TAS Releases Second Volume of Fiscal 2017 Objectives Report

Honorable Members of Congress:

Internal Revenue Code (IRC) § 7803(c)(2)(B)(ii)(III) requires the National Taxpayer Advocate to prepare an Annual Report to Congress that contains a summary of at least 20 of the most serious problems (MSPs) encountered by taxpayers. For 2015, the National Taxpayer Advocate identified, analyzed, and offered recommendations to assist the IRS and Congress in resolving 24 such problems.¹ She also made recommendations in conjunction with a study of taxpayers that obtained recognition as IRC § 501(c)(3) Organizations on the basis of Form 1023-EZ.²

IRC § 7803(c)(2)(B)(iii) requires the National Taxpayer Advocate to submit her reports "directly" to the House Committee on Ways and Means and the Senate Committee on Finance "without any prior review or comment from the Commissioner, the Secretary of the Treasury, the Oversight Board, any other officer or employee of the Department of the Treasury, or the Office of Management and Budget."³ This provision protects the independence of the National Taxpayer Advocate's perspective.

Congress provided the IRS with the ability to comment on and respond to the National Taxpayer Advocate's recommendations (in the Annual Reports and elsewhere) by requiring the Commissioner to "establish procedures requiring a formal response to all recommendations submitted to the Commissioner by the National Taxpayer Advocate within three months after submission to the Commissioner."⁴ The IRS has fulfilled its statutory responsibility by preparing written responses to the recommendations in each of the 24 Most Serious Problems (MSPs).

The IRS formal comments on our recommendations, together with the National Taxpayer Advocate's analysis of and responses to the comments, are presented here. In this way, we maintain full transparency regarding the IRS's perspective on our recommendations to address the MSP while still complying with the statutory protections.

The format for these responses is as follows:

• A problem statement for each MSP from the 2015 Annual Report;

• An analysis of the problem;

• TAS's recommendations for the MSP;

• IRS's narrative response;

• The National Taxpayer Advocate's comments to IRS's narrative response; and

• A table with the IRS's responses and actions to each recommendation along with TAS's response.

• Respectfully submitted,

   

   

  Nina E. Olson

   

  National Taxpayer Advocate

   

  30 June 2016

   

²See National Taxpayer Advocate 2015 Annual Report to Congress vol. 2, 1-23 (Research Study: Study of Taxpayers That ObtainedRecognition As IRC § 501(c)(3) Organizations on the Basis of Form 1023-EZ).

³ IRC § 7803(c)(2)(B)(iii).

⁴ IRC § 7803(c)(3). The IRS's 90-day responses to previous Annual Reports and the TAS comments on those responses are available in the "report cards" posted at http://www.irs.gov/Advocate/Reports-to-Congress.

TAXPAYER SERVICE: The IRS Has Developed a Comprehensive "Future State" Plan That Aims to Transform the Way It Interacts With Taxpayers, But Its Plan May Leave Critical Taxpayer Needs and Preferences Unmet

PROBLEM

During the past year-and-a-half, the IRS has developed a "future state" plan that details how the agency will operate in five years. There are many positive components of the plan, including the goal of creating online accounts through which taxpayers will be able to obtain information and interact with the IRS.

However, the plan raises at least two significant concerns. First, implicit in the plan -- and explicit in internal discussions -- is an intention on the part of the IRS to substantially reduce telephone and face-to-face service. Second, to the extent taxpayers require help, the IRS is developing procedures to enable third parties like tax return preparers and tax software companies to provide it -- an approach that will increase taxpayer compliance costs.

ANALYSIS

Taxpayer demand for IRS services and assistance is high and has remained so for many years. The IRS has received more than 100 million taxpayer calls and five million taxpayer visits every year since fiscal year (FY) 2008. Online accounts are unlikely to reduce taxpayer phone calls and visits significantly for several reasons, including that millions of taxpayers do not have internet access, millions of taxpayers with internet access do not feel comfortable trying to resolve important financial matters over the internet, and many taxpayer problems are not "cookie cutter," thus requiring a degree of back-and-forth discussion that is better suited for conversation and that taxpayers will insist upon.

If the IRS substantially reduces the opportunity for taxpayers to talk with IRS employees, many taxpayers will find it much harder to resolve their problems and will have to pay third parties to assist them. This will generate additional taxpayer frustration with the IRS. As a result, confidence in the fairness of the tax system may erode, and taxpayer frustration and alienation may lead over time to a lower rate of voluntary compliance.

Because the IRS's future-state plan has the potential to bring about a fundamental transformation in the way the government treats its taxpayers and interacts with them, we recommended in June 2015 that the IRS make its plan public and seek comments from taxpayers, practitioners, and others. As of the time the National Taxpayer Advocate's 2015 Annual Report to Congress was issued, the IRS had neither made its plans public nor sought public comments.

TAS RECOMMENDATIONS

Future State covers the complete end-to-end taxpayer experience and outlines the IRS's vision for delivery of additional taxpayer service and enforcement treatments moving forward. The strategic goal guiding this entire effort is to do business with taxpayers more timely and interactively through their preferred channels and means; which will also effectively reduce taxpayer burden and encourage and enhance voluntary compliance. Of course, a Future State transformation still has to navigate obstacles presented by limited funding and finite resources for enabling investments in people, process, and technology. Overcoming such obstacles will dictate how far and fast the IRS can progress toward the Future State, which will nevertheless be done literatively while learning from the taxpaying public as we go.

The MSP mischaracterizes the envisioned Future State in fundamental ways that may confuse the taxpaying public. The MSP gives the impression that the Future State is fully developed when it is still very much under development. Seven cross-functional IRS teams, which include representatives from the National Taxpayer Advocate's Office, are currently working on what it will take to produce the capabilities and functionalities necessary to deliver 18 Future State initiatives, including digital, analytic, and communication capabilities. The teams are now developing plans that will collectively form a roadmap to the Future State and provide the basis for updating the IRS Strategic Plan, from 2017 to 2021.

The IRS envisions more digital offerings over time that will allow taxpayers to interact with us in a manner similar to how they interact currently with their banks, retailers, and doctors. However, the IRS has absolutely no intention of leaving critical taxpayer needs or preferences unsatisfied, as the MSP suggests. We recognize there will always be taxpayers who do not have access to the digital economy, or who simply prefer not to conduct their tax business with the IRS online. The IRS remains committed to providing the services these taxpayers need. Offering expanded digital, online and self-service capabilities is not intended to replace our existing telephone and face-to-face taxpayer services. Rather, these additional service channels will allow new options for taxpayers who prefer online interaction. These new capabilities will complement our existing service options, which will remain available for those who wish to utilize them.

The IRS is building the Future State with the benefit of taxpayer perspectives gained through various surveys, analyses and conjoint analyses that began in the early 2000s with the Taxpayer Assistance Blueprint. Even that long ago, some taxpayers expressed a preference for interacting with us through an online service channel, such as an online chat. "Where's My Refund" and other online applications have been made available to taxpayers, with millions already able to get desired information quickly and easily without having to call or visit the IRS. We continue to elicit taxpayers' perspectives through updates to our surveys and conjoint analyses to include aspects of the Future State. We also are exploring other research techniques and channels to gain additional taxpayer insights as we develop our Future State vision and related capabilities.

The MSP is entitled TAXPAYER SERVICE, which characterizes the Future State too narrowly. The IRS is striving to make all interactions, whether taxpayer service interactions or enforcement interactions, more efficient and effective, thereby resulting in a more positive experience for taxpayers and for IRS employees. For years, IRS enforcement interaction survey results have reflected taxpayers' frustration with the time it takes to resolve compliance issues. The Future State includes early issue detection, through more robust anomaly detection at the time of filing, and more efficient interactions to resolve differences. This will reduce taxpayer frustration and improve the overall taxpayer experience.

TAXPAYER ADVOCATE SERVICE COMMENTS ON IRS RESPONSE

The National Taxpayer Advocate is pleased by the actions the IRS has taken since the publication of her report. These actions include making details of the Future State plan public, emphasizing it will continue to provide telephone and face-to-face service to taxpayers who need or prefer it, consulting with the IRS's Federal advisory committees concerning the details of the plan, and generally supporting the National Taxpayer Advocate's Public Forums on Taxpayer Needs and Preferences that the National Taxpayer Advocate has been conducting around the country to solicit taxpayers' comments.

Budget constraints have been a significant driver of the IRS's push toward online taxpayer accounts. In congressional testimony, for example, the Commissioner has stated that the move toward online accounts "is driven, in part, by business imperatives; when it costs between $40 and $60 to interact with a taxpayer in person, and less than $1 to interact online, we must reexamine how we provide the best possible taxpayer experience."¹

The IRS's clarity on this point is commendable, but taxpayer service historically has been labor-intensive. Therefore, there is an inherent tension between providing high-quality taxpayer service and reducing costs. The only way to achieve both is if large numbers of taxpayers start using online accounts in place of telephone and face-to-face service.

At the Public Forums the National Taxpayer Advocate has been holding, research experts have presented studies that show the public typically uses online accounts as a supplement to personal service -- not as a substitute for personal service. As such, online accounts probably will not reduce demand for telephone and face-to-face service. That means that either (1) the IRS will continue to provide the services taxpayers want but will not be able to reduce costs or (2) the IRS will reduce costs but to do so will have to stop providing the personal service that taxpayers need.

Ultimately, the IRS must work within whatever budget it is given. But we believe the IRS should continue to be clear in communicating to Congress about the difficult choices it is facing. If the IRS implies that online accounts will enable it to do a better job of meeting taxpayer needs at lower cost, Congress will have no reason to give the agency more funding. If the IRS continues to warn that online accounts, while desirable in many ways, will not be sufficient to address most taxpayer needs, Congress will be better informed about the tradeoffs that must be made.

With respect to using online or digital interactions in the context of compliance activities, we have consistently heard from panelists at the Public Forums that while online interactions will enable taxpayers and their representatives to get background information on what the agency is proposing, there is no substitute for personal interaction and dialogue in resolving matters and protecting taxpayer rights -- including ensuring that taxpayers understand what they are agreeing to and what procedural protections they may be waiving.² Thus, we believe the IRS is overstating the efficiencies and effectiveness of online accounts in the dispute resolution arena.

IRS USER FEES: The IRS May Adopt User Fees to Fill Funding Gaps Without Fully Considering Taxpayer Burden and the Impact on Voluntary Compliance

PROBLEM

The IRS is actively considering user fee increases that would replace its reduced appropriation. User fees that seem reasonable to the IRS in a vacuum may seem outrageous to taxpayers when added to the costs of recordkeeping, filing and paying taxes, and paying professionals for help in navigating complicated rules and procedures that the government created. If user fees discourage taxpayers from using IRS services, they can be inconsistent with the IRS's service-oriented mission, reduce voluntary compliance, and erode taxpayer rights. However, the Internal Revenue Manual (IRM) does not require the IRS to consider these items. As a result, the IRS may increase user fees without fully considering the consequences.

ANALYSIS

The IRS's mission is to "[P]rovide America's taxpayers top quality service by helping them understand and meet their tax responsibilities and by applying the tax law with integrity and fairness to all." It has also adopted a Taxpayer Bill of Rights, including the rights to quality service, privacy, and a fair and just tax system. The "right" to quality service may be inconsistent with requiring taxpayers to pay a fee for service. If some are unable to pay, IRS enforcement may be more intrusive than necessary, eroding the right to privacy. In such cases, the fee may also erode the right to a fair and just tax system. In addition, if a fee discourages taxpayers from using services that promote voluntary compliance, it may reduce compliance.

In 2007, the National Taxpayer Advocate reported that the IRS did not have a consistent methodology for determining when to charge a fee or for estimating the effect of the fee on demand for service. Since then, it updated the IRM, but still does not require employees to consider the effect of user fees on taxpayer rights, the IRS mission, voluntary compliance, or to estimate their effect on demand for service or taxpayer burden. As a result, the IRS is considering user fee proposals without sufficient regard for these effects. It may consider them in some cases and not others.

TAS RECOMMENDATIONS

Before addressing issues of burden and voluntary compliance, it is worth describing the requirements and processes governing user fees. The Independent Offices Appropriations Act (IOAA) (31 U.S.C. § 9701) authorizes each Federal agency to promulgate regulations that establish charges (i.e., user fees) for activities conducted by the agencies that confer "services and things of value." The IOAA provides that regulations implementing user fees are subject to policies prescribed by the President, though the statute notes that such services should be ". . . as uniform as practicable," and ". . . self-sustaining to the extent possible." Those policies are set forth in the Office of Management and Budget's (OMB) Circular A-25 (the OMB Circular), which uses the term "special benefit" in relating a service or thing of value and applies to such IRS programs as Installment Agreements (IAs), Offers-in-Compromise (OICs), and various practitioner enrollment programs. In certain other cases, the IRS has specific authorities under the Internal Revenue Code to charge "reasonable" fees for certain services (e.g., disclosures such as transcripts, income verification, citizenship certification, and photocopying). In yet other instances, the IRS is required by law to charge fees for services (e.g., private letter rulings and determination letters). For these latter two categories of fees, the IRS implements the fee by issuing revenue procedures in lieu of regulations.

Under the OMB Circular, agencies that provide services that confer "special benefits on identifiable recipients beyond those accruing to the general public" are to establish user fees that recover the full cost of providing the service(s) (OMB Circular Section 6(a)(1)). Such service " . . . is performed at the request of or for the convenience of the recipient, and is beyond the services regularly received by other members of the same industry or group or by the general public" (OMB Circular 6(a)(1)(c)). Agencies are to review user fees biennially and update them as necessary to account for any changes in cost or other relevant considerations. An agency must calculate the full cost of providing a service, taking into account all direct and indirect costs to any part of the Federal Government, including, but not limited to, salaries, benefits, imputed rents, utilities, travel, and management costs. Agencies are generally required to set the user fee at an amount that allows it to recover the full cost of providing the service, unless the OMB grants an exception to the full cost requirement. When an exception is granted and the fee charged reflects less than the full cost of providing a service, the agency must cover the remaining cost of providing the service from other available funding sources. By doing so, the agency subsidizes the cost of the service despite the known identity of the recipient. In effect, taxpayer dollars in the form of appropriated resources subsidize fees set below full cost, meaning the cost of providing the special benefit may ultimately be borne by those not receiving it.

Based on this full-cost principle and in light of prevailing challenges to current tax administration operations, Treasury and the IRS have determined that it is important to recoup the full costs of services that confer special benefits on identifiable recipients, and that such services should be provided at less than full cost only when there is a compelling tax administration reason to do so (e.g., for low income populations or when the special benefit directly supports tax administration). Subsidizing such services necessarily diverts resources from core tax administration programs such as taxpayer assistance, which can impact the broader taxpayer experience. For example, the IRS commits significant customer service resources to the IA and OIC programs which could otherwise support telephone level of service or submissions processing, which implicitly erodes the taxpayer service experience and places burden on non-recipients of the service.

Notwithstanding the adoption of a full-cost principle, the IRS does consider taxpayer burden and voluntary compliance and included this requirement in the newly published IRM 1.35.19, User Fees. In considering taxpayer burden, it is important to look at the cost of the service to the customer as well as the burden to the broader taxpaying public of subsidizing the service if/when provided below cost. For example, in the case of regular (i.e., not low-income) OICs the broader taxpaying public is considerably burdened for subsidizing over 90 percent of the IRS's cost under the current rate -- an equity issue that is compounded when one considers that the taxpayer ultimately receives full offset of tax liability for the fee. In considering voluntary compliance, the IRS adjusts user fees when there is a definitive link between the service and positive compliance outcomes. For example, we know that low-income populations generally experience greater difficulties accessing resources -- tax advice, paid professionals, and even internet access -- that help them comply with the tax law. To help mitigate this challenge, we plan to maintain the current IA and OIC low-income rates, the latter of which will remain completely free. As part of the consideration of any user fee we look at a variety of factors, including taxpayer burden and voluntary compliance, which play a considerable role in how we set fees. This is especially true in the case of the new online payment, direct-debit IA product which will provide taxpayers with the most inexpensive, lowest-burden means to set up an IA.

TAXPAYER ADVOCATE SERVICE COMMENTS ON IRS RESPONSE

The National Taxpayer Advocate commends the IRS for working with TAS to improve the user fee IRM, which did not require IRS business units (BUs) to:

• Consider whether the fee would impair the IRS's service-oriented mission, voluntary compliance, or taxpayer rights;

• Estimate the effect of the fee on demand for service; or

• Publish its user fee analysis and address any comments from internal and external stakeholders before adopting or increasing a fee.

However, the IRS's continued lack of transparency in discussing potential user fee increases in public remains an area of concern. For example, the IRS has still declined to permit the National Taxpayer Advocate to release an unredacted version of her memorandum to the IRS Commissioner, which discusses her concerns about the fees being proposed.

Another remaining concern is that the IRS's comments (above) understate its discretion in setting appropriate user fees and requesting a waiver for user fees, potentially leaving readers with the misimpression that its hands are tied. As noted in the MSP, the IRS did not establish any fees under IOAA for 43 years. For some fees the IRS has discretion to set any reasonable fee, and OMB Circular A-26 directs that other fees must be "fair" and based, in part, on the "public policy or interest served," and agencies can seek a waiver to set a lower fee based on anything that "in the opinion of the agency head or his designee, justifies an exception." In short, the IRS is responsible for whatever fees and fee policies it ultimately adopts. Its hands are not tied. It should not blindly adopt, retain, or raise fees without fully considering the consequences to taxpayers and tax administration.

Finally, the National Taxpayer Advocate does not agree with the IRS's premise that OICs and IAs must be considered special benefits for which it is required to charge a fee. In the case of both the IA and OIC user fee, the IRS is charging for something it is supposed to do (i.e., collect taxes) and which significantly benefits the government. Without IAs and OICs, the IRS would violate the recently enacted taxpayer right to privacy, that is, taxpayers have the right to expect that any IRS inquiry, examination, or enforcement action will comply with the law and be no more intrusive than necessary. Everyone benefits when the IRS respects taxpayer rights, as we are able to live in a civilized society that reflects our values. Charging for these services means that taxpayer rights are for sale only to those who pay for them. Applying the IRS's logic (i.e., that anyone who uses an IRS service, such as an IA or OIC, gets a "special benefit" that should trigger a user fee), then it should also charge for services as basic as using the get transcript application and for answering the phone. The IRS's logic is flawed because other agencies do not charge to answer the phone. Even though providing a citizen with the ability to communicate with an agency benefits the citizen, it benefits us all to know that we can communicate with an agency if necessary. The IRS should not be charging to do the job of upholding taxpayer rights and providing core tax administration services.

FORM 1023-EZ: Recognition As a Tax-Exempt Organization Is Now Virtually Automatic for Most Applicants, Which Invites Noncompliance, Diverts Tax Dollars and Taxpayer Donations, and Harms Organizations Later Determined to be Taxable

PROBLEM

Since July 2014, the Tax Exempt and Government Entities division (TE/GE) has addressed backlogs in its inventory of applications for tax-exempt status by allowing certain organizations to use Form 1023-EZ, Streamlined Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code. Form 1023-EZ adopts a "checkbox approach," requiring applicants merely to attest, rather than demonstrate, that they meet fundamental aspects of qualification as an exempt entity. Form 1023-EZ does not solicit any narrative of the organization's activities, any financial data, any substantiating documents, or any explanatory material. With the adoption of Form 1023-EZ, the IRS effectively abdicated its responsibility to determine whether an organization is organized and operated for an exempt purpose. TE/GE intends to address the noncompliance it helped create by shifting more resources to audits.

ANALYSIS

TE/GE's Exempt Organization (EO) function approves 95 percent of applications submitted on Form 1023-EZ. EO's own pre-determination review program shows that EO approves applications much less frequently -- 77 percent of the time -- when it reviews documents or basic information from the applicants, rather than relying only on the attestations contained in the form. EO rejects some applications simply because the applicant was not eligible to use Form 1023-EZ, but the pre-determination review also showed that almost 20 percent of Form 1023-EZ applicants, despite their attestations to the contrary, did not qualify for exempt status as a matter of law. These results are consistent with TAS's analysis of a representative sample of Form 1023-EZ applicants that obtained exempt status, which showed that 37 percent of the organizations in the sample did not satisfy the legal requirements for exempt status. Often, a deficiency in the applicant's organizing documents that prevented qualification as an IRC § 501(c)(3) organization could have easily been corrected had the applicant been advised of it.

TAS RECOMMENDATIONS

Form 1023-EZ has successfully reduced taxpayer burden due to previous back-log of applications for exempt status. As the Taxpayer Advocate Service (TAS) observes: "In the decade prior to the introduction of Form 1023-EZ, the National Taxpayer Advocate voiced concerns about delays in processing applications submitted on Form 1023." Implementation of the Form 1023-EZ, in addition to streamlined processing guidelines for all applications, has been essential in successfully eliminating a backlog of over 75,000 applications that existed at the beginning of FY 2014.

The IRS shares the concern for accuracy. To ensure accurate determinations upon Form 1023-EZ, the IRS instituted pre-determination review of a statistically valid sample of these applications. Correct determinations are consistent with 95% IRS quality measures for Form 1023-EZ (and 88% for those selected for pre-determination review) in FY 2015.

TAS asserts that the IRS approved Form 1023-EZ applications much less frequently when during a pre-determination review it requested documents or other information, rather than relying on the attestations contained in the form. Generally, Form 1023-EZ applications not approved have not been denials on the merits but rejections due to failure to respond if information was requested or due to ineligibility to use the EZ form. Over 85% of Form 1023-EZ rejections were due to either failure to respond (40%), or ineligibility due to exceeding the financial thresholds (35%) or the applicable deadline (11%). Many rejected applications could be approved if properly submitted.

The IRS does not agree with the interpretation by TAS of a sample of organizational documents. TAS asserts that 37% of 408 documents did not satisfy the organizational test. Of these, TAS contends that 25 lacked a sufficient dissolution clause, 54 did not have an appropriate purpose clause, and 70 were deficient in both areas.

As TAS observes, state law may govern the charitable disposition of assets even when the organizing document does not include an express dissolution clause. In reviewing the cases in which TAS concluded that the dissolution clause requirement was not satisfied, the IRS would have required amendments in only 15 of the cases.

Second, articles of incorporation must limit the organization's purposes to one or more exempt purposes and may not expressly empower the organization to engage, other than insubstantially, in activities not in furtherance of such purposes. While the IRS provides examples (e.g., in the Form 1023 instructions) of clauses that would satisfy this requirement, there is no prescribed language. Therefore, whether the purpose clause in the organizational documents meets the requirement is a case-by-case determination. Upon review of the purpose clauses that TAS asserted were unacceptable, the IRS would have accepted more than half.

TAS asserts that reviewing a file and requesting amendments to articles of incorporation takes about an hour. This assertion does not account for additional cycle time for the applicant to respond or additional IRS personnel time spent on follow-up telephone or mail communications, response reviews, and case closing. The asserted hour also does not account for the fact that some applicants fail to respond within the prescribed time or at all. This leads to rejection and forfeiting of the user fees. Furthermore, simplifying the application process for smaller organizations allows resources to be focused on applications that are more complex and to be deployed to back-end programs where operations and compliance can be reviewed.

TAXPAYER ADVOCATE SERVICE COMMENTS ON IRS RESPONSE

The National Taxpayer Advocate supports decreased processing times, fewer backlogs, improved customer satisfaction, or increased approval rates of applications for recognition of exempt status as IRC § 501(c)(3) organizations. In fact, over the years she has made numerous recommendations to TE/GE to achieve these administrative improvements. However, in the case of the current Form 1023-EZ, TE/GE has accomplished these objectives at the cost of erroneously approving, at an unacceptably high rate, applications of organizations that do not qualify for IRC § 501(c)(3) status.

As TE/GE notes, it rejects applications as part of its predetermination review process, and does so for various reasons. The frequency with which organizations do not respond to TE/GE's inquiries for additional information is cause for concern. Given the 95 percent approval rate of Form 1023-EZ applications, these organizations, had they not been randomly selected for pre-determination review, would very likely have been recognized as IRC § 501(c)(3) organizations even though they do not or cannot respond to basic inquiries from the IRS about their activities. The more relevant inquiry, however, concerns applications TE/GE approves, i.e., the characteristics of organizations recognized as tax exempt under IRC § 501(c)(3). TE/GE does not dispute, as discussed in the report, that the predetermination review approval rate is significantly lower than when a decision about exempt status is made on the basis of Form 1023-EZ alone (77 percent vs. 95 percent).

TE/GE's references its pre-determination quality measure (88 percent). Quality measures do not explain why Form 1023-EZ applications are approved so much more often when there is no predetermination review. Quality measures take into account the extent to which EO determinations followed its own procedures but not the rate at which an organization was found to actually qualify for IRC § 501(c)(3) status.

As for the TAS study findings, it is not clear how many organizations in the TAS sample TE/GE reviewed or why TE/GE would have accepted some dissolution or purpose clauses that TAS found insufficient. However, based on the TE/GE response, the organizing documents were insufficient for as many as half of the organizations whose applications it reviewed. TAS plans to meet with TE/GE to discuss the differences in conclusions, and it is possible that TAS would reconsider its evaluation of some of the organizations, but this does not alter the larger point -- even accepting TE/GE's conclusions, the error rate for Form 1023-EZ determinations is unacceptably high.

TE/GE notes that "[i]n the study, TAS asserts that searching for and reviewing articles requires an incremental 15 minutes of processing time" and that this time does not take into account that additional cycle time is needed for the applicant to respond or additional IRS personnel time spent on follow up telephone or mail communications, response reviews, and case closing. Actually, as TAS reported, "[i]t took the reviewers about three minutes on average to review an organization's articles and determine whether there were acceptable purpose and dissolution clauses. The longest it took to search for and review articles was 15 minutes (in four cases). In over 90 percent of the cases, it took five minutes or less." (fn. ref. omitted.) In any event, TE/GE does not quantify the amount of time it takes to request and process additional information from a Form 1023-EZ filer. Cycle times would perhaps increase if more information from Form 1023-EZ applicants were required, but it does not follow that cycle times would rise to unacceptable levels, especially in view of the reduction in erroneous approvals that would also presumably result.

REVENUE PROTECTION: Hundreds of Thousands of Taxpayers File Legitimate Tax Returns That Are Incorrectly Flagged and Experience Substantial Delays in Receiving Their Refunds Because of an Increasing Rate of "False Positives" Within the IRS's Pre-Refund Wage Verification Program

PROBLEM

The IRS uses the Pre-Refund Wage Verification Program (hereinafter -- Income Wage Verification or IWV) to temporarily freeze an individual's refund when it detects potentially false wages and withholding. The National Taxpayer Advocate first expressed concerns with the IRS's inability to properly identify, process, and timely release refund freezes in 2003. Despite certain improvements, such as technological advances and procedural and policy changes, the IRS's screening processes in this program continue to harm taxpayers with legitimate returns. The National Taxpayer Advocate acknowledges that any screening method will result in false positives but remains concerned that the IRS does not track the false positive rates for the IWV program, and thus, is unable to determine the precise filters or screens stopping legitimate refunds. Moreover, the IRS does not have adequate procedures to promptly review and adjust its fraud detection filters, rules, and models. Finally, taxpayers whose refunds the IWV program freezes cannot reach a live assistor in the Integrity & Verification Operation (IVO) unit. These shortcomings burden taxpayers whose legitimate refunds are substantially delayed. As a result, the taxpayers' rights to be informed, to quality service, to challenge the IRS's position and be heard, to privacy, and to a fair and just tax system are jeopardized.

ANALYSIS

TAS analysis of the population of taxpayers filing for tax year 2014, whose returns the Electronic Fraud Detection System (EFDS) selected for review in 2015, showed that nearly 180,000 such taxpayers who finally received their refunds experienced delays of nearly 18 weeks on average. EFDS had a "false positive" rate of almost 35 percent in fiscal year (FY) 2015. In 2015, the IRS moved potential identity theft returns identified by EFDS from the IWV to the Taxpayer Protection Program (TPP) for processing.

The TPP's false positive rate jumped from 19.8 percent in calendar year (CY) 2014 to 36.2 percent in CY 2015, while the Level of Service (LOS) for taxpayers trying to contact the IRS to verify their identity plummeted -- at one point during the peak of the filing season, the LOS was ten percent. The IRS also increased the testing of another application it uses to detect identity theft or fraud, the Return Review Program (RRP), which experienced an over 500 percent increase in stopping legitimate tax returns this year. Despite the IRS decreasing the workload in the IVO unit, which operates the IWV program, by 47 percent in CY 2015, TAS received 36,752 IWV cases in CY 2015, or nearly 15 percent more as compared to the prior year, making it the second most common reason taxpayers came to TAS. TAS provided full or partial relief for almost four out of five taxpayers who contacted TAS about delayed refunds flagged under the IWV program, spending an average of 8.2 weeks to resolve these cases.

TAS RECOMMENDATIONS

[4-1] Begin tracking the IVO false positive rates by model or filter during the filing season, perform regular global reviews, and quickly adapt filters, rules, and models based on levels of confidence in each similar to the TPP.

[4-2] Establish target false positive rates for each process and filter and create a process to adjust selection rates so that the false positive rates do not exceed target level.

[4-3] Collaborate with TAS on implementing the new legal requirement to file returns and statements related to employee wage information and nonemployee compensation on or before January 31 of the year following the calendar year to which such returns relate.

[4-4] Reinstate the Pre-Refund Program Executive Steering Committee to coordinate policy and other servicewide processes and business rules and include TAS in the steering committees as a charter voting member.

[4-5] Create a sub-committee under the Business Rules and Requirements Management office with the authority to implement real-time modifications to screening rules and filters pertaining to tax fraud detection, resolution, and prevention, which directly affect RRP systems development; include a TAS representative as a member of this sub-committee.

[4-6] Create a Taxpayer Call Area in IVO, which will include front-end outgoing verification calls to taxpayers from the IVO unit and the answering of direct taxpayer calls about refunds.

IRS RESPONSE

The Integrity & Verification Operation (IVO) programs are critical to the IRS's strategy to detect and prevent improper fraudulent refunds. These programs use filters, models, and manual reviews to identify potentially fraudulent returns. Through these methods, IRS has prevented almost $12 billion associated with 1.8 million fraudulent returns for calendar year 2015. IRS has a strong commitment to balance increased detection of refund fraud with taxpayer burden concerns and is in the process of creating base line data on productivity, efficiency, and timeliness to be used for establishing organizational goals.

Historically, information returns have not been available to the IRS until later in or after the tax filing season, impacting the most efficient way for IRS to screen and verify income by using the income information provided by the employer. Under the Consolidated Appropriations Act of 2016, the deadline for filing Forms W-2, Wage and Tax Statement, Forms W-3, Transmittal of Wage and Tax Statements, and nonemployee compensation with the Social Security Administration (SSA) has effectively been accelerated to January 31, beginning in calendar year 2017. We agree to collaborate with Taxpayer Advocate Service (TAS) on implementing the new legal requirements and have already established working groups that include TAS representation. We expect to start receiving information returns from SSA in January 2017. We are also working to ensure income information received from the SSA can be processed and posted quickly to the Information Return Master File, and in turn be leveraged for systemic income and withholding verification upfront, reducing refund delays and taxpayer burden.

For the 2016 filing season, we made improvements to our verification capabilities by implementing process efficiencies. In late 2015, the IRS actively partnered with private industry and the other federal agencies to gain access to Forms W-2 early in the 2016 filing season. The results were extremely positive. Based on this effort, the IRS processed approximately 78 million Forms W-2 received from SSA by February 17, 2016. This is approximately 33% of the total Forms W-2 that the IRS expects to process for Tax Year 2015. At this time last year, the IRS only processed 9% of all Tax Year 2014 Forms W-2. By receiving Forms W-2 earlier, the IVO is able to use income source documents to promptly verify and release legitimate taxpayer returns. IRS is now tracking each Return Review Program Non-Identity Theft model False Detection Rate (FDR) separately as the National Taxpayer Advocate has recommended and the overall results are being reviewed to minimize the selection of false positive returns. IRS agrees that TAS's understanding of the fraud model selection is important. As a result, IRS agrees to provide the National Taxpayer Advocate with an overview briefing of the FDR and updates on model modification on a periodic basis. These periodic updates will create a forum for input from the National Taxpayer Advocate, which includes allowing the business team to address modifications to the fraud models in an almost real time atmosphere to quickly adapt filters, rules, and models as necessary.

IRS understands that some taxpayers call the IRS seeking assistance with an income verification issue. We provide toll-free support for income verification inquiries and the Customer Service Representatives answering those lines have procedures to inform the caller of the status of their account, assist with the notice, and provide additional information as necessary. The toll-free operation supporting the income and withholding verification delivered a 72.1% level of service during the 2016 filing season, as additional resources were available to apply to the telephone operations. Taxpayers inquiring about the verification of income on our general Toll-free line experienced improved service from 2015.

We are in the process of reviewing IVO's end-to-end processes to determine if there are opportunities to increase efficiency or reduce taxpayer burden. The reviews will ensure that the appropriate notices/letters are generated to keep the taxpayers informed, as well as ensuring that refunds are released timely as applicable. The IRS supports continued collaboration with TAS and has implemented recurring meetings to discuss and address new issues, concerns, feedback, or recommendations to improve the IVO program.

TAXPAYER ADVOCATE SERVICE COMMENTS ON IRS RESPONSE

The National Taxpayer Advocate is pleased with the IRS's acknowledgement of the need to balance improved detection of refund fraud with reducing taxpayer burden. The IRS's decision to begin tracking non-identity theft model false detection rates and its recognition that fraud model modifications require real time modifications are encouraging developments. While these are steps in the right direction, TAS is unable to determine whether the IRS can properly identify the factors that are causing a false positive rate of almost 35 percent among returns caught up by the various filters and models, and what actions the IRS is taking when a problem with a filter or model is identified.

The National Taxpayer Advocate appreciates the IRS's willingness to collaborate with TAS on implementing the new legal requirements pursuant to the Consolidated Appropriations Act, 2016 for accelerated wage and income reporting and for including TAS representatives in the working groups. While the false detection rates overview briefing and the IRS's commitment to provide regular updates on model modification are important and helpful, the National Taxpayer Advocate continues to believe that re-establishing the Pre-Refund Executive Steering Committee is the best approach to improved fraud identification while minimizing false positives because it would be a servicewide forum to coordinate policy and other business results related to revenue protection.

The National Taxpayer Advocate is also concerned about the IRS reinstating the indefinite freeze on all returns claiming refunds that are selected for IWV at the onset of the screening process, which is unnecessary in light of accelerated wage and income reporting, and exposes the IRS to payments of large amounts of interest on returns that are held for more than 45 days. TAS also remains concerned that taxpayers whose refunds are frozen cannot directly reach a live assistor in the IVO unit, who possesses the requisite knowledge of a specific taxpayer's account. These taxpayers are left with no choice but to seek TAS assistance, placing undue stress and burden on taxpayers and wasting government resources because in these cases, two IRS employees -- TAS and the IVO unit employee -- are working the case.

TAXPAYER ACCESS TO ONLINE ACCOUNT SYSTEM: As the IRS Develops an Online Account System, It May Do Less to Address the Service Needs of Taxpayers Who Wish to Speak With an IRS Employee Due to Preference or Lack of Internet Access or Who Have Issues That Are Not Conducive to Resolution Online

PROBLEM

The IRS is planning to develop an online taxpayer account system. We are pleased that the IRS is moving forward with plans to develop such a system, due to the benefits to both taxpayers and the IRS. However, the IRS cannot ignore the service needs of a significant portion of the taxpayer population who still require more personalized service options, such as face-to-face or telephone services, due to preference or lack of internet access. In addition, even the most technologically savvy taxpayers may at times need to use personal services because the issue they have is not conducive to resolve online. While in the current budget environment it is tempting to move taxpayer service toward superficially lower-cost self-assistance options, any efforts to significantly reduce personal service options may ultimately impair voluntary compliance and undermine the taxpayers' right to quality service, right to be informed, and right to pay no more than the correct amount of tax.

The National Taxpayer Advocate also remains concerned about the scope of the self-correction authority set forth in the draft IRS Concept of Operations (CONOPS). It is unclear if these corrections will constitute an amended return or if the original return remains unprocessed until corrected. These options have legal consequences to the taxpayer with potential negative impacts on taxpayer rights.

ANALYSIS

The IRS is planning to develop an online taxpayer account program which would enable taxpayers, preparers, and authorized third parties to securely interact with the IRS to obtain return information, submit payments, and receive status updates. It would also enable them to perform "self-correction" functions such as verifying return changes made by the IRS, updating or amending returns, and providing additional documents. Taxpayers with access to the system will be more informed about their tax situation and have the tools to interact with the IRS in a convenient manner. The IRS, in turn, may benefit from both reduced and more fruitful phone calls because many of the callers will be more prepared to discuss relevant issues or ask pointed questions due to the information available on the online account. However, the IRS should not drastically reduce face-to-face and telephone services as it focuses on the online account program. Studies have shown that a significant portion of taxpayers would still require these more personalized services due to a variety of reasons. In fact, studies have shown that taxpayers prefer different service channels depending on the type of transaction they are conducting with the IRS.

TAS RECOMMENDATIONS

[5-1] Conduct a biennial nationwide survey of taxpayers to identify trends and determine the types of transactions or other activities taxpayers would be willing to conduct with the IRS digitally. The survey should include oversamples of low income, Spanish-speaking, and small business taxpayers to ensure that the IRS tracks their needs.

[5-2] Conduct research to identify the taxpayer base who will utilize the online taxpayer account system as well as other online service offerings. For those taxpayers likely to use the online services, the research should break it down by specific types of transaction or interaction with the IRS. Further, if a taxpayer has indicated that he or she will not use the program, the research should address the reasons for not using the program.

[5-3] Incorporate into the CONOPS, budget initiatives, and in the strategic plan a recognition and plan for meeting the service needs of those taxpayers who are not likely to use online service offerings. Such plan should take into account the reasons for the taxpayer's behavior and potentially tailor the personal services to meet those needs.

[5-4] Research taxpayer response to the necessary online account system cybersecurity and authentication measures to determine the percentage of taxpayers who decide the necessary barriers to entry are too burdensome and avoid online account access as a result.

IRS RESPONSE

The IRS continually looks for ways to provide more service options to America's taxpayers. Over the past few years, to meet taxpayer needs and preferences for more efficient and convenient access to information and services, we have increased the number of online tools and applications that are available through IRS.gov. The development of an Online Account tool continues as part of this effort. Taxpayers choosing to use this service will have a secure, alternate path to access their personal account information directly online without speaking to an IRS employee.

The development of the Online Account tool by the IRS is an additional service that will increase, not replace, the traditional service methods currently available, including telephone and in person assistance. We understand that not all taxpayers will want to adopt the use of online tools to access information or to conduct their tax business; the IRS will still provide traditional services to those who either prefer or need to contact the IRS directly.

Moving into the future, the IRS will continue to study taxpayer preferences to ensure continued access to the services that will allow taxpayers to meet their tax needs. The IRS produces a Taxpayer Choice Model through surveys using a conjoint analysis technique where taxpayers are given options to compare and arrive at choices. This model informs the IRS about taxpayer service channel preferences for current service offerings and gauges taxpayer reactions to service channel changes. A Spanish Taxpayer Choice Model has been developed to provide service channel preferences for IRS services in Spanish.

As part of the continued development of digital options, we completed a Web-First Channel Migration conjoint survey, with results expected by August 2016. After reviewing the results, we will continue to work on expanding criteria for future research including a focus on why a taxpayer would or would not use a service channel for each type of transaction conducted with the IRS. We will include samples of low income, Spanish-speaking, and small business taxpayers to ensure that their needs are considered.

TAXPAYER ADVOCATE SERVICE COMMENTS ON IRS RESPONSE

The National Taxpayer Advocate continues to believe that the online account system will be beneficial to those taxpayers who prefer to use and have the means to access this service channel. Current research conducted by Forrester Research found that individuals do not demand more online government services. Specifically, only 39 percent of federal customers want the government to offer more online services, and just 32 percent trust the online government services with their personal data. Forrester also recommended that taxpayer utilization may increase if the government educates the public on the benefits of the online services.³ Finally, for those taxpayers who cannot use this channel or simply prefer to speak to a live assistor to discuss a complex substantive matter, TAS urges the IRS to devote sufficient resources to satisfy this demand at acceptable levels of service.

The National Taxpayer Advocate is hosting a series of public forums across the country to discuss taxpayer demands for service as the IRS develops its future state strategy. TAS believes this is a stepping stone for future research on taxpayer service preferences. We commend the IRS for conducting the conjoint study into taxpayer preferences and look forward to a briefing on the results. TAS is also conducting a survey this year about taxpayer service channel preferences and the success of using one channel over another.

The IRS should conduct additional comprehensive research to determine service channel preferences by type of transaction, broken down by demographics. In developing the surveys and evaluating the results, the IRS should consider that many taxpayers prefer to use multiple channels for different types of transactions or even at different times during the same transaction.

Finally, the IRS has not provided sufficient detail on what services will be available to the taxpayer and any authorized representatives on the online account system. Throughout our public forums, TAS has received many questions, such as the following:

PREPARER ACCESS TO ONLINE ACCOUNTS: Granting Uncredentialed Preparers Access to an Online Taxpayer Account System Could Create Security Risks and Harm Taxpayers

PROBLEM

The National Taxpayer Advocate has advocated for years that the IRS develop an online account system for taxpayers. The IRS has identified online account access as one of the top ten initiatives needed to achieve its compliance vision. Online account access would enable taxpayers, preparers, and authorized third parties to securely interact with the IRS to obtain return information, submit payments, and receive status updates. Despite the anticipated benefits of the system, the National Taxpayer Advocate is concerned that taxpayers will be harmed if the IRS does not restrict preparer access to the system to those preparers who are subject to IRS oversight under Circular 230. In addition, the IRS should clearly define the scope of preparers' access to online accounts and enable the taxpayer to maintain strict control over preparer authorizations. Finally, it is crucial that the IRS develop and implement procedures to ensure that preparers do not exceed their authority when accessing taxpayers' online accounts.

ANALYSIS

The National Taxpayer Advocate is concerned that the IRS will expose taxpayers to potential harm due to incompetence or misconduct if it does not restrict access to those preparers subject to IRS oversight pursuant to Circular 230. Thus, the IRS should restrict preparer access to the online account to attorneys, certified public accountants, enrolled agents, enrolled actuaries, enrolled retirement plan agents, and preparers who have obtained a voluntary Annual Filing Season Program Record of Completion. Because a preparer's actions could severely prejudice the taxpayer's procedural rights, the taxpayer should be able to maintain strict control over exactly what the taxpayer authorizes the preparer to do on the taxpayer's behalf. In addition, because a taxpayer may be responsible for the preparer's actions, whether authorized or not, it is crucial that the taxpayer is aware of all the actions taken by the preparer on the taxpayer's online account. Further, if the IRS creates the online account system with blanket authorizations as the only available option, the IRS should mitigate the known risk of unauthorized actions. Accordingly, the system should alert the taxpayer whenever the preparer takes any type of action so that the taxpayer can take immediate steps to undo any unauthorized transactions. Finally, the IRS must develop a method to track preparer access and restrict all unauthorized activities.

TAS RECOMMENDATIONS

[6-1] Limit preparer access to the taxpayer online account system to only those preparers subject to IRS oversight under Circular 230.

[6-2] Develop the online account system so it validates the preparer's PTIN information. If the preparer is not subject to Circular 230 oversight, the system should block certain authorization checkboxes automatically.

[6-3] Develop the online account system so that the taxpayer can adjust preparer authorizations by checking a separate box for each type of action the designated preparer can take on the taxpayer's behalf. The checkboxes should use plain language explanations that Taxpayer Advocacy Panel members and Low Income Taxpayer Clinics have reviewed.

[6-4] Develop procedures to track preparer access to the taxpayer's online account and verify the taxpayer authorized the actions taken.

[6-5] Develop procedures to automatically alert the taxpayer of any preparer activities on the online account system and provide information to the taxpayer on how to report unauthorized access.

[6-6] Work with the Department of Treasury to issue guidance specifically applying the provisions of IRC §§ 6713 and 7216 to unauthorized access to the online account system. In addition, the IRS should work with Treasury to revise Circular 230 sanctions to include sanctions for preparers who conduct, or attempt to conduct, unauthorized transactions on the online account system.

IRS RESPONSE

The Internal Revenue Service (IRS) continually looks for ways to improve and expand services to all taxpayers to fulfill their tax obligations. We are currently in the preliminary research and design phase of developing online access for third parties to securely retrieve authorized account information and interact with the IRS as needed on behalf of taxpayers and develop an approach that allows taxpayers to grant authorization to third party entities.

As an integral part of the Future State of the IRS, the effort for developing taxpayer representative access is in the vision and strategy phase. A cross-functional IRS team, including members from the Taxpayer Advocate Service (TAS), is currently working on analysis and policy considerations. The team will develop options based on legal requirements, procedural guidelines, and business needs, while considering following business requirements:

• The ability for a taxpayer to add, change, or delete authorizations once authenticated

• The option for a taxpayer to choose the roles to be granted to the third party

• The development of rules-driven roles that will establish the specific access allowed

Finally, the IRS plans to seek input from a wide variety of stakeholders in the design of online account for third parties to ensure this service meets the needs of taxpayers and tax professionals in a secure, effective way.

TAXPAYER ADVOCATE SERVICE COMMENTS ON IRS RESPONSE

TAS commends the IRS for soliciting input from external stakeholders regarding online account features. We encourage the IRS to also review the materials submitted for and the transcripts of the National Taxpayer Advocate Public Forums. External stakeholders from diverse organizations and geographic locations discussed this issue at length. Most believed that representatives will benefit from access to taxpayer accounts, but they have various opinions on the safeguards and controls for third-party access.

The IRS's response indicates that the IRS has given serious consideration to the authorization process. TAS looks forward to working with the IRS on this issue and encourages the IRS to share more specific details on the authorization process before it is finalized. We believe it is crucial for the taxpayer to maintain absolute control of the specific actions the representative can take on the taxpayer's behalf, and we applaud the IRS for recognizing that. However, as with taxpayer access to online accounts, these necessary protections will limit the availability of third party online access, since a significant majority of taxpayers today are not able to create online tax accounts.⁵ The IRS needs to explain this clearly to the public and stakeholders so it does not raise expectations that cannot be met.

Finally, we continue to believe that the IRS should protect taxpayers from the harm that can be done by unscrupulous preparers accessing the online account system. Panelists at the National Taxpayer Advocate's Public Forums unanimously expressed concern over such access. An effective way to protect taxpayers from this harm is to prohibit online taxpayer account access by those preparers who are not subject to oversight under Circular 230.

INTERNATIONAL TAXPAYER SERVICE: The IRS's Strategy for Service on Demand Fails to Compensate for the Closure of International Tax Attaché Offices and Does Not Sufficiently Address the Unique Needs of International Taxpayers

PROBLEM

During late 2014 and 2015 the IRS eliminated the last four tax attaché posts abroad. International taxpayers now must either call an overwhelmed, tolled IRS telephone number in the United States or obtain information from irs.gov. Apart from the attachés, the only free option for taxpayers to ask a specific question and receive a response from an IRS employee was the Electronic Tax Law Assistance Program (ETLA), which the IRS terminated in October 2015. The IRS has shut itself off from international taxpayers with no way of knowing whether it is providing the service taxpayers need. Given the complexity of international tax rules and the potentially devastating penalties for even inadvertent noncompliance, the IRS's withdrawal of dialogue makes it more likely taxpayers will get it wrong.

ANALYSIS

The number of U.S. citizens living abroad continues to grow, from approximately 7.6 million in mid-2014 to about 8.7 million in mid-2015. The attachés were highly efficient and cost effective in assisting taxpayers abroad because they likely benefited many more taxpayers than just the ones who contacted them. In fiscal year (FY) 2014, approximately 5,442 taxpayers walked in to the London attaché office. In addition to providing information and personally assisting taxpayers, the attachés learned about the issues taxpayers found confusing, incorporating this into materials and sharing it with other IRS offices. ETLA provided a valuable avenue for international taxpayers to meaningfully interact with the IRS. This is evidenced by the recent increase in ETLA inquiries, with an average of almost 32,000 inquiries per year during the last four years, compared with an average of only about 13,500 inquiries per year during the prior four years. Further, ETLA inquiries from aliens and U.S. citizens living abroad are up 39 percent since FY 2013. International taxpayers face difficulty in corresponding by phone or mail due to inadequate levels of service and barriers such as tolls and time zone differences. The IRS's plans for expanding self-service options cannot fully replace personal service options. The IRS is limiting the opportunity for interaction and will no longer be able to learn firsthand what taxpayers need. Without a two-way dialogue, information will be filtered and the IRS will decide what it thinks taxpayers need to hear, instead of hearing what information taxpayers want and need.

TAS RECOMMENDATIONS

[7-1] Reopen the four international tax attaché offices and provide funding for TAS to establish one LTA position at each office.

[7-2] Conduct impact studies to determine the effects on taxpayer service, compliance, and revenue by opening additional tax attaché offices around the world.

[7-3] Reestablish the ETLA (or a similar program) with timeframes for responses and create a process for using the information from ETLA inquiries in updates to IRS internal and external materials, including the irs.gov website.

[7-4] Allocate funding for staffing additional telephone service to accommodate the need created by the expansion of international enforcement activities.

[7-5] Create a task force to analyze and provide a report within one year on the barriers to Voice Over Internet Protocol (VOIP) usage and partnering with the U.S. Department of State to employ Virtual Service Delivery (VSD) technology for taxpayers at U.S. embassies and consulates.

[7-6] Reinstate the International Individual Taxpayer Assistance (IITA) Team, with a formal charter, regular meetings, objectives, and measurable results.

IRS RESPONSE

The IRS recognizes that the issues faced by individual U.S. taxpayers working, living, or doing business abroad may be unique. We continue to look for opportunities to improve services delivered to this taxpayer base. A goal of the IRS is to ensure that all taxpayers with an obligation to pay U.S. tax have the education and assistance they need. Nevertheless, the overall IRS budget has decreased in recent years, while both the mandatory and the discretionary work required of the IRS has increased.

The Wage & Investment Division of the IRS conducted a survey, the results of which were published as 2012 Taxpayer Experience of Individuals Living Abroad: Service Awareness, Use, Preferences, and Filing Behaviors. The survey indicated that nearly 70 percent of the respondents preferred improving online services to improved telephone service. The IRS has improved services by improving the IRS.gov experience for international taxpayers.

The IRS recently redesigned the pages on IRS.gov directed at the individual international taxpayer. The main International Taxpayers landing page is organized by taxpayer category, with each category linking to a separate landing page with relevant information. The subjects included on the Frequently Asked Questions page were expanded. The IRS prepared six You Tube videos on international topics and developed two topics for the Tax Trails interactive section. The IRS added links on the main International Taxpayers landing page for information about the Report of Foreign Bank and Financial Accounts (FBAR), the Foreign Account Tax Compliance Act (FATCA), the Affordable Care Act (ACA), the directory of tax preparers (including preparers located in foreign countries), the new Streamlined Filing Compliance Procedures, and the Overseas Voluntary Disclosure programs.

The new Streamlined Filing Compliance Procedures are available to both taxpayers living in the United States and taxpayers living outside the United States. A taxpayer who is eligible to use these streamlined procedures may be able to reduce significantly penalties otherwise applicable when returns have not been filed. As a result, taxpayers subject to "inadvertent noncompliance" should be much more willing to come into compliance with their filing obligations.

The IRS has a permanent Program Manager for International Individual Taxpayer Assistance (IITA). The Program Manager is constantly looking for ways to improve international taxpayer assistance, both by improving IRS.gov and by working with the U.S. Department of State. For example, the IITA assisted taxpayers through filing season information available on each embassy's website. In addition, the IRS has developed webinars addressing the issues of international taxpayers. The first three webinars on IRS Streamlined Filing, Overseas Filing for U.S. Taxpayers Abroad and Foreign Earned Income Exclusion will be delivered in May and June 2016. These webinars will be live events with questions submitted by text. We will advertise them through several sources: the U.S. Department of State, various Embassies and Consulates, U.S. citizen overseas organizations, and internal IRS communications sources.

The IRS reorganized the Large Business & International Division in 2016 and moved IITA to the "Withholding and International Individual Compliance" Practice Area. One goal of this transfer was to align the office of IITA to the Practice Area servicing the affected taxpayers -- international individuals. In this way, IITA may be made aware of specific issues sooner and be able to respond quickly.

The IITA Program Manager continues to review specific problems faced by overseas taxpayers in an attempt to identify options available to improve service and make recommendations for implementing effective improvements.

To assist all military personnel living overseas, the IRS continues to provide free tax assistance and return preparation at its VITA sites. Additionally, taxpayers can obtain tax assistance, including assistance with account issues, through the International Taxpayer Service Call Center at 267-941-1000. Alternately, overseas taxpayers may also fax their written tax questions to IRS at 267-941-1055. Taxpayers in Guam, the Bahamas, U.S. Virgin Islands or Puerto Rico can call 800-829-1040 for assistance. The IRS will continue to seek new ways to improve taxpayer assistance to all taxpayers, both in the United States and abroad, while promoting voluntary compliance.

TAXPAYER ADVOCATE SERVICE COMMENTS ON IRS RESPONSE

The National Taxpayer Advocate recognizes the funding challenges faced by the IRS as it is repeatedly tasked with administering more programs through the tax code with a budget below previous levels. However, the IRS has not proposed adequate replacements for the services it has recently taken away from international taxpayers. TAS reviewed the Wage and Investment survey, 2012 Taxpayer Experience of Individuals Living Abroad: Service Awareness, Use, Preferences, and Filing Behaviors while working on the MSP. As noted in the MSP, although an increasing number of international taxpayers prefer online services over telephone services, the survey found nonfilers were significantly more likely than filers to prefer resources be devoted to telephone service over online service. Thus, by focusing primarily on taxpayers that prefer online services, the IRS is ignoring the very taxpayers with whom it most needs to engage -- taxpayers who do not currently file.

In addition, the 2012 study did not measure anything related to the Foreign Account Tax Compliance Act (FATCA)⁶ that went into effect for tax returns filed in 2012, even though it acknowledged that many international taxpayers were unaware of the new law requirements to report foreign financial assets on the Form 8938, Statement of Specified Foreign Financial Assets, in addition to the Report of Foreign Bank and Financial Accounts (FBAR).⁷ Thus the population of international taxpayers has vastly expanded, as has the population of international taxpayers facing problems with the IRS -- not to mention the recent passage of Individual Taxpayer Identification Number (ITIN) process changes and the passport revocation legislation.⁸ The international tax filing and reporting obligations have exponentially expanded while the IRS's service channels to these taxpayers have shrunk.

The National Taxpayer Advocate is pleased the IRS is providing enhanced resources on its website for international taxpayers, but as noted in the MSP, these are static resources that provide no opportunity for interaction between taxpayers and the IRS. Taxpayers are unable to ask questions and interact with an employee, and the IRS has no way of knowing whether it is providing the information taxpayers need or answers to the questions they may have. The IRS terminated the ETLA Program, which was the only free option⁹ for taxpayers to ask a specific question and receive a response from an IRS employee in October 2015.¹⁰ In conjunction with terminating ETLA, the IRS also discontinued R-mail, a system that allowed customer service representatives to refer taxpayer questions to employees with specific expertise. The elimination of these essential services that were used extensively by international taxpayers has increased compliance challenges and undermined taxpayer rights of this taxpayer population which includes over 8.7 million U.S. taxpayers living abroad, over 170,000 U.S. military service personnel and their families, and hundreds of thousands of students and foreign taxpayers with U.S. tax obligations.¹¹

The new Streamlined Filing Procedures and their availability to taxpayers outside the United States make it incumbent upon the IRS to provide better service to taxpayers abroad, which means not only providing a way for taxpayers to ask and receive answers to questions regarding systemic problems, but also for taxpayers to be able to ask individual questions. The webinars that the IRS cites do not provide for the same level of interaction as the services that have been taken away. TAS attended the first of the webinars on May 25, 2016, and noted that the presenters only answered a few of the questions submitted during the webinar and indicated they would not respond to questions individually. Although taxpayers abroad may contact the IRS via phone or fax, neither of these options are toll-free because taxpayers pay long distance and fax charges.

APPEALS: The Appeals Judicial Approach and Culture Project Is Reducing the Quality and Extent of Substantive Administrative Appeals Available to Taxpayers

PROBLEM

Appeals recently implemented the Appeals Judicial Approach and Culture (AJAC) project in hopes of enhancing "internal and external customer perceptions of a fair, impartial and independent Office of Appeals." Although AJAC's aspirations are commendable, its practical implementation is eroding the very perceptions of fairness and objectivity that it claims to bolster. For example, non-docketed Appeals cases have fallen by 25 percent between fiscal year end (FYE) 2011 and FYE 2015, a decline that AJAC has only perpetuated. Further, AJAC is being used as a justification by Compliance to intimidate taxpayers and deny their right to an administrative appeal. If taxpayers are able to get to Appeals, they are subjected to an AJAC regime that is causing cases to bounce back and forth between Appeals and Compliance and resulting in curtailed review by Hearing Officers of the cases they retain.

ANALYSIS

Under the guise of AJAC, Compliance has adopted a more stringent policy that closes cases and bypasses Appeals unless a taxpayer provides all requested documentation or certifies that no additional information is available. At the urging of TAS, Compliance agreed to temporarily discontinue this approach (which had been pursued through the Letter 5262 series), but is now considering reinstating it, with some minor modifications. Further, cases in Appeals face the increased risk of being unnecessarily shuttled between Compliance and Appeals, and TAS is concerned that a robust consideration of the taxpayer's case is all too often lost in the rush to judgment. Several practitioners have reported that, under AJAC, Appeals Hearing Officers (Hearing Officers) are in greater haste and that a more adversarial environment has been created.

TAS RECOMMENDATIONS

[8-1] Permanently discontinue the Letter 5262 series and preserve taxpayers' rights to an appeal even in cases where all requested information is not provided to Compliance.

[8-2] Loosen AJAC restrictions to allow Hearing Officers to exercise more discretion regarding whether additional factual development or analysis within Appeals would materially assist case resolution.

[8-3] Provide Hearing Officers with revised guidance and enhanced training emphasizing quality substantive review, rather than mere satisfaction of procedural requirements by expanding timeframes and retaining Appeals' jurisdiction where appropriate, as the best means of providing taxpayers with the right to appeal an IRS decision in an independent forum.

[8-4] Develop and implement an outreach plan aimed at practitioners to help them understand what is needed for a successful appeal and to provide Appeals with information about the difficulties experienced by taxpayers and practitioners under AJAC.

IRS RESPONSE

The IRS initiated the Appeals Judicial Approach and Culture (AJAC) project in 2012 to ensure that Appeals' policies and practices are consistent with its mission to resolve tax controversies on a basis which is fair and impartial to both the Government and the taxpayer. The policy changes clarify the distinct roles of Compliance and Appeals and ensure that taxpayers are afforded an objective, impartial appeal.

Appeals' role is to review a case with a goal of resolving it without litigation after Compliance has investigated and made a determination. Appeals should not perform Compliance actions, such as factual development and analysis, because those actions cause Appeals to be invested in the decisions themselves. Appeals is able to evaluate cases more objectively and impartially when Appeals does not play a role in investigating or making case-related decisions. The AJAC project addressed stakeholder concerns that, when Appeals hearing officers independently remedied defects in case files, analyzed information presented by the taxpayer for the first time at the Appeals level, or made lien filing determinations on a tax case, their actions were more akin to Compliance, which called into question the perception of Appeals' impartiality. Appeals should not be a continuation of the Examination or Collection process.

Appeals hearing officers apply judgment and experience in weighing the facts and law to determine hazards of litigation in resolving disputes. The AJAC project was designed to uniformly address how the Examination and Collection organizations will participate when the taxpayer provides new information or raises new theories not previously considered before Appeals received the case. In general, if Appeals receives new information from the taxpayer that, in the judgment of the Appeals hearing officer, merits additional analysis or investigative action, the case will be returned to the originating function. Such analysis or investigation by Compliance ensures that the taxpayer is afforded an objective, impartial appeal of an earlier rendered decision. Appeals will not raise new issues and will focus its efforts on resolving points of disagreement by the parties.

TAXPAYER ADVOCATE SERVICE COMMENTS ON IRS RESPONSE

As the National Taxpayer Advocate explained in the Annual Report to Congress (ARC), AJAC's goals are laudable. Nevertheless, the manner in which AJAC is being implemented undercuts the objectives it is seeking to achieve.

The National Taxpayer Advocate applauds Appeals' attentiveness to stakeholder concerns regarding various actions that might compromise perceptions of impartiality. Nevertheless, the limitations, based in AJAC policy and practice, under which Hearing Officers are now operating, are themselves causing taxpayers and their representatives to question the independence of Appeals. TAS has received a number of comments that, under AJAC, the Appeals environment has become significantly more adversarial and oppositional in tone.

To better inform its analysis of AJAC, TAS conducted a series of focus groups at the IRS Nationwide Tax Forums and separately interviewed a number of tax practitioners. This commentary, along with TAS's own observations, revealed that AJAC too often is being used as a means of docket control, that taxpayers are feeling rushed, and that their ability to adequately present their cases for Appeals' consideration is being curtailed. In refusing to undertake reasonable factual investigation or make case-related decisions, Appeals is reducing the quality of substantive reviews provided to taxpayers. This outcome of AJAC implementation runs directly counter to the perceptions of fairness and independence that AJAC purports to foster.

Appeals' response indicates that AJAC was developed partially as a reaction to stakeholder comments. Appeals should now be similarly attentive to concerns expressed by taxpayers, their representatives, and the National Taxpayer Advocate that AJAC, as currently applied, is diminishing the timeliness, quality, and fairness of case reviews.

COLLECTION APPEALS PROGRAM (CAP): The CAP Provides Inadequate Review and Insufficient Protections for Taxpayers Facing Collection Actions

PROBLEM

The IRS developed the Collection Appeals Program (CAP) as a response to congressional concerns regarding the rights of taxpayers subject to collection activity relating to liens, levies, and installment agreements. CAP hearings provide taxpayers with some distinct benefits in comparison to Collection Due Process (CDP) Appeals, including expedited timeframes and the ability to challenge determinations regarding installment agreements. They remain severely limited, however, in the remedies and scope of review they offer taxpayers. CAP rejects substantive review and a consideration of collection alternatives, which would involve a balancing of the proposed collection action versus the taxpayer's legitimate concern regarding intrusiveness of the collection action, in the name of speed, a circumstance that has only been made worse by procedures implemented under the Appeals Judicial Approach and Culture (AJAC) project. Further, pursuit of a CAP hearing by a taxpayer can inadvertently cause the loss of all substantive administrative and judicial review of a collection action.

ANALYSIS

CAP provides only limited protections to taxpayers and, likely as a result, has been underutilized in comparison with CDP appeals, which allow for a much broader range of review. From fiscal year (FY) 2012 through FY 2015, the IRS has received approximately 44,500 CDP appeals per year, while taxpayers have sought just 4,600 CAP hearings per year over this same period. Only approximately 22 percent of taxpayers fully or partially prevailed in CAP hearings during these years, while 68 percent of taxpayers obtained full or partial relief in CDP appeals. Likely as a result of the limited review and remedies provided by the CAP process, taxpayers seldom prevail in, and infrequently utilize, CAP hearings.

TAS RECOMMENDATIONS

[9-1] Revise the policies and procedures governing CAP to allow Appeals Hearing Officers the expanded authority, and where necessary, the additional time to review Collection alternatives and remand cases to Collection for consideration of those alternatives.

[9-2] Issue guidance specifying that taxpayers' use of CAP will no longer preclude them from receiving an independent reconsideration via a CDP appeal based on either issue preclusion or pro forma adoption of the prior CAP decision.

[9-3] After implementing the improvements in CAP discussed above, make a concerted effort to publicize the benefits of CAP and ensure that Hearing Officers and all IRS employees with taxpayer contact more effectively inform taxpayers and their representatives about the availability of CAP hearings.

IRS RESPONSE

The limited scope of the Collection Appeals Program (CAP) affords taxpayers an opportunity for immediate review of a proposed collection action. While characterized by the National Taxpayer Advocate (NTA) report as a problem, this feature is the strength and advantage of the program. Historically, for a CAP case, the process from start to finish takes approximately 13 days. By contrast, other Appeals programs, such as Collection Due Process (CDP), that allow for negotiated settlements and consideration of collection alternatives require on average 196 days from start to completion. We disagree with the report's suggestion that allowing full consideration of collection alternatives in CAP would mean only "slightly expanded timeframes."

The report also suggests that if a taxpayer's argument is rejected in a CAP proceeding she will be precluded from advancing the same argument in other Appeals programs. This is erroneous and unsupported. The Appeals hearing officer in a CDP may adopt the reasoning of the employee who conducted the CAP hearing, but the hearing officer is free to reach a different conclusion or consider a change in circumstances in a CDP hearing. The report did not provide any data or examples of cases where a hearing officer refused to consider an unsuccessful argument raised in an earlier CAP proceeding.

At its inception in 1996, CAP provided a taxpayer immediate review of a proposed IRS notice of lien filing or levy on property. The program was expanded to include issues affecting installment agreements. Unlike CDP cases where an appeal request is available after the filing of a Notice of Federal Tax Lien (NFTL), taxpayers may pursue a CAP hearing at any time. CAP requires the immediate attention of a hearing officer -- five days in most instances. (I.R.M. 8.24.1.2.7(1)). The report attempts to compare the effectiveness of the CAP by comparing sustention rates with CDP hearings. Given the fundamental difference in the scope of each program, this comparison is not appropriate. CAP was designed to deliver a quick response regarding the appropriateness of the single issue under appeal, not a review of all available alternatives to collection. Approximately 20-25% of the taxpayer's pursuing this route received relief in a very short period of time. These taxpayers would experience delays if the CAP program were expanded to require consideration of collection alternatives.

CAP provides an impartial appeal for taxpayers who need an immediate evaluation and determination concerning a seizure, levy, lien or installment agreement issue. Taxpayers requiring a more substantial review of collection alternatives can pursue an Officer in Compromise, Installment Agreement, or CDP hearing.

TAXPAYER ADVOCATE SERVICE COMMENTS ON IRS RESPONSE

The National Taxpayer Advocate believes that CAP can be a valuable means of providing important protections to taxpayers involved in Collection actions. As currently formulated, however, CAP is underutilized and fails to achieve its potential.

The expedited five-day target for resolution is a strength of CAP, but it is also a double-edged sword. To achieve this quick review time, CAP only affords a procedural review and does not allow Hearing Officers to consider collection alternatives. This limited scope likely accounts for the minimal use of, and low taxpayer success rates in, CAP hearings. From FY 2012 through FY 2015, approximately 44,500 CDP appeals per year have been received by the IRS, while taxpayers have sought just 4,600 CAP hearings per year over this same period. Approximately 22 percent of taxpayers fully or partially prevailed in CAP hearings during these years, while 68 percent of taxpayers were fully or partially victorious in CDP appeals.

The Appeals response takes exception to the discussion of these success rates in comparison with those in CDP Appeals. The Annual Report to Congress (ARC) points out that these programs have different roles and attributes. Nevertheless, an inescapable reality is any Appeals program that provides only approximately 22 percent of participating taxpayers with a beneficial outcome will generate little interest and enthusiasm from taxpayers.

CAP's lack of use is especially remarkable given that, unlike CDP appeals, which are only available once for a lien and once for a levy, CAP hearings are available throughout the entirety of the collection window. Underuse of such a broadly applicable Appeals program testifies to an inherent design flaw, specifically, the limited scope of review allowed in a CAP proceeding. Slightly expanding CAP review would not unduly lengthen resolution times, but would enhance interest and make its benefits attractive to a wider range of taxpayers.

As CAP is currently constituted, however, a further disincentive to participation is that such involvement might result in the forfeiture of a substantive CDP appeal. The Appeals response incorrectly characterizes the National Taxpayer Advocate's analysis as stating that rejection of a CAP hearing "will" preclude the taxpayer "from advancing the same argument in other Appeals programs." The National Taxpayer Advocate, however, did not say "will," but said, "could" -- a very real risk that is discussed at length in an on-point Chief Counsel Memorandum.¹² For some reason, the response ignores both TAS's actual analysis and that of the IRS Office of Chief Counsel.

Moreover, the response misleadingly states, "The report did not provide any data or examples of cases where a hearing officer refused to consider an unsuccessful argument raised in an earlier CAP proceeding." As explained in the ARC, however, TAS specifically requested information from Appeals for the purpose of quantifying this potential problem and was told by Appeals that Appeals did not track this data.

CAP could be a highly useful part of the collection appeals process for both taxpayers and the government. Nevertheless, for this potential to be realized, Appeals must be willing to take a hard look at the program and to accept constructive analysis and recommendations from informed parties such as the National Taxpayer Advocate.

LEVIES ON ASSETS IN RETIREMENT ACCOUNTS: Current IRS Guidance Regarding Levies on Retirement Accounts Does Not Adequately Protect Taxpayer Rights and Conflicts With Retirement Security Public Policy

PROBLEM

Taxpayers rely on retirement accounts to fund living and other expenses after retirement. Congress for years has encouraged retirement savings and formulated policies to protect these rights. Current Internal Revenue Manual (IRM) guidance lacks a definition for flagrant conduct (a prerequisite for the levy) and contains inadequate instruction for analyzing future retirement calculations. The IRS guidance that explains the steps required before a retirement account can be levied contains inadequate detail, and is insufficient to protect taxpayer rights or enable taxpayers to meet basic living expenses in retirement.

ANALYSIS

The current IRM guidance is not only vague but is overbroad, and as a result there is too much subjectivity involved in the decision to levy a retirement account. Moreover, the IRS does not track retirement account levies and therefore is unable to conduct quality reviews. TAS reviewed 43 possible Thrift Savings Plan (TSP) levy cases and found that in 33 cases, the notice of levy was issued. In 31 of those cases, the IRS employee did not document required managerial approval. Flagrant conduct, a prerequisite for the levy, was only recorded in one case. The IRS has proposed a TSP levy pilot within its Automated Collection System (ACS) unit, which could automate much of the decision to levy on a TSP retirement account, and would result in disparate treatment of TSP accounts compared to other retirement accounts.

TAS RECOMMENDATIONS

[10-1] In collaboration with TAS, revise the IRM on retirement account levies to define flagrant conduct, which should include elements of willful and voluntary conduct that appears to be a gross violation from a reasonable person standard, include examples of extenuating circumstances that can mitigate flagrant conduct, require a full pre-levy financial analysis, and educate taxpayers about actions available to avoid a levy on a retirement account.

[10-2] The IRS should identify calculators that it can use, such as those provided by the Social Security Administration (SSA) or TSP, to determine the impact of a levy on a retirement account on the taxpayer's future well-being. Alternatively, the IRS could create its own calculator.

[10-3] Create a unique Designated Payment Code for retirement levy proceeds or a unique identifier within the Integrated Collection System to identify, track, and review retirement levy cases.

[10-4] Postpone the ACS retirement levy pilot program until all of the National Taxpayer Advocate's concerns have been addressed; and if they are not able to be addressed, do not implement the pilot.

IRS RESPONSE

Congress, through the Internal Revenue Code, has long given broad authority to the Treasury Secretary to collect unpaid federal taxes by levy. As the National Taxpayer Advocate notes in MSP 10, this authority extends to funds held in retirement accounts. On January 1, 2013, Congress amended Title 5, United States Code, to make clear that accounts in the Thrift Savings Fund are also subject to federal tax levies.

The IRS recognizes the importance of balancing the taxpayer's future welfare and the need for effective enforcement action when providing guidance for levies on retirement accounts. In this regard, current guidance provides direction to Collection employees through examples of flagrant conduct and acknowledging that unique case situations will impact the determination of whether or not to issue a levy on a retirement account.¹³

Since June 2015, the IRS has been holding discussions with the National Taxpayer Advocate and her staff to revise the flagrant conduct examples in the Internal Revenue Manual (IRM) on retirement accounts. Based on suggestions provided by the National Taxpayer Advocate, six of the seven flagrant conduct examples were modified. For example, we are clarifying that a taxpayer who verifies he or she has been automatically enrolled to have a limited percentage of basic pay deducted and deposited into a retirement account is not considered to have engaged in flagrant conduct. We have made other modifications based on National Taxpayer Advocate suggestions, such as incorporating the recent updated guidance on pre-levy considerations into the steps taken prior to a retirement levy.¹⁴ This IRM section emphasizes that levy determinations are made on a case-by-case basis and revenue officers must exercise good judgment in making the determination to levy. Additionally, we plan to adopt another National Taxpayer Advocate recommendation to modify the Levy Source Screen on the Integrated Collection System (ICS) to include the type of assets being selected for the levy in order to assist the revenue officer in perfecting the levy.¹⁵

Financial information provides the basis for determining a taxpayer's ability to pay delinquent tax liabilities.¹⁶ When taxpayers provide a financial statement, Collection employees will verify and analyze the financial information to make appropriate collection decisions and consider any special circumstances in the taxpayer's specific situation to resolve the case. As part of this analysis, IRM 5.15.1.27, Retirement or Profit Sharing Plans, provides specific guidance on valuing a taxpayer's pension and profit sharing plans. We have incorporated the National Taxpayer Advocate's suggestion to document in the ICS history the calculation to determine if the taxpayer depends on the money in the retirement account (or will in the near future) for necessary living expenses. The taxpayer will be provided with an "ability to pay" determination based on a thorough financial analysis. Taxpayers have various appeal rights if they disagree with the collection decisions.

The IRS believes the current guidance on financial analysis ensures taxpayers are treated in a uniform manner and that the IRS's determination to issue a retirement account levy is supported by the case facts. These procedures also provide fairness to all taxpayers by pursuing those who fail to voluntarily comply or otherwise meet their tax obligations.

Collection employees evaluate the effectiveness of retirement levies on a case-by-case basis and retirement account levy recommendations undergo a review at the highest level before issuance. When seeking approval for a retirement account levy, the IRM requires the revenue officer to prepare a memo for the Area Director explaining the information that supports the levy determination. This memo is retained in the case file. On the face of the Form 668-A, Notice of Levy, it states, "This levy won't attach funds in IRAs, Self-Employed Individuals' Retirement Plans, or any other Retirement Plans in your possession or control, unless it is signed in the block to the right." This statement is an additional protection from an inadvertent levy on a retirement account.

In addition, to ensure our guidance is being appropriately followed, we performed a sample review of retirement inventory data. The review included all levies of Thrift Savings Plan (TSP) accounts and a sample of levies issued to Individual Retirement Accounts (IRAs) and other retirement accounts. We did not find any instances where the revenue officer did not follow IRM sections, including securing Area Director approval to levy the retirement account. Nor did we find any instances where taxpayer rights were violated.¹⁷

Currently, there is a pilot to determine whether levies should be issued on TSP accounts by our Automated Collection System. The pilot procedures were developed in partnership with the staff of the National Taxpayer Advocate. Forty-eight separate issues were identified as discussion points in the procedures. Over the course of several meetings between representatives of the National Taxpayer Advocate and Collection Headquarters, agreement was reached on all 48 items and the pilot began on January 19, 2016. We are monitoring the pilot cases and will continue to provide the National Taxpayer Advocate updates on its progress.

TAXPAYER ADVOCATE SERVICE COMMENTS ON IRS RESPONSE

The National Taxpayer Advocate appreciates the IRS's willingness to collaborate with TAS in regard to revising IRM guidance on retirement levies. TAS has been holding meaningful discussions with the IRS to define flagrancy, revise the flagrant conduct examples, and revisit pre-levy considerations. We acknowledge certain progress in this area, including:

• Modification of six of the seven flagrant conduct examples;

• Updated guidance on pre-levy considerations;

• Revision of the Levy Source Screen on the Integrated Collection System (ICS) to include the type of assets being selected for the levy in order to assist the revenue officer in perfecting the levy; and

• A tentative agreement to revise the IRM to require revenue officers to advise affected taxpayers to cease contributions to retirement accounts prior to making a flagrancy determination based on the fact of such contributions.

The National Taxpayer Advocate remains concerned that there is no standard memorandum used across IRS. Moreover, the memorandum contained in the taxpayer's case file is not a part of the ICS history. Therefore, access to the critical information in the memorandum is not readily available in closed cases where files have been shipped for storage. This impedes the IRS's ability to conduct quality reviews of retirement asset levy cases. TAS continues to negotiate for a standardized memo to be included in the ICS history.

As of August 5, 2016, the IRS has not agreed to document the taxpayer's ability to pay determination in the ICS history. The determination should be based on a calculation of whether the taxpayer now depends or will depend on the money in the retirement account for necessary living expenses in retirement and provide the taxpayer an opportunity to respond to those calculations.

The IRS's response states that it conducted a sample review of retirement inventory data and found no instances where IRM guidance was not followed or Area Director's approval was not secured. TAS has not been provided with any information related to this review. The results stand in stark contrast to the review completed by TAS as part of this MSP. TAS case review indicated IRS employees were issuing levies on retirement asset en masse without seeking the proper approval. Since the IRS has no means to identify all cases in which a retirement asset levy was issued, it is impossible to review a statistically valid sample of such cases. The National Taxpayer Advocate remains concerned that the IRS has not developed a process to identify all retirement asset levy cases and to conduct regular quality reviews.

NOTICES OF FEDERAL TAX LIEN (NFTL): The IRS Files Most NFTLs Based on Arbitrary Dollar Thresholds Rather Than on a Thorough Analysis of a Taxpayer's Financial Circumstances and the Impact on Future Compliance and Overall Revenue Collection

PROBLEM

Notices of Federal Tax Lien (NFTLs) establish priority of the government's interest in a tax debtor's property by putting the public, including third party creditors, on notice of an existing lien. Several TAS studies show that NFTLs can unnecessarily harm taxpayers and reduce their ability to become or remain compliant with their federal tax filing obligations. NFTLs also generate significant downstream costs for the government, often without attaching to any tangible assets. The IRS files most NFTLs based on an arbitrary dollar threshold of the unpaid liability, with over 21 percent of liens filed without human involvement in determining lien filing, rather than conducting a thorough analysis of the taxpayer's individual circumstances and financial situation, or consideration of the NFTL's impact on future compliance and collected revenue. Current IRS lien policies can have a negative impact on taxpayers' economic viability, ability to pay the past debt, and comply in the future.

ANALYSIS

The current NFTL filing policy is based on an arbitrary dollar threshold of the unpaid liability, rather than focused on meaningful contact with the taxpayer. The IRS generally files NFTLs if the aggregate unpaid balance of assessment is over $10,000, or for accounts in the Automated Collection System (ACS), if the assessment is over $25,000. Under current procedures, the request for an NFTL filing, or appropriate non-filing documentation, must be prepared within ten calendar days of the initial attempted contact or initial actual contact with the taxpayer. A contact is made by either a field contact by a Revenue Officer, a telephone call, or mailing a notice to the taxpayer's last known address. However, a majority of attempted telephone calls by ACS using predictive dialers do not result in actual contact with the taxpayers. Even when the taxpayer attempts to initiate contact with the IRS by calling the number provided on the majority of notices, only about one in three taxpayers can get through to the IRS to make payment arrangements prior to NFTL filing.

The IRS is "one of the largest financial institutions in the world," but has not implemented financial analysis techniques and certain automation techniques used by modern financial institutions, including financial scoring, credit risk analysis, and modeling. A recent TAS research study, which can be found in Volume 2 of this report, reveals that early interventions drive the collection of revenue. The IRS has agreed to conduct a lien pilot study to determine whether lowering the ACS NFTL filing threshold from $25,000 to $10,000 would result in enhanced protection of the government's interest and would facilitate the collection of delinquent tax liabilities, without unnecessarily harming the taxpayer. The pilot was slated to begin February 2016.

TAS RECOMMENDATIONS

[11-1] Revise the Internal Revenue Manual (IRM) to require employees to make multiple attempts to initiate a meaningful personal contact with the taxpayer by phone or through mailing notices, instead of filing a NFTL after just one attempt. The IRS should adopt an early intervention policy similar to the new standard in the mortgage industry that requires two contacts, one of which is a person-to-person attempt, rather than simply mailing a letter.

[11-2] The IRS should increase the ten-day timeframe for filing an NFTL to enable taxpayers to reach out to the IRS and provide financial information.

[11-3] The IRS should continue to mail monthly notices to the taxpayers while the account is in the queue, ACS, or the field.

[11-4] In collaboration with TAS, develop criteria for conducting the lien pilot as agreed upon with the National Taxpayer Advocate and refrain from decreasing the NFTL filing monetary threshold until the results of the lien pilot can be examined and discussed.

[11-5] Amend the IRM and related e-Guides and training materials to incorporate rules for NFTL filing determinations. The rules should specify that the following items are needed prior to filing: "meaningful contact;" analysis of the taxpayer's financial situation, including a hardship determination if needed; consideration of collection alternatives; application of the balancing test, which is to balance the need for efficient collection of the tax with legitimate concerns of the taxpayer that actions be no more intrusive than necessary; and the impact on future compliance.

[11-6] Incorporate credit scoring and automated asset verification into financial analysis for making NFTL filing determinations in ACS, with the provision to elevate close call and complex cases to a manager.

[11-7] For accounts moving from ACS to the queue, revise the IRM to require employees to conduct a limited financial analysis based on a Form 433-F and refrain from filing an NFTL, if the employee has determined there are no assets or reasonable expectation of the taxpayer to acquire assets in the future.

[11-8] Update the e-Guides with a series of questions determining if the taxpayer has or is likely to have assets to which an NFTL can actually attach.

IRS RESPONSE

Congress, through the Internal Revenue Code (IRC), has provided the IRS a tool allowing the Government to protect the American taxpaying public's interest in collecting the proper amount of tax revenues. The federal tax lien is a key tool that promotes all taxpayers' right to a fair and just tax system.

The federal tax lien arises when a tax liability has been assessed, notice of the assessment and demand for payment has been given to the taxpayer, and the taxpayer neglects or refuses to pay the liability.¹⁸ This statutory lien attaches to the right, title, or interest of the taxpayer in any current property and any property acquired in the future. The federal tax lien is referred to by some as a "silent" lien because, while the IRS and the taxpayer are aware of its existence, the lien is not public knowledge until notice of the lien has been filed.

A Notice of Federal Tax Lien (NFTL) is filed under the provisions of IRC § 6323, in a recording office designated by the state where the taxpayer lives or owns property. The NFTL is filed to establish the priority of the government's claim versus the claims of other creditors. The NFTL is filed in the same recording office where mortgages, state liens, and other Uniform Commercial Code encumbrances are filed by creditors.

The IRS has a longstanding policy that a NFTL shall not be filed until reasonable efforts have been made to contact the taxpayer in person, by telephone, or by a notice sent by mail, delivered in person, or left at the taxpayer's last known address.¹⁹ Prior to the IRS making a determination to file the NFTL, two to four notices of the liability are generally sent to the taxpayer at their last known address, each one requesting payment of the liability. Additionally, the IRS usually attempts telephone contact where a telephone number is available and, in some instances, additional personal contact is attempted before a NFTL filing determination is made. On average, the time from assessment until a NFTL is filed is over one year for business liabilities and over two years for liabilities of individuals.²⁰ Each contact attempt affords the taxpayer an opportunity to make arrangements to pay or otherwise address the liability. If the taxpayer is non-responsive to the numerous contact attempts, does not resolve the liability, or otherwise does not cooperate, a NFTL determination is made. Factors for the determination include the amount of the liability²¹ and the compliance history of the taxpayer.

If the taxpayer responds to one of the many contact attempts, but is unable to fully pay the liability, various case resolution options are discussed with the taxpayer including a payment agreement or an offer in compromise. Based on the case circumstances, financial information may be requested from the taxpayer in consideration of the resolution. Depending on the proposed resolution and other factors such as the amount owed, a NFTL determination is made. The NFTL determination can be to file, not to file, or defer the NFTL filing determination to allow the taxpayer time to complete their plan. For cases assigned to the Automated Collection System (ACS), NFTL determinations are most often made at the point of case disposition or when the taxpayer misses a deadline. For cases assigned to Field Collection, the filing determinations are made after contact is attempted and there is no immediate resolution for the liability.

Filing a NFTL to protect the public interest is akin to the practice followed by private industry to secure indebtedness owed by their customers. The policy for NFTL filings is based on the IRS mission of helping taxpayers understand their tax responsibilities and enforcing the law with fairness to all. Criteria for NFTL filings, and all other aspects of NFTL policy, have been carefully crafted over time with stakeholders, such as the National Taxpayer Advocate, to ensure NFTL procedures can be administered fairly to all taxpayers and that NFTLs are as non-intrusive as possible while still protecting the interests of compliant taxpayers at large. A NFTL may appear on the taxpayer's credit report; however, it has been shown that the NFTL impact on a taxpayer's credit score is only a mean score drop of 4.2 points.²²

After filing, NFTL policy and procedures continue to allow the IRS to work with the taxpayer for resolution of the liability. While the NFTL can, like any other encumbrance, hinder financial transactions involving the taxpayer's property, it does not prohibit the transactions. The IRS routinely utilizes its authority to work with taxpayers to address the effect of the NFTL on their property. For instance, if the taxpayer needs to sell or refinance property, the IRS works with the taxpayer to discharge the property from the lien or subordinate its position to the new financing.²³ In certain other situations, and if applicable criteria are met, the IRS may withdraw the NFTL.²⁴ The IRS works to ensure employees are knowledgeable of all NFTL procedures by updating Internal Revenue Manuals (IRMs) as needed and maintaining educational tools based on the IRMs such as training material and ACS e-guides.

The IRS continues to work with the Taxpayer Advocate Service and their input regarding NFTL policy. Recently, the IRS was considering ways to ensure greater consistency in NFTL determinations on ACS cases. The National Taxpayer Advocate (NTA) proposed a pilot to evaluate the changes intended by the IRS and proposed the pilot also measure the effectiveness of issuing other types of balance due notices, including monthly reminder notices. The IRS collaborated with the NTA to develop criteria for the "Lien Pilot" and the new notices that would be tested. Decisions on any changes to the NFTL determination process will be deferred until the pilot is completed and results can be evaluated.

TAXPAYER ADVOCATE SERVICE COMMENTS ON IRS RESPONSE

The National Taxpayer Advocate is appreciative of the IRS's efforts to collaborate with TAS regarding NFTL policy. However, she remains concerned about the IRS's longstanding policy of filing NFTLs based on an arbitrary dollar threshold that fails to take into account the taxpayers' ability to repay the liability and future compliance.

As stated in the MSP, the filing of a NFTL can significantly affect the taxpayer's creditworthiness including the ability to obtain financing for a home or other major purchases, find or maintain a job, secure affordable rental housing or insurance, and pay the tax debt. While the IRS cites the Tax Lien Impact on Consumer Credit Scores study it conducted in collaboration with Experian to support the premise that the NFTL filing has a minimal impact on a taxpayer's credit score, the very same study showed that for taxpayers with no existing other tax liens, such as state, county or city, the score drop is significant when the tax lien is filed. More specifically, approximately 52 percent of taxpayers with no other tax liens, show a score drop of up to 30 points compared to about 41 percent for those with pre-existing other tax liens. The study supports the National Taxpayer Advocate's premise that the IRS should complete a thorough analysis of the taxpayer's financial situation when it makes a lien determination, including the effect of the filing on creditworthiness and the determination of whether the taxpayer has assets currently or will have assets in the foreseeable future. Another study, conducted by VantageScore, found that approximately 70 percent of the study sample that had tax liens or civil judgments data removed completely had an average credit score increase of 11 points, demonstrating the significant impact of removing the tax lien and the long-lasting effect of a tax lien.²⁵ As one commentator noted, the 11 point increase is only the average, and many consumers saw a more significant increase, including 33.1 percent of consumers with an original score range of 601 to 620 jumping up to the 620 to 641 range, enabling them to obtain conventional mortgages, which generally require a minimum credit score of 620.²⁶

Moreover, it is not necessarily the credit score itself that has the most negative impact on a taxpayer's financial viability, but the fact that the NFTL exists at all. Potential employers, landlords, and creditors, view NFTLs much harsher than any other type of lien. Private creditors must first obtain a judgment from an independent third party -- namely, a judge; while the IRS's lien power is extra-judicial. Because of this, taxpayers who have NFTLs on their credit histories, even years after the statute of limitation for collection has expired, may be forced to pay higher rent, insurance, and interest rates, or in some cases, may have limited employment opportunities. In addition to the long-lasting financial hardship that the taxpayer may face, prior TAS research studies have shown that the IRS collects less revenue from taxpayers with NFTLs than those without liens.²⁷

A TAS research study contained in Volume 2 of the 2015 Annual Report has shown that a personal contact early in the collection process provides the best outcome in terms of revenue collection. The study determined that collection decreases as time passes, with dollar collections of over twice as much during the first year as in the second year, and over three times the collections in the third year. Furthermore, the study found that even within the first year, dollars collected decreased by about one-third after every three-month period elapsed. Not only do raw dollars collected decrease, but the percent of the amount collected declines as time progresses with only about eight percent collected in the third year. This study clearly demonstrates the importance of early meaningful contact. The IRS should use the data collected by TAS Research to revise its NFTL filing policies and increase its efforts to make early and frequent taxpayer contacts.

As noted in the February 19, 2015 National Taxpayer Advocate Blog, significant changes in IRS collection policies implemented in fiscal years (FYs) 2011 and 2012 in response to the National Taxpayer Advocate's continued concern over NFTL filing and withdrawal policies (also known as the Fresh Start Initiative) have placed greater emphasis on more flexible collection alternatives, such as installment agreements and offers in compromise. As a result, in FYs 2010 through 2014, while the overall number of NFTL filings decreased, Total Collection Yield increased. The Fresh Start Initiative also resulted in a policy decision to increase the ACS filing threshold from $10,000 to $25,000 through a programming change. This action was not documented in the IRM. In the summer of 2014, the IRS indicated its plan to revert back to published NFTL filing threshold of $10,000 for ACS NFTL filings. The National Taxpayer Advocate objected to this reversal of threshold and initiated discussions, which led to the Collection Lien Pilot.

The National Taxpayer Advocate is pleased that the IRS has agreed to conduct the Collection Lien Pilot. She suggested that the lien pilot program focus on the use of "meaningful contact" with taxpayers prior to the filing of the NFTL, rather than just studying the impact of different dollar thresholds, and examine the impact of NFTLs on future compliance. TAS appreciates that the IRS accepted the four treatment groups for the lien filing pilot, plus a control group, as the National Taxpayer Advocate recommended. TAS is looking forward to partnering with the IRS in the lien pilot and evaluation of its results.

THIRD PARTY CONTACTS: IRS Third Party Contact Procedures Do Not Follow the Law and May Unnecessarily Damage Taxpayers' Businesses and Reputations

PROBLEM

The IRS does not empower taxpayers to provide information that would make third party contacts (TPC) unnecessary. Nor does it periodically inform them about the TPCs it made, as required by statute, so that they can mitigate damage to their reputations.

ANALYSIS

The IRS is generally required by Internal Revenue Code (IRC) § 7602(c) to give the taxpayer advanced notice of a TPC, and reports of any TPCs both periodically and upon request. Advance notice is sup posed to empower the taxpayer to volunteer information that would make the TPC unnecessary, avoiding damage to his or her reputation or business. However, the IRS's TPC notices generally do not identify the information the IRS needs, inform the taxpayer the IRS will make a TPC in his or her case, or give the taxpayer enough time to provide the information. A TAS review found the IRS did not even ask taxpayers for the information before making the TPC in 22.8 percent of field exam cases and in 11.1 percent of field collection cases. In addition, the IRS does not provide periodic post-contact reports, and taxpayers have no reason to request them if they do not know the IRS has made a TPC. A TAS review of IRS cases did not identify anywhere a taxpayer requested one. Moreover, these reports are likely to be incomplete. TAS's review found that in 48.5 percent of field collection cases and 42.1 percent of field exam cases with TPCs, the IRS made TPCs not reflected in the database used to generate these reports. The IRS's failure to follow the statutory scheme impairs five of the ten taxpayer rights, including the rights to be informed, to a fair and just tax system, to privacy, to confidentiality, and to challenge the IRS's position and be heard.

TAS RECOMMENDATIONS

Generally, third party contacts (TPC) are made when the required information for a compliance investigation cannot be secured from the taxpayer, to verify information, or document witness testimony. When it is necessary to conduct a TPC, the provisions of Internal Revenue Code (IRC) § 7602(c), Notice of contact of third parties, and Procedure and Administration Regulations 301.7602-2, Third Party Contacts,are followed which require IRS to provide advance notification to the taxpayer, record each third party contacted, and provide a list to the taxpayer of third parties contacted upon request. The IRS already has several actions in place to ensure employees are following established TPC procedures.

The IRS is committed to our mission of providing taxpayers top quality service by helping them understand and meet their tax responsibilities and by applying the tax law with integrity and fairness to all. Our current Examination and Collection functions processes allow taxpayers opportunities to provide requested information necessary to address tax compliance issues.

Examination issues Publication 1, Your Rights as a Taxpayer, and Collection issues both Publication 1 and Letter 3164, Third Party Notice, to taxpayers to provide advance notice and awareness that a TPC might become necessary if taxpayers do not have the ability to produce their books and records as required by law,³⁰ or if such a contact is required in order to verify information or document witness testimony.

As part of an examination, the examiner will request information using Form 4564, Information Document Request (IDR). The IDR includes a description of the information the taxpayer needs to provide for the audit as well as a due date. Similarly, Collection issues Form 9297, Summary of Taxpayer Contact, to request information needed to address collection tax issues. IRS procedures allow for a reasonable amount of time for requested information to be presented, which is adjusted on a case-by-case basis. Additional requests for information may be issued throughout the audit/collection process depending on the facts and circumstances of each case. Information voluntarily provided by taxpayers usually reduces the need to request information through other means such as a third party contact or a summons.

The IRS may contact third parties under the provisions of IRC § 7602(c) and IRC § 7609, Special proce-dures for third-party summonses. IRC § 7602(c) governs informal third party contacts in which the third party could choose not to cooperate without facing any enforcement action. While the IRS attempts to obtain all required information directly from taxpayers, securing information from third parties is sometimes necessary in order to reach a timely and appropriate case resolution. The IRS is committed to the safety of taxpayers and any third parties contacted. When a TPC is appropriate, the contact is documented and a record is available to the taxpayer by request. If a third party fears there may be reprisal for providing the information, the contact is exempt from being recorded.

IRC § 7609 addresses third party summonses, which are enforceable by law and lengthens the process. Examiners/officers consider the facts and circumstances of each case to determine when a summons may be appropriate. Examples of factors to consider include records not made available within a reasonable time, submitted records are incomplete, or the existence and location of records are in doubt.

The IRS is continually looking for ways to improve or enhance our processes. The Small Business/Self Employed Division (SB/SE) Examination function recently concluded a TPC Program Review and is using the results to craft and communicate procedural enhancements in our internal manuals. Improvements we are working on include improving our communications to taxpayers explaining the benefits of voluntarily providing required information, as well as communicating the procedure for requesting TPC reports. In Fiscal Year (FY) 2017, Examination and Collection will be delivering training to enhance employee awareness of TPC procedures and to ensure consistent treatment of taxpayers.

TAXPAYER ADVOCATE SERVICE COMMENTS ON IRS RESPONSE

The National Taxpayer Advocate commends the IRS for undertaking a review of the TPC program in response to TAS's concerns, improving communications with taxpayers about how to request TPC reports, training employees about TPC proceedures, and working with its quality review program staff to address TPC issues. The National Taxpayer Advocate remains concerned, however, that the IRS's comments and responses to her recommendations still do not address many of the concerns identified in the MSP.

For example, the IRS's comments do not acknowledge the purpose of the TPC requirements to:

• Empower the taxpayer to minimize unnecessary damage to his or her reputation and business by informing him or her of the information the IRS needs;

• Give the taxpayer an opportunity to volunteer the information before any TPC; and

• Inform the taxpayer after the fact of any TPCs so that he or she can mitigate the damage.³¹

• The IRS did not ask taxpayers for the information before making the TPC in 22.8 percent of field exam cases and in 11.1 percent of field collection cases;

• The IRS does not provide periodic post-contact reports, as required by IRC § 7602(c)(2), and

• Taxpayers have no reason to request them if they do not know the IRS has made a TPC;

• In 48.5 percent of field collection cases and 42.1 percent of field examination cases with TPCs, the IRS made TPCs not reflected in the IRS's TPC database, which is used to generate these reports.

WHISTLEBLOWER PROGRAM: The IRS Whistleblower Program Does Not Meet Whistleblowers' Need for Information During Lengthy Processing Times and Does Not Sufficiently Protect Taxpayers' Confidential Information From Re-Disclosure by Whistleblowers

PROBLEM

In 2006, in the light of empirical evidence that audits initiated on the basis of whistleblower information are an efficient means of recovering unpaid tax liabilities, Congress added subsection (b) to Internal Revenue Code (IRC) § 7623. The new provision requires the IRS to award certain whistleblowers an amount between 15 and 30 percent of the collected proceeds, created the IRS Whistleblower Office (WO), and provides for Tax Court review of whistleblower award determinations. The legitimate purpose of enforcing tax compliance, when accomplished by using whistleblowers, creates risks for the subject of the whistleblower claim, especially when the claim is unsupported or not pursued. Voluntary compliance may be undermined if taxpayers perceive the IRS is not adequately guarding their tax information. The whistleblower program as currently administered by the IRS and existing IRC provisions does not adequately balance these concerns.

ANALYSIS

It takes the IRS almost five years on average to make payouts of IRC § 7623(b) claims. The IRS has never availed itself of IRC § 6103(n), an exception to the statutory prohibition on disclosing confidential taxpayer information, that would allow it to update whistleblowers on the status of their claims and protect taxpayer confidential information from re-disclosure by the whistleblower. The IRS does rely on other exceptions to the statutory prohibition on disclosure, IRC § 6103(k)(6) and (h)(4), which do not adequately protect taxpayers from re-disclosure of their confidential information by whistleblowers.

TAS RECOMMENDATIONS

The IRS Whistleblower Program makes an important contribution to the tax administration system, both by helping encourage compliance and by contributing to tax gap reduction. Since 2007, information received by the IRS from whistleblowers has assisted the IRS in detecting tax noncompliance resulting in collections of over $3 billion dollars in additional tax revenue. The IRS has awarded over $400 million to whistleblowers from these collected proceeds. The IRS remains committed to maximizing the success of the Whistleblower Program going forward, while at the same time ensuring continued compliance with IRC § 6103 and protecting the rights of the taxpayers subject to whistleblower submissions.

MSP #13 generally identifies the barriers to the IRS's communication with whistleblowers following submission of a claim as an impediment to the Whistleblower Program. The appeal for improved communications echoes the findings of GAO in its most recent report concerning the IRS Whistleblower Program and feedback the Whistleblower Office hears from its outside stakeholders. We appreciate that whistleblowers would like open communications from the IRS with respect to their claim. It is understandable that whistleblowers want to know whether the IRS is auditing the taxpayer they identified, whether adjustments have been made or proceeds collected. Nonetheless, the IRS is obligated by IRC § 6103 to protect the returns and return information of taxpayers. Weakening the restrictions imposed by IRC § 6103 will impair the rights of taxpayers and threaten the voluntary compliance upon which our system of tax administration is based. Moreover, information about the status of a target taxpayer's case would not, on its own, provide a basis for a whistleblower to know whether an award will ultimately be paid.

Recent whistleblower regulations (TD 9687) balance the rights of taxpayers with the interests of whistleblowers by providing for whistleblower award administrative proceedings. These proceedings allow the IRS to share limited return information with whistleblowers in connection with the IRS's award determination with respect to a submission. Treasury and the IRS determined that these proceedings should begin at the point when whistleblowers could contribute meaningfully to the proceeding. Allowing whistleblower proceedings to begin upon claim submission will not increase a whistleblower's ability to participate in the proceeding as the proceeding only relates to the award determination. Instead, the IRS uses debriefings and investigative disclosures under IRC § 6103(k)(6), and will, where appropriate, utilize IRC § 6103(n) contracts to communicate with whistleblowers. Contrary to the suggestion of the National Taxpayer Advocate, the framework adopted by Treasury and the IRS strikes the appropriate balance between protecting the rights of taxpayers, providing meaningful opportunity for whistleblower participation in the administrative process, and effectively using the resources available to the Whistleblower Office.

While the IRS does not plan to adopt the National Taxpayer Advocate recommendations, the Whistleblower Office remains actively engaged with the whistleblower community and is committed to improving the process for whistleblowers. The IRS continues to look for cases in which a IRC § 6103(n) contract would be appropriate and helpful to an examination. Finally, the IRS initiated a Lean Six Sigma review in fall 2014 to find ways to streamline operating processes by eliminating the multiple hand-offs between the Whistleblower Office and the operating divisions and to provide opportunities for efficiencies in managing whistleblower claims.

The IRS remains committed to the success of the Whistleblower Program and continues to seek ways to improve the Program while also balancing the rights of taxpayers.

TAXPAYER ADVOCATE SERVICE COMMENTS ON IRS RESPONSE

The National Taxpayer Advocate appreciates the IRS's acknowledgement that whistleblowers' need for information about the status of their claim is legitimate. She does not propose to weaken the restrictions imposed by IRC § 6103 but instead has recommended that Congress amend the statute to further protect taxpayers who are subjects of whistleblower complaints. The National Taxpayer Advocate applauds the IRS's efforts to streamline whistleblower operating processes, and hopes the lengthy time periods during which whistleblowers remain uninformed about the progress of their claims will thereby be reduced. However, the IRS could do more to accommodate the legitimate needs of whistleblowers and balance those needs with protection of taxpayer confidentiality. For example, the IRS could take a less narrow view of the purpose of a whistleblower administrative proceeding. Such a hearing need not focus exclusively on the amount of a proposed whistleblower award, but could also provide the means for the IRS to communicate with the whistleblower via status reports. As another example, even if the penalty provisions of IRC §§ 7431, 7213, and 7213A and the safeguarding requirements of IRC § 6103(p) do not directly apply to whistleblowers, the IRS could require confidentiality agreements that result in the same liability for breach of the agreement and impose safeguarding requirements as a matter of contract. The IRS's rigid adherence to existing procedures undermines its claim that it is actively seeking ways to improve the program while balancing the rights of taxpayers.

AFFORDABLE CARE ACT (ACA) -- BUSINESS: The IRS Faces Challenges in Implementing the Employer Provisions of the ACA While Protecting Taxpayer Rights and Minimizing Burden

PROBLEM

The IRS is charged with implementing complex Affordable Care Act (ACA) provisions that require updating information technology systems, issuing guidance, and collaborating with other federal agencies. For tax years (TYs) 2015 and beyond, certain provisions of the ACA impacting employers become effective. For example, applicable large employers (ALEs) must offer minimum essential coverage (MEC) to their full-time employees. Employers not in compliance with these provisions may be subject to an assessable payment, referred to as the "employer shared responsibility payment" (ESRP). The National Taxpayer Advocate is concerned that the IRS's implementation of the ACA provisions for the 2016 filing season may burden both employers and employees if certain conditions and issues are not addressed. For example, employees in the newly-established ACA Business Exam unit need to receive specialized training on the parts of ACA implementation that impact businesses.

ANALYSIS

The IRS has not yet firmed up its approach to selecting and working cases involving ACA business issues, even as the 2016 filing season is rapidly approaching. Once the IRS has determined which group of employees will focus on examining employers' compliance with the business aspects of the ACA, this new group of employees will require comprehensive and specialized training. The IRS expects to develop procedures and roll out training for these employees before the ESRP cases are assigned, but has not committed to a certain date. The IRS will receive and process estimated 77 million new information returns from ALEs during the TY 2016 and use this information to assess ESRP. No information has been provided to TAS regarding the IRS's plans to test the ability of its Information Technology systems to handle the expected volume of ACA information returns. If the IRS receives incomplete or inaccurate data, taxpayers will be harmed. For example, if the IRS receives inaccurate data regarding coverage, it may erroneously assess ESRP on ALEs, which can be costly and time-consuming for both employers and the IRS to rectify.

TAS RECOMMENDATIONS

The IRS is committed to helping taxpayers meet their obligations with regard to the Affordable Care Act (ACA) legislation. We have taken numerous steps to ensure taxpayers have the information they need to comply with their federal tax obligations under the law. For example, we created the Applicable Large Employer (ALE) information page on IRS.gov which includes comprehensive information on whether the employer is an ALE, including the computation of Full Time Equivalent (FTE) from less than full time employee hours.

The IRS Commissioner personally met with stakeholder groups of employers, software developers, and government entities to discuss the ACA information return challenges the groups were encountering. As a result of those meetings and the feedback from the stakeholders, the IRS extended the due dates for ACA information reporting.

Additionally, our Stakeholder Liaison group has held numerous events to discuss the employer provisions, reaching over 10,000 practitioners. Webinars on the employer provisions have been updated and a new Information Return Electronic Corrections Process webinar is being recorded. Taxpayers can access webinarson www.irsvideos.gov. IRS regularly updates the Affordable Care Act website (www.irs.gov/aca) to provide information, guidance and health care tax tips regarding ACA provisions. IRS is meeting regularly with Federal and State agencies required to file ACA information returns.

We have created a comprehensive action plan that provides just-in-time training for our employees. In addition, the ACA program management office has provided, and continues to develop, training for all employees so that we have a well-trained workforce able to help taxpayers in meeting their obligations under the law.

Our action plan also includes the development and implementation of a communication strategy which is flexible and able to incorporate feedback regarding additional needs. There is also a significant amount of information available on-line (e.g., IRS.gov ACA landing pages, IRS.gov ALE information center, and Healthcare.gov) which provides comprehensive resources to both external stakeholders and our employees. In addition, our joint Implementation Team on Compliance for Business is available to respond to any unique issues and considers additional updates to on-line resources.

TAXPAYER ADVOCATE SERVICE COMMENTS ON IRS RESPONSE

The National Taxpayer Advocate appreciates the attention and resources the IRS has devoted to administering portions of the ACA. The IRS has done a commendable job, especially given the budget constraints in recent years. The use of the internet and webinars are a cost-efficient way of disseminating information to employers about their obligations under the business-related portions of the ACA, and we are especially pleased that the IRS is educating employers about how to correct their electronically-filed information reports. Nevertheless, as discussed below, we believe the IRS can improve the guidance for and outreach to employers about their ACA responsibilities.

AFFORDABLE CARE ACT -- INDIVIDUALS: The IRS Is Compromising Taxpayer Rights As It Continues to Administer the Premium Tax Credit and Individual Shared Responsibility Payment Provisions

PROBLEM

Overall, the IRS has done a commendable job of implementing the first stages of the Patient Protection and Affordable Care Act of 2009 (ACA). The 2015 filing season (FS) presented difficult challenges with the introduction of the Individual Shared Responsibility Payment (ISRP) and the Premium Tax Credit (PTC) on tax year (TY) 2014 federal income tax returns. While the IRS performed well overall in FS 2015, several developments will likely result in significant burden imposed on both taxpayers and the IRS in future years. For example, the pre-refund Automated Questionable Credit (AQC) procedures for PTC mismatches are identical to and impose the same burden as post-refund PTC examinations, yet the IRS maintains it can conduct both a pre-refund AQC review and a post-refund audit of another issue, thereby undermining the important statutory protection against multiple audits.

ANALYSIS

The IRS faces several issues related to ACA implementation and enforcement as it heads into FS 2016. First, taxpayers who received the advanced premium tax credit (APTC) in 2014 and did not file TY 2014 returns (and the Form 8962) by Fall 2015 will face difficulties receiving APTC payments in 2016. Second, the pre-refund AQC procedures for PTC mismatches impose the same burden as a post-refund PTC examination without the same due process protections, thereby subverting the statutory protections against multiple audits of the same return. Third, taxpayers who receive certain large lump sum payments after receiving APTC may be caught off guard by having to repay APTC amounts, as well as penalties and interest. Fourth, the absence of the Second Lowest Cost Silver Plan (SLCSP) amounts on some Forms 1095-A are delaying the processing of PTC returns and imposing unnecessary burden on taxpayers. Fifth, the inability of health insurers and self-insured employers to match taxpayer identification numbers (TINs) before filing leads to unnecessary mismatches and notices, increasing issuer burden and wasting IRS resources.

TAS RECOMMENDATIONS

We appreciate the National Taxpayer Advocate's commendation of the IRS's job in implementing the Patient Protection and Affordable Care Act of 2010 (ACA). Filing Season (FS) 2015 put to the test the IRS's new ACA-related systems, processes, forms, guidance, and collaboration with other federal and state agencies. The IRS used internal and external research and monitoring throughout 2015 in order to iden tify and address issues as quickly and as effectively as possible given available resources and capabilities. We conducted extensive and sometimes specific outreach and education throughout the year to software developers and tax practitioners advising them of apparent issues with tax programs and offering guidance on return preparation. We continually worked to update IRS.gov content to ensure the most current information and guidance was readily available.

The IRS diligently worked to provide taxpayer assistance and support during this initial year of ACA implementation. The IRS sent almost two million letters to taxpayers who had either over-assessed their individual shared responsibility payment (ISRP) or were at risk of losing future health insurance subsidies due to failure to reconcile advance payments of the PTC received in 2014. When it was discovered that there were errors in critical information provided by the marketplaces to taxpayers in their Forms 1095-A, Health Insurance Marketplace Statement, the IRS granted transition relief from related penalties and communicated that relief through external notices, press releases and external stakeholder meetings. Employees were also provided prompt guidance on the appropriate treatment of impacted tax returns.

As a result of the IRS's extensive research and analysis, changes were made in time for FS 2016 processing of forms, Internal Revenue Manuals (IRMs), computer system settings, and correspondence to improve the processing of premium tax credit (PTC) and ISRP related tax returns. Additional improvements are currently in the planning stage for FS 2017.

The IRS continues to closely monitor ACA-related tax returns filed during FS 2016. This analysis will be used to measure the effectiveness of our outreach activities and to determine what additional measures may be appropriate to assist taxpayers. We are also continuing our close collaboration with the Centers for Medicare and Medicaid Services (CMS), Health & Human Services (HHS), and state agencies to ensure consistent messaging and content between our agencies.

TAXPAYER ADVOCATE SERVICE COMMENTS ON IRS RESPONSE

TAS believes that the IRS implementation of the individual provisions of the ACA went well overall for the 2015 filing season. However, we remain concerned regarding IRS efforts to address ISRP overpayments as well as prevent them from occurring in future filing seasons. We believe that systemic changes still need to be taken. Sending taxpayers letters and posting information online is helpful but does not go far enough to assist these taxpayers. The IRS should take systemic corrective and preventative actions to alleviate this issue in the future.

TAS also continues to express serious concerns about the IRS's failure to characterize the pre-refund automated questionable credit (AQC) procedures for PTC mismatches as an examination. The National Taxpayer Advocate believes that if a taxpayer submits the same information when the return is in AQC as he would in an exam, the AQC constitutes an actual examination of the taxpayer's books and records. When the IRS doesn't classify these tax AQC adjustments as an examination, the IRS does not trigger the taxpayer's right to avoid unnecessary examinations.⁴¹ This position enables the IRS to later conduct an examination of a taxpayer who already has been subjected to an examination of the same return, thereby undercutting an important taxpayer protection enacted by Congress to avoid that very result.

IDENTITY THEFT (IDT): The IRS's Procedures for Assisting Victims of IDT. While Improved, Still Impose Excessive Burden and Delay Refunds for Too Long

PROBLEM

In general, tax-related identity theft (IDT) occurs when an individual intentionally uses the personal identifying information of another person to file a falsified tax return with the intention of obtaining an unauthorized refund. As of the end of September 2015, the IRS had over 600,000 IDT cases with taxpayer impact (excluding duplicates) in its inventory, up nearly 150 percent from September 2014. In July 2015, the IRS reorganized its IDT victim assistance functions, centralizing them under one umbrella within the Wage and Investment division. While the National Taxpayer Advocate is pleased the IRS has finally adopted this approach, she continues to have concerns about the IRS's IDT victim assistance procedures. For example, the IRS still does not assign a sole IRS contact person to interact with IDT victims with multiple tax issues, it does not track IDT cycle time in a way that accurately represents the taxpayer's experience, and it continues to limit the availability of Identity Protection Personal Identification Numbers (IP PINs) to a small segment of the population.

ANALYSIS

The inadequacy of the IRS's IDT victim assistance is demonstrated by the growth in TAS IDT cases, which comprised 25 percent of TAS's case receipts for fiscal year 2015. A significant portion of these cases is attributable to false positives from IRS screening mechanisms; in one program, approximately one out of three returns suspended by the IRS were legitimate returns. In September 2015, the IRS convened the IDT Re-engineering Team, a group of employees from across various functions (including TAS) tasked to review current procedures and make recommendations to improve the processing of IDT cases. The Re-engineering Team has already made incremental improvements in IDT victim assistance; however, the IRS has not formally agreed to any of the recommendations listed below. We look forward to working cooperatively with the new IDT Victim Assistance unit to further improve service to this vulnerable population of taxpayers.

TAS RECOMMENDATIONS

Fighting refund fraud caused by identity theft (IDT) is a top priority for the IRS. We take the harm inflicted on victims of identity theft very seriously, and continue to look to improve the experience for taxpayers who have been victimized. Today's identity thieves are a formidable enemy. They are an adaptive adversary, constantly learning and changing their tactics to circumvent the safeguards and filters put in place to stop them from committing their crimes. Some of the individuals committing IDT refund fraud include high-tech global rings who are engaged in full-scale organized criminal enterprises for stealing identities and profiting from that information. As the criminals increase in sophistication, so do the number and scope of data breaches, which serves to further expand the network and warehousing of stolen and compromised identity information, and in turn increases the potential for that stolen identity information to ultimately reverberate through the tax system.

To improve our IDT victim assistance processes and the taxpayer's experience, we implemented several changes to centralize and streamline processes. Specifically, during 2015, the IRS centralized identity theft policy, oversight, and campus case work in the Wage and Investment (W&I) Division. We reduced operational redundancies by centralizing the campus victim assistance work under our new Identity Victim Assistance organization (IDTVA). This organization was formed from campus IDT teams in W&I and Small Business/Self-Employed (SB/SE) Compliance and W&I Accounts Management (AM). We moved the former Compliance inventories to a single repository on the Correspondence Imaging System (CIS), enabling us to manage inventory based upon available resources, and allowing anyone with CIS access to review a case, quickly identify the case status and determine actions taken regardless of the functional assignment.

Immediately following this centralization, IRS launched an Identity Theft re-engineering team to review the identity theft processes from end-to-end, identify opportunities for increased efficiency and to improve the taxpayer's experience. This team, with representatives from several business units, including the Taxpayer Advocate Service (TAS), is currently reviewing processes to identify additional improvement opportunities. This comprehensive review will examine the Identify Protection Specialized Unit (IPSU), the Global report, the Global Review process, Identity Theft Assistance Requests, and other actions needed to resolve issues. The team is in the process of implementing several recommendations related to the time frames for global review, enhancing skills of IDT employees, and clarifying procedures and time frames for cases that must be worked in outside the IDTVA organization.

As we continually improve our IDT victim assistance, we also are focused on detection and prevention of IDT refund fraud. To that end, working with our State tax partners and the private tax sector through the Security Summit, we launched an awareness campaign (titled "Taxes. Security. Together.") in an effort to better inform taxpayers about the need to protect their personal, tax and financial data online and at home. We are also looking at ways to use data from our Security Summit partners and payroll providers in validating a taxpayer's identity at the point of filing. The ongoing actions related to IDT prevention and victim assistance, including the consolidation and the re-engineering of the IDTVA program, including the issuing of refunds, have resulting in an improved experience for IDT victims.

TAXPAYER ADVOCATE SERVICE COMMENTS ON IRS RESPONSE

The National Taxpayer Advocate commends the IRS for keeping IDT as a priority. We already see improved results from the IRS centralizing its IDTVA personnel under one function. Moving the majority of Internal Revenue Manual (IRM) sections dealing with IDT victim assistance under one chapter is helpful, as is the expanded use of CIS to ensure that anyone dealing with an IDT victim can access the appropriate documents. These tangible steps, which we have recommended for years, will improve its ability to assist victims of IDT.

However, the IRS can and should do more. If it can recognize that IDT and refund fraud are two sides of the same coin, the IRS should reconsider the limited scope of its IDT re-engineering efforts. The Return Integrity and Compliance Services (RICS) organization administers the IDT filters to detect questionable returns before improper refunds are paid out. When false positives result, the affected taxpayers who have had their legitimate refunds delayed need assistance. Currently, the IDT re-engineering efforts are limited to the IDTVA, but should be expanded to include RICS and other functions (including Submission Processing, Field Collection, and Appeals). To a taxpayer with a delayed refund, it does not matter whether the IRS employee dealing with him or her is an employee of IDTVA or of another IRS function -- the taxpayer just wants to get the return processed and refund issued as soon as possible.

AUTOMATED SUBSTITUTE FOR RETURN (ASFR) PROGRAM: Current Selection Criteria for Cases in the ASFR Program Create Rework and Impose Undue Taxpayer Burden

PROBLEM

When a taxpayer who has a filing requirement fails to file a tax return, the IRS is authorized under Internal Revenue Code (IRC) § 6020(b) to use third-party information, such as Forms W-2 and 1099, to determine and assess a tax liability. This is principally worked through the Automated Substitute for Return (ASFR) program, the IRS's key program for enforcing filing compliance on taxpayers who have not filed individual income tax returns but appear to owe a tax liability. If a taxpayer has not filed a return and the IRS determines that a taxpayer has a filing requirement, it will typically select the case to prepare a substitute for return and assess the liability based on the third-party information, but it does not allow any itemized deductions or credits that might be supported by third-party information, and only allows a filing status of single or married filing separately. The ASFR program has poor collection results and a high abatement rate, which shows that ASFR's selection criteria are inefficient and lead to inflated liabilities that are later abated.

ANALYSIS

In fiscal years (FYs) 2011 through 2014, the IRS assessed nearly $34 billion through its ASFR authority. The IRS collected nearly one-third of this amount, about $11 billion. In FYs 2011 through 2014, the IRS abated nearly $10 billion of the ASFR assessments, for a total of 29 percent of all ASFR assessments. Further, the ASFR program's return on investment is small. In FY 2014, prior to the initial balance due notice, the ASFR program had revenue of $89.5 million, but spent $39.8 million operating the ASFR program, which does not include the costs of later abating liabilities, or the expense of sending out notices or making collection attempts. This means the IRS generated net revenue of about $50 million when accounting for the cost of the program. This poor performance can be attributed, at least in part, to the ASFR program's inflated liabilities which are created by not considering third-party information that would support deductions and credits. Not only does this lead to the program's poor performance, but it also wastes IRS resources by having to later abate the liability, and unnecessarily subjects taxpayers to collection action.

TAS RECOMMENDATIONS

The IRS strategy for protecting and promoting public confidence in the American tax system includes the use of enforcement tools when appropriate and providing education to customers to support future compliance. The IRS enforcement efforts through the Automated Substitute for Return (ASFR) program help ensure the continued integrity and fairness of the tax system and support the Collection mission to collect delinquent taxes and secure delinquent tax returns through the fair and equitable application of the tax laws. Additionally, not addressing the non-filer segment of taxpayers may encourage increased noncompliance by other taxpayers.

Submitting timely returns is an obligation for taxpayers who meet annual filing criteria. IRS provides annual guidance in Publication 17 and Form 1040 Instructions outlining the filing status and gross income combinations that require taxpayers to file. All taxpayers who meet the criteria are required to file. When taxpayers choose not to fulfill their filing obligations, the ASFR program is an enforcement tool that helps reduce the tax gap by ensuring delinquent taxpayers file required returns.

Before a case is referred to ASFR, much effort is expended by IRS to assist the taxpayer in complying. IRS encourages the voluntary filing of delinquent returns by contacting individuals with at least two Taxpayer Delinquency Investigation notices. If the first two notices are not successful, certain taxpayers receive additional notices; for example, taxpayers in the Automated Collection System (ACS) treatment stream. Additionally, taxpayers may receive a phone call using the predictive dialer treatment in ACS.

After all of this effort is expended, some taxpayers may receive an in-person visit by a revenue officer in our Field Collection program. Only after an individual fails to respond to these numerous attempted contacts are they referred to ASFR for possible treatment. In general, over 50% of referrals to ASFR were treated in the ACS and Field Collection programs and reassigned to ASFR as a last resort when taxpayers failed to respond to the multiple and varied requests for them to file a return.

The ASFR program yields excellent collection results. The National Taxpayer Advocate (NTA) reported the ASFR return on investment (ROI) as $89.5 million, with $39.8 million in operating costs, but did not clarify that ASFR is primarily a filing compliance program. The ASFR true ROI is actually much higher. The reported $89.5 million was the total collected before requests for payment were sent to taxpayers. The total collected on ASFR assessments in Fiscal Year (FY) 2014 was $1.4 billion⁴⁴, including revenue collected after taxpayers had been sent a request to pay. Also, it should be pointed out that the FY 2014 ASFR cost of $39.8 million includes all ASFR adjustment activity, including subsequent abatements.

The NTA reported that the IRS abated $10 billion of the ASFR assessments made in FY 2011 through FY 2014, but did not mention that many abatements are made to process joint returns filed by ASFR taxpayer spouses. When this occurs, the original ASFR assessment is abated as the returns are filed under another Social Security Number (SSN) with the ASFR taxpayer as the secondary taxpayer. In other words, a portion of the liability is being moved to another primary SSN, not being fully abated. In many cases, the ASFR assessment was the factor that motivated the taxpayers to file a joint, corrected return. These additional dollar benefits from ASFR when joint returns are processed under another SSN after the ASFR abatement are not included in the ASFR data IRS reports.

Because the Internal Revenue Code (IRC) does not allow the IRS to grant certain deductions and/or credits on a substitute for return, it may be possible that the ASFR liability calculation is higher than had the taxpayer voluntarily complied with his or her filing obligations. However, the law requires that certain filing statuses, exemptions, deductions, and credits may only be claimed by taxpayers on filed returns.

The ASFR program is currently working on future modeling in order to further refine case selection.

As part of the modeling process, we may consider what might be claimed if a return were filed, but for cases that are selected, the IRS cannot propose an assessment and issue a Statutory Notice of Deficiency based on that criteria. Abatements for subsequently filed returns will continue to be necessary for taxpayers who meet criteria for selection into the ASFR program and would like to avail themselves of benefits only allowed once they file their return to claim them.

Looking forward, the IRS will continue to refine the ASFR process in order to increase its efficiency and effectiveness. The ASFR program will remain an important tool in promoting filing compliance, ensuring the integrity and fairness of the tax system, and reducing the tax gap.

TAXPAYER ADVOCATE SERVICE COMMENTS ON IRS RESPONSE

The National Taxpayer Advocate understands the IRS's mandate to enforce filing compliance of taxpayers who have not filed individual income tax returns but appear to owe a tax liability. This program should be effective in driving voluntary filing compliance and collecting revenue. However, the current ASFR program's success in driving filing compliance and collecting revenue is limited.

As stated in the Most Serious Problem (MSP), an IRS report shows that for FY 2014, the ASFR program had revenue of $89.5 million but spent $39.8 million operating the ASFR program. This means the IRS generated net revenue of about $50 million when accounting for the cost of the program.⁴⁵ The National Taxpayer Advocate understands that overall dollars collected by the ASFR program for FY 2014 is larger than the $89.5 million stated in the IRS's report. As we acknowledged in the MSP, the $89.5 million only represents dollars collected from the time the liability on the substitute for return (SFR) was assessed and before the first collection notice was sent out. However, this report was able to compare the cost of the ASFR program to revenue collected during this short time period. Although the ASFR program collected in excess of a billion dollars overall for FY 2014, the associated cost in collecting these dollars during this time period is not known, and likewise the cost to abate excessive assessments has not been quantified. Therefore, no ROI calculation can be done using the total dollars collected.

As stated in the MSP, for ASFR assessments made in FY 2011 through FY 2014, the IRS abated about $10 billion of the ASFR assessments. TAS understands that the $10 billion abated includes situations where an original joint return has been filed and the liability was abated because it was separately assessed to a joint return tax account with the spouse. However, this only made up $1.6 billion (16 percent) of the nearly $10 billion abated between the years FY 2011 through 2014. Our larger point here is that the $10 billion abated between FY 2011 through 2014 was about 29 percent of all ASFR assessments for the same time period. Abatements of ASFR assessments will always occur, but refined selection criteria could minimize the need for abatements, thereby saving the IRS and the taxpayer both time and money.

The National Taxpayer Advocate is pleased that the IRS is working towards refining the ASFR case selection process. Considering third-party documentation when determining if a case is worthy of an ASFR assessment would allow the IRS to focus its ASFR authority on cases where there is a true liability and alternatively send a soft notice to taxpayers who are entitled to deductions or credits and who will owe little or no tax once considered, rather than assessing an inflated liability, only to be abated later.

The National Taxpayer Advocate is also encouraged by the IRS's willingness to consider adding reason codes for ASFR abatements. Even though this might require an investment up front, the information gained by specifying the reason for abatement could save the IRS funds long term by allowing it to better determine what generated the abatement and then to use that information in its ASFR selection criteria. In other words, if a primary reason for abatement is taxpayers claiming deductions for the interest paid on their mortgages, the IRS would want to consider such third-party information when determining if a case would be well-suited for the ASFR program. In its response, the IRS stated "that certain filing statuses, exemptions, deductions, and credits may only be claimed by taxpayers on filed returns." However, that does not preclude the IRS from using third party information it has to better select cases to avoid unsustainable assessments. If the IRS determines that inclusion of the mortgage interest deduction would result in most or all of the liability being abated, it may decide to take another approach, such as sending a soft notice, to reach the taxpayer. This approach likely requires fewer resources than later working an abatement of the ASFR liability.

The National Taxpayer Advocate is puzzled by the IRS's reluctance to annually review ASFR assessments to determine where it has had the most success in assisting taxpayers with filing their original return and becoming tax compliant. The IRS's own Collection Policy Statement prescribes that "factors to be taken into account include, but are not limited to . . . effect upon voluntary compliance, anticipated revenue, and collectability, in relation to the time and effort required to determine tax due."⁴⁶ Such an analysis would allow the IRS to target taxpayers who are most likely to file an original return and resolve the outstanding issue. This would also ensure that the IRS applies its resources in the most effective manner possible, thereby conserving the most expensive touches for cases where the possibility of obtaining an original return is greatest. This doesn't mean that the IRS would ignore other cases where the taxpayer has not filed an original return, but it would take a different approach in reaching those taxpayers. It runs counter to agency policy and to general management principles that the IRS would agree to improve its reason codes for abatement of ASFR liabilities but would then disagree to conduct an annual review of its ASFR liabilities and any abatement of those liabilities. The National Taxpayer Advocate respectfully requests that the IRS use its improved metrics for ASFR abatements to effect voluntary compliance and reasonably calculated revenue and collectability "in relation to the time and effort required to determine tax due."⁴⁷

INDIVIDUAL TAXPAYER IDENTIFICATION NUMBERS (ITINs): IRS Processes Create Barriers to Filing and Paying for Taxpayers Who Cannot Obtain Social Security Numbers

PROBLEM

Problems obtaining Individual Taxpayer Identification Numbers (ITINs) have long plagued taxpayers who have a tax return filing requirement, but are ineligible for a Social Security number (SSN). When taxpayers cannot obtain ITINs timely, or at all, they may face financial hardship and limitations on where and with whom they can do business. Some taxpayers may drop out of the tax system altogether. ITIN applications and associated returns filings have dropped precipitously in recent years. While the general economic climate and immigration trends help explain this decline, IRS procedures have most certainly contributed to it. Concerns about ITIN refund fraud are legitimate; the IRS's solutions, however, do not effectively target the fraud nor do they balance the anti-fraud regime with the taxpayer's need for a process no more intrusive than necessary, part of a taxpayer's right to privacy. As a result, the IRS burdens legitimate taxpayers and harms global commerce.

ANALYSIS

ITINs play a vital role in the U.S. tax system. Without ITINs, approximately 4.6 million taxpayers would not be able to comply with their annual tax filing and payment obligations, or receive tax benefits to which they are legally entitled. The requirement to apply for an ITIN during the filing season burdens applicants, creates delays, leads to lost returns, and hampers the IRS's ability to detect and prevent fraud.

During the 2015 filing season, the IRS advised taxpayers to wait up to 11 weeks for their ITIN applications to be processed and at one point had a backlog of nearly 120,000 ITIN applications with returns.

The requirement for applicants to submit original documentation with only limited alternatives significantly burdens applicants, leads to lost documents, results in delays in returning documents to taxpayers, and creates additional work for a resource-constrained IRS. Combined, these requirements contribute to errors on the parts of the ITIN unit and applicants, resulting in growing suspension and rejection rates. In addition, ITIN applications and associated return filings have dropped precipitously, down 58 percent between 2011 and 2014. Finally, the IRS's future plans for deactivating ITINs will deprive some taxpayers of ITINs they need for tax administration purposes and undermine their right to be informed.

TAS RECOMMENDATIONS

We appreciate the National Taxpayer Advocate's recognition that the IRS's administration of the Individual Taxpayer Identification Number (ITIN) program presents unique challenges with respect to the validation of the applications and the verification of accompanying identification documents.

The IRS continuously reviews procedures for processing ITIN applications to strengthen the integrity of the program and ensure ITINs are issued for valid tax administration purposes. The recent enactment of the Consolidated Appropriations Act, 2016 provides directives regarding the ITIN process. The IRS is actively collaborating with stakeholders to implement the legislative provisions. We will take into consideration your recommendations as we consider our options to implement the recently enacted legislative provisions.

In January 2013, the IRS strengthened the controls for ITIN issuance by eliminating, except in certain circumstances, the use of notarized copies of official identification documents. The IRS continues to accept only original documents or copies of documents certified by the original issuing agency to verify applicant identity. The number of ITINs issued annually subsequently decreased from 1.3 million in 2012, to 608,000 in 2015. In response to concerns raised by employees, in January 2014, the IRS implemented procedures and provided additional guidance on reviewing certified copies of documents submitted for identification purposes. Tax Examiners reviewing and processing ITIN applications are empowered with the authority to suspend an application they believe to be questionable.

In January 2013, Taxpayer Assistance Centers (TACs) began authenticating documents in select locations for ITIN applicants. The decision to provide ITIN authentication at the TACs was in response to a Treasury Inspector General for Tax Administration (TIGTA) audit of the ITIN program. This service alleviates taxpayer burden by allowing them to maintain possession of their original identification documents during the ITIN application process.

As we consider available options to implement the recently enacted Consolidated Appropriations Act, 2016, we will also evaluate alternatives to Certifying Acceptance Agent (CAA) authentication of dependent documents. The IRS and the Department of State continuously discuss ways the two agencies can work together to obtain reasonable assurance that copies of foreign-issued identification documents presented by ITIN applicants are true and correct copies of original documents. Recognizing the need to maintain a balance between the protection of taxpayer rights and to maintain the integrity of the ITIN application and refund processes, the IRS remains committed to exploring viable options that will encourage voluntary compliance and enable taxpayers to meet their U.S. tax obligations.

TAXPAYER ADVOCATE SERVICE COMMENTS ON IRS RESPONSE

Applying for and receiving an ITIN has been a perennial problem for taxpayers, and the National Taxpayer Advocate is disappointed that the IRS has repeatedly refused to adopt her recommendations that would reduce taxpayer burden, save IRS resources, protect taxpayer rights, and improve the IRS's ability to detect and prevent fraud. The passage of the Consolidated Appropriations Act, 2016 provides the IRS with an opportunity to conduct a comprehensive review of the current ITIN procedures and make changes to accommodate taxpayer needs based on prior problems with the program and the legislation's new requirements. The National Taxpayer Advocate is pleased that the IRS is exploring additional options for ITIN applicants, such as alternatives for dependents to have their documents certified, and hopes the IRS will consult with TAS and external stakeholders to ensure the changes accommodate taxpayer needs. Beyond merely considering the National Taxpayer Advocate's recommendations, the IRS should more actively collaborate with TAS in developing new ITIN procedures to take advantage of TAS's expertise and experience with the ITIN population, which is discussed further below.

PRACTITIONER SERVICES: Reductions in the Practitioner Priority Service Phone Line Staffing and Other Services Burden Practitioners and the IRS

PROBLEM

The Practitioner Priority Service (PPS) was designed to be the first point of contact with the IRS for practitioners. Practitioners with questions have a designated professional support line they can call to receive guidance and answers regarding their clients' account-related issues. The IRS reduced the scope of provided services and eliminated necessary staffing to the PPS. As a result, practitioners calling the PPS line spend more time on hold, have a lower chance of getting through to a live customer service representative, and use the PPS for fewer services than in previous years.

ANALYSIS

The right to retain representation is negatively affected when practitioners cannot reach the IRS in a reasonable amount of time and are unable to resolve issues involving their clients' accounts. Since 2011, staffing levels for the PPS have dropped by about 30 percent and wait times have increased to an average of over 45 minutes during fiscal year (FY) 2015. The number of attempted practitioner calls increased in FY 2015 and the percentage of answered calls decreased by more than 30 percent. During FY 2014, the customer service representative level of service (LOS) was about 70 percent; this number dropped to less than 48 percent for FY 2015. In addition to the long wait times, practitioners are confronted with a limited scope of services being provided by the PPS and an inability to get answers to complex tax law questions regarding their clients' accounts. The erosion of services to the PPS and increased wait times places practitioners and their clients at greater risk for negative tax consequences.

TAS RECOMMENDATIONS

[19-1] Restore staffing levels to FY 2011 levels on the PPS to decrease wait time and eliminate disconnects for the practitioners.

[19-2] Allow the resolution of complex tax law issues by asking questions and receiving answers from assistors.

[19-3] Allow practitioners to resolve as many as five client account issues during one call as stated in the Internal Revenue Manual.

[19-4] Consult with and survey the practitioner community to find out their needs and preferences before making changes to the PPS.

[19-5] Retain the PPS even as online account systems are developed to assist practitioners with account issues that cannot be solved through online channels, and consult with practitioners about the design of a post-online account PPS.

IRS RESPONSE

Tax practitioners continue to serve an important role in our nation's tax collection system as a conduit between taxpayers and the IRS. We value our relationship with the practitioner community and appreciate the opportunity to address recommendations regarding the service provided on the Practitioner Priority Service (PPS) toll-free line.

PPS is a nationwide toll-free line available to all tax practitioners who act on a taxpayer's behalf regarding account-related issues. The resources dedicated to PPS are commensurate to the overall level of funding the IRS receives. Practitioners using PPS receive service on individual or business tax account issues or can self direct on the toll-free menu to receive service on cases assigned to Automated Underreporter, the Automated Collection System, and Correspondence Examination. The ability for practitioners to receive assistance from both Accounts Management (AM) and Compliance assistors has been in place since the program was established.

In 2013, the IRS refined the menu options so practitioners can self-direct with more accuracy. If the practitioner is uncertain of the issue or area where the account is assigned, assistors conduct account research and transfer the caller to the area best equipped to respond. In addition to an exclusive toll-free number and dedicated resources, practitioners can address multiple clients and issues with one call. Guidelines in the Internal Revenue Manual (IRM) allow PPS assistors to service up to five clients per call, provided the practitioner has the appropriate authorization on file or is able to fax the authorization information during the time of the call. While this may extend the length of the call as compared to general toll-free calls, it provides more efficient service for practitioners.

Stakeholder input is always a consideration when changes are made. For example, in 2014 recommendations made by the Internal Revenue Service Advisory Council (IRSAC) about issuing transcripts on this line were adopted. In addition to partnering with IRSAC, the IRS uses several other formal and informal methods to collect input on practitioner needs and preferences. In 2009, the IRS contracted an independent research firm to explore the needs of tax professionals. The IRS participates in multiple practitioner forums throughout the year and addresses practitioner questions and concerns on an ongoing basis through the Issue Management Resolution System and Stakeholder Liaison Office. The 2015 annual customer satisfaction survey results indicated that 89% of PPS callers were satisfied with the service they received.

The IRS recognizes the importance of delivering a high level of service (LOS) to PPS customers. Increased FY 2016 funding levels are similar to FY 2011 funding, which allowed the IRS to better serve the practitioner community. In FY 2016, we delivered an 83% LOS on PPS for the filing season.

We also recognize the importance of providing high quality service to the practitioner community. The PPS customer accuracy rate for FY 2016 through February is 95.0%, 1.0 percentage point above the goal of 94.0% and 1.3 points above the FY 2015 rate of 93.7%.

TAXPAYER ADVOCATE SERVICE COMMENTS ON IRS RESPONSE

The National Taxpayer Advocate is pleased with the filing season improvements to the PPS phone line. She recognizes the funding challenges faced by the IRS as it is repeatedly tasked with administering the tax code with a diminishing budget. Utilization of the PPS by practitioners is a highly effective way to resolve tax account-related issues. These practitioners are more than a mere conduit between taxpayers and the IRS, they are representatives of the taxpayers who ensure that the rights as stated in the Taxpayer Bill of Rights are protected. The National Taxpayer Advocate also strongly encourages the IRS to continue to dialog with the practitioner stakeholders about the scope, services, and manner in which the PPS is structured.

IRS COLLECTION EFFECTIVENESS: The IRS's Failure to Accurately Input Designated Payment Codes for All Payments Compromises Its Ability to Evaluate Which Actions Are Most Effective in Generating Payments

PROBLEM

IRS guidance instructs employees to designate every payment it receives from a taxpayer with a specific code. Employees are directed to input a two-digit Designated Payment Code (DPC) to help identify payments, indicate application of the payment to a specific liability, and identify the event that primarily precipitated the payment (e.g., liens, levies, offers in compromise, and installment agreements). The input of DPCs provides a way to track taxpayer behavior and future compliance. However, the IRS is not consistently or accurately applying DPCs, which reduces the IRS's ability to assess the effectiveness of its collection actions. Such failure prevents the IRS from measuring what actions, including processes such as the notice stream and the filing of a Notice of Federal Tax Lien (NFTL), were most successful in getting the taxpayer to pay on a balance due account. As a consequence, the IRS is blindly applying its broad collection powers and resources rather than analyzing accurate information to determine funding priorities (i.e., what actions -- sending a letter, making a phone call, or taking collection action -- would yield the best return on investment). As a result, IRS actions are likely to be more intrusive than necessary, harming taxpayers and undermining voluntary compliance.

ANALYSIS

In calendar year (CY) 2014, 87 percent of payments either had no DPC or defaulted to DPCs of "00" (undesignated payment) or "99" (miscellaneous). A 2012 Treasury Inspector General for Tax Administration (TIGTA) report raised similar concerns. Specifically, the report showed that 77 percent of payments reviewed were processed without the required DPC, including payments received after an NFTL was filed. Additionally, 34 percent of payments that did have a DPC placed on the payment had an incorrect DPC. A recent IRS study also found that certain DPCs were too vague to be helpful, that IRS DPC guidance is inconsistent, and an absence of systemic review of DPCs impedes the IRS's ability to obtain useful information. The study recommended several common sense improvements, which IRS Collection officials rejected as too costly. In other words, the IRS determined it was better to continue to operate under a collection strategy conceived in a vacuum instead of adopting an approach that increases collection effectiveness and minimizes harm to the taxpayer.

TAS RECOMMENDATIONS

[20-1] Revise Internal Revenue Manual (IRM) guidance and guidelines for lockbox receipts to require the entry of specific DPCs on all balance due payments.

[20-2] Require Submission Processing employees to verify the presence of an appropriate DPC on payments by conducting regular quality reviews.

[20-3] Provide clear and specific guidance about the circumstances under which employees can use a miscellaneous DPC.

[20-4] Implement systemic input of most payment codes.

IRS RESPONSE

Designated Payment Codes (DPCs) were developed to evaluate the efficacy of specific collection actions or programs and in some cases facilitate calculation of a liability. For example, DPCs are used to distinguish payments which are designated to trust fund or non-trust fund employment taxes, indicate application of a payment to a specific liability when the civil penalty contains multiple types of civil penalties, and/or identify the event which resulted in a payment. For these reasons, it is important that the IRS apply them accurately.

DPCs are either manually assigned when a payment posting voucher is prepared by an IRS employee, or are systemically assigned when payments are related to a specific collection program. For example DPCs are systemically assigned to payments received from automated levy programs such as the Federal Payment Levy Program and the State Income Tax Levy Program. DPCs are also systemically assigned to installment agreement (IA) user fees. Since all of the payments remitted under an automated levy program represent a unique type of payment, and the IA user fee DPCs are systemically assigned by a user fee transfer program, a high accuracy rate for these DPCs is achievable.

Manually assigned DPCs are initiated when the IRS employee completes a payment posting voucher to serve as a source document. The employee's familiarity with the case actions and knowledge of Internal Revenue Manual (IRM) procedures provide the employee with the necessary information to assign the correct DPC to the payment.

Payments which are not the direct result of a collection action (such as levy or filing a Notice of Federal Tax Lien) or a collection program (such as Federal Payment Levy Program payments, State Income Tax Refund offsets or IA user fees) are not assigned a unique DPC because the IRS has no way of knowing the event that led to the payment.

A formal and ongoing quality review system is critical to ensuring that Submission Processing (SP) employees use the appropriate DPC when required to do so; therefore, verification of the appropriate DPC is already part of our regular quality review process. Submission Processing uses the Embedded Quality Submission Processing (EQSP) System to monitor, measure, and improve the quality of work throughout SP. Review data are used to identify trends, problem areas, training needs, and opportunities for improvement. IRM 3.30.30, Embedded Quality for Submission Processing (EQSP) System, provides a process overview and quality review guidelines.

Currently there are 48 available DPCs and, while some IRS functions such as SP may use all DPCs, other functions are restricted from using certain DPCs. All functions are authorized to use the Miscellaneous Payment DPC. Although the wording is slightly different in each IRM section, the guidance to employees regarding the appropriate use of the Miscellaneous Payment DPC is the same.

The Miscellaneous Payment DPC captures payment data when the remittance does not fit the specific criteria for other DPCs, or when the event that resulted in the payment cannot be determined. The IRS receives many payments which are not accompanied by a source document identifying the collection action which predicated the payment.

The MSP cites improvements some states have made in the accuracy of systemically applying payment codes. The New York Department of Taxation has developed analytical software which reviews the account actions taken just prior to the receipt of the payment in order to predict the collection action which resulted in the payment. The major challenge facing the IRS in implementing this type of systemic application of DPCs is that not all collection actions are maintained on a single database. Although most collection actions are reflected on the taxpayer's account on the Integrated Data Retrieval System, other collection actions, such as the results of phone calls or field contacts with the taxpayer by Field Collection personnel, are maintained on separate systems.

Moreover, the systemic assignment of DPCs to payments based solely on the most recent collection activity would not take into account payments which are not received due to a collection action, such as economic and behavioral variables that influence taxpayers. In addition, some payments are received due to a combination of collection actions, such as filing a Notice of Federal Tax Lien in conjunction with issuing a Notice of Intent to Levy. It would be difficult, if not impossible, to develop analytical software which could definitively attribute a payment to a competing collection action. In these situations, the Miscellaneous Payment DPC is appropriate.

TAXPAYER ADVOCATE SERVICE COMMENTS ON IRS RESPONSE

The National Taxpayer Advocate believes that in order for DPCs to be useful, it is critical that they are being input consistently and accurately. This will allow the IRS to use this information to determine what actions (e.g., liens, levies, offers-in-compromise or installment agreements) are most effective in collecting the outstanding tax liability. The National Taxpayer Advocate understands that the majority of payments do not require a DPC, and that the remaining payments are placed in a lockbox with a DPC. However, the National Taxpayer Advocate remains concerned about the accuracy and consistency of the DPCs that are input on these payments.

The National Taxpayer Advocate understands that the purpose of the miscellaneous code (DPC 99) is to be used when no other DPC fits the particular circumstance. However, she disagrees that the use of different language in describing when the miscellaneous code should be used is not confusing for IRS employees and does not result in inconsistent application of the code. For example, the definition of DPC 99 is both inconsistent and vague in the Collection (Part 5), Submission Processing (Part 3), and Accounts Management (Part 21) IRM sections. Definitions vary from:

• Miscellaneous payment (do not use if another DPC Code is applicable);⁵¹

• Miscellaneous payment other than above;⁵²

• Miscellaneous;⁵³ and

• Miscellaneous payment other than 01 through 14.⁵⁴

The National Taxpayer Advocate believes that the best way to mitigate DPC errors would be to develop software for the inputting of DPCs. A systemic DPC system would allow for the regular, automated review of DPCs. However, as mentioned in the IRS response, the IRS would have to develop a new system that could function automatically rather than manually since the IRS does not have one central location where all actions are recorded (i.e., a notice being sent out, a phone call being placed, or a levy being issued). The National Taxpayer Advocate finds the IRS's unwillingness to further investigate and consider such a system shortsighted as the IRS would not be able to determine what collection action or service initiative is the most effective in generating revenue.

EXEMPT ORGANIZATIONS (EOs): The IRS's Delay in Updating Publicly Available Lists of EOs Harms Reinstated Organizations and Misleads Taxpayers

PROBLEM

The IRS maintains a list of tax exempt organizations (EOs) on two publicly accessible online databases, the Exempt Organizations Business Master File (EO BMF) and Exempt Organizations Select Check (EO Select Check). When an exempt organization fails to file an information return or notice for three consecutive years, its exempt status is automatically revoked, the IRS removes the exempt organization from its online-published lists of exempt organizations and places it on a list of automatically revoked organizations. Unless the automatic revocation was due to IRS error, an automatically revoked organization must submit a new application to have its exempt status reinstated. Even if the IRS promptly reinstates the organization or discovers its error, IRS databases will not immediately reflect the organization's restored exempt status because the IRS only updates its databases monthly, except in January when the databases are not updated at all. Therefore, reinstated EOs may lose out on donations or grants they would have received had IRS databases accurately reflected their status, which may be an existential issue for some organizations.

ANALYSIS

The IRS recognizes the reliance on the EO BMF and EO Select Check databases by individual donors, who use them to verify that their contributions will be tax deductible, and private foundations, which use them to verify that they are making a grant to a qualifying public charity. However, the IRS does not update these databases in a timely manner, causing reinstated automatically revoked organizations to potentially lose out on donations or grants. In addition, these databases are not updated at all from the second Monday in December until the second Monday in February, a period that includes the critical year-end fundraising push. The number of automatic revocation reinstatement cases during this gap period exceeded 2,500 in both fiscal years (FYs) 2014 and 2015, and more than 70 percent of these cases were 501(c)(3) organizations. A determination letter from the IRS or a phone call to the IRS (where callers are subject to lengthy hold times) may not satisfy a potential donor or grantor. Many donors or grantors may simply "move on" and make a donation or grant to an organization that appears on EO Select Check and EO BMF.

TAS RECOMMENDATIONS

[21-1] Update EO BMF and EO Select Check on a weekly basis as is the case for Form 990-N updates.

[21-2] Until appropriate programming changes can be made, update EO Select Check manually.

[21-3] Implement an emergency process that, even when there is weekly updating, allows for manual database updates within 24 hours of the restoration of exempt status.

IRS RESPONSES

EO Select Check includes the information about an organization formerly found in Publication 78. The Taxpayer Advocate Service (TAS) observes that the monthly updating of EO Select Check is a "great improvement over the quarterly updating of the old Publication 78, and the IRS is to be commended for this." Nevertheless, TAS goes on to recommend even more frequent updates to EO Select Check and the EO BMF Extract ("EO BMF"), an online, searchable list of organizations recognized by the IRS as tax-exempt that is also updated monthly. The IRS does not plan to implement these recommendations.

The IRS does not currently have the budgetary and staffing resources to make the requested programmatic or systemic manual updates. Moreover, manual updates would result in inconsistent information regarding an organization's status and would increase risk of erroneous data input into EO Select Check.

While donor organizations may rely on an organization's entry in EO Select Check regarding the deductibility of contributions, an organization's determination letter is the ultimate proof of exemption. A determination letter therefore may be the basis for donor reliance in lieu of, or in the interim before an organization's status can be updated on, EO Select Check or the EO BMF. With respect to reinstated organizations, the IRS explicitly communicates this to donors and other stakeholders on the automatic revocation webpage:

If the IRS determines that the organization meets the requirements for tax-exempt status, it will issue a new determination letter. The IRS also will include the reinstated organization in the next update of Exempt Organizations Select Check (Pub. 78 database), and indicate in the IRS Business Master File (BMF) extract that the organization is eligible to receive tax-deductible contributions. Donors and others may rely upon the new IRS determination letter as of its stated effective date and on the updated Exempt Organizations Select Check and BMF extract listings. Available at https://www.irs.gov/Charities-&-Non-Profits/Automatic-Revocation-of-Exemption (emphasis added).

Finally, TAS requests emergency manual updates in certain circumstances. The IRS has in place already processes for manual updates to EO Select Check where appropriate and efficient, and the IRS will continue to follow those processes.

TAXPAYER ADVOCATE SERVICE COMMENTS ON IRS RESPONSE

The National Taxpayer Advocate reiterates her statement in this Most Serious Problem (MSP) that the current monthly (except for January) updating of the EO Select Check and EO BMF databases is a substantial improvement over the quarterly updates of the old Publication 78 and commends the IRS for this effort. However, she remains puzzled and concerned that the IRS continues to insist that potential donors and grantors look to an organization's determination letter when the EO databases are in between updates. As noted in the MSP, the IRS acknowledges in multiple Internal Revenue Manual (IRM) sections the reliance of donors and grantors on its online databases. Moreover, as pointed out in the MSP, many donors or grantors often refer solely on the IRS's online EO databases and will not bother to look at an exempt organization's determination letter. Therefore, the IRS's suggestion is not in line with its own recognition of how the exempt organization world operates. It is also incongruous with the IRS's Future State vision of taxpayer online service.

TAS appreciates the significant budget and staffing constraints the IRS faces. However, the harm (in lost donations or grants) caused to exempt organizations by the infrequent database updates, particularly the December until February updating gap, can be severe. As noted in the MSP, more than 2,500 automatically revoked exempt organizations were reinstated during this period in FYs 2014 and 2015. TAS therefore maintains that weekly updates as well as an interim manual EO Select Check update and an emergency 24-hour process for manual updates are critical to protect the taxpayer rights of exempt organizations as well as donors and grantors that rely on the IRS databases.

EARNED INCOME TAX CREDIT (EITC): The IRS Does Not Do Enough Taxpayer Education in the Pre-Filing Environment to Improve EITC Compliance and Should Establish a Telephone Helpline Dedicated to Answering Pre-Filing Questions From Low Income Taxpayers About Their EITC Eligibility

PROBLEM

The Earned Income Tax Credit (EITC) population often shares a unique set of attributes that create obstacles for EITC compliance, such as low levels of education and high transiency. Additionally, one-third of the eligible population changes every year. Under these circumstances, it is difficult for taxpayers to understand EITC eligibility rules. During the filing season, the IRS provides toll-free assistance for answering basic tax law questions from any taxpayer, and only rudimentary help for taxpayers with EITC questions. By failing to provide EITC taxpayers with a dedicated toll-free helpline staffed by assistors with whom they can check their EITC eligibility, the IRS disregards the specific and unique needs of the EITC population and perpetuates high noncompliance rates.

ANALYSIS

TAS research shows that taxpayers claiming the EITC need additional assistance in order to understand EITC eligibility and avoid noncompliance. In one TAS study, 26.5 percent of surveyed taxpayers did not know from reading the EITC audit letter that they were being audited. Another TAS study determined that over 75 percent of low income respondents preferred in-person meetings and meetings at a community service center compared to 28 percent who preferred telephone contact and 13 percent who preferred contact by writing. In the United Kingdom (UK), Her Majesty's Revenue and Customs (HMRC) provides a dedicated helpline for tax credit inquiries. This helpline provides advice on tax credits, allows taxpayers to report changes in their circumstances, and provides a venue for taxpayers to make complaints. HMRC's study of taxpayers' experiences, perceptions, and attitudes showed that a majority of taxpayers in the UK preferred using this dedicated helpline for their source of information over all other services provided by HMRC. Taking a similar approach could help the IRS pinpoint where mistakes are likely to occur in EITC claims, increase efficient use of resources, and encourage taxpayers' participation in EITC compliance. A dedicated helpline would address low income taxpayers' needs by accommodating their mobility before filing their tax returns and help avoid future noncompliance.

TAS RECOMMENDATIONS

[22-1] The National Taxpayer Advocate recommends the IRS conduct a study along the lines of the UK experiment to determine how best to serve low income taxpayers. This study should include interviews with taxpayers, nonprofit organizations, and IRS employees, to learn about taxpayer needs and communication preferences.

[22-2] Based on the findings from the proposed study above, create a helpline dedicated to taxpayers who claim the EITC where taxpayers can call in and ask questions about their particular area of concern. This phone line should be staffed by employees with excellent listening and communication skills who have completed training in social work and who can answer specific questions related to EITC eligibility. The IRS should provide, in conjunction with TAS, special training on listening and communication.

IRS RESPONSE

We appreciate the National Taxpayer Advocate report's recognition of the many outreach and education efforts IRS currently makes to help taxpayers and tax preparers comply with the complexities of the law and to ensure that those who may be eligible for the credit are made aware of their eligibility and claim it on their tax return.

Since the studies that Taxpayer Advocate Service conducted in 2004 and 2007, the IRS has made significant improvements to its Earned Income Tax Credit (EITC) education and outreach. For example, the IRS works with our Volunteer Income Tax Assistance (VITA) and Tax Counseling for the Elderly (TCE) community partners, well-versed in EITC requirements, to offer free tax preparation to eligible taxpayers. IRS has improved the volunteer training to better help taxpayers accurately claim EITC.

The IRS also sends educational notices to EITC taxpayers. Just prior to the tax year 2015 filing season, the IRS sent more than 25,000 notices to taxpayers who self-prepared their returns and may have incorrectly claimed EITC in the previous year. These notices provided education on the eligibility for the credit, allowed self correction, and provided handy guidance for use in preparing tax year 2015 tax returns.

The IRS has a robust communication strategy to help taxpayers understand EITC eligibility requirements. We have external partnerships that help provide taxpayers with information on how to qualify and how to get free help on filing. One of IRS's biggest activities is EITC Awareness Day, which recently celebrated its tenth anniversary. EITC Awareness Day uses traditional and social media channels to lead taxpayers back to IRS.gov to get more information and to promote use of the EITC Assistant. IRS uses available resources such as radio, print press, Skype, Twitter and YouTube to reach the broadest range of taxpayers.

IRS has also completed pre-filing-season pilots, using post cards, to reach underserved, non-filing, but eligible EITC populations. The IRS sent post cards to 200,000 taxpayers who had not filed returns but who appeared to be eligible for the EITC. Results show that the post cards did motivate return filing. IRS is continuing these research efforts that include education on eligibility requirements. IRS would like to increase the existing 79 percent (estimated) participation rate.

In an ongoing effort to make more information easily accessible to taxpayers, in 2015 we revamped the IRS.gov/EITC website. IRS also worked with governmental and external partners to post information about EITC on their websites and provide links to the IRS website. This filing season, the use of the EITC Assistant, the on-line tool that helps a taxpayer determine eligibility, has increased almost 40 percent from the same time last year.

We continue to work to improve our mission to assist taxpayers to meet their tax obligations and understand the law. In addition to the many avenues for the taxpayers to access information about claiming EITC, IRS will hold an EITC Summit in 2016. We will have representation from a wide spectrum of stakeholders including Taxpayer Advocate Service. We will gather feedback and ideas on improving both EITC participation and compliance.

TAXPAYER ADVOCATE SERVICE COMMENTS ON IRS RESPONSE

The National Taxpayer Advocate is pleased the IRS is working to improve the EITC program. She acknowledges the efforts of the IRS to provide help via the toll-free assistance lines for basic tax law questions during filing season, and the information provided through outreach and education strategies which are directed at both taxpayers and preparers. The National Taxpayer Advocate also commends the IRS for providing pamphlets and publications on the EITC which are available for English and bilingual speakers. However, since approximately one third of the population claiming EITC changes each year it continues to be difficult to develop a comprehensive program to cover the entire EITC population.

The National Taxpayer Advocate further acknowledges the efforts of the IRS to reach the EITC eligible populations through nationwide high level outreach events such as EITC Awareness Day, stakeholder partnerships, and media blitzes via email, Skype, Twitter, and YouTube. The IRS stated improvements to the EITC program have been made since the 2004 and 2007 TAS research studies, but neglected to mention the findings of the 2014 TAS research study which indicated that over 75 percent of low income respondents preferred in-person meetings and meetings at a community service center compared to 28 percent who preferred telephone contact and 13 percent that preferred contact by writing. Taxpayers claiming the EITC need additional assistance to understand EITC eligibility and avoid noncompliance which is why the National Taxpayer Advocate recommends the IRS establish a dedicated helpline for EITC questions during the filing season.

The IRS revamped the IRS.gov/EITC website in 2015 to make the information more accessible to taxpayers by providing improved information and links to the IRS website and found the use of the online tool EITC Assistant increased by almost 40 percent from the same time in 2014. While the National Taxpayer Advocate is pleased at these improvements, the IRS still needs to acknowledge and address the unique needs of the EITC eligible filing community. As recent demographic research has shown, family structure has changed a great deal over the last decades, and the EITC Assistant may not provide accurate answers for a large percentage of taxpayers whose living situations morph during the years.⁵⁸ Thus, a dedicated EITC helpline will enable taxpayers to explain their living situations and obtain pre-filing guidance, and the IRS would gain valuable information about taxpayer confusion and needs for better guidance and outreach to address particular issues.

EARNED INCOME TAX CREDIT (EITC): The IRS Is Not Adequately Using the EITC Examination Process As an Educational Tool and Is Not Auditing Returns With the Greatest Indirect Potential for Improving EITC Compliance

PROBLEM

The law surrounding the Earned Income Tax Credit (EITC) is complex. In addition, one third of the eligible EITC population changes every year. At the same time, the population of taxpayers who rely on the EITC often share a common set of characteristics, such as low education and high transiency, which create challenges for taxpayer compliance. Notwithstanding these challenges, the IRS persists in using traditional audits as its primary compliance tool.

ANALYSIS

The EITC audit program has a no-response rate of over 40 percent, raising questions about the accuracy of some default assessments and of the audit's effectiveness as an educational tool for future compliance. The IRS also may not be auditing the group of EITC returns that have the most noncompliance. TAS's analysis of the National Research Program (NRP) EITC audits shows that in tax year 2008, approximately 86 percent of the NRP audited cases did not trip a Dependency Database (DDb) rule. NRP data also show that approximately 75 percent of children claimed in error fail the residency test and only 20 percent fail the relationship test. However, about 70 percent of the DDb audits for tax year (TY) 2012 failed both the residency and relationship DDb audit rules. This data suggests that the IRS is concentrating its EITC audit resources on taxpayers with a noncompliance issue that is relatively minor.

TAS RECOMMENDATIONS

[23-1] Conduct an EITC pilot with three different treatments: a regular correspondence examination, an office audit, and a correspondence examination with one auditor assigned. The pilot should measure the following: direct time on case, no response/drop-out rate, agreed to rate, audit reconsideration rate, and future compliance rate.

[23-2] When an EITC taxpayer calls the IRS with information in response to an audit, one employee should be assigned to the taxpayer's case until it is resolved. If the taxpayer calls back, he or she could have the option to speak to the next available employee or wait for the assigned employee to call back. The IRS should hire employees with a social work background or train existing auditors to conduct the audits.

[23-3] Use NRP data to design a formula for workload selection in addition to (or incorporated into) the DDb that will reach the audits with the most impact for taxpayer education and improvement to future compliance. This would include qualifying child errors that involve the residency test.

[23-4] Revise the Internal Revenue Manual (IRM) with the list of additional documentation listed in the TAS Interim Guidance Memorandum (IGM), as well as IRM updates about accepting alternative EITC substantiating documentation.

[23-5] Publish and accept Form 8836, Third Party Affidavit, for purposes of substantiating the residency requirement for a qualifying child.

[23-6] Collaborate with TAS to draft IRM guidance requiring correspondence examiners to adjust accounts for the childless worker credit when the taxpayer is ineligible for the EITC with children. This should be done automatically without requiring the taxpayer to request the credit.

IRS RESPONSE

The Earned Income Tax Credit (EITC) makes up a large share of all IRS audits. This is because the EITC is more widely claimed than other refundable credits. Our EITC audit coverage of 1.62% is very similar to our coverage rate of the Additional Child Tax Credit. Yearly, IRS currently prevents $3 billion dollars in EITC from being claimed erroneously through our fraud and identity theft programs and an additional $3-4 billion dollars through other EITC-related examinations, under-reporter and math error programs. IRS also has return preparer compliance treatments which prevent approximately $465 million in erroneous improper EITC payments.

The Refundable Credit Policy and Program Management operation at the IRS has a dual role: to ensure that those eligible for refundable credits are made aware of them and to ensure that only those eligible for the credit claim them. Compliance studies show the two largest EITC errors are the failure to meet residency and relationship eligibility requirements. We have reliable data that indicates when there is a high probability that either the residency or relationship requirement is not met, and our filters take both tests into account when selecting cases. Our current audit results indicate that our selection criteria is effective. In FY 2015, 90% of the EITC cases selected for audit resulted in a disallowance of the EITC. We protected $2.1 billion in possible improper payments in FY 2015. Our selection criteria is reviewed annually to make improvements based on evaluation of previous audit results. Our compliance efforts are balanced with extensive outreach and education efforts.

We review our processes and look to our employees to provide feedback on how taxpayers can understand their responsibilities in the audit process. In fiscal year 2015 we reviewed 100 EITC correspondence audit calls to determine how our phone assistors responded to taxpayer inquiries with an emphasis on ensuring that taxpayers understood why they were being audited, taxpayers were clear on what they needed to do and if taxpayers understood the eligibility requirements. As a result of the review, we learned that:

• 83% of the taxpayers understood they were being audited

• 90% of the taxpayers didn't express concern about the complexity of the letter, attachments, etc.

• 90% of the taxpayers understood what they needed to do or send in by the end of the call

• 84% of the taxpayers had all their questions answered

Over the last four years, despite declining resources, IRS has made significant strides to identify other compliance treatments outside of the use of traditional audit treatments. Prior to tax year 2015 filing season we issued over 25,000 notices to taxpayers that claimed EITC in 2014 that may not have been entitled. These educational notices provide taxpayer eligibility requirements for claiming Earned Income Tax Credit and additional avenues taxpayers can use to obtain information.

We recently conducted focus groups with campus tax examiners to identify the issues most frequently raised by taxpayers when they call us. We also asked the examiners' opinions on whether taxpayers are often confused about the audit process. The focus group information is being compiled and will be used to make improvements to letters, attachments, and instructions. In addition, the information will be helpful when planning our outreach and education efforts for the coming year. IRS also reviewed Form 886-H which is included in the initial correspondence audit letter and report to the taxpayer. The Form 886-H outlines what the taxpayer needs to submit to support eligibility for EITC. In FY 2015, this form was revised to simplify and clarify the wording and layout so that taxpayers can understand what they need to submit.

As part of our FY 2016 effort, we recently held several focus groups with Low Income Taxpayer Clinics to gain insight on how they succeed in helping their EITC clients obtain documentation for audits. The team reviewed and identified potential alternative documentation that could assist with establishing eligibility for EITC during an examination. We are pleased to report that new forms of acceptable documentation will be included in the Internal Revenue Manual (IRM) for the examiners to use as supporting documentation. In addition, the team simplified and added information on our EITC letter web site including a description of every EITC notice and links to helpful information to assist taxpayers in responding. In order to understand the current taxpayer experience in a correspondence audit, the team is listening to exam calls to determine if improvements made to the Form 886-H-EIC and opportunities to strengthen phone training 'One Call Does it All,' provided this year, improved communications. The team plans to write a new CPE training module on Writing a Response after Taxpayer Contact. The CPE is expected to help examiners improve the written explanations to taxpayers who have sent inadequate documentation.

We conduct customer satisfaction surveys on both the paper audit process and telephone calls handled. We use the information from these surveys to identify opportunities to improve our processes based on taxpayer feedback. We take seriously the need to ensure that taxpayers have an effective and satisfactory experience in their interactions with us.

TAXPAYER ADVOCATE SERVICE COMMENTS ON IRS RESPONSE

The EITC is one of the primary forms of public assistance for low income working taxpayers which is relied upon to make basic ends meet, such as covering housing and transportation costs. The EITC has a rather high improper payment rate. Despite EITC returns accounting for 19 percent of all tax returns filed, the IRS audits 35 percent of them each year. The majority of the audit work is completed through correspondence audits.

The National Taxpayer Advocate believes the EITC audit process should be revised. Audits are an opportunity to educate the taxpayer -- and the IRS -- about the EITC's legal requirements and how they apply to the audited taxpayer's circumstances. The actual dollar assessment (if any) is a byproduct of the audit, not the reason for it. The EITC correspondence audit is particularly ill-suited for this type of educational activity.

The IRS conducts audits via correspondence because it believes they are a low cost, more efficient way to conduct audits. Unfortunately, the low income taxpayers who claim the EITC often have unique attributes such as language barriers, the inability to communicate clearly in writing, and less stable employment and housing. All this makes it more difficult for the taxpayers to respond to these EITC audits. TAS is pleased the IRS has convened a working group, with TAS representatives, to review the EITC audit process, and TAS commends the IRS for conducting focus groups with Low Income Taxpayer Clinics (LITCs) in 2015 to determine how best to improve the audit process as well as IRM changes and additional employee training. The National Taxpayer Advocate looks forward to reviewing any proposed changes and providing recommendations that will strengthen them.

The IRS indicated the two largest EITC errors are failure to meet the residency and relationship eligibility requirements. There are filters in place to review these accounts when selecting taxpayers for audit. However, TAS has determined the no response rate for EITC audits was over 40 percent in 2014, which calls into question the actual effectiveness of the tools and filters. Some taxpayers who fail to meet the residency test one year may in fact be eligible the next year, but may not try to claim the EITC again due to the one time denial. Other taxpayers, however, may try to claim EITC again, fail the eligibility test the second time and then be subjected to the two year ban. It is critical that taxpayers clearly understand why they were denied the EITC. Again, EITC audits should be designed to achieve the greatest taxpayer response, because engagement with the taxpayer provides an educational opportunity and furthers future compliance.

There is the added problem of default assessments where the taxpayer never replies or provides incomplete information, and the IRS moves ahead with the tax assessment. In FY 2014, the default assessment rate was 58.6 percent, which was down from a high of 63.7 percent in FY 2010. As stated earlier, EITC recipients may have less stable housing meaning they may no longer live at the address they used when they filed their return. The audit notice goes to the IRS address of record, the taxpayer never receives it, the taxpayer is assessed, and the taxpayer does not have an opportunity to contest the audit. The IRS is not educating this type of taxpayer to prevent future noncompliance.

The National Taxpayer Advocate urges the IRS to revise its audit selection criteria, conduct focus groups and use data from the NRP to develop criteria that will diminish the non-response rate and improve the responses received from taxpayers. A main area of concern is the limited acceptance of documentation submitted by taxpayers to substantiate their right to claim the credit. The allowable documentation should be clearly listed in the IRM so tax examiners will have as much information as possible to provide taxpayers with a favorable outcome. TAS is pleased the IRS has agreed to a limited expansion of the list of accepted documentation, but it should include all the documentation recommended by the LITCs and TAS, and implement the Residency Affidavit the IRS tested in 2004.

EARNED INCOME TAX CREDIT (EITC): The IRS's EITC Return Preparer Strategy Does Not Adequately Address the Role of Preparers in EITC Noncompliance

PROBLEM

Fifty-five percent of returns claiming EITC were prepared by paid return preparers in tax year 2013. Despite the involvement of so many paid preparers, the EITC suffers from a high noncompliance rate. In response, the IRS has created an EITC Return Preparer Strategy, which incorporates multiple approaches to improve the compliance behavior of EITC return preparers. However, the strategy overlooks opportunities to reach unscrupulous return preparers, which limits the program's effectiveness. Moreover, the IRS does not effectively educate taxpayers so they are equipped to identify and avoid incompetent or unscrupulous return preparers. Finally, without an accurate measure of success for each preparer treatment, the IRS cannot determine if the strategy is taking the most effective approach to increase preparer compliance.

ANALYSIS

The EITC Preparer Strategy has various tools at its disposal for addressing noncompliant preparers, referred to as "treatments." However, the current measurement for success of each treatment does not monitor the long-term improvement of a core group of preparers and overlooks preparers who operate outside of the strategy's criteria. Without a true year-to-year analysis, the strategy may be relying on more burdensome treatments than are necessary. Additionally, the strategy does not include a target outreach program specifically designed to address unscrupulous preparers. The preparer compliance strategy should couple its efforts to treat preparers with a marketing campaign to educate taxpayers about the risks of selecting an incompetent or unscrupulous preparer and how to avoid doing so.

TAS RECOMMENDATIONS

[24-1] Release the annual analysis for the EITC Return Preparer Strategy to the public, including the measures used to evaluate the effectiveness of the strategy.

[24-2] Include TAS as a member of the EITC Return Preparer Strategy team.

[24-3] In collaboration with TAS and other IRS functions, and based on this annual analysis, determine where to focus resources and how to measure success with a multiyear analysis.

[24-4] Incorporate preparer referrals, both from internal and external sources, and preparers who misuse Preparer Tax Identification Numbers (PTINs), as a selection criterion for compliance treatment in the EITC Return Preparer Strategy.

[24-5] Use measures for evaluating the effectiveness of the strategy on an annual basis that are not limited to measuring protected dollars or return on investment, but also include a year-to-year analysis of the preparer's behavior following treatment.

[24-6] Tailor outreach specifically to the unenrolled preparer population that addresses due diligence requirements and is presented where these preparers operate. This outreach should incorporate TV and radio as well as social media.

[24-7] Conduct a creative, geographic-based public education campaign in conjunction with other internal and external stakeholders including public service advertisements, videos, and tweets in order to educate taxpayers on how to select a competent preparer, what the rules of due diligence require, and the consequences of using an unskilled or unscrupulous preparer, including identity theft. Different marketing approaches should be tested and studied to track EITC compliance over the years.

IRS RESPONSE

The IRS Earned Income Tax Credit (EITC) Return Preparer Strategy (RPS) study is used to help preparers understand and meet their EITC paid preparer due diligence requirements through outreach and education. As 55 percent of EITC taxpayers used a paid preparer in 2014, the IRS considers these professionals to be essential to helping EITC taxpayers accurately claim the credit.

In Fiscal Year (FY) 2015, this strategy resulted in a change in preparer behavior that protected an estimated $386 million in EITC erroneous payments from being issued and protected another approximately $79 million in revenue involving Additional Child Tax Credit and Child Tax Credit. The total estimated program value of the program since FY 2012 is approximately $2.4 billion. IRS also audited the preparers' clients and conducted due diligence visits which resulted in $414 million in additional tax and penalties.

We continue to evaluate and improve this program. For example, in FY 2015 we refined preparer selection criteria to incorporate a historical component, current performance, and the response to past treatments. We also increased our contact rate from 70% to nearly 95% for our filing season treatments through issuance of certified mailings, first class letters, and follow-up phone calls. We expanded and improved the database that houses the treatment-related information and results, allowing us to more quickly make data-driven decisions. In FY 2015 we increased the number of preparers that received treatments by 17%. Earlier and multiple filing season treatments were implemented resulting in improved behavior among preparers.

The return preparer treatments begin with letters and progress to higher levels of contacts including face-to-face visits and injunctions. We agree to work with the National Taxpayer Advocate on making a clearer distinction between educational and compliance letters used in this strategy.

TAXPAYER ADVOCATE SERVICE COMMENTS ON IRS RESPONSE

The National Taxpayer Advocate acknowledges the work the IRS has done to improve its outreach and education initiatves for return preparers. Unfortunately the current improper payment rate of 27 percent has increased slightly from the improper payment rate of 25 percent in 2004.⁶⁴ The IRS stated its initiatives for FY 2015 have resulted in a change in preparer behavior that protect an estimated $386 million in EITC erroneous payments; TAS looks forward to reviewing the data behind these estimates of success for the RPS initiative.

The IRS issues compliance and educational letters to preparers that are designed to educate preparers about the proper actions to take and warn them about improper actions and their consequences. The undeliverable rate of these letters was 24 percent in FY 2012 and 36 percent in FY 2014. The primary reasons for the undelivereable rate were outdated addresses or simply unclaimed letters.⁶⁵ The IRS should use updated databases to improve the current delivery rate which should reduce costs and improve response rates. The IRS response indicates that for FY 2015 the preparer selection criteria have been refined and the use of certified mailings, first class letters, and phone calls have resulted in an increased contact rate. At this time TAS has not been able to review this data but the National Taxpayer Advocate encourages the IRS to continue the actions that are producing such positive results.

The IRS should also look into revising the letters so the preparers are able to clearly distinguish between educational letters and compliance letters. Currently the opening section of Letter 4833 (the most frequently mailed compliance letter) is strikingly similar to the language of Letter 4833-A (the most frequently mailed educational letter).⁶⁶

The opening paragraph of Letter 4833 (the compliance letter) states:

The IRS indicated it cannot release the annual report for the EITC RPS to the public because its contents have been deemed for official use only. TAS encourages the IRS to revisit its position. It is possible for the IRS to write a public report that does not disclose selection criteria. As the IRS moves forward with improvements to the RPS, TAS looks forward to being an active partner in planning.

²See, e.g., Oral (or written) Statement of Elizabeth Atkinson, LeClairRyan, National Taxpayer Advocate Public Forum (May 13, 2016) 25-32.

³ Rick Parrish, Forrester Research, The Public Is Still Skeptical Of Federal Digital Customer Experience (Feb. 18, 2016).

⁴ For transcripts and written statements including relevant research findings submitted for the National Taxpayer Advocate Public Forums held in Washington, D.C., see http://taxpayeradvocate.irs.gov/public-forums (last visited July 20, 2016).

⁵ When the IRS launched the Get Transcript Online program on June 6, 2016, it experienced an overall pass rate of approximately 29 percent. Email briefing on Secure Access -- Authentication -- Weekly Status Report, June 13-17, 2016 (June 19, 2016).

⁶ FATCA was passed as a part of the Hiring Incentives to Restore Employment Act, Pub. L. No. 111-147, 124 Stat 71 (2010) (adding Internal Revenue Code (IRC) §§ 1471-1474 & 6038D).

⁷See 31 U.S.C. §§ 5314, 5321; 31 C.F.R. §§ 1010.350, 1010.306(c); FinCEN Form 114, Report of Foreign Bank and Financial Accounts (FBAR), http://www.fincen.gov/forms/bsa_forms.

⁸See, e.g., Fixing America's Surface Transportation (FAST) Act, Pub. L. No. 114-94, Title XXXII, Subtitle A, § 32101 (Dec. 8, 2015) (passport revocation provisions); Consolidated Appropriations Act, 2016, Pub. L. No. 114-113, Title II, § 203 (Dec. 18, 2015) (requirements for issuance of ITINs).

⁹ Because taxpayers calling abroad may have to pay long distance toll charges, the international taxpayer assistance line is not considered a free option.

¹⁰ ETLA allowed the IRS to learn directly from taxpayers what problems and questions they had and how it needed to update its webpages and publications to provide the necessary information.

¹¹See U.S. Department of State, Bureau of Consular Affairs, Who We Are and What We Do: Consular Affairs by the Numbers (Apr. 2015), http://travel.state.gov/content/dam/travel/CA%20by%20the%20Numbers-%20May%202015.pdf. U.S. Department of Defense, Active Duty Military Personnel, Strength by Regional Area and by Country (Sept. 30, 2015). TAS Research query of IRS CDW IRTF, (Dec. 15, 2015).

¹² IRS Office of Chief Counsel Memorandum, Collection Appeal Program and I.R.C. § 6330(c)(4) Issue Preclusion, PMTA 2012-14, (May 3, 2012).

¹³ IRM 5.11.6.2 (Sept. 26, 2014).

¹⁴ IRM 5.11.1.3.1 (Aug. 1, 2014).

¹⁵ Field Collection uses the Integrated Collection System to generate levy documents.

¹⁶ IRM 5.15.1 (Nov. 17, 2014).

¹⁷ IRM 5.11.6.2 (Sept. 26, 2014) and IRM 5.11.6.2.1 (July 17, 2015).

¹⁸ IRC § 6321.

¹⁹ Policy Statement 5-47, IRM 1.2.14.1.13 (10/9/1996).

²⁰Module Age at Time of NFTL, 11/1/2012, Research Analysis & Statistics, 446 days for businesses, 767 days for individuals.

²¹ Generally, NFTL determinations are not needed if the taxpayer's total assessed liability is less than $10,000. IRM 5.12.2.6; 5.19.4.5.3.2.

²²Federal Tax Lien Impact Study, 3/31/2014, Internal Revenue Service/Experian.

²³ IRC §§ 6325(b); 6325(d).

²⁴ IRC § 6323(j).

²⁵See VantageScore, Impact to VantageScore 3.0 Credit Score Model from Revisions to Public Record Reporting (June 2016), https://www.vantagescore.com/images/resources/VantageScore_PublicRecordReporting_June2016.pdf.

²⁶See Jeanine Skowronski, Is This the Biggest Change to Credit Reports in Years?, Credit.Com (July 12, 2016), http://blog.credit.com/2016/07/would-eliminating-tax-liens-public-records-from-credit-reports-help-your-score-150300/ (also noting that "33.6 [percent] of consumers [in the sample] with scores between 581 and 600 saw their scores increase to between 601 and 620 when the [tax] lien and [civil] judgment data was removed").

²⁷See National Taxpayer Advocate 2012 Annual Report to Congress vol. 2, 105-30 (Research Study: Investigating the Impact of Liens on Taxpayer Liabilities and Payment Behavior); National Taxpayer Advocate 2011 Annual Report to Congress vol. 2, 91-111 (Research Study: Estimating the Impact on Liens on Taxpayer Compliance Behavior and Income).

²⁸See National Taxpayer Advocate 2015 Annual Report to Congress 112 n.5.

²⁹See National Taxpayer Advocate 2015 Annual Report to Congress 114 n.18; National Taxpayer Advocate 2014 Annual Report to Congress 226, 229.

³⁰ IRC § 6001, Notice or regulations requiring records, statements, and special returns.

³¹See S. Rep. No. 105-174, at 77 (1998).

³² This position was made public when the regulations were published in the Federal Register in December 2002.

³³ Senate Finance Committee hearing, held on Feb. 2, 2000.

³⁴See IRM 1.2.52.13, Delegation Order 25-12 (Rev. 1) (May 22, 2009).

³⁵ Treas. Reg. § 301.7602-2(f).

³⁶ IRS response to TAS information request (June 29, 2015).

³⁷ IRS response to TAS information request (May 18, 2015).

³⁸Id.

³⁹ TPC Sample (2015) (Q9). These omissions often (94.5 percent in exam cases and 34.5 percent in collection cases) occurred because the RA or RO did not send Form 12175 to the TPC coordinator, or in 57.2 percent of the collection cases, because the RO did not use the proper pick list item.

⁴⁰ SB/SE, Third Party Contact, Program Review Report, Field Exam Special Processes 5-6 (Oct. 30, 2015)

⁴¹ IRC § 7605(b).

⁴² The audit reopening procedures can be found in Rev. Proc. 2005-32, 2005-23 I.R.B. 1206 (June 6, 2005); IRM 1.2.13.1.1, Policy Statement 4-3 (Dec. 21, 1984)

⁴³ The Senate Appropriations Committee expressed support for the National Taxpayer Advocate's approach in its report accompanying the FY 2017 Financial Services and General Government Appropriations bill. The report states: The National Taxpayer Advocate recommended that identity theft victims with multiple issues should be assigned a sole IRS contact person who would interact with them throughout and oversee the resolution of the case, no matter how many different IRS functions need to be involved behind the scenes. . . . Recognizing the pervasive and growing problem of tax-related identity theft and understanding the need to assist taxpayers with this issue in a simple and timely manner, the Committee directs the IRS to assign cases of identity theft victims with a sole point of contact at the IRS regardless of the many IRS functions that may need to be involved in order to resolve the issue for the taxpayer and report on the full cycle time for resolving IDT cases. S. Rep. No. 114-280, at 36-37 (2016).

⁴⁴ Office of the Chief Financial Officer, Financial Management, Office of Cost Accounting Cost-Based Performance Measures ASFR, FYs 2010 -- 2014, available at http://cfo.fin.irs.gov/FinMgmt/Cost_Accounting/docs/Cost-Study-Reports/FY2014/ASFR-Cost_Study-FY_2014.doc (last visited May 28, 2015).

⁴⁵ Office of the Chief Financial Officer, Financial Management, Office of Cost Accounting Cost-Based Performance Measures ASFR, FYs 2010 -- 2014, http://cfo.fin.irs.gov/FinMgmt/Cost_Accounting/docs/Cost-Study-Reports/FY2014/ASFR-Cost_Study-FY_2014.doc (last visited June 17, 2017). The $89.5 million represents enforcement revenue collected by the ASFR program after an SFR notice has been issued and prior to the issuance of the first collection notice. Overall, IRS collected nearly $11 billion of assessments made in FY 2011 through FY 2014; however, the costs associated with the post-assessment collection, abatement, and other downstream tax account administration cannot be easily determined, making an accurate return on investment (ROI) calculation difficult.

⁴⁶ IRM 1.2.14.1.18(4), Policy Statement 5-133 (Aug. 4, 2006).

⁴⁷Id.

⁴⁸ IRS, CDW, IRTF Database (Mar. 30-31, 2016). The IRS estimated in 2014 that it had issued 21 million ITINs since 1996, but that only about a quarter of them were being used on returns. IRS, Unused ITINS to Expire After Five Years; New Uniform Policy Eases Burden on Taxpayers, Protects ITIN Integrity, IR 2014-76 (June 30, 2014), https://www.irs.gov/uac/newsroom/unuseditins-to-expire-after-five-years-new-uniform-policy-eases-burden-on-taxpayers-protects-itin-integrity (last updated May 13, 2016).

⁴⁹See Consolidated Appropriations Act, 2016, Pub. L. No. 114-113, Division Q, Title II, § 203 (2015) (codified at IRC § 6109(i)(1)(B)).

⁵⁰See Consolidated Appropriations Act, 2016, Pub. L. No. 114-113, Division Q, Title II, § 203 (2015) (codified at IRC § 6109(i)(1)(B)).

⁵² IRM Exhibit 21.1.7-5, Designated Payment Code (DPC) (July 17, 2014); IRM 3.11.10.5.10(8), Designated Payment Code (Jan. 1, 2015); IRM 3.12.10.3.23(3), Field 01DPC -- Designated Payment Code (DPC) (Jan. 1, 2015); Exhibit 3.17.278-1, DPC Codes (Oct. 1, 2014).

⁵³ IRM 21.3.4.7.1.3(2), Designated Payment Code (DPC) (Oct. 1, 2014).

⁵⁴ IRM 3.8.45.9.1(3), Designated Payment Codes (DPCs) (Nov. 13, 2014).

⁵⁵ IRS, Designated Payment Code Review Report (Dec. 17, 2012). No DPC was used at all for eight percent of the payments reviewed in this report.

⁵⁶Id.

⁵⁷ IRS, Designated Payment Code Review Report (Dec. 17, 2012).

⁵⁸ Elaine Maag, H. Elizabeth Peters, and Sara Edelstein, Increasing Family Complexity and Volatility: the Difficulty in Determining Child Tax Benefits, Urban Institute Tax Policy Center 19 (Mar. 3, 2016). The Tax Policy Center study analyzed the December panel from the 1996 and 2008 Census Bureau Survey of Income and Program Participation (SIPP) data.

⁵⁹See IRS Statistics for Tax Returns with EITC, http://www.eitc.irs.gov/EITC-Central/eitcstats.

⁶⁰https://www.irs.gov/pub/newsroom/irs-individual-vignette-version-a.pdf.

⁶¹ Oral Statement of Elizabeth Atkinson, Attorney, LeClairRyan, National Taxpayer Advocate Public Forum, 29-30 (May 13, 2016).

⁶² This percentage has dropped in subsequent years, but is still about 70 percent. IRS fact check response (Dec. 16, 2015).

⁶³ Nina E. Olson, Procedural Justice for All: A Taxpayer Rights Analysis of IRS Earned Income Credit Compliance Strategy 1-35 (John Hasseldine ed., Advances in Taxation, Volume 22, Emerald Group Publishing Limited) (2015).

⁶⁴ Treasury Inspector General of Tax Administration (TIGTA), Ref. No. 2015-40-044, Assessment of Internal Revenue Service Compliance with Improper Payment Reporting Requirements in Fiscal Year 2014 9 (Apr. 27, 2015).

⁶⁵ Wage and Investment Research and Analysis (WIRA), Fiscal Year 2014 EITC Return Preparer Analysis Summary 29 (June 20, 2014).

⁶⁶ IRS, Letter 4883, EITC Return Preparer Pre-Filing Season Alert (Aug. 2014); IRS, Letter 4833-A, EITC Return Preparer Alert (Sept. 2015).