TREASURY INSPECTOR GENERAL
FOR TAX ADMINISTRATION
The Internal Revenue Service Does Not Effectively Use the Trust Fund Recovery Penalty as a Collection Enforcement Tool
Reference No. 2001-30-014
The Collection Field function (CFf) in the Internal Revenue Service (IRS) is responsible for collecting tax liabilities owed by taxpayers. One of the CFf’s highest work priorities is trust fund liability, which includes those taxes withheld from employees’ wages. Employees who have taxes withheld from their wages expect the withheld funds to be properly deposited and credited to their accounts.
The CFf has a variety of collection tools and techniques for its use in collecting taxes, including the Trust Fund Recovery Penalty (TFRP) Program. The Internal Revenue Code provides for this penalty to be assessed against responsible corporate officers for their willful failure to collect and remit trust fund taxes to the government. Although the CFf should consider other options for collecting the taxes owed, the CFf should make the decision to assess the penalty no later than 6 months after the account is received. By statute, the IRS must make this assessment within 3 years of the original trust fund tax assessment against the corporation.
The penalty should be assessed against trust fund "repeaters," which are those taxpayers with a certain number of delinquent accounts exceeding a specified dollar amount. The TFRP investigative process includes interviewing employees of the corporation, reviewing bank and corporate records, and identifying signatures on the tax returns and payroll checks. Once the CFf assesses the penalty, the IRS can then pursue collection actions against the responsible officers.
The overall objective of our review was to determine whether the TFRP is effectively used as an enforcement tool to encourage voluntary compliance. To accomplish our objective, we evaluated management direction and reviewed a judgmental sample of 82 trust fund accounts that had been assigned to the CFf.
The CFf does not effectively use the TFRP as a Collection tool. The 82 trust fund cases in our sample were assigned to the CFf as of September 1998 and, at that time, the taxpayers owed $2,940,920. While some money has been collected on these cases, the taxpayers generally continued to incur additional tax liabilities. As of June 2000, they owed $4,961,703. The status of these accounts was as follows (percentages are rounded):
The Collection Field Function Did Not Properly Complete Investigations and Make Decisions to Timely Assess the Trust Fund Recovery Penalty
Our review of the 82 trust fund cases showed that, in 64 cases, the CFf did not assess the penalty. In 58 (91 percent) of the 64 cases, the CFf did not properly complete the investigative process or assess the penalty when appropriate. In the other 18 of the 82 cases, the CFf assessed the penalty but in 17 cases (94 percent) did not make the decision within the required 6-month time frame. The average time to recommend this assessment was 18 months after assignment to the CFf. Eleven of these 17 cases have since been written off as uncollectible. Overall, the CFf did not follow its procedures for timely deciding whether to assess the TFRP in 75 (91 percent) of the 82 cases. All of the 75 cases involved taxpayers who met the CFf criteria as repeaters.
In 32 (39 percent) of the 82 cases, the CFf initiated an installment agreement, which delayed the TFRP investigation and assessment process. However, IRS guidelines state these agreements with repeater taxpayers are normally not appropriate. In addition, IRS procedures do not prevent both accepting an agreement and assessing the penalty to collect the taxes owed. Yet the CFf assessed the TFRP after accepting an agreement in only 7 of these 32 cases. These 7 were assessed because the taxpayer defaulted (i.e., did not make payments) or the statutory period for assessment was about to expire.
We also had other concerns with the investigative and assessment process. In 3 of the 18 cases in which the CFf assessed the penalty, it did not assess the penalty against all responsible officers. In addition, in 6 of the 64 cases, the CFf did not assess the TFRP because the total dollar liability was less than the specified threshold for assessment. However, in three of these six cases, the CFf did not consider returns that were due but had not been filed. Liabilities on these unfiled returns could have increased the total liability over the threshold for assessing the TFRP.
Timely CFf actions help maximize the IRS’ ability to collect delinquent tax liabilities. When assessments are not made timely against responsible officers, the financial ability of the officers could deteriorate, thereby decreasing the IRS’ chances to collect the taxes due. A General Accounting Office (GAO) report entitled Unpaid Payroll Taxes, Billions in Delinquent Taxes and Penalty Assessments Are Owed (GAO/AIMD/GGD-99-211) was issued in August 1999. The GAO reported that the IRS collected very little of the TFRP liability. The fact that the CFf does not assess the penalty timely could be part of the cause for the low collection rate.
Reasons for the CFf’s limited use of the TFRP include:
Summary of Recommendations
We recommend that Collection function management reassess the time frames for making the TFRP decision and provide clear instructions on using the TFRP and installment agreement procedures on repeater trust fund cases. Use of the TFRP as an effective Collection tool needs to be emphasized at all management levels, and management reviews need to be conducted on these priority cases. In a separate audit report entitled The Collection Quality Measurement System’s Process Can Be Enhanced (Reference Number 2000-30-161, dated September 27, 2000), we recommended that this quality review process include the CFf’s decision to assess the TFRP.
Management's Response: Management's response was due on October 25, 2000. As of October 30, 2000, management had not responded to the draft report.