IRS Examination Division

TIGTA recently released a report discusses their audit of the IRS’s estate and gift tax examination procedures.  TIGTA made eight recommendations of changes to the estate and gift tax examination process.  The bulk of TIGTA’s recommendations address the informal processes, lack of consistency, and unknown effectiveness of the estate and gift tax examination procedures.

One of the more significant findings of the report is that while the examination division proposed over $577 million of estate and gift tax deficiencies for FY 2016, only $98 million of those deficiencies were sustained after cases were considered by IRS Appeals.  The Examination division attributed this statistic to the fact that the Examination division proposes alternative deficiencies in order to prevent being whipsawed.  However, the Examination division could not separately identify the amount of deficiencies that were attributable to these alternative positions.  TIGTA highlighted that the Government could be subject to suits for attorneys’ fees pursuant to Section 7430 if the positions set forth in the notices of deficiency were not substantially justified.  TIGTA recommended that Examination division develop written guidance “on the circumstances in which it is advisable to propose and issue notices of deficiency in estate and gift tax examinations that contain alternative positions.”

Other highlights from the report include:

  • there is one gatekeeper who decides whether or not to route a case for examination and how to prioritize cases;
  • there is no quality review process;
  • unlike the process for selecting income tax returns for examination, the process of selecting estate and gift tax examinations for examination is based minimal written guidance and involves almost no objective procedures, but instead relies on human involvement and judgment; and
  • procedures for documenting case selection, examination documentation and managerial review either did not exist or if they did exist were not followed as closely as they should be.

TIGTA’s report can be accessed here.

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.

The Tax Court has issued its long-awaited decision addressing captive insurance arrangements. In Avrahami v. Commissioner, 149 T.C. No. 7 (2017), the Tax Court held that payments made from a number of businesses owned by the Avrahamis to a microcaptive insurance company that was wholly-owned by Mrs. Avrahami were not for “insurance,” and thus were not deductible as insurance premiums paid. Here is what you need to know.

Captive Insurance Generally

Amounts paid for insurance are deductible as ordinary and necessary business expenses. Insurance companies are generally taxed on the insurance premiums they receive. However, small insurance companies that satisfy certain requirements are eligible to make a section 831(b) election, in which case they are only taxed on their taxable investment income (which does not include premiums received). For 2009 and 2010, an insurance company other than a life insurance company that had written premiums that did not exceed $1.2 million could elect to be taxed under section 831(b) as long as they met all other requirements.

A pure captive insurance company is one that only insures the risks of companies related to it by ownership. A captive insurance company that is eligible to make a section 831(b) election (referred to as a “microcaptive”) does not pay tax on the premiums it receives. Thus, if a business owner creates a microcaptive that insures only the risks of the business owner’s business, the business is able to deduct up to $1.2 million for insurance premiums paid to the related microcaptive while the microcaptive does not pay tax on the premiums received. However, the premiums are only deductible if the payments are for “insurance,” which begs the question: what is “insurance”? This is the question Avrahami addressed in the context of payments made to microcaptives.

Case Background

The Avrahamis owned jewelry stores and commercial real estate companies (the “Avrahami Entities”). In November 2007, they created an insurance company (the “Captive”) to insure the risks of the Avrahami entities. The Captive was wholly-owned by Mrs. Avrahami. In 2009 and 2010 – the years at issue in this case – the Avrahami entities paid the Captive premiums for direct insurance policies of approximately $730,000 and $810,000, respectively, for policies covering seven types of risk including: administrative actions, business risk indemnity, business income protection, employee fidelity, litigation expense, loss of key employee, and tax indemnity. In addition to its direct policies, the Captive participated in a risk distribution program with other small captive insurance companies through Pan American. Through Pan American’s risk distribution program, the Avrahami Entities paid approximately $360,000 to Pan American for terrorism coverage only. Pan American then reinsured all of the risk it had assumed and would make sure that the Captive received reinsurance premiums equal to the amount paid by the Avrahami Entities to Pan American ($360,000), and in exchange the Captive would reinsure a small percentage of Pan American’s total losses. In total, the Avrahamis deducted approximately $1.1 million and $1.3 million in 2009 and 2010, respectively, for insurance premiums paid from the Avrahami Entities to the Captive or Pan American for both direct policies and for the terrorism coverage obtained through the risk distribution program. Only the Avrahami Entities were covered by the direct policies while over 100 insureds were included in the risk distribution program.

The IRS argued that neither the Captive nor Pan American sold “insurance”, meaning the premiums paid by the Avrahami Entities were not deductible as ordinary and necessary business expenses. The Tax Court agreed.

The Court’s Analysis

To be considered insurance, the arrangement must: (1) involve risk-shifting; (2) involve risk-distribution; (3) involve insurance risk; and (4) meet commonly accepted notions of insurance. The Tax Court analyzed only two of these elements: risk distribution and commonly accepted notions of insurance.

Risk distribution occurs when the insurer pools a large enough collection of unrelated risks. The Tax Court looked to the number of companies the Captive insured and the “number of independent risk exposures” (i.e., how many policies does the Captive issue and what do those policies cover). Ultimately, the Court determined that insuring 3 companies in 2009 and 4 in 2010, issuing 7 direct policies that covered 3 jewelry stores, 3 commercial real estate companies, 2 key employees, and 35 other employees did not cover a sufficient number of risk exposures to achieve risk distribution through the affiliated entities. The Court distinguished the facts present in this case from other cases where they have determined that insurers adequately distributed risk.

The Avrahamis argued that they adequately distributed risk because, in addition to the Captive insuring the Avrahami Entities, the Captive participated in the Pan American risk distribution program and reinsured third-party risk. The Court determined that Pan American was not a bona fide insurance company in the first place, meaning the policies it issued were not “insurance” and the Captive could not have distributed risk by reinsuring policies that were not insurance to begin with. The Court looked to a number of factors to determine whether Pan American was a bona fide insurance company, ultimately concluding that it was not for the following reasons:

  • There was a circular flow of funds. Avrahami Entities paid Pan American, Pan American turned around and reinsured all of the risk it had assumed, making sure that the Captive received reinsurance premiums equal to those paid by the Avrahami Entities. Thus, money was effectively transferred from an entity owned by the Avrahamis (one of the Avrahami Entities) to an entity wholly-owned by Mrs. Avrahami (the Captive).
  • The premiums charged for terrorism coverage were “grossly excessive”. The only policy Pan American issued was for terrorism coverage, and the policy was worded in a way that it was highly unlikely that the triggering event would ever occur.
  • Pan American charged high premiums for an event that was unlikely to ever occur (and had never occurred in the past), and if the event did occur Pan American may have not been able to pay the claims.
  • Because the risk distribution program was not recognized by the Court, when the Court reviewed the direct policies it determined that on a stand-alone basis they also did not adequately distribute risk because the direct policies only covered the Avrahami Entities and the combination of risks and entities covered by the direct policies did not distribute risk among an adequate number of independent insurance risks.

For these reasons, the Court concluded that the Captive did not adequately distribute risk.

The Tax Court then analyzed whether the Captive met commonly accepted notions of insurance, which required the Court to work through a number of factors. The Court determined that the Captive was not selling insurance in the commonly accepted sense. The Court explained:

  • The Captive did not operate like an insurance company. No claims were filed until the IRS began its audit. The Captive only invested in illiquid, long-term loans to related parties and failed to get regulatory approval before transferring funds to them.
  • The Captive returned substantial portions of its surpluses to the insureds and owners of the insured through various loans and distributions.
  • The Captive policies were questionable because they were unclear and contradictory.
  • The Captive charged unreasonable premiums even though an actuary priced the policies. The Court did not find the actuary’s pricing methodology at all persuasive, noting that the actuary consistently chose inputs that would generate higher premiums. The Court noted that before creating the Captive, the Avrahami Entities paid $150,000 for commercial insurance policies. After creating the Captive, the Avrahami Entities paid $1.1 million and $1.3 million in 2009 and 2010, and paid $90,000 for a commercial insurance policy.

As a result, the Court concluded that payments made from the Avrahami Entities to the Captive and Pan American were not for insurance, and thus were not deductible as ordinary and necessary business expenses.

It is worth noting that the Captive was incorporated under the laws of the Caribbean nation of Saint Christopher and Nevis (St. Kitts). The Captive made a section 953(d) election to be treated as a domestic corporation for federal income tax purposes, and also made an election to be taxed as a small insurance company under section 831(b). However, since the Captive’s policies were not for “insurance”, both elections were invalid, and it was thus treated as a foreign corporation for federal income tax purposes. The parties stipulated that the taxable premiums earned by the Captive were not subject to U.S. Federal income tax.

Impact on Continuing IRS Scrutiny of Captive Insurance Arrangements

For several years, the IRS has devoted significant resources to examinations of captive insurance arrangements and numerous cases are the subject of Tax Court petitions.  There are several cases pending in the Tax Court post-trial.  The IRS increased its scrutiny of microcaptives when it issued Notice 2016-66, requiring self-reporting by taxpayers engaging in captive insurance arrangements where there has been a low incidence of claims or where significant loans have been made to related parties. In light of the Avrahami decision, the IRS is likely to continue devoting resources to scrutinizing and challenging captive insurance arrangements it believes are abusive.

As many readers know, the Bipartisan Budget Act of 2015 (“BBA”) repeals the long standing TEFRA procedures governing IRS examinations of partnerships.  As a result, beginning January 1, 2018, partnerships are subject to a centralized partnership audit regime.  However, partnerships are permitted to make an election to have the BBA rules apply to partnership returns filed for tax periods beginning after November 2, 2015 and before January 1, 2018.  For most partnerships, this will apply to the 2016 and 2017 tax years.

Early Election Procedures under Section 1101(g)(4) of the BBA

Partnerships who receive written notification that a partnership return for an eligible year has been selected for examination have 30 days after the date of such notification to file an election to be subject to the BBA centralized partnership regime for that year.  The election can be made on Form 7036,  or by preparing a statement that complies with the regulations.  The election statement requires the partnership representative to represent that the partnership (1) is not insolvent and does not reasonably anticipate becoming insolvent before resolution of any adjustment for the partnership taxable year for which the election is being made; (2) is not currently and does not reasonably anticipate become subject to the bankruptcy petition under Title 11; and (3) has sufficient assets, and reasonably anticipates having sufficient assets, to pay a potential imputed underpayment.

IRS Guidance

On June 29, 2017, the Commissioners of the LB&I division and the SB/SE division issued a memo addressing procedures initial contacts with taxpayers eligible to make the early election.  The memo educates managers and examiners on which partnerships are eligible to make the election, how and when the election is made, the proper content of the election statement, and related correspondence procedures.  The memo requires the issuance of a new Initial Contact Letter, Letter 2205-D, at the beginning of a partnership examination.  If the partnership responds by making an early election, the process outlined below is followed.  If an early election is not made, examiners are instructed to follow existing TEFRA or NonTEFRA procedures.

The memo instructs examiners who receive elections to verify that no amended returns or administrative adjustment requests have been filed as this would disqualify the partnership from making the early election.  The memo also instructs examiners to ensure that Form 7036 is properly completed or that an election not on Form 7036 meets the requirements of Treas. Reg. section 301.9100-22T, request any missing information from the taxpayer if the 30-day election window is still open, and determine whether the election is valid.  The memo further instructs the examiner to wait 30 days after the valid election is received before issuing a notice of administrative proceeding.  The reason for the 30-day waiting period is to allow the partnership to file any administrative adjustment requests as permitted under Section 6227 as amended by the BBA.  During this 30-day period, examiners are instructed to perform a “cursory check” to determine whether the partnership representative’s name, address, identification number and phone number are correct.  Examiners are not permitted to issue a notice of administrative proceeding until the 30-day period expires.

We expect to see continued guidance from the IRS on BBA centralized partnership examination procedures as the rules become effective.

Recently, a Colorado business protested the IRS’ disallowance of their business expenses.  The IRS alleges that the taxpayer was a Colorado medical marijuana dispensary to which Section 280E applies, as a result the IRS asserted that the taxpayers owed additional tax.  The taxpayers paid the tax and sued for a refund in Federal Court.  In a motion for summary judgment, the taxpayer asserted that the IRS did not have the authority to investigate whether the taxpayer violated the Controlled Substances Act (“CSA”), that Section 280E violates the Sixteenth Amendment, that the taxpayer properly deducted its expenses, and that the IRS did not produce evidence that Section 280E applies to the taxpayer.  The taxpayer also asserted that the application of Section 280E violated their Fifth Amendment rights and that Section 280E violates the Eighth Amendment prohibition against excessive fines and penalties.

The District Court ruled that:

  • the IRS application of Section 280E to a business it determined was selling marijuana was within its authority to apply the Internal Revenue Code;
  • the IRS’ application of Section 280E was a “purely tax-based determination” that did not violate the taxpayer’s Fifth Amendment rights;
  • the taxpayer did not allege that the IRS disallowed costs other than cost of goods sold and therefore the court could not determine that the Sixteenth Amendment was not violated;
  • the taxpayer did not allege enough facts for the court to determine whether Section 280E is an excessive fine and penalty in violation of the Eighth Amendment; and
  • the taxpayer did not allege any facts to show that the IRS lacked evidence to show that the taxpayer was violating the CSA.

The taxpayer has filed a motion for reconsideration and an amended complaint to add allegations necessary to support its claims, so the case may move forward based on those new allegations.   However, the taxpayer’s attempt to stop the IRS from enforcing Section 280E was not successful under the facts of this case.

The case is Alpenglow Botanicals, LLC v. U.S., Colorado Dist. Ct. Case No. 16-cv-00258-RM-CBS.  Opinion and Order Continue Reading Colorado District Court: IRS Enforcement of Section 280E Is Not A Criminal Investigation

I was recently interviewed by the Wall Street Journal about the IRS LB&I audit campaigns discussed here.  An interesting part of the conversation included a discussion of why the IRS would tell taxpayers what issues they are targeting.  The bottom line is to increase compliance.  The IRS has identified issues it believes a significant number of taxpayers are non-compliant and is focused on those for one reason: to generate revenue and collections.  There are a few things to keep in mind as you evaluate how to respond to the IRS audit campaigns:

  • The use of “soft letters” indicates the IRS is encouraging taxpayers to self-correct.  It is always better to self-correct than to deal with an issue in audit.  Especially when that issue is something the IRS has highlighted publicly as an issue they are targeting.
  • Failure to self-correct may give the IRS a stronger position for asserting penalties.
  • The 13 IRS audit campaigns identified is not a finite list.  It is an initial list which we expect will evolve over time.

Due to budget constraints, it makes sense that the IRS is targeting significant issues and encouraging self-correction which allows the IRS to increase revenues without significant manpower.

You can read the Wall Street Journal article here.

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.