The Internal Revenue Service Does Not Have Controls Over
Manual Levies to Protect the Rights of Taxpayers
June 2003
Reference Number: 2003-40-129
This report has cleared the Treasury
Inspector General for Tax Administration disclosure review process and
information determined to be restricted from public release has been redacted
from this document.
June
26, 2003
MEMORANDUM FOR
COMMISSIONER, SMALL BUSINESS/SELF-EMPLOYED DIVISION
FROM: Gordon C. Milbourn III /s/ Gordon C.
Milbourn III
Assistant Inspector General for Audit (Small Business and
Corporate Programs)
SUBJECT: Final Audit Report - The Internal Revenue
Service Does Not Have Controls Over Manual Levies to Protect the Rights of
Taxpayers (Audit # 200240067)
This
report presents the results of our review to determine whether the Internal
Revenue Service (IRS) has complied with 26 United States Code (U.S.C.) Section
(§) 6330, Notice and Opportunity for Hearing Before Levy. The IRS Restructuring and Reform Act of 1998
(RRA 98) requires the IRS to notify taxpayers at least 30 days before
initiating any levy action to give taxpayers an opportunity to formally appeal
the proposed levy. Specifically, we
determined whether the IRS has sufficient controls in place to ensure that
taxpayers are advised of their right to a hearing at least 30 days prior to
levy action. This is the fifth annual
report the Treasury Inspector General for Tax Administration (TIGTA) has issued
in compliance with the RRA 98 to determine whether the IRS is complying with
legal guidelines over the issuance of levies.
Prior
years’ TIGTA reports have recognized that the IRS has implemented tighter
controls over the issuance of levies.
This was due primarily to the development of systemic controls in both
the Automated Collection System (ACS) and the Integrated Collection System
(ICS) to prevent a levy from being generated unless there were at least 30 days
between the date taxpayers received the notice of their appeal rights and the
date of the proposed levy. However, last year’s review did identify a flaw in
the systemic control that could allow revenue officers to alter dates in the
history section of the ICS. This type
of change could circumvent the systemic control designed to protect the
taxpayer’s appeal rights. Accordingly,
we recommended that the IRS strengthen the systemic control. During this year’s review, we confirmed that
the IRS had implemented our recommendation and that systemic controls are now
effectively ensuring that taxpayers are informed of their appeal rights at
least 30 days prior to receiving a systemically generated levy.
While the IRS has done an
effective job of implementing controls over levies generated by the ACS and
ICS, additional controls are needed over manual levies issued by revenue
officers. Most levies are systemically
generated by the ACS and ICS and are subjected to systemic controls embedded in
the two systems. However, the ACS must
issue manual levies in some circumstances.
To protect the taxpayers’ rights, all of these are reviewed and approved
by managers prior to the levy being issued.
Conversely, revenue officers are authorized to issue manual levies on
any case. However, manual levies issued
by revenue officers are not required to be reviewed and approved by a manager,
which significantly increases the risk of taxpayers not having their appeal
rights properly protected. As a result,
we recommended that management review and approve all manual levies issued by
revenue officers to ensure that taxpayers are properly advised of their rights.
Management’s Response: While IRS
management agreed that taxpayers’ rights must be protected and indicated that
they believe they are meeting that challenge, they did not agree with our
recommendation to have group managers approve all manual levies prepared by
revenue officers. They stated this may
delay enforcement action and expressed concern about the impact on field
employees that further increasing the oversight of enforcement action could
have.
Alternatively, the IRS
indicated that they believe the errors evidence a training issue. To help address these concerns and reinforce
the procedures, the IRS will issue a memorandum in July 2003 reminding revenue
officers that all notice requirements must be satisfied before issuing a manual
levy. In addition, it will recommend
the requirements be discussed during group meetings. A copy of management’s complete response to the draft report is
included as Appendix V.
Office of Audit Comment: We
recognize the IRS’ caution in implementing any managerial action that it
believes may inhibit effective enforcement action by revenue officers. However, we also recognize the importance of
the RRA 98 provision requiring that taxpayers be properly advised of their
appeal rights prior to asset seizure through levy action. Hopefully, the IRS’ intent to issue a
memorandum reminding revenue officers that all notice requirements must be
satisfied before a manual levy is issued will suffice to ensure taxpayer rights
are adequately safeguarded. While we
believe our recommendation is worthwhile, we do not intend to elevate our
disagreement to the Secretary of the Treasury.
However, we will continue to closely monitor this issue during future
mandatory reviews of the IRS’ collection activities.
Copies of this
report are also being sent to the IRS managers who are affected by the report
recommendation. Please contact me at
(202) 622-6510 if you have questions or Michael R. Phillips, Assistant
Inspector General for Audit (Wage and Investment Income Programs), at (202)
927-0597.
The Internal Revenue Service Has Controls Over Systemic Levies
to Protect Taxpayers’ Appeal Rights
Appendix I – Detailed Objective, Scope, and Methodology
Appendix II – Major Contributors to This Report
Appendix III – Report Distribution List
Appendix IV – Outcome Measures
Appendix V – Management’s Response to the Draft Report
When taxpayers refuse to pay delinquent taxes, the Internal
Revenue Service (IRS) has authority to work directly with financial
institutions and other third parties to seize taxpayers’ assets. This action is commonly referred to as a
“levy.” The IRS Restructuring and
Reform Act of 1998 (RRA 98) requires the IRS to notify taxpayers at least 30
days before initiating any levy action to give taxpayers an opportunity to
formally appeal the proposed levy.
The RRA 98 also requires the Treasury Inspector General for Tax Administration (TIGTA) to annually verify that the IRS is complying with the new provisions. This is the fifth year that the TIGTA has evaluated the controls over levies.
Two operations within the IRS issue levies to collect delinquent taxes:
· The Automated Collection System (ACS), where customer service representatives contact delinquent taxpayers by telephone to collect unpaid taxes and secure tax returns.
· The Collection Field function (CFf), where revenue officers contact delinquent taxpayers in person as the final step in the collection process. Field contact becomes necessary when the tax matter is not resolved by the ACS. Delinquent cases that are assigned to revenue officers in IRS field offices are controlled and monitored with the Integrated Collection System (ICS).
Both operations issue two types of levies: systemically generated levies and manual levies.
Previous TIGTA reviews have recognized that the IRS has significantly improved controls over the issuance of systemically generated levies. However, last year’s review did identify a flaw in the systemic control that could allow revenue officers to alter dates in the history section of the ICS. This type of change could circumvent the systemic control designed to protect the taxpayer’s appeal rights. Accordingly, we recommended that the IRS strengthen the systemic control. During this year’s review, we confirmed that the IRS had implemented our recommendation and that systemic controls are now effectively ensuring that taxpayers are informed of their appeal rights at least 30 days prior to receiving a systemically generated levy.
We performed this audit in the Small Business/Self-Employed (SB/SE) and the Wage and Investment (W&I) Divisions of the IRS from October 2002 to March 2003. The audit was conducted in accordance with Government Auditing Standards. Detailed information on our audit objective, scope, and methodology is presented in Appendix I. Major contributors to the report are listed in Appendix II.
ACS systemic controls ensure that taxpayers receive timely notification of their appeal rights
The first step in the collection process involves mailing taxpayers a series of notices asking for payment of delinquent taxes. If taxpayers do not comply, the majority of the accounts are forwarded to 1 of the 14 ACS Call Centers where customer service representatives contact taxpayers by telephone to resolve their accounts. If accounts cannot be resolved over the telephone, and if sufficient information is available, the ACS Call Center has the authority to issue levies to collect the accounts from third-party sources.
Virtually all levies issued by ACS Call Centers are generated through an automated system. This automated system contains a control, developed to comply with the RRA 98, that compares the date the taxpayer was notified of the pending levy with the date requested for the actual levy. If there are fewer than 30 days between the dates, the system will not generate a levy. This control effectively ensures that taxpayers have been notified at least 30 days prior to the levy and have been informed of their appeal rights for any systemically generated levy.
We tested the effectiveness of the systemic control by reviewing a random sample of 20 ACS cases containing levies issued during 2002. All 20 taxpayers had been timely notified of their appeal rights. During fieldwork, we also tested the control by requesting a levy on a live case for which less than 30 days had elapsed since the final notice date. The system would not issue the levy. Based on these results, we concluded that the systemic controls in the ACS Call Centers effectively protect taxpayers’ appeal rights.
ICS systemic controls ensure that taxpayers receive timely notification of their appeal rights
Many times, notices and telephone calls to taxpayers do not successfully resolve delinquent accounts, and cases have to be assigned to revenue officers in CFf offices for face-to-face contact with taxpayers. Cases assigned to revenue officers are controlled on the ICS. Revenue officers use the ICS to record collection activity on delinquent cases and generate certain enforcement actions such as levies. Again, revenue officers must give taxpayers 30 days notice and advise taxpayers of their appeal rights before initiating any levy.
The IRS installed a control in the ICS similar to the control in the ACS that prevents a levy from being issued without taxpayers having received 30 days notice and their appeal rights. If fewer than 30 days have elapsed since the final notice date, the system will not generate a levy.
We tested the effectiveness of the systemic control by reviewing a random sample of 20 ICS cases containing levies issued during 2002. All 20 of the taxpayers had received notification of their appeal rights at least 30 days prior to the levy. Next, we tested the control by attempting to generate a levy on a live case for which less than 30 days had elapsed since the final notice date. Systemic controls within the ICS prevented the levy from being generated. Finally, we tested the systemic control by attempting to alter critical dates in the ICS history section. We could not alter the dates to generate the levy. As a result, we concluded that the systemic controls over levies issued by revenue officers in CFf offices functioned as designed and ensured taxpayers’ appeal rights are protected.
While the IRS has done an effective job of implementing controls over levies generated by the ACS and the ICS, additional controls are needed over manual levies issued by revenue officers.
The second type of levy that both ACS employees and revenue officers can issue is the manual levy. That is, the levy is issued outside the automated processes within the ACS and ICS and is not subject to the systemic controls.
Although the ACS Call Centers primarily issue levies systemically, ACS employees must issue manual levies under circumstances such as jeopardy situations and levies on individual retirement accounts. All manual levies issued by the ACS Call Centers must be reviewed and approved by a manager prior to the levy being issued. We consider this managerial review to be an effective control.
Revenue officers issue levies systemically through the ICS in virtually all cases. However, revenue officers are also authorized to issue a manual levy on any case. The difference is that manual levies issued by revenue officers are not required to be reviewed and approved by a manager. We believe there is a high risk associated with these manual levies because the IRS has not implemented any controls to ensure that taxpayers’ appeal rights are protected as required by the RRA 98.
The IRS does not specifically track manual levies, so we were unable to determine the number of manual levies that were issued by revenue officers. However, we believe that revenue officers issued relatively few of them.
We analyzed (using computerized queries) the ICS case inventory of delinquent taxpayers assigned to revenue officers and attempted to identify any manual levies issued during the 20-month period January 2001 through August 2002. Our analysis identified 114 instances of revenue officers issuing manual levies. Further analysis of these 114 taxpayer cases showed that revenue officers improperly issued manual levies to seize the assets of 8 taxpayers who had not been notified of their appeal rights. Because manual levies issued by revenue officers are not subject to either the systemic controls built into the ICS or any other control such as managerial review and approval, these eight taxpayers were denied the appeal rights required by the RRA 98.
Not offering appeal rights to taxpayers prior to issuing levies is a potential Section 1203 violation of the RRA 98 and could result in the revenue officers being terminated for misconduct. Accordingly, we have referred the cases to the TIGTA Office of Investigations for further evaluation.
1. The Commissioner, SB/SE Division, should develop and implement controls over manual levies issued by revenue officers working in IRS field offices to ensure that taxpayers are properly offered their appeal rights. At a minimum, the SB/SE Division should implement the same policy that is in effect in ACS Call Centers (i.e., manual levies should be reviewed and approved by a manager).
Management’s Response: IRS management stated that they believe the recommendation is too burdensome given the purpose of a manual levy. They acknowledged that they issued a levy before notifying the taxpayers of their rights in the eight cases we identified. However, IRS management pointed out that the taxpayers still have a right to a hearing. In addition, they stated that after being levied, all taxpayers can use the Collection Appeals Program to appeal a levy.
Alternatively, the IRS stated they believe that the errors evidence a training issue. To help address these concerns and reinforce the procedures, the IRS will issue a memorandum in July 2003 reminding revenue officers that all notice requirements must be satisfied before issuing a manual levy. In addition, it will recommend the requirements be discussed during group meetings.
Office of Audit Comment: We recognize the IRS’ caution in implementing any managerial action that it believes may inhibit effective enforcement action by revenue officers. However, we also recognize the importance of the RRA 98 provision requiring that taxpayers be properly advised of their appeal rights prior to asset seizure through levy action. Hopefully, the IRS’ intent to issue a memorandum reminding revenue officers that all notice requirements must be satisfied before a manual levy is issued will suffice to ensure taxpayer rights are adequately safeguarded. We will continue to closely monitor this issue during future mandatory reviews of the IRS’ collection activities.
Appendix I
Detailed Objective, Scope,
and Methodology
The overall objective of this audit was to determine whether the Internal Revenue Service (IRS) has complied with 26 United States Code (U.S.C.) Section (§) 6330, Notice and Opportunity for Hearing Before Levy. Specifically, we determined whether the IRS had sufficient controls in place to ensure that taxpayers were advised of their right to a hearing at least 30 days prior to any levy action. We performed the following tests to accomplish this objective:
I.
Determined whether the IRS
implemented sufficient controls and procedures to ensure that taxpayers were
advised of their right to a hearing at least 30 days prior to any levy action.
A. Performed a walk-through of one Automated Collection System
(ACS) Call Center and one Collection Field function office to evaluate
procedures and controls over due process notices.
B. Confirmed during the walk-through whether systemic controls
in the ACS and the Integrated Collection Systems (ICS) prevented levies from
being issued less than 30 days from the final notice date.
C. Selected a random sample of 20 ACS and 20 ICS levies issued
during 2002 and analyzed Master File transcripts, ACS records, and ICS records
to verify that taxpayers were advised of their right to a hearing at least 30
days prior to any levy action. The
sample of 20 ACS cases we reviewed was randomly selected from a population of
870,126 cases containing levies that were on the ACS open case database as of
December 2002. The sample of 20 ICS
cases we reviewed was randomly selected from a population of 128,372 cases
containing levies that were either open on the ICS database as of December 2002
or closed within the prior 6 months.
II.
Determined whether manual
levies issued by revenue officers in IRS field offices complied with legal
guidelines in 26 U.S.C. § 6330.
A. Analyzed the ICS database containing delinquent accounts
assigned to revenue officers working in field offices and identified 114 manual
levies issued from January 2001 through August 2002.
B. Reviewed Master File transcripts and ICS records for the
114 manual levies identified to verify that taxpayers were advised of their
right to a hearing at least 30 days prior to levy action.
Appendix II
Major Contributors to This Report
Michael R. Phillips, Assistant Inspector General for Audit
(Wage and Investment Income Programs)
Gary Young, Acting Director
Stephen Root, Audit Manager
Tom Cypert, Senior Auditor
Charles Ekunwe, Senior Auditor
Cari Fogle, Senior Auditor
Albert Greer, Auditor
Appendix III
Commissioner N:C
Deputy Commissioner for Services and Enforcement N:DC
Commissioner, Wage and Investment Division W
Deputy Commissioner, Small Business/Self-Employed Division S
Deputy Commissioner, Wage and Investment Division W
Director, Compliance S:C
Director, Compliance W:CP
Director, Strategy and Finance W:S
Chief Counsel CC
National Taxpayer Advocate
TA
Director, Legislative Affairs CL:LA
Director, Office of
Program Evaluation and Risk Analysis
N:ADC:R:O
Office of Management Controls N:CFO:AR:M
Audit Liaisons:
Chief, Customer Liaison S:COM
Program/Process
Assistant Coordinator, Wage and Investment Division W:HR
Appendix IV
This appendix presents detailed information on the measurable impact that our recommended corrective action will have on tax administration. This benefit will be incorporated into our Semiannual Report to the Congress.
Type and Value of Outcome Measure:
· Taxpayer Rights and Entitlements – Actual; 8 taxpayers did not receive notice of their appeal rights before the Internal Revenue Service (IRS) took levy action (see page 4).
Methodology Used to Measure the Reported Benefit:
We analyzed (using computerized queries) the Integrated Collection System (ICS) case inventory of delinquent taxpayers assigned to revenue officers and identified 114 manual levies issued from January 2001 through August 2002. Since the IRS does not monitor or record the use of manual levies, we were unable to determine the total number of manual levies actually issued by revenue officers working in field offices. Since the population of manual levies is unknown, the findings of our case review are not statistically valid and cannot be projected.
Appendix V
The response was removed due to its size. To see the complete response, please go to the Adobe PDF version of the report on the TIGTA Public Web Page.