TIGTA: IRS Correctly Sending Assessment Extension Notifications

Fiscal Year 2019 Statutory Audit of Compliance With Notifying Taxpayers of Their Rights When Requested to Extend the Assessment Statute

August 7, 2019

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.

Highlights

Final Report issued on August 7, 2019

Highlights of Reference Number: 2019-30-054 to the Commissioner of Internal Revenue.

IMPACT ON TAXPAYERS

The IRS is required by law to notify taxpayers of their rights when requesting an extension of the statute of limitations for assessing additional taxes and penalties. Taxpayers might be adversely affected if the IRS does not follow the requirements to notify both the taxpayers and their representatives of the taxpayers' rights related to assessment statute extensions.

WHY TIGTA DID THE AUDIT

TIGTA is required by law to annually determine whether the IRS complied with Internal Revenue Code Section 6501(c)(4)(B), which requires that the IRS provide notice to taxpayers of their rights to decline to extend the assessment statute of limitations or to request that any extension be limited to a specific period of time or specific issues.

WHAT TIGTA FOUND

TIGTA's review of a statistical sample of 60 closed taxpayer audit files with assessment statute extensions found that the IRS was compliant with Internal Revenue Code Section 6501(c)(4)(B). However, 13 of the taxpayer audit files lacked documentation to support that employees followed the IRS's internal procedures for further explaining the taxpayers' rights to the taxpayers.

In addition, TIGTA's review found instances in which the audit files lacked documentation to support that the IRS complied with procedures requiring the notification of a taxpayer's representative when an authorization for third-party representation exists. Seven of the taxpayer audit files did not contain documentation to support that the taxpayers' representatives were provided with the required notifications.

WHAT TIGTA RECOMMENDED

TIGTA made no recommendations in this report.

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August 7, 2019

MEMORANDUM FOR
COMMISSIONER OF INTERNAL REVENUE

FROM:
Michael E. McKenney
Deputy Inspector General for Audit

SUBJECT:
Final Audit Report — Fiscal Year 2019 Statutory Audit of Compliance With Notifying Taxpayers of Their Rights When Requested to Extend the Assessment Statute (Audit # 201930008)

This report presents the results of our review to determine whether the Internal Revenue Service (IRS) complied with Internal Revenue Code Section 6501(c)(4)(B), which requires that the IRS provide notice to taxpayers of their rights to decline to extend the assessment statute of limitations or to request that any extension be limited to a specific period of time or specific issues. The Treasury Inspector General for Tax Administration is statutorily required to provide information annually regarding the IRS's compliance with this provision. This audit is included in our Fiscal Year 2019 Annual Audit Plan and addresses the major management challenge of Protecting Taxpayer Rights.

Although we made no recommendations in this report, we provided IRS officials an opportunity to review the draft report. IRS management did not provide us with any report comments.

If you have any questions, please contact me or Matthew A. Weir, Assistant Inspector General for Audit (Compliance and Enforcement Operations).

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Table of Contents

Background

Results of Review

Appendices

Abbreviations

BMF	Business Master File
FY	Fiscal Year
IMF	Individual Master File
I.R.C.	Internal Revenue Code
IRM	Internal Revenue Manual
IRS	Internal Revenue Service
RRA 98	Restructuring and Reform Act of 1998
TIGTA	Treasury Inspector General for Tax Administration

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Background

The Internal Revenue Service (IRS) is required by the IRS Restructuring and Reform Act of 1998 (RRA 98) and the Internal Revenue Code (I.R.C.) to notify taxpayers of their rights when requesting an extension of the statute of limitations for the assessment of additional taxes and penalties.¹ When the IRS audits a tax return and determines that there is an additional tax liability, the additional tax assessment must generally be processed within three years from the date the return was due or from the date on which the return was actually filed, whichever is later. This three-year assessment statute of limitations normally cannot be extended without the taxpayer's written consent.

To extend the statute, the IRS generally requests that the taxpayer provide a signed consent form, such as Form 872, Consent to Extend the Time to Assess Tax; Form 872-B, Consent to Extend the Time to Assess Miscellaneous Excise Taxes; Form 872-P, Consent to Extend the Time to Assess Tax Attributable to Partnership Items; or Form SS-10, Consent to Extend the Time to Assess Employment Taxes.² IRS employees who often request assessment statute extensions include examiners in the various Examination functions of the business divisions and appeals officers in the Office of Appeals. These consents extend the assessment statute of limitations to either a specific period of time or an unlimited, indefinite period on each occasion when the taxpayer is requested to provide such consent. The statute is usually extended for a period of time that both the IRS and the taxpayer agree is reasonable to complete the examination. The consent can also be negotiated to apply only to certain audit issues.

In passing the RRA 98, Congress wanted to ensure that taxpayers are fully aware of their rights to refuse or limit the statute extension. Otherwise, taxpayers might believe that they are required to agree to an extension upon the request of the IRS.

A taxpayer might agree to extend the assessment statute of limitations for the following reasons:

• The taxpayer might want to pursue additional audit issues that are in the taxpayer's favor in offsetting a proposed tax assessment or that might allow for a tax refund.

• If the remaining time before the statute expires is too short, the IRS might have to prematurely stop the audit process and issue a notice of deficiency that limits the time for the normal appeals process before the taxpayer must file a petition with the U.S. Tax Court.

A taxpayer might decide to limit or refuse to extend the assessment statute of limitations because the taxpayer might not want to:

• Provide the IRS more time to consider additional audit issues.

• Allow the IRS the opportunity to further develop audit issues already under consideration after the normal statute period has expired.

RRA 98 Section (§) 3461(b)(2)(B) requires the IRS to “. . . notify the taxpayer of the taxpayer's right to refuse to extend the period of limitations, or to limit such extension to particular issues or to a particular period of time, on each occasion when the taxpayer is requested to provide such consent.” To implement this statutory requirement, the IRS revised its procedures to direct IRS employees to provide the taxpayer with Letter 907, Request to Extend Assessment Statute, or Letter 967, Letter Transmitting Consent Extending Period of Limitation. Included with these letters should be the actual consent forms to be signed as well as Publication 1035, Extending the Tax Assessment Period, which includes a more detailed explanation of the taxpayer's rights and consequences of the taxpayer's choices.

The consent forms include a prominent statement informing taxpayers of their rights regarding assessment statute extensions and provide information about Publication 1035. Figure 1 shows that the consent forms also include a statement for the taxpayer's representative to sign, confirming that they were notified of their rights regarding assessment statute extensions and that the taxpayers were made aware of the same rights. In addition, the consent form includes a place for an IRS official's signature. Prior to signing the consent form, the manager should review the case file and consent form in compliance with Internal Revenue Manual (IRM) 25.6.22.5.13(1), Manager's Responsibilities When Signing Consents.³

IRS procedures require that any notice or other written communication required to be given to a taxpayer also be given to the taxpayer's representative (unless restricted by the taxpayer), along with a cover letter, Letter 937, Transmittal Letter for Power of Attorney.⁴ IRS employees are instructed to document in their audit file activity log whether the taxpayer was notified of his or her rights each time the IRS requested an assessment statute extension. In addition, IRS internal procedures require employees to provide copies of any correspondence with a taxpayer's representative to the taxpayer.

In Fiscal Year (FY) 2018, the IRS completed its revised job aid for examiners on using Form 10949, Statute Extension Check Sheet.⁵ Figure 2 shows that Form 10949, specifically Part 1 questions 11 through 15, should remind the employee of the requirements to properly notify taxpayers of their rights when requesting an extension of the statute of limitations.

Effective March 26, 2019, the IRS took corrective action on the Treasury Inspector General for Tax Administration's (TIGTA) recommendation made in the FY 2018 report⁶ and updated IRM 25.6.22 to clarify management's responsibilities when requesting an extension. The IRM update ensures that management or other authorized officials verify that the notification of the taxpayer's rights are provided to all taxpayers and authorized representatives when an extension is requested. Additionally, management or other authorized officials will verify the notification was properly documented in the case activity record or on other appropriate forms.

TIGTA is required by the RRA 98 to provide information annually regarding the IRS's compliance with I.R.C. § 6501(c)(4)(B). This report presents the results of our twentieth annual review of the IRS's compliance with the statute extension provisions of the law.⁷

This review was performed with information obtained from the Office of Appeals, the Large Business and International Division, and the Tax Exempt and Government Entities Division Headquarters in Washington, D.C.; the Small Business/Self-Employed Division Headquarters in New Carrollton, Maryland; and the Wage and Investment Division Headquarters in Atlanta, Georgia, during the period December 2018 through May 2019. 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. Detailed information on our audit objective, scope, and methodology is presented in Appendix I. Major contributors to the report are listed in Appendix II.

Results of Review

The IRS was compliant with legal requirements to notify taxpayers of their rights when requesting an extension of the statute of limitations for assessing additional taxes and penalties. However, employees did not always follow internal IRS requirements to document that detailed letters further explaining the taxpayers' rights to both the taxpayer and taxpayers' representatives were sent.

The Internal Revenue Service Was Compliant With Legal Requirements Related to Requests to Extend the Assessment Statute

The IRS is required to notify taxpayers of their rights when requesting an extension of the statute of limitations for assessing additional taxes and penalties. Based on the results of this review, we believe that the IRS was compliant with legal requirements.⁸ We reviewed a statistically valid sample of 60 closed taxpayer audit files for cases in which the taxpayers granted an extension of the statute expiration date. We did not identify any instances in which the IRS failed to provide notice to the taxpayers of their rights to decline to extend the assessment statute of limitations or to request that any extension be limited to a specific period of time or specific issues. In all 60 taxpayer audit files, the legal requirements were satisfied when the taxpayers or the taxpayers' representatives signed Forms 872 or SS-10, because the taxpayers' rights are clearly specified on the front of the forms.

Internal Requirements for Notifying Taxpayers and Their Representatives of Taxpayers' Rights Were Not Always Followed

IRS procedures and publications go beyond statutory requirements by providing both the taxpayer and the taxpayer's authorized representative with notices, including notification of the taxpayer's rights. The IRS's internal procedures require that notification be made to the taxpayer by sending Letter 907 or Letter 967, along with a properly completed consent form, which contains the notice of taxpayers' rights and Publication 1035, each time a request is made to the taxpayer to consent to extend the period for assessment.⁹ IRS employees must also document in the case file on Form 9984, Examining Officer's Activity Record, that the required notification was made. We found that taxpayer audit files did not always contain documentation to support that the IRS complied with these procedures.

• From our statistically valid sample of 60 taxpayer audit files, we identified 13 (21.7 percent) audit files that did not contain documentation to indicate whether taxpayers were properly notified of their rights as required by the IRS's internal procedures, i.e., Letter 907 or Letter 967 was not in the case file and/or the activity log was not appropriately documented that the notification was made.¹⁰ Based on our sample results, from a universe of 7,572 taxpayer audit files with statute extensions, we project there were 1,639 taxpayer audit files that did not contain documentation to show that the taxpayers were properly notified of their rights when the assessment statutes were extended.¹¹

• Of the 60 taxpayer audit files, seven (11.7 percent) audit files did not contain documentation to support that the taxpayers' representatives were provided with the required notifications, i.e., Letter 937 or Letter 967 was not in the case file and/or the activity log was not appropriately documented that the notification was made.¹² Based on our sample results, from a universe of 7,572 taxpayer audit files with statute extensions, we project there were 888 taxpayer audit files that did not contain documentation to support that the taxpayers' representatives were provided with the required notifications.¹³

We considered the notification sufficient if any of the required documentation appeared to have been given to the taxpayers or a log entry to that effect was found in the related taxpayer audit files. The fact that we could not identify the required documentation in the audit file does not mean the taxpayers and/or their representatives were not properly notified of their rights. However, based upon the information available to us, we could not determine if the taxpayers or their representatives were properly notified of their rights in accordance with IRS internal procedures. Taxpayers may be adversely affected if the IRS does not follow requirements to notify both the taxpayers and their representatives of the taxpayers' rights related to statute extensions.

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Appendix I
Detailed Objective, Scope, and Methodology

Our overall audit objective was to determine whether the IRS complied with I.R.C. § 6501(c)(4)(B), which requires that the IRS provide notice to taxpayers of their rights to decline to extend the assessment statute of limitations or to request that any extension be limited to a specific period of time or specific issues. To accomplish this objective, we:

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 policies, procedures, and practices used by the Office of Appeals, the Large Business and International Division, the Small Business/Self-Employed Division, the Tax Exempt and Government Entities Division, and the Wage and Investment Division as they relate to notifying taxpayers and their designated third-party representatives of their rights to decline to extend the assessment statute of limitations or request that any extension be limited to a specific period of time or specific issues. We evaluated these controls by reviewing applicable IRM sections and documentation, interviewing management from these divisions, and reviewing a statistical sample of 60 taxpayer audit files.

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Appendix II
Major Contributors to This Report

Matthew A. Weir, Assistant Inspector General for Audit (Compliance and Enforcement Operations)

Glen Rhoades, Director

Michele Jahn, Audit Manager

Ken Henderson, Lead Auditor

Tina Fitzsimmons, Senior Auditor

David Guerra, Senior Auditor

Antony Shang, Senior Auditor

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Appendix III
Report Distribution List

Commissioner, Large Business and International Division

Commissioner, Small Business/Self-Employed Division

Commissioner, Tax Exempt and Government Entities Division

Commissioner, Wage and Investment Division

Chief, Appeals

Chief Counsel

Assistant Deputy Commissioner (Government Entities/Shared Services)

Director, Communications and Liaison, Wage and Investment Division

Director, Employee Plans, Tax Exempt and Government Entities Division

Director, Exam Policy, Small Business/Self-Employed Division

Director, Exam Quality and Technical Support, Small Business/Self-Employed Division

Director, Examination, Small Business/Self-Employed Division

Director, Exempt Organizations, Tax Exempt and Government Entities Division

Director, Return Integrity and Compliance Services, Wage and Investment Division

Director, Specialty Exam, Small Business/Self-Employed Division

Director, Enterprise Audit Management

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Appendix IV
Sampling and Case Review Methodology

Methodology used to identify the universe and sample cases

To determine the number of taxpayer audit files for which taxpayers were requested to extend the assessment statute of limitations, we identified 7,572 taxpayer audit files from the combined universe of IMF and BMF closed taxpayer audit files in which the assessment statute was extended and the examination subsequently closed.¹ The period covered IMF and BMF taxpayer audit files for which the assessment statute was extended between October 1, 2017, and September 30, 2018. Figure 1 shows that the majority of these consents were obtained for Forms 1040, U.S. Individual Income Tax Return, followed by Forms 1120, U.S. Corporation Income Tax Return; Forms 941, Employer's QUARTERLY Federal Tax Return; Forms 1065, U.S. Return of Partnership Return; and all other forms.²

Methodology used to identify noncompliance with IRS internal procedures for notification of taxpayers

To determine the number of taxpayer audit files for which taxpayers were requested to extend the assessment statute of limitations, we identified a universe of 7,572 taxpayer audit files, which consisted of two strata: IMF (4,452) and BMF (3,120) closed taxpayer audit files for which the assessment statute was extended and the examination subsequently closed. The period covered IMF and BMF taxpayer audit files for which the assessment statute was extended between October 1, 2017, and September 30, 2018. We used a 90 percent confidence level, an 8.4 percent expected error rate, and a ± 6 percent precision to determine our sample size of 60 taxpayer audit files, which consisted of 35 IMF and 25 BMF taxpayer audit files.

We reviewed the sample of 60 taxpayer audit files and identified 13 taxpayer audit files (seven IMF and six BMF audit files) that did not contain documentation to show that the taxpayers were properly informed of their rights. The range of lower and upper limits was calculated using an error rate of 5.380 percent and a 90 percent confidence interval between 12.80 percent (lower limit) and 30.50 percent (upper limit). Based on this, we projected to the general population of all 7,572 audit files, and estimated that there were 1,639 audit files in which taxpayers were not properly notified of their rights when the assessment statutes were extended. We are 90 percent confident that the range of procedural errors is between 969 and 2,309 taxpayer audit files.

Methodology used to identify noncompliance with IRS internal procedures for notification of taxpayer representatives

We reviewed the same sample of 60 taxpayer audit files and identified 45 taxpayer audit files that contained an authorization for a third party to represent the taxpayer before the IRS. Although we were able to determine that there were 45 taxpayer representatives in our sample of 60 taxpayer audit files, we were unable to determine the true number of taxpayer representatives in our sampled population of 7,572 taxpayer audit files with statute extensions. Of the 60 taxpayer audit files reviewed, seven (11.7 percent) audit files showed no documentation to support that the employees provided the representatives with a copy of the written communications provided to the taxpayers.

The range of the lower and upper limits was calculated using an error rate of 4.126 percent and a 90 percent confidence interval between 4.94 percent (lower limit) to 18.51 percent (upper limit). Based on this, we projected to the general population of all 7,572 audit files, and estimated that 888 audit files in which the taxpayer was represented by an authorized representative were noncompliant. The 90 percent confidence interval for this projection is 374 to 1,402 audit files.

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Appendix V
Prior Reports on Compliance With Requests to Extend the Assessment Statute

1. TIGTA, Ref. No. 2018-30-059, Fiscal Year 2018 Statutory Audit of Compliance With Notifying Taxpayers of Their Rights When Requested to Extend the Assessment Statute (Aug. 2018).

2. TIGTA, Ref. No. 2017-30-047, Fiscal Year 2017 Statutory Audit of Compliance With Notifying Taxpayers of Their Rights When Requested to Extend the Assessment Statute (July 2017).

3. TIGTA, Ref. No. 2016-30-081, Fiscal Year 2016 Statutory Audit of Compliance With Notifying Taxpayers of Their Rights When Requested to Extend the Assessment Statute (Aug. 2016).

4. TIGTA, Ref. No. 2015-30-071, Fiscal Year 2015 Statutory Audit of Compliance With Notifying Taxpayers of Their Rights When Requested to Extend the Assessment Statute (Aug. 2015).

5. TIGTA, Ref. No. 2014-30-066, Fiscal Year 2014 Statutory Audit of Compliance With Notifying Taxpayers of Their Rights When Requested to Extend the Assessment Statute (Aug. 2014).

6. TIGTA, Ref. No. 2013-30-071, Fiscal Year 2013 Statutory Audit of Compliance With Notifying Taxpayers of Their Rights When Requested to Extend the Assessment Statute (July 2013).

7. TIGTA, Ref. No. 2012-30-102, Fiscal Year 2012 Statutory Audit of Compliance With Notifying Taxpayers of Their Rights When Requested to Extend the Assessment Statute (Sept. 2012).

8. TIGTA, Ref. No. 2011-30-055, Fiscal Year 2011 Statutory Audit of Compliance With Notifying Taxpayers of Their Rights When Requested to Extend the Assessment Statute (June 2011).

9. TIGTA, Ref. No. 2010-30-103, Fiscal Year 2010 Statutory Audit of Compliance With Notifying Taxpayers of Their Rights When Requested to Extend the Assessment Statute (Aug. 2010).

10. TIGTA, Ref. No. 2009-30-113, Fiscal Year 2009 Statutory Audit of Compliance With Notifying Taxpayers of Their Rights When Requested to Extend the Assessment Statute (Aug. 2009).

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Appendix VI
Audit Review Results by Division

Noncompliance With IRS Internal Procedural Requirements to Notify Taxpayers and Their Representatives of Taxpayer Rights	Division1					Total
	Appeals	LB&I	SB/SE	TE/GE	W&I
Noncompliance With Requirement to Notify Taxpayers	1	5	7	0	0	13
Noncompliance With Requirements to Notify Taxpayer Representatives	1	1	5	0	0	7
Number of Taxpayer Audit Files Reviewed	4	19	35	0	2	602

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Appendix VII
Error Rates for Noncompliance With Internal Revenue Service Procedures for Notifying Taxpayers and Their Representatives

As noted in the report, the IRS is in compliance with statutory requirements and is providing taxpayers and taxpayers' representatives with notice of the taxpayers' rights when applicable. In addition, the IRS's noncompliance with internal procedures has increased with notifying taxpayers. Specifically, for our FY 2019 review, we reviewed 60 audit case files and found evidence that 13 (21.6 percent) taxpayers were not properly notified, which is up from 16.7 percent in our FY 2018 review, as shown in Figure 1. As for the IRS's compliance with notifying the taxpayers' representatives, we reviewed the 60 audit case files and found seven (11.7 percent) taxpayer representatives were not properly notified, which increased slightly from the FY 2018 review, as shown in Figure 1.