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Report on Trust Fund Recovery Penalty Procedures

Posted on Nov. 29, 2016

The Treasury Inspector General for Tax Administration (TIGTA) issued a report on June 30, 2016, detailing IRS procedures for processing trust fund recovery penalty (TFRP) cases.  The report contains statistics on the number of TFRP cases, the amounts at issue in these cases and the timeliness of the IRS response in these cases.  In general, the report paints a picture of an agency moving fairly slowly to collect a liability that involves the misuse of funds held by these individuals in trust.  As I have mentioned in prior post involving the TFRP, I have written three law review articles on TFRP concerning the way the IRS charges interest and posts payments, some practices the states use to collect unpaid trust fund taxes and the disclosure of the returns containing the information about the money held in trust. This TIGTA report does not directly address any of the issues on which I have written law review articles and I realize that I should not have an expectation that anyone would read the article.  The report does show that the IRS continues to struggle to get in front of the collected tax issue.

The struggle to timely pursue unpaid collected taxes is hampered by the diminution in the ranks of revenue officers.  The response to the report by SBSE Commissioner Karen Schiller states that between 2010 and 2015 the number of revenue officers dropped by almost 40%.  Because TFRP cases require investigation by revenue officers if the number of businesses continues to grow, or even remain stable, this level of drop off in the number of investigators has to have an impact.  The response to the report also cites to a new program Collection has adopted concerning the failure of businesses to pay over collected taxes.  That program seeks to contact the business that fails to pay over collected taxes almost immediately in order to keep the business from incurring the type of debt that would lead to the necessity to begin a TFRP investigation.  The TIGTA report does not discuss the new program because the program has had insufficient time to demonstrate its worth and it started after the period covered by the TIGTA report.  We discussed the announcement of that program made in December of 2015 in a prior post.

The TIGTA report contains several useful graphs for those interested in TFRP.  The first concerns the number of assessments and the amount assessed.  Predictably, the number of assessments has declined; however the amount assessed has slightly risen over that period.  The rise in the amount assessed may reflect that by the time the IRS gets to a case more quarters of unpaid liability exist but neither the narrative nor the chart attempt to explain the slight increase.  The first finding of the report concerns the timing of the assignment of the TFRP case vis a vis the timing of the work on the underlying business entity that fails to pay over the collected taxes.  The TFRP should happen when the IRS cannot collect the unpaid taxes from the entity or, in some cases, to motivate the business to pay the taxes.  Yet, the assignment of a revenue officer to investigate the business did not smoothly result in the assignment of the same revenue officer to investigate the TFRP.  For some reason the IRS not only does not assign a revenue officer to perform both functions at more or less the same time but took, on average, about 15 months to assign a case for TFRP investigation after it had assigned someone to look into the failure of the business to pay the collected taxes.

The delay in assigning someone to work the TFRP case negatively impacts the ability to ultimately collect the liability.  In a study done by the National Taxpayer Advocate about which she testifies before Congress, which the TIGTA report cites, collection potential goes down as much as 50% from the first year to the second and 30% from the second to the third.  TIGTA recommends that the IRS assign the same revenue officer to work the TFRP who it assigns to work the delinquent business account.  This seems like a recommendation that covers a practice the IRS would have adopted decades ago and not one present today.  While the IRS agrees to the recommendation, it notes that barriers to its implementation exist.  This surprises me.  In a time of limited resources, if not before, it seems that the IRS should work the TFRP simultaneously with working the delinquent account.  Maybe the new initiative to contact businesses as soon as a delinquency occurs will cut down on the problem but I cannot imagine that the need for performing TFRP assessments on a fairly large scale will go away simply based on contacting the business sooner.  So, the IRS needs to continue looking for ways to improve its performance in assessing and collecting the TFRP.  This suggestion by TIGTA seems like a no brainer.

The other focus of the report concerned filing the notice of federal tax lien (NFTL).  Not only is the IRS slow to do the TFRP investigation but it then moves slowly to file the NFTL.  In many of these cases the amounts meet the current criteria for filing the NFTL.  The failure to file the NFTL leaves the IRS vulnerable to other creditors obtaining a priority in the responsible person’s assets.  Sometimes the IRS will need to back away from filing the NFTL in order to allow the taxpayer to get funds with which to pay back the tax liability but the decision to file or not file the NFTL should occur at or near the time of the assessment and not over a year later.  Again the IRS agreed with the concept but had excuses for why it could not happen or at least could not happen in the short term.  Like the suggestion that the same person work the business account and the TFRP investigation, this suggestion seems like a problem that the IRS should have fixed long ago.

The TIGTA report deserves a quick read for those interested in the inter-working of the IRS on TFRP.  Unless the new program has a more dramatic impact than I envision, the problems collecting trust fund taxes will continue.  The TIGTA report gives me little hope that the IRS will soon solve the mystery of collecting from those who have collected for it and failed to pay over.

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