IRS Should Assert Taxpayer Contact Restrictions, TIGTA Finds

Fiscal Year 2020 Statutory Review of Restrictions on Directly Contacting Taxpayers

August 19, 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 August 19, 2020

Why TIGTA Did This Audit

This audit was initiated because TIGTA is required to annually report on the IRS's compliance with the direct contact provisions of the Internal Revenue Code (I.R.C.). For this year's review, TIGTA analyzed the extent to which revenue officers in the Small Business/Self-Employed (SB/SE) Division's Field Collection comply with the direct contact provisions of I.R.C. Section (§) 7521 and fair tax collection practices of I.R.C. § 6304(a)(2) during interactions with taxpayers or their representatives. The Taxpayer Bill of Rights (I.R.C. § 7803(a)(3)(I)) also guarantees the right of representation for taxpayers appearing before the IRS. This review also analyzed the extent to which Exempt Organizations Determinations (EOD) specialists in the Tax Exempt and Government Entities (TE/GE) Division's Exempt Organizations (EO) Determinations business unit comply with taxpayers' rights to representation.

Impact on Taxpayers

If taxpayers' rights to representation are not adhered to by the IRS, they might not receive the benefits under the law and procedures to which they are entitled, and they may experience adverse outcomes.

What TIGTA Found

The IRS has a number of policies and procedures to help ensure that taxpayers are afforded the right to designate an authorized representative to act on their behalf in a variety of tax matters. In addition, the IRS has a process to handle the review and disposition of taxpayer allegations of direct contact violations.

TIGTA selected a statistically valid sample of case histories to review in the Field Collection function for 96 taxpayers who had collection actions documented on the Integrated Collection System between July 1, 2018, and June 30, 2019. TIGTA reviewed the case history narratives for these sampled cases and found three instances in which revenue officers contacted taxpayers directly, even though there was an authorized representative on file. The contacts appeared to have violated I.R.C. § 6304, which could indicate that the rights granted under I.R.C. § 7521 were also not protected. For six of the 96 cases, Field Collection function employees disclosed taxpayer information to individuals not authorized to receive that information.

TIGTA also selected for review a statistically valid sample of case histories in the EO Determinations area for 96 determination requests made by organizations that may have had direct contact made between July 1, 2018, and June 30, 2019. TIGTA determined that the Internal Revenue Manual (IRM) covering EO Determinations cases does not provide clear guidance on who the EOD specialist should contact when a valid power of attorney (POA) is on file, and allows the EOD specialist to bypass the POA and contact others.

What TIGTA Recommended

TIGTA made five recommendations including that the Director, Field Collection, SB/SE Division, report the potential I.R.C. § 6304 noncompliance identified in this report to the appropriate local Labor Relations Specialist, and reemphasize to revenue officers the importance of following the law and established guidelines and procedures on the taxpayer's right to confidentiality. Also, the Commissioner, TE/GE Division, should revise Form 1023, Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code and/or the instructions to clearly allow for taxpayers to elect their POA as the initial contact with the EO Determinations function, and update EO Determinations training and the IRM to include bypass procedures and recognize the taxpayers' election to have the POA serve as the main point of contact with the EO Determinations function.

The IRS agreed with all of our recommendations. SB/SE Division Field Collection plans to report potential I.R.C. § 6304 noncompliance identified in this report to the appropriate local Labor Relations Specialist, and reemphasize to revenue officers the importance of following the law and established guidelines and procedures on the taxpayer's right to confidentiality and representation. The TE/GE Division plans to review Form 1023 and/or the instructions as well as EO Determinations training and the IRM and make any appropriate clarifications or revisions regarding bypass procedures.

August 19, 2020

MEMORANDUM FOR:
COMMISSIONER OF INTERNAL REVENUE

FROM:
Michael E. McKenney
Deputy Inspector General for Audit

SUBJECT:
Final Audit Report — Fiscal Year 2020 Statutory Review of Restrictions on Directly Contacting Taxpayers (Audit # 202030023)

This report presents the results of our review to determine whether the Internal Revenue Service is in compliance with legal guidelines addressing the direct contact of taxpayers and their representatives as set forth in Internal Revenue Code (I.R.C.) Sections (§§) 7521(b)(2) and (c), and the fair tax collection practices set forth in I.R.C. § 6304 (a)(2) and I.R.C. § 7803(a)(3)(I). 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 III.

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 — Previous Audit Reports Related to This Statutory Review

Appendix III — Management's Response to the Draft Report

Appendix IV — Glossary of Terms

Appendix V — Abbreviations

Background

Taxpayers have a right to representation in matters before the Internal Revenue Service (IRS).¹ Internal Revenue Code (I.R.C.) Sections (§§) 7521(b)(2) and (c) provide taxpayers the right to representation during interviews.² The Treasury Inspector General for Tax Administration (TIGTA) is required to annually assess whether the IRS is protecting the taxpayers' rights to representation under I.R.C. § 7521.³ I.R.C. § 6304(a) also protects taxpayers' rights to representation by prohibiting collection-related contact of a taxpayer if the IRS has been appropriately notified that the taxpayer is represented.⁴

The effort to determine whether the IRS is complying with I.R.C. §§ 7521(b)(2) and (c) (hereafter referred to as the direct contact provisions) and other provisions of the law protecting the right to representation is complicated by the fact that the IRS cannot proactively identify IRS employee violations of this law. TIGTA's Office of Investigations receives complaints and initiates investigations based on those complaints. The Office of Investigations tracks those complaints and investigations using its Criminal Results Management System.

From July 1, 2018, to June 30, 2019, the Office of Investigations resolved nine complaints alleging that IRS employees bypassed taxpayer representatives and contacted taxpayers directly, and/or potentially violated the fair tax collection practices. The Office of Investigations evaluates all complaints and makes a determination as to whether it will initiate an investigation into the matter or take other appropriate action. During this period, five new investigations were initiated based on the nine complaints. The Office of Investigations closed five investigations from July 1, 2018, to June 30, 2019 (some of which may have been opened in prior years). * * * 1 * * *

To designate power of attorney (POA) authority to a representative, a taxpayer files Form 2848, Power of Attorney and Declaration of Representative, with the IRS. Once received and validated, the IRS records the representative's authorization in its Centralized Authorization File, a computerized system of records that houses authorization information from both the POAs and tax information authorizations. This file is part of the Integrated Data Retrieval System, which can be used by IRS functions to determine when a taxpayer is working with an authorized representative.

Identifying the authorized representative during audit or collection activities is critical for IRS personnel because I.R.C. § 6103 prohibits disclosure of tax return information to third parties unless the taxpayer has authorized the IRS to make the disclosure. In addition, the direct contact provisions of I.R.C. § 7521 enacted on November 10, 1988, as part of the Omnibus Taxpayer Bill of Rights,⁵ created a number of safeguards to protect the rights of taxpayers interviewed by IRS employees as part of a tax examination or collection action. Specifically, IRS employees are required to:

• Stop the interview (unless initiated by an administrative summons) whenever a taxpayer requests to consult with a representative, i.e., any person, such as an accountant or attorney, who is permitted to represent taxpayers before the IRS.

• Obtain their immediate supervisor's approval to contact the taxpayer instead of the representative if the representative unreasonably delays the completion of an examination, collection, or investigation.

The Senate Committee on Finance conducted numerous hearings in Calendar Years 1997 and 1998 addressing the rights of taxpayers. Several witnesses provided statements regarding abuses of taxpayer rights by IRS employees, including incidents in which employees failed to observe the taxpayers' right to representation. Shortly after those hearings, the IRS Restructuring and Reform Act of 1998⁶ was enacted into law, which directed the IRS to revise Publication 1, Your Rights as a Taxpayer, to better inform taxpayers of these rights. In addition, this Act added I.R.C. § 7803(d)(1)(A)(ii), which requires TIGTA to annually evaluate the IRS's compliance with the direct contact provisions. In 2015, the right of taxpayers to be represented before the IRS was enacted into law as part of the Taxpayer Bill of Rights in I.R.C. § 7803(a)(3)(I). TIGTA has previously performed 21 annual reviews to meet this requirement. Appendix II lists the five most recent audit reports related to this statutory review.

Results of Review

The Internal Revenue Service Has a Process to Handle the Review and Disposition of Taxpayer Allegations of Direct Contact Violations

IRS management cannot track situations in which a taxpayer is denied the right to appropriate representation unless the taxpayer or his or her representative files a complaint with the IRS, TIGTA, Taxpayer Advocate Service, or his or her congressional Representative or Senator. The IRS has not put a system in place to systemically track violations of the direct contact provisions and does not plan to implement a system. However, the IRS has a process to ensure that reported allegations, including direct contact violations, are reviewed to determine if there was any employee misconduct.

The IRS Employee Conduct and Compliance office receives, processes, and tracks all complaint referrals, e.g., allegations not investigated by TIGTA, as well as reports of investigation that TIGTA forwards to the IRS. According to the IRS, the Employee Conduct and Compliance office is responsible for ensuring that IRS management addresses the complaint referrals to determine their proper disposition. It also tracks the disposition of TIGTA complaint referrals. These complaint referrals are assigned, tracked, and recorded on the Employee Issues Branch E-trak database.

During our review, we requested a report of all complaints received between July 1, 2018, and June 30, 2019, by the Employee Conduct and Compliance office and maintained on the E-trak database. We reviewed these cases and determined that the Employee Conduct and Compliance office closed four cases in which there were allegations of possible direct contact violations. We reviewed the details of the closed cases, and we agreed with the final disposition of each case.

For those complaint referrals in which there is action taken by IRS management, the dispositions of the complaint referrals (including any disciplinary actions for substantiated allegations) are entered into the Automated Labor and Employee Relations Tracking System to ensure the maintenance of historic records of employee misconduct. The use of this system also helps ensure consistency in recording employee misconduct and disciplinary actions, e.g., admonishment letters, employee suspensions, and employee removals.

Field Collection Employees Are Generally Following Procedures Intended to Protect Taxpayer Rights

The Small Business/Self-Employed (SB/SE) Division's Field Collection employees record actions and decisions taken on cases within the Integrated Collection System (ICS).⁷ To determine how well Field Collection employees (revenue officers) are complying with the direct contact provisions and fair tax collection practices of the I.R.C., we obtained a download of ICS data from TIGTA's Data Center Warehouse for all open and archived cases with action dates between July 1, 2018, and June 30, 2019. From this population, we selected a statically valid random sample of 96 cases.⁸

We reviewed the case history narratives for these sampled cases and determined that revenue officers working the cases generally adhered to procedures that help ensure compliance with the direct contact provisions of I.R.C. § 7521(b)(2) and I.R.C. § 7521(c). However, in our review of SB/SE Division Field Collection sampled cases, we found instances of potential violations with the fair tax collection practices of I.R.C. § 6304(a)(2) (discussed later in this report), which could indicate that the rights granted under I.R.C. §§ 7521(b)(2) and (c) were also not protected.

Revenue officers have a responsibility to protect a taxpayer's right to privacy

Taxpayers have the right to confidentiality, and IRS employees are prohibited from disclosing taxpayer information to unauthorized individuals.⁹ This right is also addressed in the Taxpayers Bill of Rights as outlined in Publication 1, which states that the information taxpayers provide to the IRS will be released only if the disclosure is authorized by the taxpayer or by law. The IRS's disclosure policies outline every IRS employee's responsibility to protect the confidentiality of records and information entrusted to the IRS, and states that every IRS employee who has access to tax returns, return information, Personally Identifiable Information, and sensitive but unclassified information is charged with the responsibility of protecting the information from disclosure and is charged with the responsibility to know when disclosures are authorized.¹⁰ Publication 1 states that employees who disclose taxpayer return information without proper authorization may be disciplined. The Internal Revenue Manual (IRM) states that indications of willful disclosures of returns or return information must be reported to TIGTA, while no further corrective action is necessary once the employee and manager discuss the matter for inadvertent disclosures.¹¹ Employees who are convicted of willfully disclosing any return or return information to an unauthorized party may be subject to a fine in any amount not exceeding $5,000, imprisonment of five years or less, or both. The employee would also be subject to paying for the costs of prosecution, and he or she may be subject to dismissal from the IRS.

In our review of the case history narratives from the ICS, we found potential disclosure violations in six of the 96 case files reviewed. In the six cases, revenue officers spoke with and provided confidential information to unauthorized parties who did not have a Form 2848 on file. Based on case reviews, there was no evidence indicating that the disclosures made in the six cases were authorized by either the taxpayer or the law. We provided the case history narratives and our observations to Collection function management, and they agreed that four instances could be potential violations of
I.R.C. § 6103(a). * * * 1 * * * Additionally, the staff of the SB/SE Division's National Quality Review System (NQRS) identified similar findings in their Fiscal Year (FY) 2018 and FY 2019 reviews of Field Collection. The NQRS reported the following:

• The confidentiality of taxpayers was not observed in 323 (7.7 percent) instances out of 4,181 reviews in FY 2018 and in 315 (9.2 percent) instances out of 3,419 case reviews in FY 2019.

Field Collection management should ensure that revenue officers remain mindful of I.R.C. § 6103(a). When revenue officers disclose confidential taxpayer information to unauthorized parties or management does not take action on quality review results, the Field Collection function not only violates a taxpayer's right to confidentiality, but it may also negatively affect taxpayers' perception of the IRS as a trusted institution. Additionally, a taxpayer who has had his or her right to confidentiality violated may bring a civil action for damages against the United States in a district court, which can result in other costs to the Government.¹²

Field Collection can take additional steps to ensure that revenue officers are protecting taxpayers' right to representation

In three cases, the revenue officers did not secure managerial approval to bypass an authorized representative and deal with the taxpayer directly, and we found no evidence that the revenue officers provided notification to the POA on file of such a bypass. Specifically, for the three cases, the revenue officers improperly contacted the taxpayers directly when there was a valid POA on file or a Form 2848 was sent directly to SB/SE Division Field Collection. The revenue officers attempted to contact the taxpayers directly by telephone or in person during field calls instead of contacting the authorized representative listed in the ICS or in the Integrated Data Retrieval System. Based on the case reviews, there was no evidence indicating the POA was delaying the process. Additionally, NQRS staff identified similar findings in their FY 2018 and FY 2019 reviews of Field Collection. The NQRS reported the following:

• The right to representation was not observed in 144 (3.4 percent) instances out of 4,181 reviews and in 132 (3.9 percent) instances out of 3,419 case reviews in FYs 2018 and 2019, respectively.

The Field Collection IRM addresses POA bypass procedures. Revenue officers are instructed to consult with their group managers before beginning the bypass process, and the employees are also instructed to notify the POA of the potential bypass with Letter 4016-A, Bypass Warning Letter (Power of Attorney). The IRM provides detailed instructions for the revenue officer to follow if the representative impedes or delays the case.¹³ The IRM instructs group managers to report any potential employee violations of the fair tax collection practices to the local Labor Relations Specialist by the close of the next business day following notification of the alleged violation. If violations are confirmed, group managers are instructed to work with the Labor Relations Specialist to determine the next appropriate action.¹⁴

When SB/SE Division employees do not follow appropriate bypass procedures as described in their IRM, group managers do not identify direct contact violations during their case reviews, or management does not take action on quality review results, SB/SE Division employees may not only violate taxpayers' right to receive appropriate and effective representation, but they may also negatively affect the outcome of these cases because taxpayers may not otherwise make an informed decision. We provided the case history narratives and our observations to Collection function management, and they agreed that these could be potential violations of I.R.C. § 6304(a)(2). Field Collection management should consider reemphasizing relevant requirements and procedures related to I.R.C. § 6304(a)(2) and I.R.C. §§ 7521(b)(2) and (c).

Revenue officer documentation of Publication 1 needs improvement

The IRM specifically requires revenue officers to provide taxpayers a copy of Publication 1 at the initial appointment if the taxpayers have not already received one. Once a copy of Publication 1 has been provided, the revenue officer is to review Publication 1 with the taxpayer or his or her representative and answer any questions that he or she may have.¹⁵ We reviewed the sampled SB/SE Division Field Collection cases to determine whether these actions were documented in the case files. We found instances in which the revenue officer did not consistently follow IRM guidelines. * * * 1 * * * . Additionally, NQRS staff identified similar results for Field Collection for FYs 2018 and 2019 as follows:

• 282 (6.7 percent) of 4,181 reviews found that the revenue officer did not verify that the taxpayer received Publication 1 in FY 2018.

• 260 (7.6 percent) of 3,419 reviews found that the revenue officer did not verify that the taxpayer received Publication 1 in FY 2019.

According to the IRS, these violations are likely a consequence of the numerous requirements that revenue officers need to document upon initial contact and the revenue officer forgetting to document the discussion regarding taxpayer rights in the ICS case history. The IRS uses Publication 1 as the main document to inform taxpayers of their rights. Publication 1 also includes a contact number for TIGTA, for which suspected violations of the direct contact provision and other potential misconduct or abuse by IRS personnel can be reported. Further, the Taxpayer Bill of Rights as published in Publication 1 is also codified under I.R.C. § 7803(a)(3). The IRS could better ensure that taxpayers are informed of their rights during interviews if revenue officers verified that Publication 1 was provided and explained during the initial contact. TIGTA believes that taxpayers should be informed of their rights and most importantly understand them and any potential consequences.

The Exempt Organizations Determinations Business Unit Procedures Need Refining to Better Protect Taxpayers' Right to Representation

The Tax Exempt and Government Entities (TE/GE) Division Exempt Organizations (EO) Determinations business unit (hereafter referred to as EO Determinations) is responsible for processing applications for tax exempt status and other determination requests, such as requests submitted on Form 1023, Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code and Form 1024, Application for Recognition of Exemption Under Section 501(a). We obtained a download of 115,568 active and closed cases worked by EO Determinations from July 1, 2018, through June 30, 2019. From this population, we selected a statistically valid random sample of 96 cases.¹⁶ Those cases were reviewed to determine TE/GE Division EO Determinations' observance of the taxpayer's right to representation under I.R.C § 7803(a)(3)(I).

We found in three of the 96 cases, the EO Determinations (EOD) specialist either contacted or attempted to contact the primary point of contact on Form 1023 instead of or before contacting the taxpayer's
POA. * * * 1 * * *

When an EOD specialist receives a Form 2848 and determines that the form is invalid, the EO Determinations IRM instructs the EOD specialist on how to proceed, depending on whether the EOD specialist needs more information from the taxpayer to make a determination.¹⁷ If the EOD specialist does not need additional information, he or she prepares the determination letter and sends it only to the organization. In the event the EOD specialist needs additional information, the IRM provides that the EOD specialist generally should send the invalid Form 2848 back to the organization with the additional information request (Letter 1312, Request for Additional Information) and explain why the form is invalid. In all three cases, the Form 1023, Line 7, was marked “yes” as shown in Figure 1 and a Form 2848 was provided, making clear the intent to exercise the right to representation authorizing the IRS to communicate directly with the taxpayer's elected representative.

I.R.C. § 7803(a)(3)(I) states that taxpayers have the right to retain representation. Based on our review of the three case histories, the EOD specialist sent Letter 1312 to request additional information and either contacted or attempted to contact the primary contact listed on Form 1023, Line 6, who was not the taxpayer's representative listed on Form 2848. The case history narratives also did not mention whether the Form 2848 was invalid or if the EOD specialist sent the Form 2848 back to the organization when the Letter 1312 was sent. In addition, we did not find evidence that the EOD specialist attempted to contact the taxpayer or representative to obtain a valid POA before sending Letter 1312 or before any other case action was taken.

While the applications for these three cases were eventually approved, we are concerned that the current Form 1023 for EO Determinations may result in the EOD specialist contacting the organization and not the taxpayer's POA when an adverse determination might be made.¹⁸ When taxpayers hire a POA, they are doing so with the expectation that the POA will handle contacts with the IRS. Taxpayers are also relying on the expertise of the POA to make sure the correct forms are completed and the correct information is provided to the IRS. By contacting the taxpayer instead of the hired representative, the taxpayer may feel pressured to provide information immediately and inadvertently provide the wrong information that would result in an adverse determination.

We also found that EO Determinations training does not specify that when an organization has a POA, the POA should be the main point of contact. An EOD specialist may interpret the lack of guidance as permission to contact the primary point of contact on Form 1023 directly, even when a taxpayer has made it clear that he or she wishes to be represented by their designated representative on a valid Form 2848 and/or Form 1023 application, Line 7.

It is problematic that EO Determinations allows EOD specialists to bypass authorized representatives without an appropriate objective analysis of whether the POA is nonresponsive or has otherwise become an impediment to resolving the issue with the taxpayer's application for nonprofit status. The Field Collection procedures, which we discussed earlier in this report, protect these rights by addressing the specific circumstances pertaining to POA bypass procedures. Revenue officers are instructed to consult with their group managers before beginning the bypass process and are also instructed to notify the POA of the potential bypass with Letter 4016-A. The Field Collection IRM provides detailed instructions for the revenue officer to follow if the representative impedes or delays the case.¹⁹ Based on our review of the EO Determinations case history narratives, the POA did not impede or delay these cases.