Treasury Inspector General for Tax Adminstration
Report: Improvements Are Needed to Comply with Legal and
Procedural Requirements for Collection Statute
Extensions and Installment Agreements (2001-10-103)
Treasury Inspector
General for Tax Adminstration report: Collection statute
extensions: Installment agreements: Compliance
improvements needed: Legal and procedural requirements.
Improvements Are Needed
to Comply With Legal and Procedural Requirements for
Collection Statute Extensions and Installment Agreements
August 2001
Reference Number:
2001-10-103
This report has cleared
the Treasury Inspector General for Tax Administration
disclosure review process and information determined to
be restricted from public release has been redacted from
this document.
DEPARTMENT OF THE TREASURY
WASHINGTON, D.C. 20220
INSPECTOR GENERAL for TAX ADMINISTRATION
August 2, 2001
MEMORANDUM FOR COMMISSIONER, SMALL
BUSINESS/SELF-EMPLOYED DIVISION COMMISSIONER, WAGE AND
INVESTMENT DIVISION
FROM: Pamela J. Gardiner Deputy Inspector General for
Audit
SUBJECT: Final Audit Report - Improvements Are Needed to
Comply With Legal and Procedural Requirements for
Collection Statute Extensions and Installment Agreements
This report presents the results of our review and
recommendations regarding collection statute extensions.
The objective of this review was to determine if the
Internal Revenue Service (IRS) was complying with the
IRS Restructuring and Reform Act of 1998 (RRA 98) 1
§§3461(a) and (c) and internal procedures involving
extensions of the collection statute of limitations.
In summary, we found that the IRS secured some
collection statute extensions without also securing the
related installment agreement or levy release as
required by law and internal procedures. In addition,
many of the collection statute extensions secured with
installment agreements involved extension dates that
were not properly calculated. Further, the IRS does not
have a comprehensive plan to identify, correct, and
process the tax accounts that should have the collection
statute expiration dates reduced to the later of the
10-year collection statute of limitations date or
December 31, 2002. As a result, the IRS may not have
sufficient time to complete its review of collection
statute expiration dates and to take appropriate
collection action.
We recommended that the IRS clarify procedures to ensure
that collection statute extensions are approved
concurrently with a related installment agreement or
levy release and communicate the procedures to
applicable employees and managers. Taxpayer accounts
that we identified with collection statute expiration
dates that are inaccurate or do not comply with the law
should be reviewed and corrected. Nationally
standardized procedures should be developed to centrally
store collection statute forms within area offices. In
addition, the IRS needs to develop a comprehensive plan
for timely implementing the provisions of RRA 98 §3461(c)
and for taking actions to collect the remaining tax
liabilities before the statutes expire.
IRS management agreed with these recommendations.
However, management's response stated that the outcome
of additional collection action on accounts that have a
reduced collection statute expiration date may be
limited because of the age of the accounts and the lack
of collection options. We believe these accounts have
the potential to be collected because they met the
following criteria:
l The account case
histories indicated that the accounts had never been
classified as "Currently Not Collectible" by
the IRS. (The IRS classifies accounts as "Currently
Not Collectible" once the collection options have
been exhausted.)
l The accounts met the
IRS' criteria for taking enforcement action to collect
delinquent liabilities. However, to receive the proper
priority, the collection statute expiration dates must
be corrected to show the reduced (i.e., earlier) statute
expiration dates.
Management's comments have been incorporated into the
report where appropriate, and the full text of their
comments is included as an appendix.
Copies of this report are also being sent to the IRS
managers who are affected by the report recommendations.
Please contact me at (202) 622-6510 if you have
questions or Maurice S. Moody, Assistant Inspector
General for Audit (Headquarters Operations and Exempt
Organizations Programs), at (202) 622-8500.
Table of Contents
Executive Summary
Objective and Scope
Background
Results
Collection Statute Extensions Were Sometimes Secured
Without Also Securing the Related Installment Agreement
or Levy Release As Required
Actions to Evaluate and Update Collection Statute Expiration
Dates May Not Be Completed in Time to Fully Comply With
the Law
The Internal Revenue Service Could Not Provide the
Documentation to Support Some of the Collection Statute
Extensions Recorded on Its Computer Systems
Collection Statute Extensions and Installment Agreements
Were Not Always Accurately Calculated for the Necessary
Time and Payment Amount to Fully Satisfy the Tax Liability
Conclusion
Appendix I - Detailed Objective, Scope, and Methodology
Appendix II - Major Contributors to This Report
Appendix III - Report Distribution List
Appendix IV - Outcome Measures
Appendix V - Management's Response to the Draft Report
Executive Summary
The Internal Revenue Service (IRS) generally must
collect federal tax, including penalties and interest,
within 10 years of the date the tax was assessed. This
10-year period is referred to as the collection statute
of limitations. Normally, the collection statute cannot
be extended without the taxpayer's written agreement.
The IRS Restructuring and Reform Act of 1998 (RRA 98) 1
§3461(a) limits the use of collection statute
extensions to allow them only in connection with an
installment agreement or levy release. The reason for
these exceptions is that a taxpayer may benefit from a
release of a levy or from being able to pay the tax in
installment payments past the original collection
statute expiration date. In addition, RRA 98 §3461(c)
provides that collection statute extensions requested
before the effective date of the law, January 1, 2000,
that are not in connection with an installment
agreement, will expire on the later of the 10-year
collection statute of limitations date or December 31,
2002.
The overall objective of this audit was to determine if
the IRS was complying with RRA 98 §§3461(a) and (c),
as well as the Internal Revenue Code (I.R.C.), and
internal procedures covering collection statute
extensions obtained in connection with installment
agreements before the effective date of the RRA 98.
Results
The IRS was not fully complying with RRA 98 §§3461(a)
and (c) and with internal procedures. For example, some
of the collection statute extensions were secured
without also securing the related installment agreement
or levy release as required by law and internal
procedures. In addition, the IRS does not have a
comprehensive plan to adequately identify, correct, and
process the tax accounts that should have the collection
statute expiration date reduced to December 31, 2002. As
a result, the IRS may not have sufficient time to
complete its review of collection statute expiration
dates and to take appropriate collection action.
Moreover, the IRS' review and approval processes for
collection statute extensions and installment agreements
were not adequate to ensure the computations were
accurate and in compliance with laws and/or internal
procedures.
Collection Statute Extensions Were Sometimes Secured
Without Also Securing the Related Installment Agreement
or Levy Release As Required
RRA 98 §3461(a) limits the use of collection statute
extensions to allow them only in connection with an
installment agreement or levy release. This provision
was effective for collection statute extensions
requested after December 31, 1999. In addition, to help
ensure that it would be compliant with the law, the IRS
implemented its own procedures with this same
requirement in August 1998. 2
We reviewed collection statute extensions that were
recorded between January 2 and April 1, 2000, for 968
taxpayers and determined that the IRS was not in
compliance with RRA 98 §3461(a) or its own procedures
for 102 taxpayers (11 percent). For the 102 taxpayers,
the collection statute extensions were secured without
also securing the related installment agreement or levy
release as required. In most of the cases in which the
case history was available, it appeared that the IRS and
the taxpayer intended to establish an installment
agreement; however, the installment agreement was never
processed or approved.
l In 16 cases (2 percent),
the extensions were requested after December 31, 1999,
the effective date of RRA 98 §3461(a). The collection
statute extensions for these cases may not be legally
valid, increasing the risk that over $153,000 in tax
liabilities may not be collected.
l In 20 cases (2 percent),
the case histories were not available to determine
whether the date of the extension request was after
December 31, 1999. As a result, we could not determine
whether the requests were in compliance with RRA 98 §3461.
These extension requests were prohibited by IRS
procedures and if it is determined that the extensions
were requested after December 31, 1999, the statute
extensions may not be legally valid.
l In 66 cases (7 percent),
the extensions were requested before December 31, 1999.
These were prohibited by IRS procedures that were
effective in August 1998 but not by RRA 98 §3461, since
the requests were secured before the effective date of
this provision.
Any collection activity performed after the original
collection statute expiration date for the 16 extensions
that may not be legally valid could violate these
taxpayers' rights.
These improper extensions may have occurred because the
IRS approving officials did not always review and
approve the collection statute extension and the
installment agreement at the same time to ensure that
the statute extension was based on an installment
agreement or levy release. IRS procedures do not require
statute extension approval requests to be submitted
simultaneously with the approval requests for
installment agreements.
Actions to Evaluate and Update Collection Statute
Expiration Dates May Not Be Completed in Time to Fully
Comply With the Law
RRA 98 §3461(c) provides that collection statute
extensions requested on or before December 31, 1999,
that are not in connection with an installment agreement
will expire on the later of the 10-year collection
statute of limitations date or December 31, 2002.
Although the IRS has identified some actions to
implement this provision, it did not develop a
comprehensive plan of action that considers all the
appropriate issues. For example, to determine whether
the collection statute extension was secured in
connection with an installment agreement, the IRS plans
to generate a report in October 2001 to provide a
listing of accounts to be manually reviewed. To perform
the manual review of these accounts, the IRS must obtain
closed case histories. However, case histories may not
be available or will be difficult to obtain depending on
how long ago the collection statute extension was
secured. In addition, the IRS has not determined the
amount of resources that will be needed for the high
volume of taxpayer accounts where the correct collection
statute expiration date must be manually calculated.
Based on our analysis of the IRS' database,
approximately 56,000 taxpayer accounts must be manually
reviewed between January and June 2002. After the manual
review, the IRS plans to run a computer program in July
2002 to review the accounts and systemically adjust the
collection statute expiration date if the collection
statute extension was not recorded within 4 weeks of an
installment agreement. However, the IRS' criteria for
the computer review may cause erroneous adjustments on
taxpayer accounts for the following reasons:
l The manual review of
accounts may not be properly performed or completed to
ensure the accuracy of the collection statute expiration
dates. For example, accounts that do not fall under the
provisions of RRA 98 §3461, such as those with special
statute considerations, may have their statutes
improperly shortened if the special considerations are
not included in the calculations. Also, accounts that
should have their statutes shortened may not be
correctly identified by the computer program.
l There were 402 accounts
in which the collection statute extension was requested
in 1999 but recorded on the IRS' computer systems in
2000. The collection statute expiration dates should be
reduced, but according to the IRS' criteria, these
accounts would be excluded from both the manual and
computer review.
The proposed dates for completion of the manual review
may not provide enough time to properly review and
correct all appropriate tax accounts. This may lead to
incorrect collection statute expiration dates and
insufficient time for the IRS to collect $289 million
that may be collectible before the statutes expire. The
IRS will have less than 6 months to collect remaining
tax liabilities for accounts on which the computer
program changes the collection statute expiration date
to December 31, 2002. However, the IRS generally does
not assign cases for collection action less than 6
months before the collection statute expires, so any
remaining liability on these accounts may not be
collected.
If the statute dates for the 56,000 accounts are
incorrectly revised as a result of the July 2002
computer program, it could result in incorrect records
and inequitable treatment of taxpayers. This could
affect management's ability to rely on the collection
statute expiration date in the system and may lead to
potential violations of taxpayers' rights.
The delays in implementing RRA 98 §3461(c) as well as
the limitations of the IRS' proposed methodology were
caused by the lack of a comprehensive plan that factors
in the appropriate time, availability of case
documentation, and resources needed to determine the
correct collection statute extension dates. If the IRS
does not expedite the development of an adequate plan,
it is at risk of not properly implementing this
provision.
The Internal Revenue Service Could Not Provide the
Documentation to Support Some of the Collection Statute
Extensions Recorded on Its Computer Systems
In order to extend the statute of limitations period for
collection, the IRS must obtain from the taxpayer an
executed Tax Collection Waiver (Form 900), which
specifies the tax period and the statutory extension
date. IRS administrative procedures also require an IRS
official to approve and sign the agreement once it has
been signed by the taxpayer. However, the IRS could not
provide adequate documentation to support 233 of the 968
(24 percent) collection statute expiration dates that
were recorded on the taxpayer accounts we reviewed. In
most of these cases, the IRS could not locate the
collection statute extension forms or provided the
carbon copy part of the Form 900 that does not include
the taxpayer's signature. In certain cases, the revised
statute expiration date shown on the Form 900 was
different from the date recorded on the taxpayer's
account.
Without the necessary documentation, the IRS cannot
support the collection statute extensions for 206
taxpayer accounts. Taxpayer rights may be violated if
these statute extensions are not valid and if the IRS
collects money on these accounts after the collection
statute has already expired. For the 27 accounts in
which the date on the Form 900 does not match the date
recorded on the taxpayer's account, the risk is
increased that at least $352,000 may not be collected
because the IRS is relying on an incorrect collection
statute expiration date.
The inability of the IRS to locate the documents needed
to support the collection statute extensions appears to
be caused by outdated guidance on properly storing the
Forms 900.
In addition, the cases in which the date on the Form 900
was different from the date recorded on the taxpayer's
account were due to errors made when the cases were
input to the computer system.
Collection Statute Extensions and Installment
Agreements Were Not Always Accurately Calculated for the
Necessary Time and Payment Amount to Fully Satisfy the
Tax Liability
We reviewed 761 tax modules, 3
from 387 taxpayer accounts, to determine whether the
collection statute extensions and installment agreements
were computed to allow adequate time to fully pay the
tax liability as required by IRS procedures and by law. 4
These 761 tax modules were covered by installment
agreements and did not have penalty or interest
restrictions; therefore, the time needed for the
installment payments to fully pay the liability could be
computed using the IRS computer system. Of the 761 tax
modules, 625 (82 percent) had collection statute
extensions and/or installment agreements that were not
computed in accordance with the law or IRS procedures.
l The collection statute
extension period was too short, by an average of 32
months, for 337 tax modules (44 percent). The collection
statute would expire before the liability would be paid.
l The liability would
never be paid for 33 tax modules (4 percent), regardless
of the statute extension date, because the accruing
interest is greater than the payments.
l The collection statute
extension period was longer than needed, by an average
of 37 months, to allow the installment payments to fully
satisfy the tax liability for 255 tax modules (34
percent).
For the 370 tax modules (222 taxpayers) included in the
first two bulleted items above, the taxpayers will have
a remaining liability of $1.8 million that the IRS will
have to write off when the collection statutes expire.
Further, for the 255 tax modules (154 taxpayer accounts)
in which the collection statute expiration date was
extended for too long a period, if any of these
taxpayers default on their installment agreements, they
would be subject to collection activity longer than if
the collection statute expiration dates had been
calculated according to the IRS' internal procedures.
Additionally, in our computer extract of accounts with
collection statute expiration dates extended in the
first quarter of Calendar Year 2000 (1,866 tax modules),
62 tax modules were extended more than 5 years (the
maximum time allowed under IRS procedures) past the
10-year collection statute expiration date.
The IRS' procedures indicate that its computer system
should be used to assist in computing the amount of time
required to fully satisfy a liability for each tax
module, including accruals of penalties and interest, as
long as the tax module does not have penalties and
interest restrictions. However, employees were not
always following the procedures. None of the 761 tax
modules involved restrictions, so the IRS' system could
have been used to systemically calculate the correct
full payment date for each tax module. Moreover, the
required documents are not always provided
simultaneously to IRS managers so that they may properly
review and approve collection statute extensions and the
associated installment agreements. Without reviewing the
computations for the full payment dates, managers do not
have a basis for approving the collection statute
extensions or installment agreements.
Summary of Recommendations
We recommend that the Commissioners of the Small
Business/Self-Employed (SB/SE) and the Wage and
Investment (W&I) Divisions clarify procedures to
ensure that collection statute extensions are approved
concurrently with a related installment agreement or
levy release. Procedures should also be updated based on
the IRS reorganization to reflect the new locations for
storing signed collection statute forms. SB/SE Division
and W&I Division management should review the
taxpayer accounts that we identified as inaccurate or
that may not comply with the law and take appropriate
action to correct the collection statute expiration
dates. The IRS should develop a comprehensive plan for
implementing the provisions of RRA 98 §3461(c) and for
taking actions to collect the remaining tax liabilities
before the statutes expire.
Management's Response: The IRS Commissioner
agreed with the recommendations in the report and plans
to take appropriate corrective action. The corrective
actions planned include training for IRS employees and
managers on computing collection statute extension and
installment agreement time periods, revising the
conditions for approval of these documents, and updating
the requirements for their storage. The IRS will also
take additional actions to implement the provisions of
RRA 98 §3461(c) and develop a plan to address the
collection potential from accounts with reduced
collection statute expiration dates. Management's
complete response to the draft report is included as
Appendix V.
Objective and Scope
The overall objective of this audit was to determine
if the IRS is complying with RRA 98 §§3461(a) and (c),
as well as the I.R.C., and internal procedures covering
collection statute extensions obtained in connection
with installment agreements.
The overall objective of this audit was to determine if
the Internal Revenue Service (IRS) was complying with
the IRS Restructuring and Reform Act of 1998 (RRA 98) 1
§§3461(a) and (c), as well as the Internal Revenue
Code (I.R.C.), and internal procedures covering
collection statute extensions obtained in connection
with installment agreements.
The audit scope included all collection statute
extension agreements that were input to the IRS'
computer system from January 2 to April 1, 2000, and any
related installment agreement. It also included an
analysis of all taxpayer accounts in which a collection
statute extension was still in effect and was input to
the IRS' computer system before December 31, 1999. We
interviewed National Headquarters personnel to obtain
the information needed to evaluate the IRS' plans and
procedures developed to implement the two RRA 98 §3461
provisions. We also interviewed field employees in the
former Los Angeles, Manhattan, Midwest, Southern
California, and South Florida District Offices. The
audit work was performed from February through December
2000. This audit was performed in accordance with Government
Auditing Standards.
Details of our audit objective, scope, and methodology
are presented in Appendix I. Major contributors to this
report are listed in Appendix II.
Background
The IRS generally must collect federal tax, including
penalties and interest, within 10 years of the date the
tax was assessed. This 10-year period is referred to as
the collection statute of limitations. Normally, the
collection statute cannot be extended without the
taxpayer's written agreement.
Prior to the passage of the RRA 98, there were no
restrictions on the IRS' ability to enter into a written
agreement, or even multiple agreements, with a taxpayer
to extend the 10-year statute of limitations for
collection of tax. To address concerns that these
extension agreements allowed the IRS to take collection
enforcement action for too long a period, RRA 98 §3461(a)
amended I.R.C. §6502(a) (Supp. IV 1998) to prohibit
collection statute extension agreements after December
31, 1999, except in two specific situations:
l If the collection
statute extension agreement is in connection with an
agreement to pay the balance due in installment payments
(known as an installment agreement).
l If the collection
statute extension agreement involves the release of a
levy.
The reason for these exceptions is that a taxpayer may
benefit from a release of levy or from being able to pay
the tax in installment payments past the original
collection statute expiration date. The restrictions
became effective for collection statute extension
requests made after December 31, 1999.
Although RRA 98 §3461(a) does not provide any
limitation on the length of time the collection statute
of limitations can be extended in connection with an
installment agreement, IRS procedures (effective August
1998) prohibit extending a collection statute beyond 5
years after the original collection statute expiration
date, even with an installment agreement.
An agreement to extend the collection statute on or
before December 31, 1999, without an installment
agreement, will expire on the later of the 10-year
statute of limitations date or December 31, 2002.
RRA 98 §3461(c) provides that an agreement to extend
the collection statute that was requested on or before
December 31, 1999, will expire on the later of the
10-year collection statute of limitations date or
December 31, 2002, if not in connection with an
installment agreement. To comply with this provision,
the IRS must review accounts with extended collection
statutes to determine whether the extensions were in
connection with installment agreements.
Results
Some of the collection statute extensions reviewed
were not in connection with an installment agreement or
levy release.
The IRS does not have a comprehensive plan to process
the tax accounts that should have a reduced collection
statute expiration date.
The IRS was not fully complying with RRA 98 §§3461(a)
and (c) and with internal procedures. For example, some
of the collection statute extensions were secured
without also securing the related installment agreement
or levy release, as required by law and internal
procedures. In addition, the IRS does not have a
comprehensive plan to adequately identify, correct, and
process the tax accounts that should have the collection
statute expiration date reduced to December 31, 2002. As
a result, the IRS may not have sufficient time to
complete its review of collection statute expiration
dates and to take appropriate collection action.
For some of the accounts with extended collection
statute expiration dates, the IRS was unable to provide
copies of the collection statute extension, Tax
Collection Waiver (Form 900), or provided the carbon
copy part of the Form that does not have the taxpayer's
signature. In other cases, the revised statute
expiration date shown on the Form 900 was different from
the date recorded on the taxpayer's account.
In addition, the IRS' review and approval process for
determining the full payment date and revised collection
statute expiration date was not always adequate to
ensure the computations were accurate and in compliance
with laws and/or internal procedures.
Collection Statute Extensions Were Sometimes Secured
Without Also Securing the Related Installment Agreement
or Levy Release As Required
RRA 98 §3461(a) 2
limits the use of collection statute extension requests
to allow them only in connection with an installment
agreement or levy release. This provision became
effective for collection statute extensions requested
after December 31, 1999. In addition, to help ensure
that it would be compliant with the law, the IRS
implemented its own procedures for this provision in
August 1998. 3
To determine whether the IRS was in compliance with this
RRA 98 provision and its own internal procedures, we
obtained a computer extract of collection statute
extensions that were input between January 2 and April
1, 2000, as well as the associated Forms 900. We
analyzed the computer extract, Forms 900, and available
case histories to determine the request date of the
collection statute extension and to determine whether
the extension was in connection with an installment
agreement or levy release.
Of the 968 accounts reviewed, 102 had collection
statute extensions that were not secured in connection
with an installment agreement or levy release.
Of the 968 taxpayer accounts in which a collection
statute extension was input between January 2 and April
1, 2000, the IRS was not in compliance with RRA 98 §3461(a)
or its own procedures for 102 taxpayers (11 percent).
For the 102 taxpayers, the collection statute extensions
were secured without also securing the related
installment agreement or levy release as required. In
most of the cases in which the case history was
available, it appeared that the IRS and the taxpayer
intended to establish an installment agreement; however,
the installment agreement was never processed or
approved.
l In 16 cases (2 percent),
the extensions were requested after December 31, 1999,
the effective date of RRA 98 §3461(a). The collection
statute extensions for these taxpayers may not be
legally valid, increasing the risk that over $153,000 in
tax liabilities may not be collected. If these
extensions are not legally valid, the collection statute
expiration date should be revised back to the prior
collection statute expiration date. The potentially
incorrect collection statute expiration dates on the
IRS' computer system indicate to IRS employees that
there is more time to collect than is actually allowed
by law.
l In 20 cases (2 percent),
the taxpayer case histories were not available to
determine whether the date of the extension request was
after December 31, 1999. As a result, we could not
determine whether the requests were in compliance with
RRA 98 §3461. These extension requests were prohibited
by the IRS' internal procedures because they were not
secured in connection with an installment agreement or
levy release. If the extensions were requested after
December 31, 1999, the statute extensions may not be
legally valid.
l In 66 cases (7 percent),
the extensions were requested before December 31, 1999.
These were prohibited by the IRS' internal procedures
that became effective in August 1998 but were not
prohibited by law, since the requests were secured
before the effective date of RRA 98 §3461.
The rights of 16 taxpayers could be violated because
a collection statute extension was not secured with an
installment agreement or levy release after the
effective date of the law.
Any collection activity performed after the original
collection statute expiration date for the extensions
that may not be legally valid could violate the rights
of 16 taxpayers. For example, if a collection statute
extension was requested on January 23, 2000, to extend
the collection statute expiration from the original date
of April 15, 2004, to November 28, 2006, the extension
would not be legally valid if it was not secured in
connection with an installment agreement or levy
release. Any attempt to collect the tax after April 15,
2004, would be a violation of the law and the taxpayer's
rights.
For the 16 cases which may not be legally valid, the IRS
discussed an installment agreement with the taxpayer,
but it was not approved for the following reasons:
l It was determined that
the taxpayers could not meet the original payment terms.
l The length of time on
the collection statute extension was inadequate.
l The installment
agreements were not sent for approval and input to the
IRS' computer system.
These improper extensions may have occurred because the
IRS approving officials did not always review and
approve the collection statute extension and the
installment agreement at the same time to ensure that
the statute extension was based on an installment
agreement. Based upon the case histories reviewed, none
of the collection statute extensions involved a
discussion of a levy release.
The IRS' internal procedures do not require that the
collection statute extensions and installment agreements
receive approval at the same time.
The IRS' internal procedures require managerial approval
on both the installment agreement and the collection
statute extension. 4
However, the procedures do not require submission of
both the installment agreement and the collection
statute extension for approval at the same time. Because
of the requirements of RRA 98 §3461(a), approval of the
collection statute extension must be contingent on the
approval of an installment agreement or levy release.
Approval of the documents should take place once the
signed and dated collection statute extension form is
received back from the taxpayer. If IRS officials
required collection statute extensions and installment
agreements or levy releases to be reviewed and input to
the IRS' computer system at the same time, it would
better ensure that collection statute extensions are
approved only in connection with an installment
agreement or levy release.
Recommendations
The Commissioners of the Small Business/Self-Employed
(SB/SE) and the Wage and Investment (W&I) Divisions
should implement the following recommendations:
Procedures should be issued to ensure that collection
statute extensions are submitted for approval only with
an installment agreement or levy release.
1. Clarify procedures to require that approving
officials approve both the installment agreement or levy
release and the Form 900 simultaneously and ensure the
revised collection statute expiration date is extended
beyond the full payment date of the installment
agreement.
Once the procedures are
clarified, communicate them to the applicable IRS
employees and managers to ensure they are aware of the
changes.
Management's Response: The IRS plans to revise
the IRM with new procedures that:
l
Require the same manager to approve the installment
agreement (or levy release) and Form 900 simultaneously.
l
Clearly emphasize that the revised collection statute
expiration date must be after the full payment date of
the installment agreement.
l
Provide a review process to ensure employees follow
these new procedures.
2. Correct the collection statute expiration dates on
the 16 taxpayer accounts in which an installment
agreement was not secured with the Form 900 as required
by RRA 98 §3461(a).
Management's Response: The IRS will change the
computer records for these accounts to reflect their
true collection statute expiration dates.
Actions to Evaluate and Update Collection Statute
Expiration Dates May Not Be Completed in Time to Fully
Comply With the Law
RRA 98 §3461(c) provides that collection statute
extensions requested on or before December 31, 1999,
that are not secured in connection with an installment
agreement will expire on the later of the 10-year
collection statute of limitations date or December 31,
2002.
RRA 98 §3461(c) provides that collection statute
extensions requested on or before December 31, 1999,
that are not in connection with an installment agreement
will expire on the later of the 10-year collection
statute of limitations date or December 31, 2002.
To determine whether the IRS will be in compliance with
this RRA provision, we discussed with IRS officials the
proposed methodology for analyzing accounts and changing
the collection statute expiration dates, as appropriate,
to comply with the new legal requirements. We also
analyzed a computer extract of all taxpayer accounts in
which a collection statute extension was still in effect
and was input to the IRS' computer system before
December 31, 1999, to determine the volume of collection
statute extensions that the IRS may need to review.
Although the IRS has identified some actions to
implement RRA 98 §3461(c), it did not develop a
comprehensive plan of action that considers all the
appropriate issues to ensure collection statute
expiration dates are correctly changed.
Although the IRS has identified some actions to
implement RRA 98 §3461(c), it did not develop a
comprehensive plan of action that considers all the
appropriate issues. In addition, the IRS has not
determined the amount of resources necessary to review
the high volume of accounts with collection statute
extensions input before December 31, 1999, that would
require a manual calculation of the collection statute
expiration date.
The IRS plans to generate a report in October 2001 that
will provide a listing of accounts to be manually
reviewed. From January through June 2002, IRS employees
will manually review these accounts to determine which
ones do not meet the criteria to have the collection
statute expiration dates changed. In July 2002,
programming changes will be made to systemically change
applicable accounts to the correct collection statute
expiration dates (the later of the 10-year collection
statute of limitations date or December 31, 2002).
The IRS plans to manually review all accounts that meet
the following criteria:
l The collection statute
extension was input before January 1, 2000.
l The collection statute
was extended beyond December 31, 2002.
l The total liability on
the taxpayer's account is greater than $5,000.
Based on our analysis of the IRS' database and the
IRS criteria for cases it intends to manually review,
approximately 56,000 taxpayer accounts must be manually
reviewed within a 6-month period.
The manual review of taxpayer accounts during this
6-month period may present significant problems for the
IRS. Based on our analysis of the IRS' database using
these criteria, approximately 56,000 taxpayer accounts
must be manually reviewed during this time period. To
conduct the required review, the IRS must obtain the
taxpayer case histories to determine whether the
collection statute extension was secured in connection
with an installment agreement. However, case histories
may not be available or will be difficult to obtain,
depending on how long ago the collection statute
extension was secured. Most of the cases subject to
review would have been closed before January 1, 2000.
Taxpayer case histories for closed collection field
cases are retained for approximately 3 years, and
automated case histories are limited to the most recent
case actions because of space limitations.
In addition, some of these taxpayer accounts have other
factors, such as bankruptcy, litigation, and pending
Offers in Compromise, which affect the collection
statute expiration date. These factors are considered
special collection statute considerations because the
collection statute expiration date is legally suspended
for a period of time. These considerations require
additional calculations to properly compute the
collection statute expiration date. Of the 56,000
accounts to be reviewed, approximately 13,000 taxpayers
have these special collection statute considerations.
Because of the potential problems in obtaining case
histories and the large volume of accounts to review, it
will be difficult for the IRS to properly review and
determine the correct collection statute expiration
dates for all appropriate tax accounts by June 2002. For
accounts in which IRS employees do not note that the
collection statute expiration date on the account is
already correct, the IRS' planned July 2002 computer
program will systemically adjust the collection statute
expiration date to the later of the 10-year collection
statute of limitations date or December 31, 2002, if the
collection statute extension was not recorded within 4
weeks of an installment agreement.
However, the IRS' criteria for the computer review may
not result in a proper adjustment to the collection
statute expiration date on taxpayer accounts for the
following reasons:
l If the manual review of
accounts is not properly performed or completed, the
computer program may make erroneous adjustments to
collection statute expiration dates. For example,
accounts that do not fall under the provisions of RRA 98
§3461, such as those with special statute
considerations, may have their statutes improperly
shortened if the special considerations are not included
in the calculations. Also, accounts that should have
their statutes shortened may not be correctly identified
by the computer program. This would apply, for example,
to accounts with collection statute extensions that were
not secured in connection with an installment agreement
but were input within 4 weeks of the installment
agreement.
l The manual and computer
review criteria did not include 402 accounts in which
the collection statute extension was requested in 1999
but input in the IRS' computer system in 2000. The
collection statute expiration dates should be reduced,
but according to the IRS' criteria, these accounts would
not be reviewed. We provided a list of these accounts to
the SB/SE Division compliance managers and they agreed
to include these accounts in the manual review.
Once the computer program changes the collection
statute expiration date on appropriate taxpayer accounts
to December 31, 2002, the IRS will have less than 6
months to collect the remaining tax liabilities.
In addition, the late dates for the manual (January -
June 2002) and computer reviews (July 2002) may not give
the IRS adequate time in which to take collection action
on the accounts before the expiration of the reduced
collection statute expiration date. Once the computer
program changes the collection statute expiration dates
to December 31, 2002, on applicable taxpayer accounts,
the IRS will have less than 6 months to collect the
remaining tax liabilities. However, the IRS generally
does not assign cases for collection action less than 6
months before the collection statute expires, so any
remaining liability on these accounts may not be
collected.
Approximately 7,100 taxpayer accounts with $289
million in liabilities may be collectible.
Completing the update of the collection statute
expiration dates timely will allow the IRS enough time
to take appropriate collection action on these accounts.
Of the 56,000 taxpayer accounts meeting the criteria for
review, approximately 7,100 accounts with $289 million
in liabilities may be collectible. These cases meet the
IRS' criteria for collection enforcement action, have
collection statute extensions that were not recorded
within 4 weeks of an installment agreement, and have not
been classified by the IRS as "Currently Not
Collectible."
Additionally, if the statute dates are incorrectly
revised for any of the 56,000 accounts as a result of
the July 2002 computer program, it could result in
inequitable treatment of taxpayers and potential
violations of taxpayers' rights.
The delays in implementing RRA 98 §3461(c), as well as
the limitations of the IRS' proposed methodology, were
caused by the lack of a comprehensive plan that factors
in the appropriate time, availability of case
documentation, and resources needed to determine the
correct collection statute extension dates. If the IRS
does not expedite the development of an adequate plan,
it is at risk of not properly implementing this RRA 98
provision and losing the revenue that could be obtained
during the extended collection period.
Recommendation
3. The Commissioners of the SB/SE and W&I Divisions
should develop a comprehensive plan for implementing the
provisions of RRA 98 §3461(c). The plan should begin
the analysis and account review as soon as possible so
that conversion to appropriate collection statute
extension dates can be completed with sufficient time in
which to take appropriate collection action. Further, it
should provide information on the resources that will be
provided for this effort and guidance on the allocation
of these resources, as well as the course of action to
take if case histories are not available. A plan for
collecting the tax liabilities on accounts with reduced
collection statute extension dates should also be
included.
Management's Response: The IRS plans to complete
several actions to fully implement the provisions of RRA
98 §3461(c), including:
l
Providing instructions for case reviews.
l
Developing a plan to address the collection potential
from these accounts.
l
Developing instructions for review teams to consider
special statute circumstances so that collection statute
expiration dates are not inappropriately shortened.
l
Providing procedures for the handling and disposition of
accounts - including instructions concerning the extent
of collection efforts to be attempted.
The Internal Revenue Service Could Not Provide the
Documentation to Support Some of the Collection Statute
Extensions Recorded on Its Computer Systems
To extend a collection statute, the IRS must obtain a
signed agreement from the taxpayer for the specific date
to which the statute is extended.
To extend the collection statute of limitations period,
the IRS must obtain from the taxpayer an executed Form
900, which specifies the tax period and the statutory
extension date. To further ensure that the agreement is
adequate to cover the period of time needed to collect
the tax, IRS administrative procedures also require an
IRS official to approve and sign the agreement once it
has been signed by the taxpayer. These requirements are
intended to protect the taxpayers' as well as the
government's interest if the collection statute
expiration date is ever disputed.
In many of the cases reviewed, the IRS could not
locate the collection statute extension forms.
However, the IRS could not provide adequate
documentation to support 233 of the 968 (24 percent)
collection statute expiration dates that were recorded
on the taxpayer accounts we reviewed. In most of these
cases, the IRS could not locate the collection statute
extension forms or provided the carbon copy part of the
Form 900 that does not include the taxpayer's signature.
In other cases, the revised statute expiration date
shown on the Form 900 was different from the date
recorded on the taxpayer's account. The following table
shows reasons why the collection statute extension was
not supported by documentation.
Collection Statute Extensions That Were
Not Supported by Documentation
Number of Taxpayer Reason Why the Collection Statute
Accounts Extended Extension Was Not Supported
194 The IRS could not provide the
supporting Form 900.
12 The IRS provided the carbon copy part
of the Form 900 that does not include
the taxpayer's signature.
27 The extended date on the Form 900 was
different from the date on the IRS'
computer system.
233 TOTAL
Without the necessary documentation, the IRS cannot
support the collection statute extensions for 206 (194
plus 12 noted in the table above) taxpayer accounts.
Taxpayer rights may be violated if these statute
extensions are not valid and if the IRS takes action to
collect money on these accounts after the collection
statute has expired.
For the 27 taxpayer accounts in which the collection
statute expiration date on the Form 900 does not match
the date recorded on the taxpayer's account, at least
$352,000 is at risk of becoming uncollectible.
For the 27 taxpayer accounts in which the collection
statute expiration date on the Form 900 does not match
the date recorded on the taxpayer's account, the risk is
increased that at least $352,000 may not be collected
because the IRS is relying on an incorrect collection
statute expiration date.
In addition to the 233 collection statute extensions
that were not supported, there were 21 collection
statute extensions that were not approved by an IRS
official as required by IRS procedures. While these
extensions may still be legally valid, the requirement
for managerial approval is an important control to
ensure that collection statute extensions comply with
legal and procedural requirements.
The IRS' inability to locate the documents supporting
the collection statute extensions appears to be caused
by outdated guidance.
The IRS' inability to locate the documents needed to
support the collection statute extensions appears to be
caused by outdated guidance on properly storing the
Forms 900 as a result of the IRS reorganization.
Previous IRS procedures required a copy of the Forms 900
to be stored at a central location within each district.
However, because of organizational changes, these
procedures are not being followed. For example, one
Automated Collection System (ACS) site attempted to send
the collection statute extensions to the district office
as required by former procedures, but the district
office sent them back because the ACS site was no longer
considered a part of the district office. No new
procedures have been developed for storing the Forms
900.
In addition, the outdated procedures did not specify
which part of the Form 900 to store. Parts 1 through 3
of the Form have the taxpayer's and IRS manager's
signatures, whereas part 4 does not. If the IRS does not
properly retain copies of the signed documents, it has
no assurance that taxpayers agreed to these collection
statute extensions.
The cases that had a date on the Form 900 that was
different from the date recorded on the taxpayer's
account were a result of errors made during input to the
IRS computer system.
Recommendations
The Commissioners of the SB/SE and W&I Divisions
should implement the following recommendations:
4. Update the IRM based on the IRS reorganization to
reflect the new locations for storing signed collection
statute extension forms in each of the new IRS business
units.
Management's Response: The IRS plans to revise
the IRM with new procedures that will address how
waivers will be stored.
5. Discuss with the IRS Office of Chief Counsel whether
the extensions are legally valid for the 206 taxpayer
accounts in which the IRS either did not provide a copy
of the Form 900 or could not determine if the Form had
been properly signed. Correct the taxpayers' accounts
for any extensions that are determined not to be legally
valid.
Management's Response: The IRS Chief Counsel
advised that the IRS may rely on its computer records
and other circumstantial evidence to show that the
statute of limitations on collection was extended or
suspended due to litigation, bankruptcy, offer in
compromise, or by agreement with the taxpayer. Based on
its Chief Counsel's advice, the IRS concluded the
waivers are legally valid.
Office of Audit Comment: The missing
documentation for these statute extensions still leaves
the possibility that the dates in the computer are
incorrect or that the taxpayers never formally agreed to
the collection statute extensions. For example, we
identified that the collection statute expiration dates
recorded on the IRS computer system did not always match
the dates on the Form 900 signed by the taxpayer.
6. Correct the 27 taxpayer accounts in which the
extended date on the Form 900 does not match the date on
the taxpayer's account as shown on the IRS' computer
system.
Management's Response: The IRS will change the
computer records for these accounts to reflect the
proper collection statute expiration dates.
Collection Statute Extensions and Installment
Agreements Were Not Always Accurately Calculated for the
Necessary Time and Payment Amount to Fully Satisfy the
Tax Liability
The IRS' internal procedures prescribe that the
collection statute expiration date should be extended
only long enough for the installment payments to satisfy
the tax liability, plus approximately 3 months, and not
longer than 5 years past the original collection statute
expiration date.
I.R.C. §6159(a) 5
allows the IRS to enter into written agreements with any
taxpayer under which the taxpayer is allowed to satisfy
liability for payment of any tax in installment payments
if the IRS determines that the agreement will facilitate
collection of the liability. To ensure that the
installment agreement facilitates the collection of the
liability, the IRS must properly compute the payments
and time needed to pay the liability. Once this is
determined, if the time needed goes beyond the 10-year
collection statute of limitations, the IRS may request
the taxpayer to sign a collection statute extension. The
IRS' internal procedures prescribe that the collection
statute expiration date should be extended only long
enough for the installment payments to satisfy the tax
liability, plus approximately 3 months, and not longer
than 5 years past the original collection statute
expiration date. 6
The internal procedures also explain the process for
computing the correct installment agreement and
collection statute extension period. If a tax return is
filed timely, the tax is assessed on the due date of the
return. If the tax return is later subject to an
examination and additional tax is assessed, the
collection statute expires 10 years from the date of the
additional assessment. As a result, the collection
statute expiration dates may not always be in the same
sequence as the tax periods. The computation should
begin with the oldest assessed tax and be completed with
the most recently assessed tax. The following table
shows an example of the sequence in which installment
payments should be applied.
Example: Installment Payment Sequence to Use in
Calculating the Length of an Installment Agreement
Sequence in Which
Assessment
Tax Period Ended Installment Payments
Date
Should Be Applied
December 31, 1990 April 15, 1995 2
December 31, 1991 April 15, 1995 3
December 31, 1992 April 15, 1993 1
In this example, the 1992 period would have the oldest
assessed tax and the earliest collection statute
expiration date. The installment payments would be
applied first to the period ending December 31, 1992.
Once the 1992 period was fully satisfied, the
installment payments would be applied to 1990 and
finally to 1991.
The IRS' procedures indicate that its computer system
should be used to assist in computing the amount of time
required to fully satisfy a liability for each tax
module, including accruals of penalties and interest, as
long as the tax module does not have restrictions on the
computation of penalties and interest. Accounts with
these restrictions cannot be properly calculated
systemically because of limitations or complicating
factors, such as business losses that can be applied to
previous tax periods.
However, when completing collection statute extensions
in connection with installment agreements, IRS employees
did not ensure that the collection statute expiration
dates and the installment agreements complied with legal
and/or procedural requirements. In a majority of the
cases reviewed, the collection statute expiration date
was extended too long or not long enough, compared to
the terms of the installment agreement. In some cases,
the collection statute was extended more than the 5
years allowed by IRS procedures.
For the 968 taxpayer accounts for which the collection
statute expiration date was extended during the period
of January 2 through April 1, 2000, we analyzed the
associated 1,866 tax modules. Of these 1,866 tax
modules, there were 761 (from 387 taxpayer accounts) in
which there were no penalty and interest restrictions
and the accounts were still on installment agreements
that had never been defaulted due to missed payments.
Therefore, the time needed for the installment payments
to pay the liability in full could be computed using the
IRS' computer system.
Of the 761 tax modules reviewed, 625 (82 percent) had
collection statute extensions and installment agreements
that were not computed in accordance with the law or IRS
procedures.
We reviewed the 761 tax modules to determine whether the
collection statute extensions and installment agreements
were correctly computed to allow the taxpayers adequate
time in which to fully pay the tax liability, as
required by law 7
and IRS procedures. Of the 761 tax modules, 625 (82
percent) had collection statute extensions and/or
installment agreements that were not computed in
accordance with the law or IRS procedures. The types of
incorrect calculations we identified are as follows:
l The collection statute
extension period was too short, by an average of 32
months, for 337 tax modules (44 percent). For these tax
modules, the installment payments would not fully
satisfy the tax liability by the end of the new statute
extension period. For example, a tax module with an
original collection statute expiration date of April 15,
2004, was extended to November 28, 2006, but the
installment payments will not fully pay the tax
liability until July 28, 2009.
l The liability would
never be paid for 33 tax modules (4 percent), regardless
of the statute extension date, because the accruing
interest is greater than the payments. For example, an
account with a balance due of $1 million that has an
installment agreement for $100 per month would never be
paid in full.
l The collection statute
extension period was longer than needed, by an average
of 37 months, to allow the installment payments to fully
satisfy the tax liability for 255 tax modules (34
percent). For example, a tax module has a collection
statute expiration date of April 15, 2004, that was
extended to November 28, 2006, but the tax will be paid
in full on July 28, 2005. This is different from the
IRS' internal procedures, which would have calculated
the statute date as October 28, 2005.
For the 370 tax modules, the IRS will have to write
off a total of $1.8 million when the collection statutes
expire.
For the 370 tax modules (222 taxpayers) noted in the
first two bulleted items, the taxpayers will have a
remaining liability of $1.8 million that the IRS will
have to write off when the collection statutes expire.
Further, for the 255 tax modules (154 taxpayer accounts)
in which the collection statute expiration date was
extended for too long a period, if any of these
taxpayers default on their installment agreements, they
would be subject to collection activity longer than if
the collection statute expiration dates had been
calculated according to the IRS' internal procedures.
Additionally, in our computer extract of accounts with
collection statute expiration dates extended in the
first quarter of Calendar Year 2000 (1,866 tax modules),
62 tax modules were extended more than 5 years (the
maximum time allowed under IRS procedures) past the
10-year collection statute expiration date.
The incorrectly calculated installment agreements and
collection statute extensions occurred because IRS
employees did not always follow internal procedures and
requirements for computing the installment agreements
and collection statute extension periods. Computations
did not always begin with the oldest assessed tax and
end with the most recently assessed tax. If the
computations are not based on the timing of the
assessments for each tax period, it can result in tax
periods with collection statutes that expire before the
tax is paid in full.
In addition, the case histories for some of the cases
did not indicate whether the employee used the IRS'
computer system to assist in making the correct
computations to determine the number of payments and
time required to fully satisfy the tax liability.
Further, the approval process is not functioning as
intended because the required documents are not always
provided to IRS managers concurrently so that they may
properly review and approve the collection statute
extensions and the associated installment agreements.
Without reviewing the computations for the full payment
dates, managers do not have a basis for approving the
collection statute extensions or installment agreements.
Recommendation
The approval process for installment agreements and
collection statute extensions is addressed in
Recommendation 1. In addition, the Commissioners of the
SB/SE and W&I Divisions should implement the
following recommendation:
7. Provide training to applicable IRS employees and
managers on the requirements and the method to compute
installment agreements and collection statute
extensions, consistent with the law and IRS policy and
procedures. The training should focus on the proper use
of the IRS' newly revised computer system to make these
computations.
Management's Response: The IRS plans to provide
training to applicable employees and managers on the
methods of computing installment agreements and
collection statute extensions. The training will focus
on the proper use of the IRS' newly revised computer
system.
Conclusion
The IRS should issue additional guidance to its
employees and managers to promote compliance with the
law and its own internal procedures governing collection
statute extensions and installment agreements.
In general, the IRS was not fully complying with RRA 98
§§3461(a) and (c) and internal procedures. Some of the
collection statute extensions secured after the
effective date of the law were secured without also
securing the related installment agreement or levy
release, as required by law and internal procedures. In
addition, the IRS does not have a comprehensive plan to
adequately identify, correct, and process the tax
accounts that should have the collection statute
expiration date reduced to the later of the 10-year
collection statute of limitations date or December 31,
2002. As a result, the IRS may not have sufficient time
to complete its review of collection statute expiration
dates and take appropriate collection action. Further,
the IRS' review and approval process of collection
statute extensions and installment agreements was not
adequate to ensure the computations were accurate and in
compliance with laws and internal procedures.
Appendix I
Detailed Objective,
Scope, and Methodology
The overall objective of this audit was to determine
whether the Internal Revenue Service (IRS) was complying
with the IRS Restructuring and Reform Act of 1998 (RRA
98) 1
§§3461(a) and (c), as well as the Internal Revenue
Code (I.R.C.), and internal procedures covering
collection statute extensions obtained in connection
with installment agreements before the effective date of
the RRA 98. To accomplish our objective, we performed
the following tests:
I. Determined whether the IRS is in compliance with RRA
98 §3461(a), which prohibits extending the collection
statute of limitations unless it is in connection with
an installment agreement or levy release.
A. Obtained and analyzed an
extract from the IRS' computer system that identified
collection statute extensions posted from January 2
through April 1, 2000. There were collection statute
extensions input on 1,866 tax modules for 968 taxpayers.
B. Attempted to obtain
copies of the collection statute extension forms input
to the IRS' computer system from January 2 through April
1, 2000, from all of the former district offices 2
and service centers. We requested the Tax Collection
Waivers (Form 900) on 1,866 tax modules for 968
taxpayers and received Forms 900 for 1,520 tax modules
for 788 taxpayers. 3
C. Researched the IRS'
installment agreement records for the extension forms
requested in step I.B. to confirm whether extensions
were related to an ongoing installment agreement.
1. Determined if the
extended date on the collection statute extension, Form
900, was properly calculated to last the length of the
installment agreement plus 90 days, as required by the
Internal Revenue Manual (IRM).
2. For extensions that were
not secured in connection with an installment agreement,
researched the IRS' computer system to determine whether
the collection statute extension was related to a levy
release under I.R.C. §6343.
3. Reviewed available case
histories to determine when the collection statute
extensions were requested for extensions that were not
secured in connection with an installment agreement or
levy release. For those cases in which case histories
were not available, the requests were not considered to
be in connection with an installment agreement if there
was no indication of an installment agreement on the
taxpayer's account by February 6, 2001 (this date is
approximately 10 months after the collection statute
extension date was entered on the taxpayer's account).
4. Determined if the
extended date on the Form 900 was more than 5 years past
the original 10-year collection statute expiration date.
5. Determined if the
taxpayer and an IRS approving official signed the Form
900.
6. Determined if the
extended date on the Form 900 matched the date on the
IRS' computer system.
II. Determined whether IRS managers and employees
responsible for establishing collection statute
extensions have been trained on RRA 98 §§3461(a) and
(c).
A. Reviewed nationally
distributed RRA 98 §§3461(a) and (c) training
material.
B. Reviewed national
memoranda related to collection statute extension
procedures.
C. Reviewed the IRM
sections related to collection statute extensions and
installment agreements.
D. Interviewed special
procedures staff in the former IRS Collection Division
in National Headquarters and in a judgmental sample of
five field locations to determine their understanding of
the RRA 98 provisions and the training provided for RRA
98 §3461 and to obtain copies of internal
correspondence. We also discussed problems and concerns
with implementing this provision.
III. Determined whether the IRS had implemented or had
formulated an adequate plan to implement RRA 98 §3461(c),
which provides that collection statute extensions
requested before the effective date of the law, January
1, 2000, that are not secured in connection with an
installment agreement must be changed to the later of
the 10-year collection statute of limitations date or
December 31, 2002.
A. Reviewed the law and
procedures in the RRA 98, the I.R.C., and the IRM
related to the collection statute updates required by
the RRA 98.
B. Interviewed IRS
officials from the Information Systems Division and the
former Collection Division who were responsible for the
collection statute updates required by RRA 98 §3461(c)
and obtained information regarding the IRS' action plan
and requests for information systems changes to update
taxpayer accounts.
C. Obtained and analyzed an
extract from the IRS' computer system for business and
individual accounts which identified collection statute
changes (including extensions) posted on or before
December 31, 1999, with a collection statute expiration
date beyond December 31, 2002, and a balance due. These
data were extracted on May 26, 2000, and included
interest and penalty accrued up to that date.
1. Determined the number of
accounts that need to be reviewed by the IRS in order to
determine the correct collection statute expiration
date.
2. Determined the number of
accounts that may have special collection statute
considerations, such as bankruptcy, litigation, and
Offers in Compromise, that will affect the calculation
of the correct collection statute expiration date.
3. Determined the number of
accounts and liabilities that the IRS still considers to
be collectible. (Note: we considered accounts to be
collectible if they met the IRS' criteria for collection
enforcement action, had collection statute extensions
that were not recorded within 4 weeks of an installment
agreement, and had not been classified by the IRS as
"Currently Not Collectible".)
Appendix II
Major Contributors to
This Report
Maurice S. Moody, Assistant Inspector General for Audit
(Headquarters Operations and Exempt Organizations
Programs)
Nancy A. Nakamura, Director
Michael E. McKenney, Audit Manager
Cheryl Cerqua, Senior Auditor
Thomas F. Polsfoot, Senior Auditor
Daniel M. Quinn, Senior Auditor
Joseph P. Smith, Senior Auditor
Cindy L. Wright, Auditor
James E. Adkisson, Computer Specialist
Appendix III
Report Distribution List
Commissioner N:C
Deputy Commissioner N:DC
Chief Counsel CC
Director, Compliance, Small Business/Self-Employed
Division S:C
Director, Compliance, Wage and Investment Division W:CP
Director, Legislative Affairs CL:LA
Director, Office of Program Evaluation and Risk Analysis
N:ADC:R:O
Director, Tax Administration Coordination N:ADC:T
National Taxpayer Advocate TA
Office of Management Controls N:CFO:F:M
Appendix IV
Outcome Measures
This appendix presents detailed information on the
measurable impact that our recommended corrective
actions will have on tax administration. These benefits
will be incorporated into our Semiannual Report to the
Congress.
Type and Value of Outcome Measure:
l Taxpayer
Rights--Potential; 16 taxpayer accounts with collection
statute extensions that are potential violations of the
law (see page 4).
l Revenue
Protection--Potential; $153,000 in tax liabilities that
may not be collected due to potentially incorrect
statute expiration dates on the Internal Revenue
Service's (IRS) computer system for the 16 taxpayer
accounts that were potential violations of the IRS
Restructuring and Reform Act of 1998 (RRA 98) 1
§3461(a) (see page 4).
Methodology Used to Measure the Reported Benefit:
Using an extract from the IRS' computer system, we
identified and reviewed collection statute extension
agreements input to the IRS' computer between January 2
and April 1, 2000. There were a total of 968 taxpayers;
102 had a collection statute extension input to their
accounts without an associated installment agreement.
The 16 taxpayers who had collection statute extensions
that were potential violations of RRA 98 3461(a) had
$153,000 in outstanding liabilities as of November 24,
2000, that is at risk of not being collected if the IRS
continues to rely on the incorrect collection statute
expiration date. This amount is at risk because the IRS
employees working the cases would not be aware of the
correct collection statute expiration date and could
base the timing of collection actions on incorrect
information. For example, an installment agreement could
be granted to a taxpayer based on the incorrect
collection statute extension date. However, once the
correct collection statute expiration date passed, the
IRS would be prohibited by law from requiring any
remaining installment payments.
Type and Value of Outcome Measure:
l Revenue
Protection--Potential; $289 million in liabilities that
may be collectible (see page 8).
l Taxpayer
Rights--Potential; 56,000 taxpayer accounts that may be
reviewed and changed (see page 8).
Methodology Used to Measure the Reported Benefit:
From the IRS' computer system, we obtained an extract of
every collection statute extension that was related to
Tax Collection Waivers (Form 900) input prior to
December 31, 1999. From this extract, we identified
56,000 taxpayer accounts that would need to be manually
reviewed using the IRS' criteria. We also reviewed the
IRS' plans for reviewing and correcting the collection
statute expiration dates on these accounts and
determined that the IRS' methodology could result in
erroneous adjustments to the collection statute
expiration dates because accounts that do not fall under
the provisions of RRA 98 §3461, such as those with
special statute considerations, may have their statutes
improperly shortened. In addition, accounts that should
have their statutes shortened may not be correctly
identified by the computer program.
From the same 56,000 taxpayer accounts, we identified
7,100 accounts totaling $289 million in tax, penalties,
and interest that may be collectible if collection
action is expedited based upon the updated collection
statute expiration date. These accounts met the IRS'
criteria for collection enforcement action (not accounts
in the queue) which did not have an installment
agreement posted to the account within 4 weeks of the
date the collection statute extension was input and had
never been classified as "Currently Not
Collectible."
Type and Value of Outcome Measure:
l Taxpayer
Rights--Potential; 206 taxpayer accounts that did not
have proper documentation to support the collection
statute expiration date recorded on the IRS' computer
systems (see page 13).
l Revenue
Protection--Potential; $352,000 in taxes that may not be
collected for 27 taxpayer accounts that did not have the
correct collection statute expiration dates on the IRS'
computer system (see page 13).
Methodology Used to Measure the Reported Benefit:
Based on the extract from the IRS' computer system which
contained collection statute extension agreements input
to the computer system between January 2 and April 1,
2000, we requested copies of the Form 900 for 968
taxpayers. The IRS could not provide a Form 900 for 194
taxpayers, and 12 of the Forms 900 received were the
carbon copy part of the Form that did not have the
taxpayer's signature. In addition, 27 taxpayers' Form
900 had an "extended to" date different from
the collection statute expiration date on the IRS'
computer system.
The 27 taxpayers who had a collection statute extension
date on the IRS' computer system that did not match the
date shown on the Form 900 had $352,000 in outstanding
liabilities as of October 30, 2000, that is at risk of
not being collected if the IRS continues to rely on the
incorrect collection statute expiration date. The risk
is increased because the IRS employees working the cases
would not be aware of the correct collection statute
expiration date and could base the timing of collection
actions on incorrect information.
Type and Value of Outcome Measure:
l Revenue
Protection--Potential; $1.8 million that may be written
off because the collection statute expiration date is
not long enough for the taxpayer's installment payments
to satisfy the liability or the accruing interest is
greater than the taxpayers' computed payments (see page
17).
l Taxpayer
Burden--Potential; 154 taxpayers with collection statute
expiration dates that were extended longer than allowed
by IRS procedures. If any of these taxpayers default on
their installment agreements, they would be subject to
collection activity longer than if the collection
statute expiration dates had been calculated according
to the IRS' internal procedures (see page 17).
Methodology Used to Measure the Reported Benefit:
For the 968 taxpayer accounts for which the collection
statute expiration date was extended during the period
of January 2 through April 1, 2000, we analyzed the
associated 1,866 tax modules. We recalculated, via the
IRS' computer program, the collection statute dates for
761 tax modules in which there were no penalty and
interest restrictions and the accounts were still on
installment agreements that had never been defaulted due
to missed payments. Of the 761 tax modules, 625 were not
computed accurately. Of these, 255 tax modules (154
taxpayers) have collection statute extensions that were
longer than allowed by the IRS' internal procedures.
For 370 of the 625 tax modules, the collection statute
expiration date will expire prior to full payment of the
balance due, which may require the IRS to write off $1.8
million in liabilities.
Appendix V
Management's Response to
the Draft Report
DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
WASHINGTON, D.C. 20224
COMMISSIONER
June 22, 2001
MEMORANDUM FOR DEPUTY INSPECTOR GENERAL FOR AUDIT
FROM: Charles O. Rossotti Commissioner of Internal
Revenue
SUBJECT: Draft Audit Report- Improvements Are Needed to
Comply With Legal and Procedural Requirements for
Collection Statute Extensions and Installment Agreements
We have made and will continue to make improvements to
ensure we protect taxpayers rights and comply with the
legal and procedural requirements for collection statute
extensions and installment agreements.
We appreciate your recognition of our responsiveness to
Section 3461(a) of RRA 98, which requires Revenue
Officers to secure waivers of the Collection Statute
Extension Date (CSED) only with installment agreements
or levy releases. Your report acknowledges that, prior
to the effective date of the law, our procedures limited
use of CSED extensions to those secured in connection
with installment agreements. In addition, to ensure
appropriate use of these extensions, we established a
policy whereby we only accept agreements that satisfy
taxes within five years of the original CSED. You also
acknowledge this in your report.
In 1999 we began identifying those accounts that would
expire by law on December 31, 2002, both by programming
requests and examination of accounts assigned to revenue
officers.
Thank you for the opportunity to respond to your draft
report on our compliance with Section 3461 of the
Restructuring and Reform Act of 1998 (RRA 98) and our
policies regarding CSED extensions.
As part of the IRS's overall strategic plan to provide
better customer service, we recognize we need to further
emphasize our current installment agreement procedures.
In this response I address the actions we will take in
accordance with your recommendations.
IDENTITY OF RECOMMENDATION 1
Clarify procedures to require that approving officials
approve both the installment agreement or levy release
and the Form 900 simultaneously and ensure the revised
collection statute expiration date is extended beyond
the full payment date of the installment agreement. Once
the procedures are clarified, communicate them to the
applicable IRS employees and managers to ensure they are
aware of the changes.
ASSESSMENT OF CAUSE
Revenue Officers sometimes secured collection statute
extensions without also securing the related installment
agreement or levy release.
CORRECTIVE ACTION
We will revise the Internal Revenue Manual (IRM) with
new procedures that:
l Require the same manager
to approve the installment agreement (or levy release)
and Form 900 simultaneously
l Clearly emphasize the
revised collection statute expiration date must be after
the full payment date of the installment agreement
l Provide a review process
to ensure employees follow these new procedures
IMPLEMENTATION DATE
December 1, 2001
RESPONSIBLE OFFICIAL
Director, Filing and Payment Compliance, Small
Business/Self-Employed
CORRECTIVE ACTION MONITORING PLAN
The appropriate functional staff will advise the
Director, Filing and Payment Compliance of any delay in
completing the corrective action.
IDENTITY OF RECOMMENDATION 2
Correct the collection statute expiration dates on the
16 taxpayer accounts in which an installment agreement
was not secured with the Form 900 as required by RRA 98
§3461(a).
ASSESSMENT OF CAUSE
Installment Agreements were not secured, as required,
after the waiver was secured for the 16 accounts.
CORRECTIVE ACTION
We will change the computer records for these accounts
to reflect their true Collection Statute Expiration
Dates (CSEDs).
IMPLEMENTATION DATE
September 1, 2001
RESPONSIBLE OFFICIALS
Director, Filing and Payment Compliance, Small
Business/Self-Employed
CORRECTIVE ACTION MONITORING PLAN
The appropriate functional staff will advise the
Director, Filing and Payment Compliance of any delay in
completing the corrective action.
IDENTITY OF RECOMMENDATION 3
The Commissioners of the SB/SE and W&I Divisions
should develop a comprehensive plan for implementing the
provisions of RRA 98 §3461(c). The plan should begin
the analysis and account review as soon as possible so
that conversion to appropriate collection statute
extension dates can be completed with sufficient time in
which to take appropriate collection action. Further, it
should provide information on the resources that will be
provided for this effort and guidance on the allocation
of these resources, as well as the course of action to
take if case histories are not available. A plan for
collecting the tax liabilities on accounts with reduced
collection statute extension dates should also be
included.
ASSESSMENT OF CAUSE
While work has progressed on the elements needed to
implement RRA 98 §3461(c), we have no overall action
plan incorporating these activities set forth as a
master document.
CORRECTIVE ACTION
We have completed a number of actions to implement the
provisions of RRA 98 Section 3461(c).
l By memorandum dated
November 16, 2000, we asked Revenue Officers to review
all cases in active inventory for subject CSEDs.
l We took preliminary
steps beginning in 1999 to include a Request for
Information Services (RISs) that provided systemic
review and update of subject CSEDs; certain cases will
require manual review due to lack of a systemic fix.
l We submitted a RIS to
produce extracts of cases requiring manual review.
Information Systems (IS) has accepted our RIS. We will
provide the result of the extract run to the field in
January, 2002.
l We submitted a RIS
providing the programming to truncate statutes. IS
accepted our RIS in 1999.
We need to complete several actions to fully implement
the provisions of the section.
l We will solicit subject
matter experts from the advisory, case processing, and
service center functions to help us develop instructions
for case reviews. (July 31, 2001)
l Management will develop
a plan to address the collection potential from this
population of accounts; the majority of the accounts
have already been the subject of unsuccessful collection
attempts. Many are already classified as currently not
collectible (CNC). We will pursue these cases for
additional collection will be based upon:
--The anticipated return
from the aged account relative to overall work
priorities and resource availability
--The current account
status (e.g. active inventory, queue, CNC)
--An established dollar
criterion. (August 31, 2001)
l We will develop
instructions for review teams that identify appropriate
truncation cases, ensure that special statute
circumstances (such as suspension in bankruptcy or offer
in compromise) are not inappropriately truncated, and
provide procedures for the disposition/handling of
accounts; instructions will reflect management decisions
concerning the extent of collection efforts to be
attempted. (October 01, 2001)
l We will conduct review
of identified cases by teams beginning in early 2002;
beginning dates are contingent upon receipt of account
listings.
l We will complete case
reviews (June, 2002)
IMPLEMENTATION DATE
We will fully implement the corrective action as
outlined above by July 1, 2002.
RESPONSIBLE OFFICIALS
Director, Filing and Payment Compliance, Small
Business/Self-Employed
CORRECTIVE ACTION MONITORING PLAN
The appropriate functional staff will inform the
Director, Filing and Payment Compliance of any delay in
completing the corrective action.
IDENTITY OF RECOMMENDATION 4
Update the IRM based on the IRS reorganization to
reflect the new locations for storing signed collection
statute extension forms in each of the new IRS business
units.
ASSESSMENT OF CAUSE
We did not update guidance on the storage of signed
extension forms after the reorganization.
CORRECTIVE ACTION
As noted in response to recommendation 1 above, we will
include new procedures for processing waivers in the
Internal Revenue Manual by December 31, 2001. We will
include procedures and direction for employees,
managers, review functions in this revision of the
manual. The revision will also address how we will store
waivers. The IRM revision will provide information on
which copy of the waiver to use for input and which to
store. The new procedures will resolve the problem
identified by TIGTA on storage of the part of the form
that contains the approving official's signature.
IMPLEMENTATION DATE
January 1, 2002
RESPONSIBLE OFFICIALS
Director, Filing and Payment Compliance, Small
Business/Self-Employed
CORRECTIVE ACTION MONITORING PLAN
The appropriate functional staff will advise the
Director, Filing and Payment Compliance of any delay in
completing the corrective action.
IDENTITY OF RECOMMENDATION 5
Discuss with the IRS Office of Chief Counsel whether the
extensions are legally valid for the 206 taxpayer
accounts in which the IRS either did not provide a copy
of the Form 900 or could not determine if the Form had
been properly signed. Correct the taxpayers' accounts
for any extensions that are determined not to be legally
valid.
ASSESSMENT OF CAUSE
The Service relied on its computerized records for the
206 accounts; paper copies were not always available.
CORRECTIVE ACTION
During the audit, we discussed "whether the
extensions are legally valid for the 206 taxpayer
accounts in which the IRS either did not provide a copy
of the Form 900 or could not determine if the Form had
been properly signed," with our Chief Counsel. From
this, and a prior opinion from Counsel, we concluded the
waivers are legally valid.
According to Chief Counsel, "the Service may rely
on its computerized records and other circumstantial
evidence to show that the statute of limitations on
collection was extended or suspended due to litigation,
bankruptcy, offer in compromise, or by agreement with
the taxpayer."
IMPLEMENTATION DATE
Completed
RESPONSIBLE OFFICIAL
Director, Filing and Payment Compliance, Small
Business/Self-Employed
CORRECTIVE ACTION MONITORING PLAN
N/A
IDENTITY OF RECOMMENDATION 6
Correct the 27 taxpayer accounts in which the extended
date on the Form 900 does not match the date on the
taxpayer's account as shown on the IRS' computer system.
ASSESSMENT OF CAUSE
We did not correctly record extension dates on the
taxpayer's account due to input error.
CORRECTIVE ACTION
We will revise the 27 taxpayer accounts to reflect the
proper Collection Statute Expiration Dates (CSEDs).
IMPLEMENTATION DATE
September 1, 2001
RESPONSIBLE OFFICIAL
Director, Filing and Payment Compliance, Small
Business/Self-Employed
CORRECTIVE ACTION MONITORING PLAN
The appropriate functional staff will inform the
Director, Filing and Payment Compliance of any delay in
completing the corrective action.
IDENTITY OF RECOMMENDATION 7
Provide training to applicable IRS employees and
managers on the requirements and the method to compute
installment agreements and collection statute
extensions, consistent with the law and IRS policy and
procedures. The training should focus on the proper use
of the IRS' newly revised computer system to make these
computations
ASSESSMENT OF CAUSE
IRS employees were not always computing installment
agreement and collection statute extensions correctly.
CORRECTIVE ACTION
We will provide training consistent with the law and IRS
policy and procedures to applicable IRS employees and
managers on the requirements and the method to compute
installment agreements and collection statute
extensions. The training will focus on the proper use of
the IRS' newly revised computer system to make these
computations. We are also considering a policy change
for the length of CSED extensions. The training program
will be implemented as follows.
l Revise the Service
policy on the length of CSED, as appropriate by December
1, 2001.
l Ensure the revised
computer programming to enhance CSED computations is
accurate by January 1, 2002.
l Develop a training
module for CSED computations by February 1, 2002.
l Roll out training
beginning June 1, 2002.
IMPLEMENTATION DATE
We will complete all phases of the training program by
September 1, 2002.
RESPONSIBLE OFFICIALS
Director, Filing and Payment Compliance, Small
Business/Self-Employed
CORRECTIVE ACTION MONITORING PLAN
The appropriate functional staff will inform the
Director, Filing and Payment Compliance of any delay in
completing the corrective action.
OUTCOME MEASURES RESPONSE
We understand how you reached your conclusions about the
potential yield of updating the identified collection
statue expiration dates. You based your conclusions,
however, on assumptions of account collectibility, which
are unconfirmed by the report's methodology. In a
universe of aged accounts, the revenue potential of a
case may be limited because of the lack of collection
options. These issues may have been explored earlier in
the case life cycle. We will address these cases as
outlined in our response to recommendation three.
Please call Martha Sullivan, Deputy Director, Compliance
Policy, Small Business/Self-Employed, at (202) 622-5563
if you have any questions.
1Pub.
L. No. 105-206, 112 Stat. 685 (codified as amended in
scattered sections of 2 U.S.C., 5 U.S.C., 5 U.S.C. app.,
16 U.S.C., 19 U.S.C., 22 U.S.C., 23 U.S.C., 26 U.S.C.,
31 U.S.C., 38 U.S.C., and 49 U.S.C.).
1Pub.
L. No. 105-206, 112 Stat. 685 (codified as amended in
scattered sections of 2 U.S.C., 5 U.S.C., 5 U.S.C. app.,
16 U.S.C., 19 U.S.C., 22 U.S.C., 23 U.S.C., 26 U.S.C.,
31 U.S.C., 38 U.S.C., and 49 U.S.C.).
2Memorandum
from Chief Operations Officer to District Directors,
Service Center Directors, Regional Chief Compliance
Officers, Regional Chiefs Customer Service and Assistant
Commissioner (International), dated August 17, 1998.
3A
tax module is the part of a taxpayer's account that
includes information for one type of tax for one tax
period. Collection statute extensions must be separately
computed for each tax module.
4I.R.C.
§6159 (1988).
1Pub.
L. No. 105-206, 112 Stat. 685 (codified as amended in
scattered sections of 2 U.S.C., 5 U.S.C., 5 U.S.C. app.,
16 U.S.C., 19 U.S.C., 22 U.S.C., 23 U.S.C., 26 U.S.C.,
31 U.S.C., 38 U.S.C., and 49 U.S.C.).
2This
RRA 98 section amended I.R.C. §6502(a)(2) and was
effective for collection statute extension requests made
after December 31, 1999.
3Memorandum
from Chief Operations Officer to District Directors,
Service Center Directors, Regional Chief Compliance
Officers, Regional Chiefs Customer Service and Assistant
Commissioner (International), dated August 17, 1998.
4Internal
Revenue Manual (IRM) §5.14 (October 18, 1999).
5I.R.C.
§6159(a) (1999).
6IRM
5.14.1.7 (October 18, 1999).
7I.R.C.
§6159 (1988).
1Pub.
L. No. 105-206, 112 Stat. 685 (codified as amended in
scattered sections of 2 U.S.C., 5 U.S.C., 5 U.S.C. app.,
16 U.S.C., 19 U.S.C., 22 U.S.C., 23 U.S.C., 26 U.S.C.,
31 U.S.C., 38 U.S.C., and 49 U.S.C.).
2The
IRS district office structure that was in place at the
time of this review has since been changed to a business
unit structure.
3In
the case of 14 taxpayers, we received Forms 900 but not
for all extended tax modules. We received Forms 900 for
all extended tax modules for 774 taxpayers.
1Pub.
L. No. 105-206, 112 Stat. 685 (codified as amended in
scattered sections of 2 U.S.C., 5 U.S.C., 5 U.S.C. app.,
16 U.S.C., 19 U.S.C., 22 U.S.C., 23 U.S.C., 26 U.S.C.,
31 U.S.C., 38 U.S.C., and 49 U.S.C.).
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