IRS Occasionally Unfair in Property Seizures, TIGTA Says 

Fiscal Year 2020 Review of Compliance With Legal Guidelines When Conducting Seizures of Taxpayers' Property

September 9, 2020

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.

Redaction Legend:

1 = Tax Return/Return Information

HIGHLIGHTS

Final Audit Report issued on September 9, 2020

What TIGTA Found

For this audit, TIGTA reviewed more cases than in any previous review, 205 (60 percent) of the 342 seizures the IRS conducted from July 1, 2018, through June 30, 2019. TIGTA identified instances in which the IRS did not comply with a particular I.R.C. section or internal procedure and identified IRS procedures that are problematic and result in potentially unfair outcomes.

I.R.C. § 6343 requires the IRS to release any levy that is causing an economic hardship. Yet, at times, the IRS seizes property, including personal residences, when the taxpayer appears to be already suffering an economic hardship. Additionally, internal guidelines applicable to installment agreements require Form 433-A, Collection Information Statement for Wage Earners and Self-Employed Individuals, when a balance due exceeds $50,000. Installment agreement requests will be recommended for rejection when the taxpayer has equity in property that can fully pay or make a substantial payment towards the liability.

The decision of whether to seize property takes into consideration a number of different factors, including whether the taxpayer is deemed a “will pay,” “won't pay,” or “can't pay” taxpayer. The IRS states that it will not seize the property of “can't pay” or “will pay” taxpayers and will be more likely to seize the property of “won't pay” taxpayers, including taxpayers who have equity in assets but who cannot or will not borrow against the equity. For 18 cases in which taxpayer property was ultimately seized, taxpayers or their representatives discussed with the revenue officer whether an installment agreement was feasible; however, in each case, the revenue officer would not consider the request because the taxpayer had equity in assets. For 11 cases, there were facts present indicating the taxpayers may have been experiencing economic hardship; however, the taxpayers were deemed “won't pay” taxpayers due to the existence of equity in assets, some of which involved residences.

What TIGTA Recommended

TIGTA recommended that the IRS: 1) emphasize procedures that require completion of pre-seizure checklist items and analysis prior to seizure, 2) document discussions about the identification of encumbrances, 3) ensure that the proceeds from cases identified in this report are applied to taxpayer accounts immediately, 4) emphasize procedures to ensure that the Notice of Sale is issued timely from the date of the Notice of Seizure, and 5) do not seize personal residences of taxpayers who appear to be suffering an economic hardship and allow more discretion for employees to avoid seizures for taxpayers who might benefit from an installment agreement. The IRS agreed with Recommendations 1, 3, and 4 but disagreed with Recommendations 2 and 5.

---

September 9, 2020

MEMORANDUM FOR:
COMMISSIONER OF INTERNAL REVENUE

FROM:
Michael E. McKenney
Deputy Inspector General for Audit

SUBJECT:
Final Audit Report — Fiscal Year 2020 Review of Compliance With Legal Guidelines When Conducting Seizures of Taxpayers' Property (Audit # 201930024)

This report presents the results of our review to determine whether seizures were conducted in accordance with Internal Revenue Code Sections 6330 through 6344 and Internal Revenue Service procedures. This review is part of our Fiscal Year 2020 Annual Audit Plan and addresses the major management and performance challenge of Protecting Taxpayer Rights.

Management's complete response to the draft report is included as Appendix V.

Copies of this report are also being sent to the Internal Revenue Service managers affected by the report recommendations. If you have any questions, please contact me or Matthew A. Weir, Assistant Inspector General for Audit (Compliance and Enforcement Operations).

---

Table of Contents

Background

Results of Review

Appendices

Appendix I — Detailed Objective, Scope, and Methodology

Appendix II — Outcome Measures

Appendix III — Synopsis of Selected Legal Provisions for Conducting Seizures

Appendix IV — Prior Reports on Compliance With Seizure Procedures

Appendix V — Management's Response to the Draft Report

Appendix VI — Glossary of Terms

Appendix VII — Abbreviations

---

Background

The collection of unpaid tax by the Internal Revenue Service (IRS) generally begins with collection notices, after which the case will usually be assigned either to the IRS's Automated Collection System, Field Collection, or Collection Queue.¹ The IRS considers the taxpayer's ability to pay the tax and discusses alternative payment options, such as an installment agreement or an offer in compromise. If these actions have been taken and the taxpayer is able to pay some or all of the tax but has not taken steps to address the liability and if the taxpayer had the opportunity to exercise available appeal rights, the IRS has the authority to levy the taxpayer's funds or seize property for the payment of tax.² Taking a taxpayer's property for unpaid tax is commonly referred to as a seizure. The IRS's Property Appraisal and Liquidation Specialists sell seized property by public auction or by public sale under sealed bids.

To ensure that taxpayer rights are protected, the IRS Restructuring and Reform Act of 1998 amended the seizure provisions in Internal Revenue Code (I.R.C.) Sections (§§) 6330 through 6344.³ These provisions and the IRS's internal procedures govern many aspects of the seizure process, from notification of the taxpayer through sale or redemption of the property. For example, a taxpayer's principal residence cannot be seized without a court order.⁴ Additionally, seizures are not permitted if estimated expenses related to the sale exceed the fair market value of the property at the time of the seizure.⁵

The Treasury Inspector General for Tax Administration (TIGTA) is required under I.R.C. § 7803(d)(1)(A)(iv) to annually evaluate the IRS's compliance with the legal seizure in I.R.C. §§ 6330 through 6344.⁶

Figure 1 shows the number of seizures conducted by the IRS from Fiscal Year (FY) 2012 to FY 2019. With the exception of a small increase in FY 2016, the number of seizures the IRS conducted continued to diminish from 733 in FY 2012 to 228 in FY 2019. During this period, the number of seizures decreased by 69 percent.

Results of Review

Most of the Seizures Conducted Involved Real Property and Varied Geographically

During the period July 1, 2018, through June 30, 2019, the IRS conducted 342 seizures against taxpayers with unpaid liabilities.⁷ The 342 seizures correspond to the number of distinct properties that were seized; however, as we subsequently describe, the IRS Collection Areas account for the number of seizures differently, some Areas counting each property separately and other Areas counting multiple properties of the same taxpayer as a single seizure. Accordingly, the IRS Collection Areas' count of seizures was 243 for this same period. We analyzed the population of distinct property seizures to identify any common characteristics or trends. Figure 2 shows that many seizures involved real property, and the majority of them were classified as “other” real property, which is real property other than a taxpayer's primary or personal residences.

[Editor’s Note: The reference mark for footnote ⁸ appears in the image above.]

After “other” real property, the next most common seizures involved vehicles, personal residences, and other personal property. Figure 3 shows the number of seizures conducted by each of the Small Business/Self-Employed Division's six Collection Area Offices.⁹

Figure 3: Seizures by IRS Area Office From July 1, 2018, Through June 30, 2019

Collection Area	Number of Seizures	Percentage of Total
Central	30	12%
Gulf States	71	29%
North Atlantic	35	15%
Northwest	55	23%
South Atlantic	32	13%
Southwest	20	8%
Nation	243	100%
Source: TIGTA analysis of IRS seizure logs.10

The Gulf States Area Office had the largest number of seizures, with 71 (29 percent), followed by the Northwest Area Office, with 55 (23 percent) seizures. With 20 (8 percent) seizures, the Southwest Area Office conducted the fewest number.

Seizure Procedures and Internal Controls Were Not Always Followed

To determine the IRS's compliance with seizure procedures and guidelines, we reviewed a judgmental sample of 205 of the 342 seizures that the IRS conducted from July 1, 2018, through June 30, 2019.¹¹ The judgmental sample of 205 seizures consisted of four principal residences, 64 personal or other residences, 29 business properties, 61 parcels of land, 32 vehicles and other personal property, 12 seizures that included cash, liquor licenses, and Treasury Checks, and three involving machinery and equipment. We noted differences between property descriptions reported in the seizure log and in the seizure case files that we reviewed. Specifically, the seizure log reported * * * 1 * * * principal residence seizures. However, we determined that the IRS erroneously coded * * * 1 * * * principal residence seizures on the seizure log. Accordingly, the IRS seized five principal residence (not three) during the 12-month period ending June 30, 2019.

The balance due amounts for taxpayers at the time of the seizure for the tax modules included on the seizure ranged from more than $16,000,000 to approximately $6,000, with an average balance due of $621,889. Our review of the 205 seizures identified the following instances in which the IRS did not comply with a particular I.R.C. or Internal Revenue Manual (IRM) requirement:

• 14 cases — the revenue officers did not perform a proper Master File research prior to seizure.

• Five cases — the revenue officers did not timely document or provide notices to taxpayers or third parties.

• * * * 1 * * *

• * * * 1 * * *

• * * * 1 * * *

• * * * 1 * * *

• * * * 1 * * *

Revenue officers did not always perform a proper Master File research prior to seizure

I.R.C. § 6331(k) requires that no levy may be made on any property or right to property of any person with respect to any unpaid tax during the period that an offer in compromise by such person under § 7122 or installment agreement under § 6159 of such unpaid tax is pending. In addition, IRM 5.10.1.3 provides that prior to conducting a seizure, the revenue officer must review the list of prohibited seizures as listed on Form 13719, Pre-Seizure Checklist and Approval Request, to ensure that the case does not meet any of these conditions. Prior to submission for approval, Form 13719 should be documented to reflect that the revenue officer reviewed the list of prohibited seizures and that no prohibition against seizure exists. Accordingly, the revenue officer is required to ensure that there is no offer in compromise pending, under Appeal, or rejected within the last 30 days. * * * 1 * * *

I.R.C. § 6331(j)(2)(D) requires that no seizure be made on any property or right to property which is to be sold under I.R.C. § 6335 until, per IRC 6331(j)(2)(A), a thorough investigation of the status of the property has been completed, including verification of the taxpayer's liability. An investigation of the status of any property shall include a verification of the taxpayer's liability. IRM 5.10.3.3(2) requires the revenue officer to check the Integrated Data Retrieval System prior to conducting the seizure to confirm that there have been no changes to the status of the taxpayer's account, such as bankruptcy filings, adjustments, or credits that would cause the seizure action to no longer be allowable or warranted. For another three cases, there was insufficient documented evidence that the research was performed in a reasonable time frame to capture changes that could have occurred days prior to seizure. For example, * * * 1 * * * In all three cases, we do not believe these are reasonable time frames as taxpayers' financial conditions can immediately change.

Revenue officers did not always timely document or provide notices to taxpayers and third parties

I.R.C. § 6340(a) requires that the IRS keep a record of all sales of property. The record should include the tax for which any such sale was made, the dates of the seizure and sale, the name of the party assessed, all proceedings in making the sale, the amount of expenses, the names of the purchasers, and the date of the deed or certificate of sale of personal property. I.R.C. § 6340(c) requires that the taxpayer be furnished the record of sale under subsection (a) (other than the names of the purchasers).

When property is sold to the highest bidder or declared purchased for the United States, the IRS is required to prepare Record 21, Record of Seizure and Sale, and provide the document to the taxpayer. IRM 5.10.6.12 includes Record 21 as one of three documents that must be retained in the permanent record and provided to the taxpayer after the 180-day redemption period for real property. However, three cases that we reviewed lacked evidence that this document was sent to the taxpayer after the 180-day period. For example, * * * 1 * * * was not provided all of the information from the seizure and sale that is required under the statute. IRS officials stated that it allowed assigned staff more time to resolve these cases, which delayed the records sent to taxpayers.

Management Action: * * * 1 * * *

In addition, I.R.C. § 6338(a) provides that the certificate of sale be given to a purchaser for property sold upon payment in full of the purchase price. * * * 1 * * *

Lastly, I.R.C. § 6343 calls for the return of property to the taxpayer when various conditions are met that cause a seizure to be released. These conditions include full payment of the liability, determination of a wrongful seizure, and a levy that creates an economic hardship based on the taxpayer's financial condition. * * * 1 * * *

Seizures would not have occurred if accurate encumbrance analyses had occurred

I.R.C. § 6331(j) requires that no levy may be made on any property or right to property which is to be sold under I.R.C. § 6335 until a thorough investigation of the status of the property has been completed. The elements of investigation should include the determination that the equity in the property is sufficient to yield net proceeds from the sale to apply to the liability. IRM 5.10.1.5.3.3 requires a records check to verify the taxpayer's interest in the property and to identify any encumbrances against the property no more than 90 calendar days prior to submission for the group manager's approval. Besides determining the fair market value of assets, the revenue officer is required to conduct a records search to verify ownership and identify all recorded encumbrances against the property. In addition, after a seizure and before a sale, a current records check must be completed and Form 2434-B, Notice of Encumbrances Against or Interests in Property Offered for Sale, must be updated if the most recent records check is 90 calendar days or more prior to the sale date.

* * * 1 * * * We included recommendations in our FY 2018 report to ensure that there is documentation of the revenue officer's actions with respect to property valuation and to identify encumbrances.¹² The IRS partially agreed with the recommendations, indicating that there is already IRM guidance for these discussions; however, the IRS proposed to issue memorandums to remind employees of their responsibilities as included in the IRM. The proposed corrective actions were completed in December 2018, which is before these seizures occurred; therefore, we are making a recommendation at this time.

The IRS did not timely complete the sale of the taxpayers' seized property

I.R.C. § 6335(b) requires the IRS to, as soon as practicable after the seizure of property, give notice of sale to the owner and take action to publish the sale in a newspaper that is published or generally circulated within the county where the seizure is made. Per IRM guidance, the Notice of Sale should ordinarily be issued within 90 calendar days (for personal property) or 180 calendar days (for real property) from the date of the Notice of Seizure.¹³ I.R.C. § 6335(d) provides guidance on the timing for the sale of seized property. Specifically, the time of sale shall not be less than 10 days nor more than 40 days from the time of giving public notice under subsection. Compliance with I.R.C. §§ 6335(b) and 6335(d) can minimize the penalties and interest associated with a taxpayer's outstanding liability between seizure and sale.

* * * 1 * * *.¹⁴ * * * 1 * * *

* * * 1 * * *

Proceeds from seizures were not always properly applied to taxpayers' accounts

I.R.C. § 6341 requires the IRS to determine the expenses to be allowed in all cases of levy and sale. I.R.C. § 6342(a) and the IRM require that any money realized by seizure or by sale of seized property be applied in the following order against:¹⁵

* * * 1 * * *

Management Action: * * * 1 * * *

Property Appraisal and Liquidation Specialists did not adequately document the method used to assign values to the inventory of seized assets

Pursuant to IRM 5.10.3.13.(1), the revenue officer will prepare Form 2433, Notice of Seizure, as soon as possible for all cases in which property has been seized. The items seized should be described and identified with reasonable certainty in an inventory listed on the form or in an attachment to it. The actual inventory values must be included on the Supplemental Form 2433. * * * 1 * * *¹⁶ * * * 1 * * * Because we only identified * * * 1 * * * of this procedure not being followed, we are not making a recommendation at this time.

Revenue officers did not document a calculation of the taxpayer's ability to pay the tax liability prior to conducting the seizure

IRMs 5.15.1.2 and 5.15.1.3(1) state that the analysis of a taxpayer's financial condition provides a basis to make one or more of the following decisions:

• Initiate enforcement action if assets are available to pay the liability and the taxpayer is unwilling to voluntarily convert assets to cash.

• Analyze the income and expenses to determine the amount of disposable income (gross income less all allowable expenses) available to apply to the tax liability.

IRS guidance states that the Collection function will use Integrated Collection System history functionality to record case actions and decisions, and it is extremely important that Integrated Collection System history entries be clear, accurate, concise, complete, and timely. These entries should be made in chronological order and recorded the day the action occurs or as soon as practical thereafter. Guidance also states that items such as a resolution plan, action expected of taxpayers, target dates established, taxpayer compliance, enforcement actions, financial analysis, etc., should be included as part of the Integrated Collection System history. * * * 1 * * * Because we only identified a 1 of this procedure not being followed, we are not making a recommendation at this time.

Management's Response: IRS management agreed with the recommendation and will develop and coordinate distribution of an executive communication emphasizing the IRM procedures outlined on the issuance of the Notice of Sale within 90 days (for personal property) or 180 days (for real property) from the date of the Notice of Seizure.

Collection Procedures Sometimes Result in Property Seizures From Taxpayers Experiencing Economic Hardships and Other Taxpayers Who Had Requested Installment Agreements

The law guarantees taxpayers the right to an installment agreement when certain criteria have been met including (i) the balance due does not exceed $10,000 and (ii) taxpayers are otherwise in filing and payment compliance.¹⁷ Through its administrative procedures, the IRS established processes for taxpayers to obtain so-called streamlined installment agreements for any balance due not exceeding $50,000, subject to certain limitations.¹⁸ For example, the procedures limit the types of taxpayers who qualify for the $50,000 agreement to individual taxpayers and out-of-business sole proprietors. Businesses only qualify for installment agreements up to $25,000.¹⁹

The procedures applicable to installment agreements require a Form 433-A, Collection Information Statement for Wage Earners and Self Employed Individuals, to be completed and the revenue officer must review for equity in assets for requests above these amounts, and state that installment agreement requests will be recommended for rejection when the taxpayer has equity in property that can fully pay the liability or make a substantial payment towards the liability.²⁰

The decision of whether to seize property takes into consideration a number of different factors, including whether the taxpayer is deemed a “will pay,” “won't pay,” or “can't pay” taxpayer.²¹ The IRS will not seize the property of “can't pay” taxpayers or “will pay” taxpayers and will be more likely to seize the property of “won't pay” taxpayers, including taxpayers who have equity in assets but who cannot or will not borrow against the equity. Taxpayers who want to enter into an installment agreement are deemed “won't pay” taxpayers if they have equity in assets.

Taxpayers who would otherwise qualify for “Currently Not Collectible” status as a “can't pay” taxpayer will be considered a “won't pay” taxpayer if they have equity in assets. The criteria for these taxpayers can lead to problematic outcomes, such as when a taxpayer wants to resolve the liability with an installment agreement but is deemed a “won't pay” taxpayer because of the existence of equity in an asset (such as undeveloped property or a residence) — even when the taxpayer has represented that he or she attempted to secure a loan on the equity and was denied.

For 18 cases in which taxpayer property was ultimately seized, taxpayers or their representatives discussed with the revenue officer whether an installment agreement was feasible; however, in each case, the revenue officer would not consider the request because the taxpayer had equity in assets.

In 11 cases, there were facts present indicating that the taxpayers may have been experiencing economic hardship, but they were deemed “won't pay” taxpayers due to the existence of equity in assets. Three of them had their personal residence seized.

In addition, we reviewed the revenue officers' case notes, which document the revenue officers' observations and findings. In 11 cases, we found that the revenue officers' case notes were consistent with our conclusion that the taxpayers were either already unable to meet basic living expenses or that the seizure would cause them to be unable to meet basic living expenses. For example, observations from the revenue officers in these cases included notations similar to the following:

• * * * 1 * * *.

• * * * 1 * * *

• Collection Information Statements that showed no ability to pay.

• Allowable living expenses that exceeded verified income.

Despite these and other similar observations, revenue officers working these cases seized the taxpayers' property. As a result, we believe that levying these taxpayers likely created or exacerbated existing economic hardships.

As we wrote in last year's report, the law requires that the IRS must release a levy if it is causing an economic hardship, i.e., if satisfaction of the levy in whole or in part will cause an individual taxpayer to be unable to pay his or her reasonable basic living expenses.²² A levy can be the garnishment of wages, in which case the employer remits wages to the IRS; it can be the attachment of a bank account, in which case the bank remits the account contents to the IRS; or it can be the seizure of an asset, such as land or personal property, in which case the IRS follows a process whereby it seizes the property and sells it to pay off or contribute to the tax debt. Because of the law's prohibition on levies that cause an economic hardship, we again asked the IRS why its procedures allow for the seizure of property from taxpayers who appear to be already experiencing an economic hardship.

These revenue officers were acting in a manner that is consistent with IRS guidance. However, the guidance led to seizures in the cases of 18 taxpayers who had expressed a willingness to pay through installment agreements, and 11 appeared to be experiencing an economic hardship, which is contrary at least to the spirit of I.R.C. § 6343.

With so many delinquent balance due accounts and so few property seizures, it is difficult to reconcile IRS seizures of personal residences and other property of taxpayers who appear to be experiencing economic hardships (who are “can't pay” taxpayers) and other taxpayers who want to enter into installment agreements (who are “will pay” taxpayers). The IRS should not constrain revenue officers from options other than seizure in these cases when taxpayers own some equity in assets.

The IRS Did Not Seize Assets During the Collection Due Process Period

I.R.C. § 6330 authorizes the IRS to seize a taxpayer's property for unpaid tax only after sending the taxpayer a Letter 1058 (which provides taxpayers the opportunity to exercise their Collection Due Process (CDP) rights of appeal) and the expiration of CDP rights.²³ In Fiscal Year 2020, we did not find evidence that the IRS seized taxpayers' property in violation of I.R.C. § 6330. If a taxpayer does not pay overdue taxes, make other arrangements to satisfy the tax debt, or request a hearing within 30 calendar days of the date of the notice, the IRS may seize the taxpayer's property.²⁴ The law requires that, if the taxpayer files a timely request for a CDP hearing, collection actions on the assessments that are the subject of the CDP notice must generally be suspended during the appeal period and while any court proceedings are pending.²⁵ Additionally, the law provides that, during the pendency of the CDP hearing, the running of the collection statute of limitations is suspended.

Appeals' mission is to resolve tax controversies on a basis that is fair and impartial to the Government and the taxpayer. In CDP hearing cases, the Appeals officer is responsible for making a determination based on the facts and the law known to Appeals during the time of the hearing.²⁶ After Appeals has made its determination, and if the taxpayer disagrees, the taxpayer can petition the U.S. Tax Court and appeal the CDP determination. Generally, all collection actions are suspended from the date of the taxpayer's request until a Notice of Determination is issued or the Tax Court's decision is final.

If the taxpayer did not timely request a CDP hearing with Appeals, the taxpayer may be entitled to an “equivalent hearing” with Appeals, but only if specifically requested. An equivalent hearing is equivalent to a CDP hearing in all ways except that there is no statute suspension and no retained jurisdiction, and the taxpayer does not have the right to seek judicial review of Appeals' decision at the conclusion of the hearing.²⁷

We evaluated the IRS's compliance with CDP and equivalent hearing procedures prior to the seizure by reviewing a random sample of 57 seizure cases conducted from July 1, 2018, through June 30, 2019, that had an Appeals CDP hearing request or an equivalent hearing.²⁸ We reviewed the 57 CDP and equivalent hearing tax modules for taxpayers with a seizure, and we did not identify any collection activity for the tax modules affected by the taxpayer's CDP between the equivalent hearing request date and the date the appeal was closed.

The IRS Appropriately Conducted Seizures During the People First Initiative

In response to the economic impacts of the COVID-19 virus on taxpayers, the IRS initiated the People First Initiative. This initiative provides relief to taxpayers by suspending most collection activities during the period of April 1, 2020, through July 15, 2020, unless:

• There is a risk of permanent loss to the Government due to the expiration of a statute or other exigent circumstance, or

• The taxpayer has agreed to an action.²⁹

Suspended collection actions include seizures, and revenue officers were advised on March 30, 2020, absent exigent circumstances and executive approval, not to schedule or take seizure action during this suspension period. The IRS conducted three seizures during this suspension period; however, in all three cases, the seizure was appropriate to protect the Government's interest in collection of significant delinquent amounts due.³⁰

---

Appendix I

Detailed Objective, Scope, and Methodology

The overall objective of this audit was to determine whether seizures were conducted in accordance with the I.R.C. and IRS procedures. To accomplish the objective, we:

• Identified current IRS procedures and guidelines used by Small Business/Self-Employed Division employees during the audit period for achieving compliance with I.R.C. §§ 6330 through 6344.¹ Also, we followed up on prior TIGTA report recommendations for achieving compliance with seizure requirements.

• Evaluated the IRS's compliance with the seizure procedures of I.R.C. §§ 6330 through 6344 and its internal procedures through reviewing a judgmental sample² of 205 of the 342 seizures conducted from July 1, 2018, through June 30, 2019.

• Evaluated the IRS's compliance with CDP and equivalent hearing procedures prior to the seizure by reviewing a random sample of 57 seizure cases conducted from July 1, 2018, through June 30, 2019, that had a previous Appeals CDP hearing request or an equivalent hearing (I.R.C. § 6330). We identified the entire population using TIGTA's Data Center Warehouse and reviewed the sampled cases using the IRS's Integrated Data Retrieval System and Appeals Centralized Database System information to determine if the seizure occurred during the open CDP.

Performance of This Review

This review was performed with information obtained from the offices of the Small Business/Self-Employed Division Headquarters located in Lanham, Maryland, and at Small Business/Self-Employed Division Field Collection offices in Little Rock, Arkansas, and Knoxville, Tennessee, during the period September 2019 through June 2020. We conducted this performance audit in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objective. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objective.

Major contributors to the report were Matthew A. Weir, Assistant Inspector General for Audit (Compliance and Enforcement Operations); Christina Dreyer, Director; Tim Greiner, Audit Manager; Jamelle Pruden, Lead Auditor; and Victor Taylor, Senior Auditor.

Validity and Reliability of Data From Computer-Based Systems

During this review, we relied on Appeals data located on the Data Center Warehouse. Before relying on this data, we ensured that the file contained the specific data elements we requested. We tested a randomly selected sample for the Appeals database and verified relevant data fields recorded against the IRS Master File using the Integrated Data Retrieval System. We determined that the data were sufficiently reliable for purposes of this audit.

Internal Controls Methodology

Internal controls relate to management's plans, methods, and procedures used to meet their mission, goals, and objectives. Internal controls include the processes and procedures for planning, organizing, directing, and controlling program operations. They include the systems for measuring, reporting, and monitoring program performance. We determined that the following internal controls were relevant to our audit objective: the Small Business/Self-Employed Division Collection function's policies, procedures, and practices for conducting seizures of taxpayers' property under the provisions of I.R.C. §§ 6330 through 6344 and the interest-compounding requirement of I.R.C. § 6622. We evaluated these controls by reviewing appropriate internal procedures and guidelines and completed a review of seizure case files.

---

Appendix II

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 Congress.

Type and Value of Outcome Measure:

• Taxpayer Rights and Entitlements — Potential; 19 taxpayers for whom the IRS did not comply with a particular I.R.C. section, IRM requirement, or did not exhibit due diligence to ensure that the seizure was appropriate when conducting seizures (see Recommendations 1, 2, and 4).

Methodology Used to Measure the Reported Benefit:

We reviewed a judgmental sample of 205 seizures from the 342 seizures that the IRS conducted from July 1, 2018, through June 30, 2019. We identified 19 seizures for which the IRS did not comply with a particular I.R.C. section, IRM requirement, or did not exhibit due diligence to ensure that the seizure was appropriate.

Management's Response: In their response, IRS management acknowledged that 19 cases cited reflected failure to follow IRM procedures but did not agree that the any of these cases were violations of the I.R.C.

Office of Audit Comment: * * * 1 * * * of the 19 cases involved encumbrance reviews and were in violation of I.R.C. § 6331, pertaining to seized assets to be sold pursuant to I.R.C. § 6335. Specifically, these * * * 1 * * * seizures would not have occurred if a thorough investigation of the property's status (to include a proper and accurate encumbrance analysis) had occurred. As a result, the seized assets were released * * * 1 * * * of these cases and returned to the taxpayer.

Type and Value of Outcome Measure:

• Taxpayer Rights and Entitlements — Potential; * * * 1 * * * (see Recommendation 3).

Methodology Used to Measure the Reported Benefit:

We reviewed a judgmental sample of 205 seizures from the 342 seizures that the IRS conducted from July 1, 2018, through June 30, 2019. * * * 1 * * *

Type and Value of Outcome Measure:

• Taxpayer Rights and Entitlements — Potential; 11 taxpayers experiencing possible economic hardship due to seizures of their property (see Recommendation 5).

Methodology Used to Measure the Reported Benefit:

We reviewed a judgmental sample of 205 seizures from the 342 seizures that the IRS conducted from July 1, 2018, through June 30, 2019. In 11 cases, there were facts present indicating the taxpayers may have been experiencing economic hardship but were deemed “won't pay” taxpayers due to the existence of equity in assets; three of them had their personal residences seized. As we wrote in last year's report, the law requires that the IRS must release a levy if it is causing an economic hardship, i.e., taxpayers are having difficulties meeting basic living expenses.¹ A levy can be the garnishment of wages, in which case the employer remits wages to the IRS; it can be the attachment of a bank account, in which case the bank remits the account contents to the IRS; or it can be the seizure of an asset, such as land or personal property, in which case the IRS follows a process whereby it seizes the property and sells it to pay off or contribute to the tax debt.

Management's Response: In their response, IRS management did not agree that the seizure action taken in these 11 cases caused the taxpayer an economic hardship.

Office of Audit Comment: IRS procedures for seizures divide taxpayers into three categories: “will pay” taxpayers, “can't pay” taxpayers, and “won't pay” taxpayers. The IRS will not seize property on “will pay” or “can't pay” taxpayers but are inclined to seize the property of “won't pay” taxpayers. IRS procedures turn these standards upside down when there is the presence of equity in assets in two situations: where taxpayers appear to be experiencing an economic hardship but possess some equity in assets and where taxpayers are seeking an installment agreement above the streamlined threshold of $50,000 but possess some equity in assets. In these situations, the IRS labels taxpayers who can't pay as “won't pay” simply because they have some equity in an asset (such as a personal residence), and the IRS labels taxpayers who want an installment agreement, i.e., they want to pay, as “won't pay” taxpayers because of equity in assets.

Again this year, we observed taxpayers who appear to be experiencing an economic hardship who had their homes taken from them because there was some equity in the personal residence. The IRS will not agree that there is an economic hardship unless the taxpayer is able to complete a personal financial statement (Form 433-A) and the IRS agrees with all of the information on the form. The IRS will not allow revenue officers to infer economic hardship for themselves from circumstances they observe, e.g., in which the taxpayer is out of work, unable to afford medicine, or living in dilapidated circumstances. This year we also observed numerous taxpayers who wanted an installment agreement but were declined that opportunity because IRS procedures advise that installment agreements with balance dues above certain thresholds should be rejected where there is equity in assets.

---

Appendix III

Synopsis of Selected Legal Provisions for Conducting Seizures

I.R.C. § 6330 requires the IRS to issue the taxpayer a notice of his or her right to a hearing prior to any seizure action. The notice must be: 1) given in person, 2) left at the taxpayer's home or business, or 3) mailed as certified-return receipt requested no fewer than 30 calendar days before the day of the first levy. The notice must explain in simple terms: 1) the amount owed, 2) the right to request a hearing during the 30-calendar-day period, and 3) the proposed action by the IRS and the taxpayer's rights with respect to such action.

The statute of limitations for collection is suspended from the time a taxpayer requests a hearing and while such hearings and appeals are pending, except when the underlying tax liability is not at issue in the appeal and the court determines that the IRS has shown good cause not to suspend the seizure. No limitation period may expire before 90 calendar days after a final determination. These procedures do not apply if the collection of tax is in jeopardy.

I.R.C. § 6331 authorizes the IRS to seize a taxpayer's property for unpaid tax after sending the taxpayer a 30-calendar-day notice of intent to levy. This section also prohibits seizure: 1) during a pending suit for the refund of any payment of a divisible tax, 2) before a thorough investigation of the status of any property subject to seizure, or 3) while either an offer in compromise or an installment agreement is being evaluated and, if necessary, for 30 additional calendar days during which the taxpayer may appeal the rejection of the offer in compromise or installment agreement.

I.R.C. § 6332 requires that a third party in possession of property subject to seizure surrender such property when a levy notice is received. It contains sanctions against third parties who do not surrender such property when a levy notice is received.

I.R.C. § 6333 requires that a third party with control of books or records containing evidence or statements relating to property subject to seizure exhibit such books or records to the IRS when a levy notice is received.

I.R.C. § 6334 enumerates property exempt from seizure. The exemption amounts are adjusted each year and include $9,200 in fuel, provisions, furniture, and personal effects and $4,600 in books and tools necessary for business purposes for Calendar Year 2017. For Calendar Year 2018, the amounts are $9,380 for fuel, provisions, etc., and $4,690 for books and tools of a trade. Also, any primary residence, not just the taxpayer's, is exempt from seizure when the amount owed is $5,000 or less other than real property that is rented. Seizure of the taxpayer's principal residence is allowed only with the approval of a U.S. District Court judge or magistrate. Property used in the individual taxpayer's business is exempt except with written approval of the Area Director, and the seizure may only be approved if other assets are not sufficient to pay the liability.

I.R.C. § 6335 contains procedures for the sale of seized property. Notice must be given to the taxpayer; the property must be advertised in the county newspaper or posted at the nearest U.S. Postal Service office; and such notices shall specify the time, place, manner, and conditions of sale. This section requires that the property be sold no fewer than 10 calendar days or no more than 40 calendar days from the time of giving public notice. Finally, this section expressly prohibits selling seized property for less than the minimum bid.

I.R.C. § 6336 contains procedures for seized property that is likely to perish.

I.R.C. § 6337 allows the taxpayer to redeem seized property prior to sale by paying the amount due plus the expenses of the seizure. It also allows a taxpayer to redeem real property within 180 calendar days of the sale by paying the successful bidder the purchase price plus 20 percent per annum interest.

I.R.C. § 6338 requires that the IRS give purchasers of seized property a certificate of sale upon full payment of the purchase price. This includes issuing a deed to real property after expiration of the 180-calendar-day period required by I.R.C. § 6337. The deed is exchanged for the certificate of sale issued at the time of the sale.

I.R.C. § 6339 provides the legal effect of the certificate of sale for personal property and the transfer deed for real property.

I.R.C. § 6340 requires that each Area Office keep a record of all sales of seized property. This record must include the tax for which such sale was made, the dates of seizure and sale, the name of the party assessed, all proceedings in making such sale, the amount of expenses, the names of the purchasers, and the date of the deed or certificate of sale of personal property. The taxpayer will be furnished: 1) the previous listed information except for the purchasers' names, 2) the amount of such sale applied to the taxpayer's liability, and 3) the remaining balance of such liability.

I.R.C. § 6341 allows expenses for all seizure and sale cases.

I.R.C. § 6342 enumerates how the proceeds of a seizure and sale are to be applied to a taxpayer's account. Proceeds are applied first to the expenses of the seizure and sale proceedings. Any remainder is then applied to the taxpayer's liability.

I.R.C. § 6343 outlines various conditions under which a seizure may be released and property returned to the taxpayer. These conditions include full payment of the liability, determination of a wrongful seizure, levy is creating an economic hardship due to the financial condition of the taxpayer, etc. This section allows a consent agreement between the United States and either the taxpayer or the National Taxpayer Advocate when the return of seized property would be in the taxpayer's best interest.

I.R.C. § 6344 contains cross-references for I.R.C. §§ 6330 through 6344.

I.R.C. § 6622 requires when computing the amount of any interest required to be paid under Title 26 or §§ 1961(c)(1) or 2411 of Title 28, United States Code, that the interest amount will be compounded daily.

Public Law Number 105-206 (IRS Restructuring and Reform Act of 1998) § 3421 requires the IRS to employ a supervisory review of seizures before action is taken.¹

Public Law Number 105-206 (IRS Restructuring and Reform Act of 1998) § 3443 required the IRS to implement a uniform asset disposal mechanism by July 22, 2000, for sales of seized property under I.R.C. § 6335. This mechanism was designed to remove revenue officers from participating in the sales of seized assets.

---

Appendix IV

Prior Reports on Compliance With Seizure Procedures

TIGTA, Ref. No. 2019-30-075, Fiscal Year 2019 Review of Compliance With Legal Guidelines When Conducting Seizures of Taxpayers' Property (Sept. 2019).

TIGTA, Ref. No. 2018-30-067, Fiscal Year 2018 Review of Compliance With Legal Guidelines When Conducting Seizures of Taxpayers' Property (Sept. 2018).

TIGTA, Ref. No. 2017-30-063, Fiscal Year 2017 Review of Compliance With Legal Guidelines When Conducting Seizures of Taxpayers' Property (Aug. 2017).

TIGTA, Ref. No. 2016-30-074, Fiscal Year 2016 Review of Compliance With Legal Guidelines When Conducting Seizures of Taxpayers' Property (Aug. 2016).

TIGTA, Ref. No. 2015-30-048, Fiscal Year 2015 Review of Compliance With Legal Guidelines When Conducting Seizures of Taxpayers' Property (June 2015).

---

Appendix V

Management's Response to the Draft Report

---

Appendix VII

Abbreviations

CDP	Collection Due Process
FY	Fiscal Year
I.R.C.	Internal Revenue Code
IRM	Internal Revenue Manual
IRS	Internal Revenue Service
TIGTA	Treasury Inspector General for Tax Administration