Today, guest blogger Marilyn Ames provides a brief description of the IRS master file in order to provide context for some of the discussions we have had about taxpayer accounts. Understanding the way the IRS keeps its books on taxpayer accounts can make a difference. When an account moves from the master file to non-master file, the transcript, at first glance, can give the impression that the taxpayer owes nothing. Without an understanding of the different accounts, it is easy to become confused.
The National Taxpayer Advocate did a study on the problems created by conversion from master file to non-master file and reported on it in her 2009 annual report. The issue is further complicated by the timing of when the IRS will or should convert a case from mater file to non-master file and that can depend on the type of case involved. One trigger causing an account to move to non-master file status is a request for innocent spouse status. Other triggers include the filing of bankruptcy by one spouse or the filing of an offer in compromise by one spouse. It should occur whenever the collection on the formerly joint account moves in two directions because the actions of one spouse no longer move in sync with the other. Consult the IRM on when the split should occur but be aware that the IRS does not always move the account to non-master file status when it should and the failure to do so can cause havoc. Keith
According to the Internal Revenue Manual, the master file is “the official repository of all taxpayer data extracted from magnetic tape records, paper and electronic tax returns, payments, and related documents….” (IRM 126.96.36.199, Master File (Oct. 1, 2011). This statement, which appears to include all of a taxpayer’s tax accounts, is not quite correct. Because of the limitations to the technology behind the master file, the Internal Revenue Service has a Plan B. That Plan B is known as the non-master file, and as some taxpayers have found to their dismay, it includes liabilities not reflected in the taxpayer’s master file.
The non-master file system exists for the sole purpose of providing a means to assess and collect liabilities that cannot be handled by the master file. The non-master file was initially a manual system that consisted of index cards maintained in alphabetical order. Since those not-so-long-ago days, non-master files are now kept electronically, but in a system totally separate from the master file system known as the Automated Non-Master File, or ANMF. Unfortunately, the ANMF cannot be accessed by the Integrated Data Retrieval System of the IRS, which is how Service employees generally obtain information about taxpayers’ accounts, and from which tax transcripts are usually printed. If a Service employee does not recognize the existence of a liability on a non-master file, or the taxpayer only receives transcripts printed from the master file system, a taxpayer or an unknowing representative may be left with the impression that there is no outstanding tax liability, while assessments are still lurking on the ANMF.
So what kinds of liabilities are contained on the non-master file? Generally, cases involving transferor/transferee liability, termination or jeopardy assessments, cases involving lookback interest, and individual returns on which the secondary taxpayer is deceased will be assessed on non-master file. If the Service is collecting child support obligations, these liabilities will be shown on a non-master file account. Beyond these types of cases, there are other assessments that are also made on the non-master file. If the Internal Revenue Service needs to make an assessment within a matter of hours, the assessment will be made on non-master file, as it can be posted within 24 to 36 hours, rather than the four to six weeks for an assessment to be made on the master file. If Congress passes new tax laws that need to be implemented quickly, the returns reflecting those changes will be assessed on non-master file until the master file system can be updated. Certain other assessments, such as penalty assessments made under IRC §§ 6692, 6652(e), and 6652(d)(1) or (2), are also made on non-master file. A reversal of an erroneous abatement after the statute of limitations on assessment has expired will also occur on non-master file. And, my personal favorite, some tax liability is simply too big for the master file system and must be assessed on non-master file. If an individual taxpayer files a return showing a tax liability of $1 billion or more, the record will be maintained on the non-master file. (Interestingly, the Internal Revenue Service also maintains a spreadsheet of the taxpayers who regularly file such returns, and tracks these returns. Finally, an IRS list I wouldn’t mind being on.)
Some liabilities may start out on master file, and then be switched to non-master file. The master file system can only handle a certain number of transactions for any particular tax account. When the limit is reached, the account is systemically transferred to non-master file. A transaction code 130 and a freeze will be made on the master file account to warn IRS personnel that this transfer has been made, but the master file account will also have the outstanding liability zeroed out by the addition of an equal credit. This can make a taxpayer very happy if the Service employee fails to note and tell the taxpayer about the existence of the new non-master file account. There is also a delay between the movement of a transaction from master file to the new non-master account, and it can be up to 45 days before the new file is posted in the ANMF system.
And if this wasn’t complicated enough, there may also be more than one non-master file account for the same tax period. If an additional assessment is made for an account on the ANMF system, the additional assessment is not just added to the account as it would be on master file, a new separate non-master file account is established.
The ANMF system also issues different collection notices from those issued by master file. A taxpayer whose liability is assessed on non-master file will only receive two initial collection notices – those that would be the first and the fourth notices sent for a master file account. However, the taxpayer will still receive an annual reminder notice for the non-master file account of the outstanding balance, just as a taxpayer does for a liability assessed on master file.
So how does a taxpayer know that the notices being received are for a liability assessed on ANMF? This is easy – there will be an “N” after the taxpayer identification number. If there is a reference to a document locator number in a tax transcript, the third digit in the number will be a 6 if the document is on non-master file. Because the processing involved with non-master file can be extremely specialized, most non-master file accounts are handled at just two Service campuses, Cincinnati and Philadelphia. If a taxpayer appears to have a non-master file issue, the taxpayer or the representative should send a copy of the notice, letter or other document along with any correspondence discussing the problem so the issue is routed to the right office for handling.
Non-master file assessments are not as common as they were in the past, because one large area of non-master file cases is now handled by the master file system. In the past, when individual taxpayers filed a joint return and some action occurred that affected only one spouse, the accounts would be split between the two spouses on non-master file. This could have occurred because of a bankruptcy filing by only one spouse, one spouse being granted innocent spouse relief, or one spouse entering into an offer-in-compromise. Split assessment accounts can now be created on master file, in what is referred to as MFT 31. The creation of MFT 31 accounts causes each spouse’s liability and any transactions with respect to that liability to be tracked separately. The National Taxpayer Advocate has expressed concerns about the MFT 31 accounts. While report in which these concerns were expressed is now several years old, the issues raised in the report may still have some currency. Taxpayers and their representatives still need to remain aware, however, because the liability remaining at the time the split assessment accounts are created will still be zeroed out on the original master file account. As with a transfer to non-master file, if the liability has not been paid off, it may still remain and be lurking in the new MFT 31 account like a monster under the bed. If the tax transcript shows a transaction code 400, the representative needs to press further to find the transcript for the new split assessment.