TREASURY INSPECTOR GENERAL

FOR TAX ADMINISTRATION

Full Compliance With Requirements for Notifying Taxpayers of Federal Tax Lien Filings Has Not Yet Been Achieved

August 2001

Reference No. 2001-10-127

Executive Summary

When initial contacts by the Internal Revenue Service (IRS) do not result in the successful collection of unpaid tax, the IRS has the authority to attach a claim to the taxpayer’s assets for the amount of unpaid tax liabilities. This claim is referred to as a Federal Tax Lien.

Since January 19, 1999, the IRS has been required by 26 U.S.C. § 6320 to notify taxpayers that a Notice of Federal Tax Lien (NFTL) has been filed. The notice must be provided to the taxpayer within 5 business days after a NFTL has been filed and must include an explanation of the taxpayer’s right to request a hearing within the 30 calendar days following the 5 business days. The Treasury Inspector General for Tax Administration (TIGTA) is required to determine annually whether NFTLs filed by the IRS comply with the legal guidelines in 26 U.S.C. § 6320. In Fiscal Year (FY) 1999, we reported that 33 percent of the lien notices reviewed involved potential violations of taxpayer rights. In FY 2000, we reported that the IRS had improved compliance; only 4 percent of the lien notices reviewed did not meet legal requirements.

This is the third annual audit to determine if the NFTLs filed by the IRS comply with legal requirements set forth in 26 U.S.C. § 6320. The audit also included a review of the IRS’ own related internal guidelines when filing NFTLs. To accomplish the objective, we reviewed a nationwide statistical sample of 167 lien notices requested through the IRS’ Automated Lien System (ALS), the Automated Collection System, and the Integrated Collection System between January 1 and August 31, 2000.

Results

The IRS has not yet achieved full compliance with the law and its own internal guidelines. A review of 167 lien notices identified 14 cases (8 percent) with potential legal violations of taxpayers’ rights. We estimate that similar taxpayer rights could have been potentially affected in 11,507 lien notifications from January 1 to August 31, 2000. In addition, we identified 58 cases (35 percent) in which IRS employees did not follow internal guidelines. Four cases involved both legal and internal guideline violations.

The IRS performed a similar review of lien notices filed in four offices during the last half of FY 2000, and identified instances of noncompliance with both legal and internal guidelines similar to those in this report. However, the IRS report did not address specific causes or any actions planned to prevent similar problems from occurring, as the TIGTA had recommended in the FY 2000 report.

The Internal Revenue Service Did Not Always Follow Legal Provisions and Its Own Guidelines for Filing Notices of Federal Tax Lien

To achieve full compliance with the law and related internal guidelines, the IRS must mail all notices timely, notify taxpayers and their representatives of lien filings, process undelivered notices correctly, properly document actions taken in each case, and maintain supporting documentation of actions taken.

If the taxpayer is not notified that a lien has been filed, he or she might not be aware of the right to appeal. In addition, delays in mailing the notices can reduce the time taxpayers have to request a hearing to less than the 30-day period allowed by the law. These errors could result in potential violations of the taxpayer’s rights, particularly when the taxpayer appeals the filing of the lien and the IRS denies the request for the appeal.

Legal provisions

The IRS issued notices informing taxpayers that a NFTL had been filed in 163 of 167(98 percent) cases we sampled in the review. For the remaining 4 cases (2 percent), due to employee error, the notices were either not mailed to the taxpayer, the taxpayer’s spouse, or to the taxpayer’s business partners; or were not mailed to the taxpayer’s or spouse’s last known address. The IRS has substantially automated the lien notification process. However, certain information must be manually input into the ALS when requesting the lien due process notices, including the names of business partners and newfound addresses.

In 135 of 145 (93 percent) cases reviewed where the IRS provided proof of mailing, the notices were mailed within 5 business days after the NFTL was filed. For the remaining 10 cases (7 percent), the notices were late because they were not printed timely or were not mailed timely. This condition occurred during a time when the IRS had an unusual increase in the volume of liens filed during a 3-month time period.

Internal guidelines

In 58 of 167 (35 percent) cases reviewed, the IRS did not always follow its internal guidelines when issuing lien notices. In 2 of the 58 cases, there were multiple violations of the internal guidelines.

Lien due process compliance review

In response to the TIGTA’s FY 2000 report, the IRS modified its lien due process compliance review. The review was modified to include analyses to determine if the IRS notified business partners, spouses, and taxpayers’ representatives of the filing of a NFTL, and to determine if undelivered mail was timely processed. The revised review provides an effective method to measure the IRS’ compliance with the law and its own internal guidelines. However, the IRS did not address either the specific causes of why established procedures were not followed or the planned actions to prevent similar problems, as the TIGTA had recommended in the FY 2000 report.

Summary of Recommendations

We recommend that the Commissioner, Small Business and Self-Employed (SB/SE) Division, take appropriate actions to improve the effectiveness of the lien compliance review and to correct the potential legal violations that the TIGTA identified in this audit.

Management’s Response: SB/SE management agreed to improve the lien compliance review by focusing on the cause of noncompliance for lien procedures. To improve compliance, SB/SE management will follow up with field offices by conducting training sessions for the lien unit managers. SB/SE management also agreed to consult with Chief Counsel to discuss any actions needed to correct the potential legal violations identified in this audit.