common starting point for

relief, regardless of

where the case is worked

in the IRS.

The IRS had already identified this

problem and had developed a plan to

resolve the problem. While a

coordinated approach would be

preferred, it is not an available remedy

for all situations based on the

distinctions of each case and the

nature of the TPP role. This approach

has worked favorably in some

instances and the IRS will continue to

explore the use of a coordinated

approach where situations warrant.

IRM guidance will be provided to

ensure appropriate and consistent

treatment of taxpayers whose accounts

were not handled correctly by TPPs.

161

2007 ARC – MSP Topic #23 – EMPLOYMENT TAX TREATMENT OF HOME CARE SERVICE RECIPIENTS

Problem

Many elderly and disabled individuals receive home care and support services administered through a variety of state and

local government health and welfare programs. Often, elderly and disabled home care service recipients (HCSRs) who

participate in these programs fall into the category of common law employers, and they are required to apply highly

technical and complex employment tax rules to determine their employer tax status and responsibilities. Elderly and

disabled HCSRs can suffer substantial financial hardships when state and local government agencies contract out

program responsibilities, including payroll functions, to intermediary service organizations (ISOs) that fail to properly

report, file, and pay employment taxes. As a result, the elderly and disabled HCSRs – as the common law employers –

remain liable for the tax, interest, and penalties. The National Taxpayer Advocate proposes a legislative change and a

series of administrative steps that, if adopted, will complement and bolster the actions taken by the IRS to significantly

mitigate the problems affecting HCSRs and minimize the downstream impact of ISO failures on elderly and disabled

individuals.

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IRS Addressed NTA Recommendation IRS Response

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TAS Assessment

1. The National Taxpayer

Advocate recommends

that the IRS take the

following actions to help

elderly and disabled

home care service

recipients (HCSRs) and

their agents to better

understand employment

tax responsibilities and

minimize the

downstream impact of

intermediary service

organization (ISO)

failures on elderly and

disabled individuals:

Issue a Collection Policy

statement to indefinitely

suspend assessment

and collection of

employment tax from

elderly and disabled

HCSRs resulting from

ISO defaults, while

actively pursuing

collection of the unpaid

employment tax liability

from the ISOs that are

jointly and severally

liable under IRC § 3504.

The IRS had already identified this

problem and worked closely with TAS

and other stakeholders to develop a

plan to resolve the problem as well the

cases resulting from this issue. To that

end, in September 2006, Collection

Policy issued a memorandum to its

field offices alerting Collection

personnel to the issues surrounding

HCSW (home care service workers)

and HCSR (home care service

recipients) and advising them to “stop

collection activity until you determine

the facts and circumstances of the

case, and whether or not collection

activity is appropriate.” The

memorandum also urged employees to

“use the utmost caution and discretion

on these accounts to determine the

validity of the liability before taking

action to secure returns or payment.”

Collection continues to work with TAS

and Office of Taxpayer Burden

Reduction to identify HCSR cases that

may need corrective action or

suspense on the account.

Yes 11/24/08

2. The National Taxpayer

Advocate recommends

that the IRS develop

The IRS has identified this problem and

developed a plan to resolve the

problem through the Home Health Care

Yes

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analytical materials that

can be used to analyze

facts in a given HCSR

case and determine

whether an employer-

employee relationship

exists, based upon

grouping relevant facts

and circumstances

attributable to the HCSR

- home care service

worker (HCSW)

relationships.

Service Recipient (HHCSR) Team. A

cross functional team was established

to address issues related to Home

Health Care Service Recipients

(HHCSR) and the team will consider

the NTA recommendations. The team

will address systemic issues that may

cause unwarranted notices on

accounts as well as aggregate FUTA

issues.

However, absent legislative change,

we are bound to current law as to the

application of the common law test,

which provides us with the relevant

facts and circumstances in making

these determinations. The common

law test applies factors to ascertain

whether the HCSR has the right to

direct and control the HCSW. The

common law test is not unique to in

HCSRs and HCSWs; it applies to all

taxpayers. The IRS does not have the

authority to deem a party in any

employment situation to be the

common law employer. The particular

facts of each employment relationship

must be examined in order to reach a

conclusion about whether an employer

and employee relationship exists. In

addition, section 530 of the Revenue

Act of 1978 precludes the IRS from

issuing revenue rulings or regulations

on employment status.

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3. The National Taxpayer

Advocate recommends

that the IRS proactively

develop outreach and

educational materials for

the home health care

industry.

The IRS has identified this problem and

developed a plan to resolve the

problem through the Home Health Care

Service Recipient (HHCSR) Team. A

cross functional team was established

to develop outreach and educational

materials, including enhanced web site

information, concerning issues related

to Home Health Care Service

Recipients (HHCSR).

Yes

165

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TAS Assessment

Date

4. The National Taxpayer

Advocate recommends

that the IRS simplify its

processes for state and

local agencies managing

welfare-funded home

care programs for

HCSRs and develop

uniform and mandatory

third party application

and filing guidelines for

use by IRS campuses

across the country.

The IRS has identified this problem and

developed a plan to resolve the

problem through the Home Health Care

Service Recipient (HHCSR) Team.

The IRS agrees that HCSR processes

should be simplified and uniformly

applied by all governmental agencies.

Contacts are currently being made with

State and other governmental agencies

to discuss mandatory or uniform

guidelines concerning HCSR

programs. The variation in program

operation across the fifty states (e.g.,

who has discretion to select the

individual who will be the HCSW, who

has discretion to prescribe the tasks to

be performed and the way they should

be performed, who controls the bank

account from which the HCSW is paid,

who can exercise discretion on the

HCSR’s behalf if the HCSR is not

capable of communicating for him or

herself), may produce different

answers under different programs. To

provide some assistance with the

reporting and payment of employment

taxes where the HCSR is determined

to be the common law employer, the

Service has proposed guidance (Notice

2003-70) on how a third party, such as

an ISO, can be involved in the

reporting and payment of the

employment taxes.

Yes

166

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5. The National Taxpayer

Advocate recommends

that the IRS implement

appropriate computer

programming that can

currently determine

whether the correct

amount of taxes is

reported and paid by the

ISO on behalf of the

HCSRs and link the

accounts of the HCSRs

and the ISO for Forms

2678 filed prior to

January 1, 2007.

The IRS had already identified this

problem and is working on a resolution.

SB/SE Specialty Employment Tax is

developing a schedule, which will link

the related clients of the fiscal agents

and provide an allocation of the tax

liability for the aggregate Form 941

return. All anticipated activities

including processing and programming

activities are expected to be completed

by Jan 2010. Once implemented, all

clients will be identified by agent and

resubmission of Form 2678s prior to

2006 should not be necessary.

Yes

167

2007 ARC – MSP Topic #24 – OFFERS IN COMPROMISE

Problem

The IRS’s Offer in Compromise (OIC) program is no longer being used to any significant extent as a viable collection

alternative. Between FY 2001 and FY 2007, offer receipts declined by 63 percent and the number of accepted offers

declined by 70 percent. The National Taxpayer Advocate believes that the long-term success of the OIC program is best

served by maximizing the number of cases in which the IRS is able to complete the investigation and make a decision to

accept or reject the offer on its merits. However, for the IRS to achieve its policy goals and reap the benefits of a

successful OIC program, it must first minimize the extent to which policies intended to deter taxpayers from submitting

incomplete or unrealistic offers do not also discourage taxpayers from submitting good ones. In order to do so, the

National Taxpayer Advocate recommends the IRS ensure all IRS Collection employees can identify when accepting an

OIC is a “win-win” situation for taxpayers and the government. Moreover, the IRS should revitalize its OIC outreach efforts

to taxpayers and practitioners to better assist them with the submission of reasonable and appropriate offers. The key to

success of the OIC program is to identify those taxpayers for whom an offer is an appropriate collection alternative and

ensure they are aware of the OIC process and do not face unreasonable barriers in the submission of an offer.

IRS Addressed NTA Recommendation IRS Response

Yes/No Date

TAS Assessment

1. The National Taxpayer

Advocate recommends

that the IRS provide

taxpayers with the right

to appeal to the IRS

Appeals function the

IRS’s decision to return

an Offer in Compromise

(OIC) before or after

accepting it for

processing. The IRS

could use the existing

Collection Appeals

Process, which allows it

to review appeals in just

five days. The IRS

should also conduct a

comprehensive review of

The return procedures that are

currently in the IRM are necessary to

ensure that valuable resources are not

expended working cases in which

taxpayers do not respond to requests

for information or are not in compliance

with current filing or deposit

requirements. Collection and Appeals

agree that it will benefit neither the

taxpayer nor the IRS to send a case to

Appeals that has not progressed to the

point that a resolution can be reached.

Current procedures provide taxpayers

with an opportunity to have a return

decision reconsidered.

The not-processable rate has declined

from 26% in FY 06 to 19% in FY 07

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OICs that were returned

as both not processable

and processable to

ensure employees are in

fact making the correct

decision.

and is currently at 10%. We believe

that our revised processability criteria

implemented in July 2006 are effective

and guide employees in making correct

decisions. These decisions are

reviewed by management during the

course of normal employee work

reviews.

We are diligent in conducting reviews

of return dispositions. Group

managers are required to approve the

majority of return decisions. Returned

offers are already included in our

operational reviews of the program. In

addition, a TIGTA review of returned

offers found the returns they reviewed

to be appropriate.

2. The National Taxpayer

Advocate recommends

that the IRS give

taxpayers credit for Tax

Increase Prevention &

Reconciliation Act of

2005 (TIPRA) payments

associated with prior

offers returned, rejected,

or withdrawn within the

preceding 24 month

period on the basis that

the new offer should

really be regarded as

part of the same debt

resolution process.

We are currently working with IRS

Counsel on issuance of the OIC TIPRA

regulations and to determine what

period is appropriate, if any, to give

credit for prior payments.

Yes

169

IRS Addressed NTA Recommendation IRS Response

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TAS Assessment

Date

3. The National Taxpayer

Advocate recommends

that the IRS revitalize its

OIC outreach efforts to

taxpayers and

practitioners and to

better assist them with

the submission of "good"

or reasonable and

appropriate offers and

clearly state that OICs

are an acceptable

collection alternative.

Additionally, the IRS

should ensure that low

income taxpayers are

made more fully aware

that they are exempt

from the $150 OIC user

fee and TIPRA payment

requirements. We

strongly recommend that

the IRS partner with TAS

and the Low Income

Taxpayer Clinics, in

particular, to help convey

this important guidance.

The IRS should also

conduct a study to

determine why taxpayers

who qualify for the waiver

do not request it.

We maintain a strong commitment to

education and outreach and are

continuing our efforts to educate the

public and encourage the use of the

offer in compromise program as a

collection alternative. We believe that

outreach efforts, which have included

representatives from Low Income Tax

Clinics, such as our National Phone

Forums, external OIC SME

presentations, the media release

associated with the redesign of Form

656, Offer in Compromise, and OIC

information pages on IRS.gov have led

to a better understanding of the Offer in

Compromise Program.

Waiver submissions have increased

sharply since the implementation of the

new guidelines. As of February 2008,

the percentage of processable offer

receipts submitted with a Form 656-A

has increased to 31.6% as compared

to 6.8% in FY 2006. As evidenced by

the rapid increase in 656-A

submissions, we feel that our outreach

efforts are already effectively

communicating waiver eligibility and

TIPRA payment requirements to low

income taxpayers. However, as

opportunities arise, we will participate

in outreach efforts involving Low

Income Taxpayer Clinics, and ensure

understanding of all collection issues.

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4. The National Taxpayer

Advocate recommends

that the IRS ensure that

OIC training is a

mandatory topic in FY

2008 for all Collection

personnel responsible for

taxpayer contact (e.g.,

Revenue Officers and

ACS employees) to

heighten employee

awareness of OICs being

a "win-win" situation for

taxpayers and the

government, given the

appropriate set of

circumstances, and

partner with TAS to

develop such training.

Existing policy and procedures require

ACS employees and field employees to

be aware of and understand the OIC

process as well as its use as a

collection alternative. IRS collection

personnel, both Field and ACS, receive

OIC training in basic training as new

hires. In addition, information with

respect to offers in compromise is fully

detailed in IRM 5.8 and IRM 5.19.

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5. The National Taxpayer

Advocate recommends

that the IRS issue

guidance that includes

several realistic

examples of offer

resubmissions that are

not deemed solely to

delay collection.

IRS had already identified the need to

supply realistic examples, had already

updated the IRM to include these, and

had already sent the IRM through

clearance. These IRM changes had

been discussed with TAS. We have

revised the language in IRM 5.8.3.19 to

provide more clarity. IRM 5.8.3.19.1

lists specific instances when an offer

would be considered materially

different and therefore would not

qualify for return as solely to delay, and

IRM 5.8.3.19 outlines two instances

when return as solely to delay would be

inappropriate. We feel that these

references along with the examples of

when returning due to solely to delay

would be appropriate adequately

address this issue. Only a small

number of offers have been returned

under the solely to delay criterion, and

in fact the percent of offers disposed

due to solely to delay collection

accounted for only 1.7% of total offer

case dispositions in FY 05 and FY 06,

and was reduced to 1.3% in FY 07.

Yes 11/24/08

172

2007 ARC – MSP Topic #25 – INADEQUATE TRAINING AND COMMUNICATION REGARDING EFFECTIVE TAX

ADMINISTRATION OFFERS

Problem

Although the IRS has the ability to accept an OIC on the basis of “effective tax administration” (ETA), it has done very little

to educate the public or its employees about how or when it will use this authority. As a result, eligible taxpayers may not

be applying for OICs based on ETA, and IRS employees may not recognize situations when these offers are appropriate.

Thus, the IRS needs to do more to ensure that all collection employees know when an ETA offer may be a viable

collection alternative. The IRS also needs to conduct more in-depth external outreach to educate taxpayers and

practitioners about when the IRS will accept an ETA offer.

IRS Addressed NTA Recommendation IRS Response

Yes/No Date

TAS Assessment

1. The National Taxpayer

Advocate recommends

that the IRS update all

IRS internal guidance

(including the IRM) which

discusses available

collection options to

include a section on both

hardship and non-

hardship effective tax

administration (ETA)

offers. This is necessary

to ensure that all offer in

compromise (OIC) and

non-OIC employees

have the proper

guidance to assist them

with recognition of when

an ETA offer may be

appropriate. The

guidance should also

include a discussion of

economic hardship (per

The IRS has updated internal guidance

and the IRM with respect to both

hardship and non-hardship ETA offers.

IRM 5.8.11 was sent for clearance in

September 2007. We are still waiting

for the NTA to clear this document.

(Feedback was recently received and

is currently being reviewed.) In the

meantime, interim guidance has been

issued.

In addition, the form 656 (rev 02/2007)

was rewritten to clarify the definition of

an ETA offer and when an ETA offer

would be appropriate. ETA offers are

also discussed on IRS.gov.

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IRC § 6343).

Additionally, the IRS

should provide more

specific guidance and

examples of situations

where it is appropriate to

accept an ETA offer on

future revisions of Form

656 and the section of

the IRS website devoted

to OIC and ETA offers.

2. The National Taxpayer

Advocate recommends

that the IRS require all

IRS Collection

employees to consider

whether an ETA offer

might be an appropriate

collection alternative

before determining to

seize or recommending

foreclosure on a personal

residence.

An ETA offer is not appropriate in all

cases in which seizure or foreclosure is

considered. Current IRM 5.10 and

5.17 procedures already require

alternative collection remedies to be

thoroughly considered before

recommending seizure or foreclosure

on a personal residence.

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3. The National Taxpayer

Advocate recommends

that the IRS train all

Compliance, Counsel,

and Appeals personnel

to ensure they can

determine when it may

be appropriate for the

IRS to accept an ETA

offer or refer an offer to

the specialized ETA offer

group for further

analysis.

We are in the process of developing an

Articulate ETA training module that will

be a mandatory course for FY 2008 RO

CPE. The training module will be

shared with Appeals, Counsel, and

ACS contact employees. In addition,

the training module will be shared with

all OIC external presenters.

Yes

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TAS Assessment

Date

4. The National Taxpayer

Advocate recommends

that the IRS conduct

additional and more in-

depth external outreach

to better educate

taxpayers and

practitioners about when

the IRS will accept ETA

offers. It should focus

outreach on taxpayers

most likely to be eligible

for ETA offers, such as

delinquent taxpayers

whose tax deposits have

been embezzled by a

payroll service provider,

those located in areas

devastated by natural

disaster, and those who

are about to lose their

primary residence to

foreclosure.

We have developed an Articulate ETA

training course that will be shared with

the presenters who conduct outreach

presentations. In addition, an ETA

example will be added to the “notes”

section of the FY 2008 OIC Outreach

PowerPoint used by the OIC external

presenters.

Yes

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TAS Assessment

Date

5. The National Taxpayer

Advocate recommends

that the IRS ensure that

employees who answer

the phone when

taxpayers dial the toll-

free number listed in

Form 656 have the

training to provide the

necessary assistance to

taxpayers who may be

eligible for ETA offers.

We are in the process of developing an

Articulate ETA training module that will

be a mandatory course for FY 2008 RO

CPE. Additionally, this training module

will also be shared with all personnel

having taxpayer contact, including Toll

Free Assistors, Appeals, Counsel, ACS

contact employees and OIC external

presenters. COIC personnel received

ETA training when the ETA Non-

economic Hardship Memorandum was

issued in FY 2007. They will also

receive additional training during FY

2008 CPE.

Yes

177

2007 ARC – MSP Topic #26 – ASSESSMENT AND PROCESSING OF THE TRUST FUND RECOVERY PENALTY

(TFRP)

Problem

Employers are responsible for withholding and remitting to the IRS certain trust fund taxes, including income and Federal

Insurance Contributions Act (FICA) taxes from payments to employees, as well as certain federal excise taxes. When

these monies are not paid as required, the law provides for the assessment of a TFRP, which can have disastrous

economic consequences for those deemed to be responsible persons. However, the IRS has failed to consistently adhere

to its own quality standards for investigating these cases. Despite almost a decade of negative findings by the

Government Accountability Office (GAO), the IRS has yet to implement an effective or reliable system for the accounting

and application of payments, credits, and offsets. The National Taxpayer Advocate makes several recommendations

designed to improve the timeliness, fairness, and quality of the process.

IRS Addressed NTA Recommendation IRS Response

Yes/No Date

TAS Assessment

1. To supplement the

initiatives undertaken by

the IRS to address our

concerns, the National

Taxpayer Advocate

recommends that the

IRS, prior to

implementing any further

changes to the TFRP

process, should confer

with the National

Taxpayer Advocate and

other stakeholder

functions, such as the

Office of Taxpayer

Burden Reduction

(OTBR) to assess the

potential impact on

taxpayers. The IRS

should also consult

external stakeholder

IRS generally solicits stakeholder input

before any new initiative or significant

changes are implemented.

The Small Business/Self-Employed

Division's (SB/SE) Stakeholder Liaison

Headquarters' Task Force to Enhance

Small Business Outreach, with Service-

wide representation, also recently

recommended the development of a

five-year outreach strategic plan to

more effectively provide outreach and

education to the small business

community. This initiative already

covers stakeholder involvement and

TFRP will be included as a topic.

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Date

groups and partners to

ascertain their

perspective on the

change. This approach

would serve several

purposes:

• To determine if there is

a less intrusive

alternative;

• To leverage the

resources of the National

Taxpayer Advocate and

outreach functions such

as SB/SE

Communications, Liaison

& Disclosure to

communicate to external

stakeholders the "when,

how, and what" of the

change, and to offer

suggestions for dealing

with it in an effective and

efficient manner; and

• To determine

downstream workload

increases or impact on

both internal and external

customers.

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2. The National Taxpayer

Advocate recommends

that the 45-day period for

routing TFRP cases to

Appeals should be a

requirement, rather than

a suggested timeframe

and should be enforced.

There may be issues raised in a protest

that call for inquiries requiring longer

than 45 days to resolve. Managers

now receive reports and follow up on

TFRP cases not sent to appeals within

60 days of protest receipt.

3. The National Taxpayer

Advocate recommends

that any appeal that is

not forwarded within 60

calendar days should

undergo a mandatory

review and the reason for

the delay should be

documented.

IRM 5.7.6.1.6(4) (4/13/2006) already

requires case history documentation if

additional case development to resolve

a protest will exceed 45 days.

There may be issues raised in a protest

that call for inquiries requiring longer

than 60 calendar days to resolve.

Managers now receive reports and

follow up on TFRP cases not sent to

appeals within 60 days of protest

receipt.

4. The National Taxpayer

Advocate recommends

that revenue officers be

required to acknowledge

and begin processing a

request for an appeal

within ten business days.

IRM 5.7.6.1.6 (4/13/2006) already

requires revenue officers to “review the

(protest) request within 10 days of

receipt.”

Acknowledgement of the protest within

that time frame adds an unnecessary

step which could confuse taxpayers. A

separate acknowledgement is already

required when the revenue officer

either agrees with the protest (IRM

5.7.6.1.7(3) or (4)) or forwards it to

Appeals (IRM 5.7.6.1.8(1)c).

5. The National Taxpayer The temporary guidelines to input TC No

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Advocate recommends

that the IRS cease

inputting a freeze on the

SSN of the non-liable

spouse until computer or

systemic processes are

in place to monitor and

freeze only those refunds

that are due persons

filing joint tax returns.

Additionally, the

Computer Paragraph 44

(CP44), a generic notice

sent to taxpayers whose

refund has been or will

be frozen, should be

rewritten to contain

detailed and clear

instructions on how a

taxpayer can contest the

freeze and apply for

injured spouse relief

when the refund is due

from a jointly filed return.

A Form 8379, Injured

Spouse Allocation,

should be attached to the

notice CP44 and the

notice should list the

name and number of the

IRS employee who can

explain the process,

answer questions, and

appropriately address the

130 on the primary SSN of the non-

liable spouse of a person responsible

for the TFRP (in accordance with a

GAO recommendation) expired in

January 2008. In January 2008,

systemic IDRS programming took

effect that offset joint income tax

refunds to TFRP liabilities of the

secondary SSN on the tax return.

Because the offset is now systemic,

there is no CP44 generated and

therefore no need to re-write it relative

to TFRP cases. Additionally, if a non-

liable spouse files a separate return

and is due a refund, the refund is not

frozen for TFRP purposes and

therefore negates any need for a

review of these cases to release a

TFRP-related freeze.

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taxpayer’s concerns.

Most importantly, the IRS

should be prepared to

conduct an expedited

review of cases where

the non-liable spouse

has filed separately and

is due a refund, which

was frozen under the

new policy, in order to

release the freeze code

and have the refund

issued promptly. The IRS

should not rely on usual

freeze release

procedures, which could

delay the refund for eight

weeks or longer. We

must note that the non-

liable spouse who files

separately does not

qualify under injured

spouse provisions, which

are limited solely to

refunds arising from

jointly filed returns. The

National Taxpayer

Advocate is not

reassured that the review

process noted in the IRS

response will prove

effective or preclude the

expenditure of significant

resources by both the

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IRS and TAS, not to

mention the burden

imposed upon the

taxpayers.

6. The National Taxpayer

Advocate recommends

that the IRS update the

training provided to

revenue officers using

actual case examples,

provided by Appeals,

TAS, and the campuses,

which would reflect both

ideal and unacceptable

case actions. The

training should include a

specific discussion of the

impact on internal and

external stakeholders

when case actions are

not timely, appropriate,

or fail to meet minimum

quality standards. TAS

would support this effort

by reviewing the

proposed training

materials and offering

suggestions and

feedback.

The TFRP training material contained

in Revenue Officer Unit II Module G

was revised in February 2008 (prior to

this report). We believe the content

sufficiently addresses the issues raised

in this recommendation. In addition,

disclosure rules prevent use of actual

case examples in training material.

However, the TFRP Module G does

include some comprehensive case

studies to develop the students’ TFRP

abilities and foster specific discussions

of the impact on internal and external

stakeholders when case actions are

not timely, appropriate, or fail to meet

minimum quality standards.

Yes 11/24/08

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2007 ARC – Status Update Topic #27 – PRIVATE DEBT COLLECTION

Problem

The Private Debt Collection initiative is failing in most respects. It is not meeting revenue projections; its return on

investment is dismal; the private collection agencies (PCAs) are no better at locating or collecting tax liabilities than the

IRS itself; the IRS has failed to require the PCAs to disclose their taxpayer-related procedures to the public to the same

extent as the IRS, which shields the program from adequate congressional and public scrutiny; and the IRS is sending the

PCAs new cases (because the number of “easy” cases is smaller than projected) and these new cases may require the

exercise of discretion and judgment in collection matters that is appropriately the sole province of the IRS. For these

reasons, the National Taxpayer Advocate once again calls for the initiative’s repeal.

IRS Addressed NTA Recommendation IRS Response

Yes/No Date

TAS Assessment

1. The National Taxpayer

Advocate recommends

that the IRS include a

provision in the new or

extended Private

Collection Agency (PCA)

contract that requires

PCAs to disclose all

materials that impact

taxpayers and their

contacts with PCAs,

including instructions to

staff, the content and

format of taxpayer

letters, and calling

scripts.

Modifications were incorporated into

the task orders signed by the PCAs in

February 2008 that require disclosure

of all materials to the IRS. Specifically,

the language incorporated states “the

Government shall be afforded full, free,

and uninhibited access to all facilities,

installations, technical capabilities,

operations, documentation, records,

and data bases…”.

The information from the PCA is

shared within the IRS on an as needed

basis. Even with the full disclosure to

the IRS, there is still some information

that the IRS Counsel has deemed

proprietary and, as such, cannot be

shared with the general public.

However, proprietary information has

been, and will continue to be, shared

with TAS for review and comment.

Yes 10/1/08

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2. The National Taxpayer

Advocate recommends

that the IRS recall

taxpayer cases that were

placed with the PCAs at

the inception of the

initiative so the IRS can

conduct an analysis of

the PCAs’ success in

locating taxpayers and

collecting tax liabilities.

These cases should be

analyzed by a variety of

key measures, such as

cycle time for account

resolution, the timeliness

of taxpayer contacts, and

others used by the IRS to

measure the

performance of the

Automated Collection

System (ACS), which will

result in a better picture

of the PCAs’

performance.

Cases that were placed with the PCAs

at program inception will begin to be

recalled in November 2008. The IRS

will review metrics for these cases

similar to those used to measure

performance in other areas of the IRS.

Because the IRS does not work these

cases currently and the procedures

and tools available to ACS and the

PCAs are different, comparisons

between ACS and PCA performance

would be inappropriate and potentially

misleading.

Yes

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3. The National Taxpayer

Advocate recommends

that the IRS require the

PCA calling scripts to

inform taxpayers, after

their identity has been

authenticated, about their

right to opt out of the

Private Debt Collection

(PDC) initiative.

At the request of TAS, opt out

language was added to the PCA initial

contact letters and the language was

strengthened in the IRS initial contact

letter. In addition to these two

modifications, the IRS also published

the opt out provisions on an irs.gov

webpage geared towards taxpayers

that have had their account placed with

a PCA. We will continue to explore

ways to ensure taxpayers are aware of

their opt-out rights. It should be noted

that PCA procedures are in place so

that if taxpayers request to opt out of

the program, they receive the

information necessary to enable them

move forward with opting out of the

program.

4. The National Taxpayer

Advocate recommends

that the IRS add a

component to the Cost

Effectiveness Study test

that limits the IRS test

group’s authority to use

its enforcement powers

in order to determine

whether IRS employees

would be more effective

than PCA employees in

collecting outstanding

tax.

The data collection phase of the Cost

Effectiveness Study has been

completed, so it is not feasible to

incorporate this recommendation into

the parameters of the study. The Cost

Effectiveness Study report is scheduled

to be released in November 2008 and

TAS has been an active participant in

the working group formed to perform

the study and analyze results.

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2007 ARC – Status Update Topic #28 – IRS COLLECTION STRATEGY

Problem

The National Taxpayer Advocate has continually urged the IRS to employ a collection strategy that effectively and

efficiently balances the goals of tax collection, taxpayer service, and tax compliance. We are mindful of the difficulties the

IRS faces when carrying out its collection strategy and properly administering the tax system, which requires a delicate

balance between customer service and enforcement. Although the IRS’s collection strategy has improved over the past

year, significant work remains to be done. We continue to believe that more emphasis by the IRS on providing timely

service to taxpayers with tax delinquency problems and employing more flexibility in the use of available collection

payment alternatives (e.g., installment agreements, partial payment installment agreements, and OICs), are necessary to

deliver an effective, balanced, and service-oriented program. By better understanding the needs of taxpayers and its own

employees, the IRS can make significant headway toward fostering voluntary compliance and achieving maximum

revenue.

IRS Addressed NTA Recommendation IRS Response

Yes/No Date

TAS Assessment

1. The National Taxpayer

Advocate recommends

that the IRS continue to

explore methods to

better prioritize and

assign collection cases,

fully recognizing the

impact of elapsed time

on collectibility and

taxpayer service. The

IRS should brief TAS on

these efforts and invite

TAS to participate.

The Collection program is currently

flexible in its design and allows for

targeted shifts in inventory to meet

defined objectives of civil enforcement

provisions. Collection leadership has

an on-going practice of discussion and

analysis regarding case prioritization

and assignment, and initiates

adjustments where necessary.

Delinquent taxpayers have the

opportunity to self-correct during the

initial notice stream; those that do not

are then subject to receive more

intense collection activity.

This activity is prefaced by the

Inventory Delivery System (IDS) which

employs decision analytics and the use

of predictive models to help determine

the best treatment stream for the

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delinquency. Risk categories identify

case attributes that represent current

operational priorities and account for

issues that pose greater risk to overall

voluntary compliance. We recognize

that an increase in elapsed time on

assessments may decrease

collectibility, and age is a primary factor

in our assignment processes. IDS

ensures a high degree of efficiency in

routing cases to the operation which is

likely to be the most effective in

handling them.

Collection is currently developing

enhanced analytical models for use in

the IDS and leveraging a customized

rules-based engine to further increase

the efficiency of routing collection work

at the Enterprise level. Additionally,

Collection is studying the feasibility of

applying IDS analytics to delinquencies

during the notice stream (versus after),

which will provide an opportunity for

earlier involvement to more effectively

deal with delinquent taxpayers who are

unlikely to self-correct through the

notice process.

Collection has in the past, and will

continue to, brief TAS on significant

procedural changes and invite TAS to

participate on teams established to

explore issues such as early

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intervention. Five such teams are

currently in process and include TAS

representation.

2. The National Taxpayer

Advocate recommends

that the IRS tailor the

delivery of collection

inventory to recognize

the differing needs and

characteristics of

different types of

taxpayer cases. The IRS

should conduct studies,

with the involvement of

TAS, to identify

opportunities to expedite

personal contacts, where

it is evident such actions

will achieve mutually

successful resolutions.

The Inventory Delivery System (IDS)

employs decision analytics and the use

of predictive models to help determine

the best treatment stream for the

delinquency. IDS ensures a high

degree of efficiency in routing cases to

the operation which is likely to be the

most effective in handling them.

Risk categories identify case attributes

that represent current operational

priorities and account for issues that

pose greater risk to overall voluntary.

Compliance risk level methodology

accounts for type of tax and entity, age

of delinquency, and dollar value or

potential dollar value. Collection is

currently enhancing the analytical

models for use in the IDS and

leveraging a customized rules-based

engine to further increase the efficiency

of routing collection work at the

Enterprise level.

IRS is also studying the feasibility of

applying IDS analytics to delinquencies

during the notice stream (versus after),

which will provide an opportunity for

earlier involvement to more effectively

deal with delinquent taxpayers who are

unlikely to self-correct through the

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notice process. We are also currently

working with TAS to identify treatment

streams, such as early intervention

techniques, that could help

successfully resolve delinquencies

earlier in the collection process.

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3. The National Taxpayer

Advocate recommends

that the IRS move

forward with its revision

or development of

program measures that

accurately reflect the true

age of its accounts

receivables. These

measures should reflect

the age of collection

accounts from the

taxpayer’s perspective,

i.e., the due date of the

tax return.

We have seen a decline for the third

year in a row of our total unpaid

assessments over four years old, and

the percentage of inventory we are

working which is less than two years

old has continued to increase. These

results show that we continue to focus

on the currency of our inventory.

Our current program measures

regarding age are designed to identify

aging trends at each point in the

Collection workstream, and have

served very well to identify both

positive and negative operational

trends regarding aging of cases.

Case age is a regular focus for all

levels of management and operational

trends are addressed as warranted.

Because a tax return does not legally

become an account receivable until it is

assessed and unpaid, whether it’s an

initial assessment or an audit

assessment, use of the due date of the

tax return in an aging measure for

accounts receivable would not be

appropriate. However, we will

determine the feasibility of

developing a Collection end-to-end

enterprise-wide measure of age for

Collection balance-due cases based

on the date of assessment.

Yes

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4. The National Taxpayer

Advocate recommends

that the IRS continue to

assess and revise its

current policies regarding

the use of collection

payment alternatives,

i.e., installment

agreements, partial

payment installment

agreements, and offers

in compromise. The IRS

should set clear policy

guidance, as follows: In

instances involving

taxpayers seeking to

resolve tax

delinquencies, the IRS

should approve a

payment option that is

reasonable and realistic.

TAS will continue its

involvement in any task

groups or studies that

address IRS collection

payment alternatives.

Collection offers reasonable and

realistic payment alternatives and

works with taxpayers who need to

resolve tax delinquencies. While it is

clear that demand has decreased in

the offer in compromise program, our

data reflects that there has been a ten

times greater increase in the use of

collection alternatives than the

decrease in offers. Partial payment

installment agreements entered into in

FY2007 were about double the number

granted in FY2006. This trend

indicates that we are reaching

resolution for a greater number of

taxpayers. The total number of

installment agreements entered into by

the Service has continued to increase

year-over-year, and has more than

offset the decline in accepted offers in

compromise. Thus, use of collection

payment alternatives continues to

increase and is trending toward more

of those agreements providing for full

payment. We believe that this is a very

positive trend for both taxpayers and

the Government. However, we are

currently working with TAS to study

possible enhancements for payment

alternatives.

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5. The National Taxpayer

Advocate recommends

that the IRS continue to

revise the Allowable

Living Expense (ALE)

standards. TAS has

committed to partner with

the IRS in this venture

and recommends that

the IRS solicit the input

of external stakeholders,

particularly Low Income

Taxpayer Clinics (LITCs),

for future changes.

The latest revisions to the allowable

living expense standards reflect

significant improvements in both the

accuracy and fairness of the standards.

In particular, the changes resulted in

higher allowances for many low-income

taxpayers and taxpayers with larger

households.

We do not agree that the standards are

a barrier to case resolution. In more

than 95% of agreements reached with

taxpayers, the standards are not

applicable because the Service and

taxpayers are able to reach agreement

without the need for in-depth financial

analysis. Where the standards are

applied, our experience and reviews

have shown that employees deviate

from the standards when appropriate.

We have invited stakeholders,

including representatives from Low

Income Tax Clinics, to provide

examples of situations in which

deviation from the standards should be

considered and will take these

examples into account when revising

the IRM. We are currently working with

TAS and Research to continue to

improve both the standards and their

application.

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6. The National Taxpayer

Advocate recommends

that the IRS remove the

"solely to delay

collection" standard from

all collection decisions,

and instead implement

the "delay or impede tax

administration standard"

that Congress enacted in

26 USC §

6702(b)(2)(A)(ii).

Nonetheless, whatever

criterion it adopts, the

IRS must provide clear

guidance that

encourages taxpayers to

resolve their outstanding

tax debts and avoid

potential rejections and

sanctions.

The authority to return offers in

compromise or proposed installment

agreements submitted solely to delay

collection is intended to be used with

discretion. In FY 2007, offers returned

as solely to delay collection accounted

for only 3 percent of all return

dispositions, and 1 percent of total offer

case dispositions. Offers returned for

this reason require the manager’s

concurrence and signature.

Examples of situations where returning

an offer as solely to delay collection is

appropriate are included in IRM and

available to IRS employees for use as

guidance when making a determination

to return a case as solely to delay

collection.

We recently revised the language in

the IRM to provide more clarity.

Guidance issued does encourage

taxpayers to resolve their tax

delinquencies at the earliest possible

time and specifies the steps that must

be taken to avoid rejections.

7. The National Taxpayer

Advocate recommends

that the IRS devise

measures to track the

number of installment

agreement (IA) proposals

There is no indication that large

numbers of installment agreements are

being declined on the basis of solely to

delay collection. Collection does not

have and has not received data or

anecdotal information from any part of

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that it denies under its

solely to delay collection

criteria. A possible

solution would be to

consider the input of a

transaction code to IRS

computer systems when

the IRS denies an IA for

this reason, similar to the

situation in which a

taxpayer requests an

abatement of a penalty

and the IRS employee

denies such abatement.

Grant administrative

appeal rights to allow

taxpayers to contest

determinations of

installment agreements

deemed to be submitted

as solely to delay

collection, offers returned

for any reason (including

solely to delay

collection), as well as

IRS penalty

assessments.

the IRS or from TAS reflecting that

“solely to delay” determinations

regarding IAs are being made in any

significant numbers or being made

imprudently.

If an IA request is denied due to “solely

to delay” collection, the taxpayer has

the right to appeal to the manager, to

request an appeal to a resulting levy

action, or to contact the Taxpayer

Advocate. These options are clearly

laid out in IRM 5.14.3.2.

Because an IA submitted solely to

delay collection is not a legitimate

proposal to resolve the account, the

taxpayer is not entitled to an

independent review (other than the

manager) or a CAP appeal.

Offers disposed due to solely to delay

collection accounted for only 1.7% of

total offer case dispositions in FY 05

and FY 06, and was reduced to 1.3% in

FY 07. Because it is clear that the

solely to delay standard is used only

with discretion, an additional tracking

measure is not warranted. Proposed

case resolutions can change a number

of times according to case facts as they

are uncovered. The actual resolution is

the appropriate datum to track, and

which the IRS does track.

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Concerning the issue of appeal rights

for OICs, the majority of returns on

otherwise processable offers are made

because the taxpayer failed to submit

the information that is necessary to

properly evaluate the OIC in a timely

manner or because the taxpayer is not

currently in compliance with filing or

payment requirements. It will benefit

neither the taxpayer nor the IRS to

send a case to Appeals that has not

progressed to the point that a

resolution can be reached. We believe

that the currently established

procedures to reconsider such

decisions are adequate. However, as

part of a recently established working

group that includes representatives of

TAS, we have committed to

reexamining OIC return procedures to

ensure that adequate safeguards are in

place, along with a number of other

Collection program issues.

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2007 ARC – Status Update Topic #29 – QUESTIONABLE REFUND PROGRAM

Problem

The IRS established the Questionable Refund Program (QRP) in 1977 to prevent the payout of false refund claims.

Historically and presently, the IRS’s Criminal Investigation (CI) function has managed the program, though the vast

majority of the work is civil. In the 2005 Annual Report, the National Taxpayer Advocate identified the QRP as the second

most serious problem facing taxpayers, and documented fundamental flaws with the program. While CI and the IRS

responded with improvements, QRP cases still rank among the top five reasons that taxpayers seek TAS assistance. The

National Taxpayer Advocate recommends that the IRS expeditiously transfer oversight of the program to the civil side of

the IRS and further reduce the volume of legitimate taxpayer refunds that the QRP inappropriately delays. In an effort to

further improve the program, CI and the IRS have agreed to support a TAS study in 2008 to determine whether refund

claims that the QRP concluded were false were correctly decided.

IRS Addressed NTA Recommendation IRS Response

Yes/No Date

TAS Assessment

1. The National Taxpayer

Advocate recommends

that the IRS

expeditiously transfer

primary responsibility for

the Questionable Refund

Program (QRP) to the

Pre-Refund Program

Office (PRPO). The

PRPO should implement

a distribution system to

refer cases to the

appropriate pre-refund

compliance operations

for resolution. CI should

remain involved, but its

emphasis should be

limited to criminal

matters and schemes.

During the past year, IRS Criminal

Investigation and the Wage and

Investment Operating Division have

collaborated to address the long-term

concerns about the Questionable

Refund Program (QRP). To achieve

the goals of the new Pre-Refund

Program (PRP), the IRS established

three important initiatives to identify

enterprise-wide improvements. These

initiatives evolved into separate task

force teams (Fraud Detection Center

(FDC) Transition Team; the Refund

Crimes Concept of Operations

(CONOPS) team and the Pre-Refund

Program CONOPS team) which

worked in concert to identify enterprise-

wide needed improvements.

The FDC Transition Team studied the

FDC processes to identify work

Yes

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currently residing within the FDCs that

could be realigned to W&I. The

ultimate goal of this study is to

determine which work and associated

resources could move to W&I during

FY 2010, allowing FDC personnel to

refocus on criminal scheme

development and supporting ongoing

criminal investigations.

The Refund Crimes and PRP

CONOPS Teams have focused on a

3-5 year vision of future operations for

their respective offices. Criminal

Investigation Refund Crimes will

refocus its mission on criminal scheme

development and field support for high

impact criminal tax and related financial

investigations. The PRPO will be

responsible for the development of an

enterprise vision and strategy for IRS

pre-refund activities.

The PRP CONOPS developed a PRP

lifecycle that features 3 phases

(detection, prevention and resolution)

and a program management function:

The program management function is

the coordinating body that handles the

strategic planning, research and policy,

and internal and external

communications activities of the PRP.

The detection phase identifies improper

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refund returns and ensures the timely

release of legitimate refunds. Once

improper returns are identified, the

resolution phase enables disposition of

the case based on the issues detected.

The resolution phase will utilize a suite

of systemic and resource driven

treatments to increase the number of

cases that can be worked; it will

expand treatments options to balance

workload and resource capacity,

propose treatment options that focus

on data-matching and eliminate hand-

offs, enhance taxpayer

communications by allowing

transparency throughout the resolution

process, and supports improvement of

future pre-refund activities through the

capture of outcomes and performance.

The prevention phase seeks to

eliminate the improper refund returns

before they begin.

In May 2008, the co-chairs of the FDC

Transition Team and the executive

leadership of CI and W&I briefed the

IRS Deputy Commissioner on the

team’s recommendations for realigning

certain FDC work processes to W&I.

Their specific recommendations

included aligning to W&I Accounts

Management (AM):

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• Scanning and Verification

• Operation Assistance Requests

• Form 4442 Inquiry Referrals

• ID Theft Adjustments

All parties including the IRS Deputy

Commissioner agreed in principle with

the team’s recommendations, the IRS

corporate decision was to defer making

any final decision on how or when to

realign this work until after the 2009

filing season. The decision was

deferred for several reasons, but

primarily because W&I is currently

facing some tremendous challenges

resulting from the 2008 filing season,

and expects these to continue into the

2009 filing season.

2. The National Taxpayer

Advocate recommends

that the IRS reduce the

automatic refund

resequencing of 14 days

(two Integrated Data

Retrieval System (IDRS)

processing cycles) to

seven days (one IDRS

processing cycle). The

IRS must also ensure

that it notifies all

taxpayers of refunds that

it freezes beyond the

initial resequencing

period.

EFDS generates a Transaction 971

action code 052 to resequence the

posting of returns that meet the CI

workload and resequencing tolerances.

This is necessary to give CI Analysts

time to screen all refund returns to

identify potentially fraudulent refunds.

In November 2004, a Request for

Information Services (RIS) was

submitted to request that the current

resequencing timeframe of 1 cycle (7

days) associated with the CI TC 971

AC052 is extended to 2 cycles (14

days).

At that time, it was expected that the

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benefit of extending the resequencing

to 2 cycles would increase the false

refund deletion rates which at that time

was 71%.

In 2005, the deletion rate was 77.87%

to include, 132,945 .Returns Identified,

103,537 Returns Deleted for a deletion

rate of 77.87%

In 2007, the deletion rate increased

slightly to 78.99% to include 240.406

Returns Identified, 189,915 Returns

Deleted for a deletion rate of 78.99%.

As of 5/27/08, the deletion rate

increased to 83.37% to include

228,693 Returns Identified, 190,673

Returns Deleted for a Deletion Rate of

83.37%.

Current Verification statistics indicate

that the 2 cycle resequencing has also

helped to improve other processes.

The number of income documents sent

to verification has increased as well as

the number of income document

verifications completed. Additionally, it

should be noted that the percentage of

fraudulent income documents

completed has increased 35% since

2005.

CI currently verifies the return as a

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legitimate claim or as a “potentially

fraudulent” claim within 14 days. On

average, 70% are verified within the

initial resequencing period. CI

completes 89% of all verifications

within 35 days.

Workload Volumes- Resequenced

returns are delayed for a period of two

weeks but not all of these returns were

held for further verification. The

numbers have decreased over the past

few years and resequenced returns

affect a very small percentage of the

population of filers. Per IRS Statistics

there were 78,795,000 returns filed as

of 3/27/08. The resequencing process

has affected only .33% of the filing

population (less than ½ of 1%).

• 2002-1,942,089

• 2003-740,216

• 2004-463,222

• 2005-512,297

• 2006-0

• 2007-506,797

• 2008-266,975 (3/30/08)

EIC- The number of EIC filers affected

by Refund Crimes processes has also

decreased. In 2004, the percentage of

fraudulent returns with EIC was

53.84%

In 2005, the percentage increased to

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57.75% However; in 2007 this

percentage decreased to 37.71% and

is currently at 39.77%.

The FDC’s provides written

notifications as follows:

CP05 when the following occurs was

implemented in cycle 200611:

• A return unposts due to an

existing prior year CI freeze

(TC916/918)

• The FDC inputs a P or Z-

Freeze

This notification informs the taxpayer

that the refund is being held for further

review. This notice will generate

through an automatic process done

through master file programming.

The notice also informs the taxpayer

that if they do not hear from the IRS in

three weeks and/or receive their refund

that they may call Customer Service.

The FDC will also issue CP05A

notifications. This notification was

implemented in the processing year

2007 and will automatically generate a

notice from master file. This file will be

extracted through a WMS query and

will be placed on a server for automatic

notice generation. This notice will be

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issued to all filers when their return is

verified false and has been added to

STARS. TheCP05A notice replaces

the FDC requirement to send a 4115C

letter to all returns being referred to

AM, except when multiple documents

are involved. In this case, the

Memphis FDC will issue Letter 4115C

Letter 4115C (Withholding Verification

Request) will be issued to all taxpayers

whose returns will be forwarded to AM

(only in the instance described above

involving multiple documents).

CI is confident that the 14 day

resequencing will have a minimal effect

on the overall population of taxpayers.

The FDC’s have diligently worked to

improve their automation processes,

thereby improving their overall

efficiency and effectiveness.

Consequently, there was an efficiency

improvement of 59% in the workload

transfer process from Processing Year

2007 to Processing Year 2008. Below

is a summary of other significant

results:

• Identified 126,224 potentially

fraudulent claims that were

forwarded to AM and

Examination for civil disposition.

Average fraudulent claim

detected was $5,530

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• Using EFDS, identified more

than 132,000 potentially

fraudulent returns claiming

more than $711 million in

refunds. Stopped over $630

million in fraudulent claims.

• Efficiency improvement of 16%

in verification due to

centralization of processes

• Improvement of 51% in the

preparation of returns for

referral due to automation

Additionally, the PRP agrees that

taxpayer’s legitimately due refunds

should have them issued as quickly as

possible. However, PRP suggests that

metrics should be developed that

measure the total time it takes for a

taxpayer’s proper refund to be paid

from the filing date. PRP remains

committed to reducing the total time

that questionable but good refunds are

frozen.

These metrics will help IRS measure

the planned improvements and make

any necessary adjustments.

Also The Treasury Inspector General

for Tax Administration (TIGTA) in a

report on the QRP program, dated May

31, 2007 found that CI’s resequencing

(that delays refunds for 2 weeks) has

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minimal impact on taxpayers, and is an

appropriate balance to allow the IRS

time to screen refunds for fraud.

(TIGTA report “Actions Have Been

Taken to Address Deficiencies in the

Questionable Refund Program;

However, Many Concerns Remain,

With Millions of Dollars at Risk” p. 10.)

Note this comment is in the public

domain.

3. The National Taxpayer

Advocate recommends

that the IRS establish a

goal of improving its pre-

refund case screening

criteria, including all

available databases such

as Electronic Fraud

Detection System

(EFDS), Dependent Data

Base (DDb) and the

National Directory of

New Hires (NDNH) (from

the Department of Health

and Human Services

(HHS)).

We support and

recommend that IRS

continue in their efforts to

improve refund

verification, fraud

detection and resolution

Criminal Investigation (CI) and the Pre-

Refund Program Office (PRPO)

collaborated with the EFDS Project

Office to identify enhancements to the

current case screening criteria for the

current year as well as for future

enhancements to FY 09. In summary,

ELF (non-prisoners) returns deemed as

suspicious’ scan ratio has an average

improvement of 16%. This indicates

that the data mining model for 2008

is continuing to do very well.

Additionally, the enhancements also

resulted in a decrease of approximately

23% fewer receipts and 29% fewer

external leads.

Redundancy as well as further delay to

taxpayers was lessened during current

year processing by utilizing a file

generated from the Dependent Data

Base (DDb) for returns that also hit

EFDS. If a return “hit” both systems,

the return was not brought into CI

Yes 10/7/08

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activities by incorporating

the business processes

and reengineering

improvements they have

identified when using

SSA, IRP, URP and

third party, prisoner data

files.

workload and eliminated from the

EFDS workflow. This reduced

workload duplication.

The Department of Health and Human

Services (HHS) maintains the National

Directory of New Hires (NDNH), which

is a database that contains up-to-date

new hire, quarterly wage, and

unemployment compensation

information.

• The National Directory of New

Hires (NDNH) (from the

Department of Health and

Human Services (HHS)) was

utilized this year to reduce the

volume of verifications.

• However, the constraints within

this program such as providing

information only for

electronically filed returns that

have earned income tax credit

(EITC) issues, as well as, not

providing withholding

information limits the usefulness

of this application.

• NDNH data could prove to be a

significant validation tool on all

EITC filings.

• Overall, for the total number of

return inquiries sent to HHS and

the format in which the

responses received were

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substantiated by the CI manual

verification process, the

indication is that the use f the

NDHD program is a successful

tool in determining potential

fraud or substantiation of

income on EITC returns.

Additionally, the PRPO identified

several business process and

reengineering improvements to

enhance our utilization of data for

improved refund verification, fraud

detection and resolution activities:

• Improved use of SSA data, by

the timing and availability of this

data.

• Expanded use of Information

Returns Processing (IRP or

AUR) data, to improve the

modeling capability and the

accuracy of identifying compliant

and non-compliant returns.

• Increase efficiencies in using

third party data from internal and

external sources.

• Improve use of the

prison/prisoner data file.