TREASURY INSPECTOR GENERAL

FOR TAX ADMINISTRATION

Improvements Are Needed to Comply With Legal and Procedural Requirements for Collection Statute Extensions and Installment Agreements

August 2001

Reference No. 2001-10-103

Executive Summary

The Internal Revenue Service (IRS) generally must collect federal tax, including penalties and interest, within 10 years of the date the tax was assessed. This 10-year period is referred to as the collection statute of limitations. Normally, the collection statute cannot be extended without the taxpayer’s written agreement. The IRS Restructuring and Reform Act of 1998 (RRA 98) § 3461(a) limits the use of collection statute extensions to allow them only in connection with an installment agreement or levy release. The reason for these exceptions is that a taxpayer may benefit from a release of a levy or from being able to pay the tax in installment payments past the original collection statute expiration date. In addition, RRA 98 § 3461(c) provides that collection statute extensions requested before the effective date of the law, January 1, 2000, that are not in connection with an installment agreement, will expire on the later of the 10-year collection statute of limitations date or December 31, 2002.

The overall objective of this audit was to determine if the IRS was complying with RRA 98 §§ 3461(a) and (c), as well as the Internal Revenue Code (I.R.C.), and internal procedures covering collection statute extensions obtained in connection with installment agreements before the effective date of the RRA 98.

Results

The IRS was not fully complying with RRA 98 §§ 3461(a) and (c) and with internal procedures. For example, some of the collection statute extensions were secured without also securing the related installment agreement or levy release as required by law and internal procedures. In addition, the IRS does not have a comprehensive plan to adequately identify, correct, and process the tax accounts that should have the collection statute expiration date reduced to December 31, 2002. As a result, the IRS may not have sufficient time to complete its review of collection statute expiration dates and to take appropriate collection action.

Moreover, the IRS’ review and approval processes for collection statute extensions and installment agreements were not adequate to ensure the computations were accurate and in compliance with laws and/or internal procedures.

Collection Statute Extensions Were Sometimes Secured Without Also Securing the Related Installment Agreement or Levy Release As Required

RRA 98 § 3461(a) limits the use of collection statute extensions to allow them only in connection with an installment agreement or levy release. This provision was effective for collection statute extensions requested after December 31, 1999. In addition, to help ensure that it would be compliant with the law, the IRS implemented its own procedures with this same requirement in August 1998.

We reviewed collection statute extensions that were recorded between January 2 and April 1, 2000, for 968 taxpayers and determined that the IRS was not in compliance with RRA 98 § 3461(a) or its own procedures for 102 taxpayers (11 percent). For the 102 taxpayers, the collection statute extensions were secured without also securing the related installment agreement or levy release as required. In most of the cases in which the case history was available, it appeared that the IRS and the taxpayer intended to establish an installment agreement; however, the installment agreement was never processed or approved.

Any collection activity performed after the original collection statute expiration date for the 16 extensions that may not be legally valid could violate these taxpayers’ rights.

These improper extensions may have occurred because the IRS approving officials did not always review and approve the collection statute extension and the installment agreement at the same time to ensure that the statute extension was based on an installment agreement or levy release. IRS procedures do not require statute extension approval requests to be submitted simultaneously with the approval requests for installment agreements.

Actions to Evaluate and Update Collection Statute Expiration Dates May Not Be Completed in Time to Fully Comply With the Law

RRA 98 § 3461(c) provides that collection statute extensions requested on or before December 31, 1999, that are not in connection with an installment agreement will expire on the later of the 10-year collection statute of limitations date or December 31, 2002. Although the IRS has identified some actions to implement this provision, it did not develop a comprehensive plan of action that considers all the appropriate issues. For example, to determine whether the collection statute extension was secured in connection with an installment agreement, the IRS plans to generate a report in October 2001 to provide a listing of accounts to be manually reviewed. To perform the manual review of these accounts, the IRS must obtain closed case histories. However, case histories may not be available or will be difficult to obtain depending on how long ago the collection statute extension was secured. In addition, the IRS has not determined the amount of resources that will be needed for the high volume of taxpayer accounts where the correct collection statute expiration date must be manually calculated.

Based on our analysis of the IRS’ database, approximately 56,000 taxpayer accounts must be manually reviewed between January and June 2002. After the manual review, the IRS plans to run a computer program in July 2002 to review the accounts and systemically adjust the collection statute expiration date if the collection statute extension was not recorded within 4 weeks of an installment agreement. However, the IRS’ criteria for the computer review may cause erroneous adjustments on taxpayer accounts for the following reasons:

The proposed dates for completion of the manual review may not provide enough time to properly review and correct all appropriate tax accounts. This may lead to incorrect collection statute expiration dates and insufficient time for the IRS to collect $289 million that may be collectible before the statutes expire. The IRS will have less than 6 months to collect remaining tax liabilities for accounts on which the computer program changes the collection statute expiration date to December 31, 2002. However, the IRS generally does not assign cases for collection action less than 6 months before the collection statute expires, so any remaining liability on these accounts may not be collected.

If the statute dates for the 56,000 accounts are incorrectly revised as a result of the July 2002 computer program, it could result in incorrect records and inequitable treatment of taxpayers. This could affect management’s ability to rely on the collection statute expiration date in the system and may lead to potential violations of taxpayers’ rights.

The delays in implementing RRA 98 § 3461(c) as well as the limitations of the IRS’ proposed methodology were caused by the lack of a comprehensive plan that factors in the appropriate time, availability of case documentation, and resources needed to determine the correct collection statute extension dates. If the IRS does not expedite the development of an adequate plan, it is at risk of not properly implementing this provision.

The Internal Revenue Service Could Not Provide the Documentation to Support Some of the Collection Statute Extensions Recorded on Its Computer Systems

In order to extend the statute of limitations period for collection, the IRS must obtain from the taxpayer an executed Tax Collection Waiver (Form 900), which specifies the tax period and the statutory extension date. IRS administrative procedures also require an IRS official to approve and sign the agreement once it has been signed by the taxpayer. However, the IRS could not provide adequate documentation to support 233 of the 968 (24 percent) collection statute expiration dates that were recorded on the taxpayer accounts we reviewed. In most of these cases, the IRS could not locate the collection statute extension forms or provided the carbon copy part of the Form 900 that does not include the taxpayer’s signature. In certain cases, the revised statute expiration date shown on the Form 900 was different from the date recorded on the taxpayer’s account.

Without the necessary documentation, the IRS cannot support the collection statute extensions for 206 taxpayer accounts. Taxpayer rights may be violated if these statute extensions are not valid and if the IRS collects money on these accounts after the collection statute has already expired. For the 27 accounts in which the date on the Form 900 does not match the date recorded on the taxpayer’s account, the risk is increased that at least $352,000 may not be collected because the IRS is relying on an incorrect collection statute expiration date.

The inability of the IRS to locate the documents needed to support the collection statute extensions appears to be caused by outdated guidance on properly storing the Forms 900. In addition, the cases in which the date on the Form 900 was different from the date recorded on the taxpayer’s account were due to errors made when the cases were input to the computer system.

Collection Statute Extensions and Installment Agreements Were Not Always Accurately Calculated for the Necessary Time and Payment Amount to Fully Satisfy the Tax Liability

We reviewed 761 tax modules, from 387 taxpayer accounts, to determine whether the collection statute extensions and installment agreements were computed to allow adequate time to fully pay the tax liability as required by IRS procedures and by law. These 761 tax modules were covered by installment agreements and did not have penalty or interest restrictions; therefore, the time needed for the installment payments to fully pay the liability could be computed using the IRS computer system. Of the 761 tax modules, 625 (82 percent) had collection statute extensions and/or installment agreements that were not computed in accordance with the law or IRS procedures.

For the 370 tax modules (222 taxpayers) included in the first two bulleted items above, the taxpayers will have a remaining liability of $1.8 million that the IRS will have to write off when the collection statutes expire. Further, for the 255 tax modules (154 taxpayer accounts) in which the collection statute expiration date was extended for too long a period, if any of these taxpayers default on their installment agreements, they would be subject to collection activity longer than if the collection statute expiration dates had been calculated according to the IRS’ internal procedures.

Additionally, in our computer extract of accounts with collection statute expiration dates extended in the first quarter of Calendar Year 2000 (1,866 tax modules), 62 tax modules were extended more than 5 years (the maximum time allowed under IRS procedures) past the 10-year collection statute expiration date.

The IRS’ procedures indicate that its computer system should be used to assist in computing the amount of time required to fully satisfy a liability for each tax module, including accruals of penalties and interest, as long as the tax module does not have penalties and interest restrictions. However, employees were not always following the procedures. None of the 761 tax modules involved restrictions, so the IRS’ system could have been used to systemically calculate the correct full payment date for each tax module. Moreover, the required documents are not always provided simultaneously to IRS managers so that they may properly review and approve collection statute extensions and the associated installment agreements. Without reviewing the computations for the full payment dates, managers do not have a basis for approving the collection statute extensions or installment agreements.

Summary of Recommendations

We recommend that the Commissioners of the Small Business/Self-Employed (SB/SE) and the Wage and Investment (W&I) Divisions clarify procedures to ensure that collection statute extensions are approved concurrently with a related installment agreement or levy release. Procedures should also be updated based on the IRS reorganization to reflect the new locations for storing signed collection statute forms. SB/SE Division and W&I Division management should review the taxpayer accounts that we identified as inaccurate or that may not comply with the law and take appropriate action to correct the collection statute expiration dates. The IRS should develop a comprehensive plan for implementing the provisions of RRA 98 § 3461(c) and for taking actions to collect the remaining tax liabilities before the statutes expire.

Management’s Response: The IRS Commissioner agreed with the recommendations in the report and plans to take appropriate corrective action. The corrective actions planned include training for IRS employees and managers on computing collection statute extension and installment agreement time periods, revising the conditions for approval of these documents, and updating the requirements for their storage. The IRS will also take additional actions to implement the provisions of RRA 98 § 3461(c) and develop a plan to address the collection potential from accounts with reduced collection statute expiration dates. Management’s complete response to the draft report is included as Appendix V.