IRS Collection Division

On September 11, 2017, the Treasury Inspector General for Tax Administration (TIGTA) issued its final report discussing IRS compliance activities through fiscal year 2016 (the federal government’s fiscal year begins on October 1 and ends on September 30). TIGTA compiles statistical information reported by the IRS and issues the report annually in response to continuing stakeholder interest in the analysis and trends in IRS Collection and Examination function activities. Here are the highlights:

  • IRS Budget Increased, but Staffing Declined. Although the IRS budget increased in 2016, IRS staffing continued to decline. The budget increase was intended to improve customer service, prevent fraud and identity theft, and enhance cybersecurity to safeguard taxpayer data.
  • The Number of Tax Returns Examined Declined. The number of tax returns examined in 2016 decreased approximately nine percent compared to 2015. The number of examinations conducted in 2016 is approximately 32 percent lower than the number conducted during 2012. The report attributes the significant reduction in the number of examinations over that time period to a continued decline in examination staffing, which reached a 20-year low in 2016.

Percentage Change in the Number of Field Examiners and Examinations Since FY 2012

Source: IRS Data Book and Table 37 Examination Program Monitoring

 

  • IRS Issued Fewer Liens and Levies. The number of liens and levies issued continued to decline in 2016. The IRS issued its fewest amount of liens and levies since 2002.
  • Payment Alternatives – Increase in Direct Debit Installment Agreements. The number of direct debit installment agreements (a payment option available to certain taxpayers who cannot fully pay their tax obligations on time) has increased by 128 percent since 2012. The increased use of this payment option is likely attributable to reductions in enforcement personnel and the need to efficiently and effectively collect outstanding tax liabilities.
  • Legislative Initiatives. In December 2015, Congress enacted the Fixing America’s Surface Transportation Act. The law contains two measures designed to assist the IRS in collecting delinquent taxes: (1) authorizing the use of private debt collectors for the collection of outstanding inactive tax receivables, and (2) authorizing the State Department to revoke, or deny, passports to taxpayers with seriously delinquent tax debt. The IRS began assigning cases to private debt collection agencies in April 2017. The IRS also worked to coordinate with the State Department to implement the passport revocation program. You can read more about the passport revocation program here and here.

You can read the full report here.

Yesterday the Taxpayer Advocate published a blog post entitled “The IRS’s New Passport Program: Why Notice to Taxpayers Matters (Part 1 of 2)” which criticizes the Internal Revenue Service’s planned initiative to revoke, or deny, passports of individuals who have substantial tax liabilities. We have previously covered the planned rollout of this program by the IRS here and here. In our last article on this subject, we reported — based on information contained on the IRS website — that the IRS planned to begin issuing certifications of individuals with “seriously delinquent tax debt” to the State Department in “early 2017.” According to the IRS web page addressing the passport revocation program – which was last updated on June 2, 2017 – certifications to the State Department have in fact not yet started, but are slated to begin at some point “in 2017.” According to the Taxpayer Advocate, “there is no firm date for implementation” of the passport revocation/denial program at this time, although the IRS plans to publish a notice providing more details about the program shortly before implementation.

The passport revocation provision was enacted into law in December 2015 as part of the Fixing America’s Surface Transportation Act (FAST Act), which contained two controversial measures designed to assist the IRS in collecting delinquent taxes: (1) re-authorizing the use of private collection agencies for certain delinquent tax accounts; and (2) authorizing the State Department to revoke, or deny, passports to taxpayers with “seriously delinquent tax debt.”

“Seriously delinquent tax debt” is defined as a federal tax liability that been assessed and is greater than $50,000 (including interest and penalties), and for which the IRS has either filed a lien or levy. The dollar threshold will be adjusted for inflation every year. Taxpayers who have entered into installment agreements or offers-in-compromise, or have requested collection due process hearings or innocent spouse relief, are not considered to have “seriously delinquent tax debt” even if they owe the IRS more than $50,000.

In the blog post, the Taxpayer Advocate notes prior efforts by the U.S. government to restrict issuance of passports to individuals with other types of non-tax debt:

The concept of restricting a person’s travel to incentivize behavior isn’t new. In 1996, Congress passed the Personal Responsibility and Work Opportunity Reconciliation Act (PRWORA) of 1996, which requires the DOS to deny a passport application and allows the DOS to revoke or limit a passport if the person owes delinquent child support exceeding $5,000 (subsequently lowered to $2,500). Courts have long recognized that the right to travel internationally is a liberty right, protected by the Due Process Clause. See e.g., Kent v. Dulles, 357 U.S. 116 (1958). In the context of passport denial for unpaid child support, courts have found the statute meets due process requirements because it provides for notice and an opportunity to be heard prior to the state agency certifying the unpaid child support to the federal government. Weinstein v. Albright, 261 F.3d 127 (2nd Cir. 2001), aff’g 2000 WL 1154310 (S.D.N.Y. 2001).

The Department of Health and Human Services, Office of Child Support Enforcement (OCSE) requires states to issue (or request OCSE to issue) a Pre-offset Notice (PON) for all new cases within the Federal Tax Refund Offset Program, the Administrative Offset Program, and the U.S. Passport Denial Program. Following the issuance of a PON, there is a 30 day holding period before the passport denial occurs. The primary focus of the PON is to communicate the pending consequences of not resolving the unpaid amount – that is, administrative offset, federal tax refund offset, and passport denial if the amount is greater than $2,500. You can view a sample PON in the OSCE Federal Offset Program Technical Guide. The OSCE Guide strongly encourages states to send repeated PONs to the noncustodial parents at least annually.

The Taxpayer Advocate’s primary concern about the new IRS passport revocation program is its lack of meaningful notice and opportunity to be heard, which are the hallmarks of constitutional due process:

In the context of passport denial for a seriously delinquent tax debt, notice and an opportunity to be heard prior to the certification are limited. The FAST Act only requires two forms of notice to taxpayers who will be certified:   (1) a notice sent to the taxpayer close to or at the same time as the IRS certifies the seriously delinquent tax debt (“contemporaneous notice”), and (2) language included in Collection Due Process (CDP) hearing notices explaining the potential certification.

Unlike the PONs in the child support context, currently, the IRS does not plan to provide any additional, direct notice to affected taxpayers beyond the statutory requirements. I believe this lack of notice may not satisfy taxpayers’ due process rights under the Fifth Amendment of the Constitution because taxpayers do not have a meaningful opportunity to be contest the certifications prior to them taking place. Furthermore, it infringes on the Taxpayer Bill of Rights, notably the right to be informed and the right to challenge the IRS’s position and be heard. The passport language in the broader CDP notice is delivered at a time when the taxpayer is focusing on resolution of the debt and claiming CDP rights – thus the language is buried among the other information and may not constitute effective notice. This is in contrast to the child support PON, which focuses primarily on the soon to occur consequences – offset and passport denial. Additionally, some taxpayers may not have the benefit of the passport language in the CDP notice at all because they received their CDP notices prior to the IRS including this language. At this time, the IRS has no plans to send a separate notice to these taxpayers.

Although the passport revocation program has not yet been implemented, the IRS is now including the following warning language on levy notices:

Denial or Revocation of United States Passport
On December 4, 2015, as part of the Fixing America’s Surface Transportation (FAST) Act, Congress enacted section 7345 of the Internal Revenue Code, which requires the Internal Revenue Service to notify the State Department of taxpayers certified as owing a seriously delinquent tax debt. The FAST Act generally prohibits the State Department from issuing or renewing a passport to a taxpayer with seriously delinquent tax debt. Seriously delinquent tax debt means an unpaid, legally enforceable federal tax debt of an individual totaling more than $50,000 for which a Notice of Federal Tax Lien has been filed and all administrative remedies under IRC § 6320 have lapsed or been exhausted, or a levy has been issued. If you are individually liable for tax debt (including penalties and interest) totaling more than $50,000 and you do not pay the amount you owe or make alternate arrangements to pay, we may notify the State Department that your tax debt is seriously delinquent. The State Department generally will not issue or renew a passport to you after we make this notification. If you currently have a valid passport, the State Department may revoke your passport or limit your ability to travel outside of the United States. Additional information on passport certification is available at www.irs.gov/passports.

The Taxpayer Advocate’s critique of the passport revocation program continued by calling for the IRS to provide additional notice to affected taxpayers that their right to travel may be at risk:

The IRS’s current policy of relying exclusively on the CDP notice to provide pre-certification notice also ignores behavioral research. This is a topic I discussed last year in the Annual Report to Congress Most Serious Problem on Voluntary Compliance and in a related Literature Review on Behavioral Science Lessons for Taxpayer Compliance. One topic that came up repeatedly in the literature was the concept of salience, focusing on the timing and relevancy of communications. A simple way to increase the salience of the passport notice would be to issue a stand-alone notice shortly before the certification, similar to the child support PON that is issued 30 days prior.

The IRS needs to approach passport certifications from the point of view, “If we want people to do something, what’s the best way to make that happen?” Here, the IRS wants taxpayers to resolve their tax debts – either by fully paying the liability, entering into a payment plan, or having their accounts corrected if the liability is incorrect. A stand-alone notice, focusing only on the pending harm that will occur if the taxpayer does not resolve their account quickly, is likely to be successful in prodding taxpayers to take action. However, the IRS doesn’t plan to send out a separate notice other than the notice at the time of the passport certification, which triggers many kinds of actions.

As the IRS and State Department are preparing to implement the passport revocation program, it remains to be seen whether those agencies will take note of any of the Taxpayer Advocate’s comments, particularly her concerns about meaningful lack of notice and opportunity to be heard before certification to the State Department. The Taxpayer Advocate concludes by noting that in her next blog post, she intends to discuss “the actual operations of the passport certification process, showing how the IRS’s lack of notice leads to an inefficient and burdensome process.” Stay tuned.

irsThe Internal Revenue Service has released additional guidance about its new and controversial “Private Debt Collection” program — which requires the use of private debt collectors to collect certain delinquent tax debts — while fraudsters continue to scam unsuspecting victims by posing as IRS debt collectors.

According to the new guidance which will be incorporated into the Internal Revenue Manual, “[t]he IRS will do everything it can to help taxpayers avoid confusion and understand their rights and tax responsibilities, particularly in light of continuing scams where callers impersonate IRS agents and request immediate payment.” To this end, the IRS will utilize the following procedures when a taxpayer’s account is referred to a private collection agency (PCA):

  • The IRS will first send a letter to the taxpayer indicating that their account that the module has been assigned to the PCA.
  • The PCA will also send a letter to the taxpayer to confirm that the module has been assigned to them.
  • Both of these letters to the taxpayer will contain a unique 10-digit identifier, instead of the taxpayer’s SSN.
  • This unique identifier will be used to conduct a two-party verification between the taxpayer and the PCA.
  • Taxpayers can confirm the names of the PCAs under contract with the IRS at this link:   https://www.irs.gov/businesses/small-businesses-self-employed/private-debt-collection.
  • PCAs will not ask for payment on prepaid debit, gift or iTunes cards (a common technique used by fraudsters impersonating IRS representatives).
  • Payment by check will be payable to the “United States Treasury” and sent directly to IRS, not the PCA.

The IRS has entered into collection contracts with only four PCAs: (1) CBE Group in Cedar Falls, Iowa; (2) ConServe in Fairport, New York; (3) Performant in Pleasanton, California; and (4) Pioneer in Horseheads, New York. Each of the PCAs are authorized to identify themselves as contractors of the IRS collecting taxes. Private debt collectors are required to be courteous and respect taxpayers’ rights. They must follow provisions of Internal Revenue Service Private Collection Agency Policy and Procedures Guide and the Fair Debt Collection Practices Act, and are also subject to various provisions of the Internal Revenue Code governing confidentiality of tax returns and return information.

Under the new law requiring the use of PCAs, the IRS must refer the following categories of collection cases to private collection agencies:

  • Cases removed from active IRS inventory because of lack of resources;
  • Cases removed from active IRS inventory due to inability to locate the taxpayer;
  • Cases for which more than one-third of the 10 year statute of limitations for collection has passed and there has been no assignment to an IRS employee for collection; or
  • Cases where 365 days have passed without taxpayer or third party interaction to further collection of the account.

In addition, IRS has the discretion to refer other types of collection cases to PCAs as appropriate.

The following types of collection cases may not be referred to PCAs:

  • Cases involving a taxpayer that is deceased;
  • Cases involving a taxpayer that is under the age of 18;
  • Cases involving a taxpayer located in a designated Combat Zone;
  • Cases involving a taxpayer that is the victim of tax-related identity theft;
  • Cases involving a taxpayer under examination, litigation, criminal investigation or levy;
  • Cases subject to pending or active offers in compromise;
  • Cases subject to a pending or active installment agreement;
  • Cases subject to a statutory right of appeal;
  • Innocent spouse cases; or
  • Cases involving a taxpayer located in a presidentially declared disaster area who requests relief from collection.

Any case assigned to a PCA that subsequently meets any of the above criteria — due to a change in circumstances — will be returned to the IRS.

The IRS guidance also provides direction to IRS employees when contacted by taxpayers whose accounts have been referred to private collection agencies. Such taxpayers are to be advised that they must work directly with the PCA to work out collection issues, including the negotiation of installment agreements. Any taxpayer who says they feel threatened or have reason to believe they are being scammed are to be referred to the Treasury Inspection General for Tax Administration (TIGTA).

Critics of the IRS Private Debt Collection program warn that it will provide fraudsters with additional opportunities to perpetrate a long-running scam where criminals prey on unsuspecting victims by posing as IRS representatives seeking to collect tax debts.  According to the Treasury Inspector General for Tax Administration, this widespread fraud scheme has caused taxpayer losses of over $55 million.  To date, more than 50 individuals have been criminally charged for their roles in a complex fraud scheme in which individuals from call centers in India impersonated IRS officials in demanding payment of back taxes.  Call center operators targeted U.S. victims who were threatened with arrest, imprisonment, fines, and/or deportation if they did not pay money allegedly owed to the IRS.  Victims who agreed to pay the scammers were instructed on how to provide payment, such as by purchasing stored value cards or wiring funds.

In federal court yesterday in Houston, an Indian national pleaded guilty to conspiracy to commit money laundering for his role in liquidating and laundering victim payments generated through various telephone fraud schemes using India-based call centers.  Also yesterday the Justice Department announced the arrest of seven individuals who are alleged to have participated in a nationwide scheme to steal $9 million from unsuspecting taxpayers by impersonating IRS agents.  In this scheme, individuals purporting to be employees of the IRS would call and threaten victims with legal action, arrest, and imprisonment for a supposed debt owed to the IRS.  The callers made these threats and used other methods of intimidation to persuade the victims to wire money utilizing MoneyGram, Walmart-2-Walmart Money Transfer, and other wire transfer services.  IRS investigators have currently identified nearly 8,000 victims of this fraud scheme and total loses approximating $9 million.

The Justice Department press release announcing yesterday’s arrests cautions taxpayer to be wary of telephone calls demanding payment of tax debts:

“No legitimate employee of the United States Treasury Department or the Internal Revenue Service will demand that anyone make payments via MoneyGram, Western Union, Walmart-2-Walmart Money Transfer, or any other money wiring method, for any debt to the IRS or the Department of the Treasury,”  J. Russell George, Treasury Inspector General for Tax Administration, said. “Nor will the Department of the Treasury demand that anyone pay a debt or secure one by using iTunes cards or other prepaid debit cards. If you receive one of these calls, hang up immediately and go to the Treasury Inspector General for Tax Administration (TIGTA) scam reporting page to report the call.”

With private collectors set to start making calls about overdue tax debts, taxpayers must be more vigilant than ever to ensure that they are dealing with legitimate representatives of either the IRS or a duly-authorized private collection agency.

irsThe Internal Revenue Service announced earlier this week that its private debt collection program is starting now.  Beginning this week, the IRS will start sending letters to taxpayers whose overdue federal tax debts are being assigned to one of four private-sector collection agencies. At the same time, the IRS is warning taxpayers that they must be vigilant to guard against scammers posing as legitimate tax collectors.

The new private tax collector program, authorized under a federal law enacted by Congress in December 2015, enables these designated contractors to collect, on behalf of the IRS, unpaid tax debts. Usually, these are unpaid individual tax obligations that are not currently being worked by IRS collection employees and often were assessed several years ago.

According to the IRS, taxpayers whose tax debts are being assigned to private collectors would have had multiple contacts from the IRS in previous years and still have an unpaid tax bill. “The IRS is taking steps throughout this effort to ensure that the private collection firms work responsibly and respect taxpayer rights,” said IRS Commissioner John Koskinen. “The IRS also urges taxpayers to be on the lookout for scammers who might use this program as a cover to trick people. In reality, those taxpayers whose accounts are assigned as part of the private collection effort know they have a tax debt.”

The program will begin this month with a few hundred taxpayers receiving mailings and subsequent phone calls, with the program growing to thousands a week later in the spring and summer. Taxpayers with overdue taxes will always receive multiple contacts, letters and phone calls, first from the IRS, not private debt collectors.

The IRS will always notify a taxpayer before transferring their account to a private collection agency (PCA). First, the IRS will send a letter to the taxpayer and his/her tax representative (if any) informing them that their account is being assigned to a PCA and giving the name and contact information for the PCA. (See prior coverage here.) This mailing will include a copy of Publication 4518, entitled “What You Can Expect When the IRS Assigns Your Account to a Private Collection Agency.”

There are four private firms that are participating in this collection program: CBE Group of Cedar Falls, Iowa; Conserve of Fairport, N.Y.; Performant of Livermore, Calif.; and Pioneer of Horseheads, N.Y. The taxpayer’s account will only be assigned to one of these agencies, and never to all four. No other private group is authorized to represent the IRS.

Once the IRS letter is sent, the designated private collection firm will send its own letter to the taxpayer and his/her representative (if any) confirming the account transfer. To protect the taxpayer’s privacy and security, both the IRS letter and the collection firm’s letter will contain information that will help taxpayers identify the tax amount owed and assure taxpayers that future collection agency calls they may receive are legitimate.

The private collectors will identify themselves as contractors of the IRS collecting taxes. Employees of these collection agencies will be required to follow the provisions of the Fair Debt Collection Practices Act, and like IRS employees, must be courteous and must respect taxpayer rights.

The private firms are authorized to discuss payment options, including setting up payment agreements with taxpayers. But as with cases assigned to IRS employees, any tax payment must be made, either electronically or by check, to the IRS. A payment should never be sent to the private firm or anyone besides the IRS or the U.S. Treasury. Checks should only be made payable to the “United States Treasury.”

Private firms are not authorized to take enforcement actions against taxpayers. Only IRS employees can take these actions, such as filing a notice of Federal Tax Lien or issuing a levy.

The IRS announcement also warned taxpayers to be on the lookout for scammers posing as private collection firms. “Here’s a simple rule to keep in mind. You won’t get a call from a private collection firm unless you have unpaid tax debts going back several years and you’ve already heard from the IRS multiple times,” Koskinen said. “The people included in the private collection program typically already know they have a tax issue. If you get a call from someone saying they’re from one of these groups and you’ve paid your taxes, that’s a sure sign of a scam.” If taxpayers are unsure if they have an unpaid tax debt from a previous year – which is what the private collection firms will handle – they can go to IRS.gov and check their account balance at www.irs.gov/balancedue.

Whether or not a taxpayer’s account is assigned to a private collection agency, the IRS warns taxpayers to beware of scammers pretending to be from the IRS or an IRS contractor. Here are some things the scammers often do but the IRS and its private contractors will never do.

  • Call to demand immediate payment using a specific payment method such as a prepaid debit card, gift card or wire transfer. Generally, the IRS will first mail a bill to any taxpayer who owes taxes, and if a case is assigned to a PCA, both the IRS and the authorized collection agency will send the taxpayer a letter. Payment will always be to the United States Treasury.
  • Threaten to immediately bring in local police or other law-enforcement groups to have the taxpayer arrested for not paying.
  • Demand that taxes be paid without giving the taxpayer the opportunity to question or appeal the amount owed.
  • Ask for credit or debit card numbers over the phone.

“Unexpected and threatening calls out of the blue from someone saying they’re representing the IRS to collect a tax debt is a warning sign people should watch out for,” Koskinen said.

passportThe Internal Revenue Service is moving forward with implementation of a new law requiring the State Department to deny, or revoke, the U.S. passports of individuals who owe the IRS more than $50,000. The passport revocation measure became law in December 2015, when President Obama signed a five-year, $305 billion highway funding bill that included several controversial tax measures designed to help fund the legislation, including authorizing the revocation of passports in the case of unpaid taxes and the use of private debt collectors to collect taxes.

A new provision of the Internal Revenue Code now authorizes the Treasury Secretary to certify, to the Secretary of State, that a taxpayer has a “seriously delinquent tax debt.” According to the IRS website, certifications to the State Department will begin in early 2017. Upon receipt of certification from the IRS, the Secretary of State is authorized to revoke the taxpayer’s passport or impose restrictions on the use of such passport, such as limiting its use to return travel to the U.S. only. The Secretary of State is also prohibiting from issuing a new passport to any individual who has a “seriously delinquent tax debt,” with limited exceptions provided for emergency circumstances or humanitarian reasons. Taxpayers who are serving in combat zones are granted relief from the law’s provisions.

Passport Revocation as a Tax Collection Tool

The threat of passport revocation provides the IRS with a powerful tool to force tax compliance, particularly for non-residents or dual citizens who regularly travel to or from the United States. Until Congress enacted this new law in December 2015, the State Department had no authority to restrict the issuance of passports to individuals because they owed back taxes. In contrast, other federal laws authorize the State Department to deny or revoke the issuance of passports in certain circumstances, such as in the case of individuals with delinquent child support obligations.

Several years ago, the Government Accountability Office studied the potential for using passport issuance/revocation to increase collection of unpaid federal taxes. As part of that study, the GAO found that during fiscal year 2008, the State Department issued passports to more than 224,000 individuals who collectively owed the IRS in excess of $5.8 billion in back taxes. The GAO concluded that even this amount was likely substantially understated, as it did not include amounts owed by taxpayers who did not file a tax return or by businesses associated with such taxpayers.

“Seriously Delinquent Tax Debt”

Under the new law, individuals with “seriously delinquent tax debt” may have their passports revoked or applications for passports denied. “Seriously delinquent tax debt” is defined as a federal tax liability that been assessed and is greater than $50,000 (including interest and penalties), and for which the IRS has either filed a lien or levy. The dollar threshold will be adjusted for inflation every year.

Taxpayers who have entered into installment agreements or offers-in-compromise, or have requested collection due process hearings or innocent spouse relief, are not considered to have “seriously delinquent tax debt” even if they owe the IRS more than $50,000.

New Taxpayer Notifications

The law includes certain safeguards to protect taxpayer rights. Taxpayers who are certified to the Secretary of State as having a “seriously delinquent tax debt,” or whose certifications are subsequently revoked, are entitled to prompt written notice. The IRS will mail “Notice CP 508C” to the taxpayer’s last known address notifying the taxpayer of his or her certification to the State Department for having “seriously delinquent tax debt.”

In addition, the new law amends existing Internal Revenue Code provisions to ensure that taxpayers are warned in advance that they could be subject to U.S. passport denial, revocation or limitation. For example, notices of federal tax lien and notices of intent to levy must now include language advising the taxpayer that they may be certified to the Secretary of State as having a “seriously delinquent tax debt” with attendant passport consequences. The specific language that now appears on IRS levy notices is as follows:

Denial or Revocation of United States Passport
On December 4, 2015, as part of the Fixing America’s Surface Transportation (FAST) Act, Congress enacted section 7345 of the Internal Revenue Code, which requires the Internal Revenue Service to notify the State Department of taxpayers certified as owing a seriously delinquent tax debt. The FAST Act generally prohibits the State Department from issuing or renewing a passport to a taxpayer with seriously delinquent tax debt. Seriously delinquent tax debt means an unpaid, legally enforceable federal tax debt of an individual totaling more than $50,000 for which a Notice of Federal Tax Lien has been filed and all administrative remedies under IRC § 6320 have lapsed or been exhausted, or a levy has been issued. If you are individually liable for tax debt (including penalties and interest) totaling more than $50,000 and you do not pay the amount you owe or make alternate arrangements to pay, we may notify the State Department that your tax debt is seriously delinquent. The State Department generally will not issue or renew a passport to you after we make this notification. If you currently have a valid passport, the State Department may revoke your passport or limit your ability to travel outside of the United States. Additional information on passport certification is available at www.irs.gov/passports.

Before denying a passport application as a result of a certified tax debt, the State Department will hold such application for a period of 90 days to allow the applicant to either pay the tax liability in full or enter into a payment arrangement with the IRS. Note, however, that the State Department will not grant a similar grace period before revoking a passport as a result of a tax debt.

Taxpayer Options If Certified to the State Department

Once a taxpayer has been certified to the State Department as having “seriously delinquent tax debt,” such certification will only be reversed if (1) the tax debt is fully satisfied or becomes legally unenforceable (such as when the 10-year statute of limitations for collection expires); (2) the tax debt is no longer considered “seriously delinquent”; or (3) the original certification was erroneous. The IRS will provide notice as soon as practicable if the certification is erroneous by mailing “Notice CP 508R” to the taxpayer’s last known address. The IRS will provide notice within 30 days of the date the debt is fully satisfied, becomes legally unenforceable or ceases to be seriously delinquent.

A previously certified debt is no longer considered to be “seriously delinquent” when any of the following occur:

  • the taxpayer enters into an installment agreement with the IRS allowing payment of the debt over time;
  • the IRS accepts an offer-in-compromise to satisfy the debt;
  • the Justice Department enters into a settlement agreement to satisfy the debt as a result of litigation;
  • collection is suspended because the taxpayer requests innocent spouse relief; or
  • the taxpayer submits a timely request for a collection due process hearing in connection with a levy to collect the debt.

The IRS will not reverse certification where a taxpayer requests a collection due process hearing or innocent spouse relief on a tax debt that is not the basis of the certification. Also, the IRS will not reverse the certification simply because the taxpayer makes a payment that brings the debt below $50,000, but not to zero.

Judicial Review

A taxpayer whose debt has been certified to the State Department has the right to challenge such certification by filing suit in the U.S. Tax Court or a federal district court to challenge the certification. A taxpayer may also file suit to challenge an IRS refusal to reverse a certification. If the court determines that the certification was erroneous or should have been reversed, it can order reversal of the certification. The law does not require a taxpayer to exhaust any administrative remedies before filing suit.

Conclusion

The ability to cause passport revocation or denial provides the IRS with powerful leverage over individuals who are delinquent in their tax debts. Taxpayers who owe the IRS more than $50,000 and are concerned about the possibility of passport revocation must take immediate steps to address their outstanding tax liabilities, by either paying such debt in full or seeking to negotiate a collection alternative such as an installment agreement or offer-in-compromise. In addition, because the IRS will mail certification notices to the taxpayer’s last known address, it is critically important that taxpayers ensure that the IRS has an up-to-date address on file so notices are timely received and can be addressed promptly. Individuals who owe the IRS more than $50,000 and fail to heed these warnings will face dire consequences with respect to their ability to travel to and from the United States.

For questions or more information about this alert, please contact Matthew D. Lee at 215.299.2765 or any member of the firm’s Tax Controversy and Litigation practice.

Previously, we discussed Congress’s enactment of the FAST Act requiring the IRS to use private debt collection agencies to recover inactive tax receivables. In September, the IRS announced that it had contracted with four collection agencies to begin private collection, and last week, the IRS posted to its website a sample of the letter it will send to some taxpayers to notify them that their overdue account has been assigned to a private collection agency (Notice CP40). A copy of the letter can be found here.

The letter contains the name, address and phone number of the private collection agency and notes the following:

  • The private collection agency will explain payment options.
  • The private collection will provide the taxpayer with a payment plan if the taxpayer can’t pay the full amount.
  • Taxpayers should go to www.irs.gov/payments for information about how to pay an account that was transferred to a private collection agency.
  • The private collection agency is required to maintain the security and privacy of the taxpayer’s tax information. To do this, it will ask the taxpayer to provide their name and address of record before assisting the taxpayer in resolving his account. Also, it will perform two-party verification by asking the taxpayer for the first five numbers of their taxpayer authentication number at the top of the CP40. The private collection agency will then provide the subsequent five numbers.

The letter also suggests that the taxpayer refer to Publication 4518, What You Can Expect When the IRS Assigns Your Account to a Private Collection Agency. Publication 4518 can be found here and provides answers to questions taxpayers may have when their account has been assigned to a private collection agency including:

  • What will the private collection agency do?

The private collection agency assigned to your account is working on behalf of the IRS. They will send you a letter confirming assignment of your unpaid tax liability and then contact you to resolve your account. They will explain the various payment options and help you choose one that is best for you.

  • How can I be sure it is the private collection agency calling me?

The private collection agency will send you a letter confirming assignment of your tax account. The letter will include the same unique taxpayer authentication number that is on the letter sent to you from the IRS.

  • Who do I make my payments to?

Make all payments to the IRS. The private collection agency can provide information on ways to pay.

Helpful Tips

The private collection agencies must abide by the consumer protection provisions of the Fair Debt Collection Practices Act (the “FDCPA”) and have agreed to be courteous and respectful of taxpayer rights. Under the FDCPA, if a taxpayer sends the private collection agency a letter stating that it does not want to work with the private collection agency and requests that the case be handled by the IRS, the private collection agency must honor the request.

In addition, it is important for taxpayers to be on the lookout for scams, especially around this time of year. Taxpayers should only make payments to the IRS, not the private collection agency. There are electronic payment options for taxpayers on IRS.gov and payments by check should be payable to the U.S. Treasury and sent directly to the IRS, not the private collection agency.

passportThe Internal Revenue Service is moving forward with implementation of new rules requiring the State Department to deny, or revoke, the U.S. passports of individuals with seriously delinquent federal tax debt.  According to Mary Beth Murphy, commissioner of the IRS Small Business/Self-Employed Division, the new rules will be rolled out in phases.  The first phase will focus on denying passport renewal applications for delinquent taxpayers.  In the second phase, the IRS and State Department will focus on revocation of passports held by delinquent taxpayers.  According to an article published by Bloomberg BNA, Murphy said “[w]e don’t want to have people stuck in foreign countries.”  See Bloomberg BNA, “IRS Hashing Out Debt Collection, Passport Revocation Plans” (Nov. 18, 2016).

The passport revocation measure became law approximately one year ago, when President Obama signed a five-year, $305 billion highway funding bill that included several controversial tax measures designed to help fund the legislation. One provision in the legislation authorizes the State Department to revoke U.S. passports of taxpayers who owe the U.S. Treasury more than $50,000 in tax liabilities. Another provision authorizes the Internal Revenue Service to use private debt collectors.

The new passport revocation provision provides the IRS with a powerful tool to force tax compliance, particularly for non-residents or dual citizens who regularly travel to the United States.  Newly-enacted Internal Revenue Code section 7345 authorizes the Treasury Secretary to certify, to the Secretary of State, that a taxpayer has a “seriously delinquent tax debt.” A “seriously delinquent tax debt” is defined as a federal tax liability which been assessed and is greater than $50,000, and for which the IRS has either filed a lien or levy. (The dollar threshold will be adjusted for inflation after 2016.)

Upon receipt of such certification, the Secretary of State is authorized to take action with respect to denial, revocation, or limitation of such taxpayer’s U.S. passport. The law prohibits the Secretary of State from issuing a passport to any individual who has a “seriously delinquent tax debt,” with exceptions provided for emergency circumstances or humanitarian reasons. The law authorizes the Secretary of State to revoke a passport previously issued to an individual with a “seriously delinquent tax debt.” If the Secretary of State decides to revoke a passport under these circumstances, he or she is authorized to limit such passport to return travel to the United States only.

Taxpayers who have entered into installment agreements or offers-in-compromise, or have requested collection due process hearings or innocent spouse relief, are exempt from the new law. If the Treasury Secretary has already certified a taxpayer to the Secretary of State, such certification must be revoked within 30 days of the taxpayer making full payment and obtaining a release of lien; requesting innocent spouse relief; entering into an installment agreement; or making an offer-in-compromise which is accepted. In the event that the Treasury Secretary issues an erroneous certification, such certification must be revoked as soon as practicable.

The law does include certain safeguards to protect taxpayer rights. Taxpayers who are certified to the Secretary of State as having a “seriously delinquent tax debt,” or whose certifications are subsequently revoked, are entitled to prompt written notice. Such notice must specify that the taxpayer is entitled to file a lawsuit in the U.S. Tax Court or a federal district court to challenge the certification. The court may determine that the certification was erroneous and, if so, order the Treasury Secretary to so notify the Secretary of State. Taxpayers who are serving in a combat zone are granted relief from the law’s provisions.

In addition, the new law amends existing Internal Revenue Code provisions to ensure that taxpayers are warned in advance that they could be subject to U.S. passport denial, revocation, or limitation. For example, notices of federal tax lien and notices of intent to levy must now include language advising the taxpayer that they may be certified to the Secretary of State as having a “seriously delinquent tax debt” with attendant passport consequences.

Finally, the law amends the Internal Revenue Code provision addressing confidentiality of tax returns and return information in order to permit the sharing of such information with the Secretary of State. In particular, for each taxpayer certified as having a “seriously delinquent tax debt,” the law authorizes the Treasury Secretary to share information regarding the taxpayer’s identity and the amount of the tax debt.

Effective November 18, 2016, Revenue Procedure 2016-57 established the Small Business/Self-Employed (“SB/SE”) Fast Track Mediation Collection (“FTMC”) program to allow taxpayers and the IRS to resolve disputes quickly with an Office of Appeals mediator serving as a neutral third party. The FTMC obsoletes the SB/SE Fast Track Mediation program (“FTM”) (as outlined in Revenue Procedure 2003-41) and will enable taxpayers to settle offer-in-compromise and trust recovery penalty issues quickly.

Participants in the FTM program were taxpayers whose cases were being worked in either Examination or Collection and provided taxpayers the opportunity to expedite resolution of their cases by mediating their disputes with an Appeals mediator acting as a neutral party. However, taxpayer requests for FTM have been infrequent throughout the life of the program and became increasingly so after Fast Track Settlement (“FTS”) was implemented. FTS is only available to taxpayers in Examination and does not provide an expedited Appeals alternative dispute resolution opportunity for taxpayers in Collection.

According to the revenue procedure, the FTMC was created to ensure that taxpayers involved in disputes with Collection will be afforded an early opportunity for expedited resolution of their cases via mediation. The FTMC can only be used when all other collection issues involving the taxpayer have been resolved. The IRS Appeals mediator does not have settlement authority in the FTMC proceeding and cannot render a decision regard any issue in dispute.

Case Eligibility

Appropriate cases for FTMC include:

  • Issues involving the value of a taxpayer’s assets
  • The amount of dissipated assets that should be included in the overall determination of reasonable collection potential
  • Whether the taxpayer meets the criteria for deviation from national and/or local expense standards
  • Determination of a taxpayer’s proportionate interest in jointly held assets
  • Projections of future income based on calculations other than current income
  • The calculation of a taxpayer’s future ability to pay when living expenses are shared with a non-liable person
  • Doubt as to liability cases worked by Collection
  • Other factual determinations, such as whether a taxpayer’s contributions into a retirement savings account are discretionary or mandatory as a condition of employment

Inappropriate cases for FTMC include:

  • Issues requiring assessment of the hazards of litigation or use of the Appeals mediator’s delegated settlement authority
  • Cases referred to the Department of Justice
  • Cases worked at an SB/SE Campus site
  • Collection Appeals Program cases
  • Collection Due Process cases
  • Collection cases in which the taxpayer has failed to respond to IRS communications or failed to submit documentation to Collection for consideration

Application Process

A request for participation in FTMC should be initiated after an issue has been fully developed and before Collection has made a final determination regarding the issue. A Form 13369, Agreement to Mediate, must be signed by the taxpayer and collection group manager to initiate proceedings. The FTMC allows either party to withdraw at any time before reaching an agreement on the issues, and the proceedings will be held at a location mutually agreed to by both parties.

Mediation Session

Both the taxpayer and Collection will be given ample opportunity to present their respective positions. The Appeals mediator may also ask either party for additional information if necessary for a full understanding of the issues being mediated. If it is determined that meaningful progress toward resolution of the issues has stopped, the Appeals mediator may terminate the mediation session. In addition, the Appeals mediator may, but is not required to, terminate or postpone the session if: (a) either party presents new information or new issues during the mediation session; (b) the taxpayer wishes to submit a substantial amount of additional documentary information; (c) the taxpayer wishes to present new witnesses, including experts; or (d) for other good cause.

The Appeals mediator may recommend to the parties a possible resolution of one or all of the issues considered in FTMC based on the Appeals mediator’s analysis of the issues. Any recommendation made by the Appeals mediator does not bind the parties and is not a decision regarding any issue in dispute.

At the conclusion of the mediation session, the Appeals mediator will prepare a brief written report by completing Form 13370, Fast Track Mediator’s Report. A copy of the report is provided to the taxpayer and the Collection Group Manager at the end of the mediation session. If the parties resolve any of the disputed issues during the mediation session, Collection will secure the appropriate closing documents from the taxpayer and close the case. If the parties do not reach an agreement on a mediated issue, FTMC does not eliminate the taxpayer’s opportunity to request a hearing before Appeals through the traditional Appeals process.

In October 2016, the IRS declared that in-person conferences will no longer be the default method for Appeals conferences. The IRS also made several key Collection and Examination policy clarifications to ensure that Compliance functions as the finders of fact and Appeals does not take investigative actions.

Appeals Conferences

Historically, Appeals conferences have, for the most part, been conducted in-person. In an attempt to make the most of its limited resources, IRS Appeals conferences will, as of October 1, 2016, be conducted over the phone unless the taxpayer requests an in-person meeting. The revised procedures in Internal Revenue Manual (“IRM”) 8.6.1 provide that if the taxpayer requests an in-person meeting, it must be approved by the Appeals team manager and should be limited to certain situations including when:

  • There are substantial books and records to review that cannot be easily referenced with page numbers or indices.
  • The Appeals Technical Employee cannot judge the credibility of the taxpayer’s oral testimony without an in-person conference.
  • The taxpayer has special needs (e.g., disability, hearing impairment) that can only be accommodated with an in-person conference.
  • There are numerous conference participants (e.g., witnesses) that create a risk of an unauthorized disclosure or breach of confidentiality.
  • An alternative conference procedure (e.g., Post Appeals Mediation or Rapid Appeals Process) involving separate caucuses will be used.

In addition, language was added to IRM 8.6.1.4.4 that permits Appeals to invite IRS Chief Counsel and/or Compliance (which includes Examination, Collections, and Accounts Management) to the Appeals conference. However, the IRM notes that the prohibition against ex parte communications must not be violated and thus Appeals still may not communicate with IRS Chief Counsel or Compliance without the taxpayer also being present.

Key Collection Policy Clarifications

The IRS made some key collection policy clarifications to ensure that Compliance functions as the finders of fact and Appeals does not take investigative actions. These policies ensure taxpayers have a true appeal right so that Appeals reviews a final determination made by Compliance. The key collection policy clarifications include:

Appeals will not take investigative actions with respect to financial information provided by taxpayers. Financial information that warrants investigation will be sent to Collection.

  • Appeals will only consider assets that were documented by Collection or introduced by the taxpayer.
  • Appeals will not make recommendations to file Notices of Federal Tax Liens.
  • All Offers in Compromise submitted to Collection Due Process or Equivalent Hearings will be reviewed by Collection for a preliminary recommendation or acceptance.
  • In non-Collection Due Process or Offers in Compromise cases, Appeals will only determine the acceptability of the Offer in Compromise and will not offer other collection alternatives.

Key Collection Examination Policy Clarifications

The IRS also made some key examination policy clarifications that are effective October 3, 2016 and apply to docketed examination cases where a taxpayer submits new information or evidence or raises a new issue. The key examination policy clarifications include:

  • Appeals will attempt to settle a case based on the factual hazards when not fully developed by Examination (i.e. cases will not be sent back to Examination for further development).
  • Appeals will not raise new issues or reopen issues on which the taxpayer and Examination have reached an agreement.
  • Appeals will return non-docketed cases to Examination when a taxpayer submits new information or evidence or raises a new issue that merits investigation or additional analysis.
  • Appeals will retain jurisdiction of docketed cases when a taxpayer submits new information or evidence or raises a new issue that merits investigation or additional analysis, but will request assistance from Examination in performing those functions.
  • For most work streams, Appeals will engage Examination for review and comment when a taxpayer raises a relevant new theory or alternative legal argument.

What Taxpayers Need to Know

Taxpayers should fully cooperate with the IRS’s compliance function during the development of their cases so that their file is complete when it goes to Appeals. When a taxpayer appeals a compliance function’s decision, the taxpayer should specifically identify in their protest the items in dispute. If a taxpayer introduces new information in Appeals, it may result in Appeals returning the case to the compliance function. The policy changes discussed above ensure that taxpayers have an opportunity for an impartial appeal by ensuring Appeals reviews a final determination made by the compliance function. The aim of the policy clarifications is to improve the appeals process by strengthening a taxpayer’s right to an independent appeal.

 

 

 

 

 

On September 8, 2016, the IRS issued its final report on taxpayer compliance through fiscal year 2015 (the federal government’s fiscal year begins on October 1 and ends on September 30). The report is a compilation of statistical information collected by the IRS and provides taxpayers with information about how the IRS focuses its compliance resources and the impact of those resources on revenue and compliance over time.

For fiscal year 2015, the IRS continued to experience losses in the number of employees available to provide services to taxpayers and those needed to enforce the tax laws. In addition, after an increase in the in the IRS’s budget in 2014, the IRS’s budget for 2015 decreased $345 million (3 percent), from $11.3 billion to $10.9 billion. Despite fewer resources, however, total tax revenues received and collected climbed to $3.3 trillion, an increase of 8 percent from 2014. On the other hand, enforcement revenue collected decreased from $57.1 billion in 2014 to $54.2 billion in 2015, a decline of 5 percent. Unpaid assessments increased to $412 billion.

Total Tax Revenue by Type of Tax

Revenue

Source: TIGTA analysis of the IRS Data Book.


Amount of Enforcement Revenue Collected
Compared to Unpaid Assessments

 Enforcement Revenue

Source: Offices of Research, Analysis, and Statistics and the Chief Financial Officer.

For 2015, while some areas of compliance declined, collections on delinquent accounts increased in every collection program except Field Collection (which consists of revenue officers who handle face-to-face contacts with taxpayers to collect delinquent accounts or secure unfiled returns). However, the number of liens, levies, and seizures by the IRS all declined in 2015. In addition, although the number of offers in compromise and installment agreements decreased in 2015, the amount of delinquent taxes collected through these payment options increased.

Notably, examinations continued to decline in 2015, with 28 percent fewer tax returns examined than in 2011. The report attributes the decline in the number of examinations to the 24 percent decrease in revenue agents and tax compliance officers during the same period.

Percentage Change from FY 2011 of All
Tax Returns Filed and Examined

Percent Change

Source: TIGTA analysis of the IRS Data Book.


Number of Revenue Officers in the Field Assigned
Delinquent Cases at the End of Each Fiscal Year

Revenue Officers

Source: Collection Activity Report 5000-23.