Fiscal
Year 2005 Statutory Review of Compliance With Lien Due Process Procedures
June 2005
Reference Number: 2005-30-095
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
15, 2005
MEMORANDUM FOR
COMMISSIONER, SMALL BUSINESS/SELF-EMPLOYED DIVISION
FROM: Pamela J. Gardiner /s/ Pamela J. Gardiner
Deputy Inspector General for
Audit
SUBJECT: Final Audit Report - Fiscal Year 2005
Statutory Review of Compliance With Lien Due Process Procedures (Audit # 200430026)
This
report presents the results of our review of the Internal Revenue Service’s
(IRS) compliance with lien due process procedures. The overall objective of this review was to
determine whether the Notices of Federal Tax Lien (NFTL) filed by the IRS
complied with legal requirements set forth in Internal Revenue Code Section
(I.R.C. §) 6320.
The
IRS attempts to collect Federal taxes due from taxpayers by sending letters,
making telephone calls, and meeting face to face with taxpayers. When initial contacts by the 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, called a Federal Tax Lien, for the
amount of unpaid tax liabilities. The
IRS files an NFTL, which notifies people that a lien exists. Since January 19, 1999, I.R.C. § 6320 has
required the IRS to notify taxpayers in writing within 5 business days of the
filing of an NFTL.
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
I.R.C. § 6320. This is the seventh annual
audit performed on the IRS’ compliance with the law and its own related
internal guidelines when filing NFTLs.
In
summary, we determined the IRS did not completely comply with the law. Our review of a statistically valid sample of
150 NFTLs identified 7 NFTLs (4.67 percent) for which the IRS correctly mailed
the lien notices; however, it did not mail the lien notices timely, as required
by I.R.C. § 6320. In addition, for
another 35 NFTLs (23.3 percent), we could not determine if the IRS complied
with the law because the IRS could not provide proof or legible proof of timely
mailing. During the past fiscal year,
the IRS changed procedures for retaining certified mail listings, which
contributed to this problem. Finally, in
11 (7.33 percent) of the 150 NFTLs reviewed, the IRS did not follow its own
internal guidelines when issuing lien notices, including the guidelines for
notifying taxpayer representatives and resending notices when they are returned
as undeliverable.
As corrective action to a prior TIGTA
report, the IRS has partially implemented systemic changes to improve the
notification of taxpayer representatives; however, the scheduled completion
date for the enhancement was postponed from its targeted date of the middle of Fiscal
Year 2005 and now is scheduled for completion during Fiscal Year 2008.
We recommended the Director,
Collection, Small Business/Self-Employed (SB/SE) Division, consult with the
Office of Chief Counsel to identify any actions necessary to correct the
potential legal violations we identified in this audit. Also, we recommended the Director, Campus
Compliance Services, SB/SE Division, ensure effective controls and adequate
procedures are implemented for transferring, storing, and safeguarding certified
mail listings at the Centralized Case
Processing function.
Management’s Response: SB/SE
Division management agreed with our recommendations and already has completed
the corrective actions. SB/SE Division
management consulted with the Office of Chief Counsel to identify any actions
necessary to correct the potential legal violations. In addition, they reviewed the process for
controlling the Certified Mail Listings (Form 3877). While they complete the transition to the centralized
lien processing, management will list any remaining Forms 3877 on Document
Transmittals (Form 3210), which require acknowledgment of receipt of listed
documents. Management’s complete
response to the draft report is included as Appendix VII.
Copies of this
report are also being sent to IRS officials who are affected by the report
recommendations. Please contact me at
(202) 622-6510 if you have questions or Richard Dagliolo, Acting Assistant
Inspector General for Audit (Small Business and Corporate Programs) at (631) 654-6028.
Lien Notices
Were Not Always Mailed Timely and Proof of Mailing Could Not Be Located
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
– Synopsis of the Internal Revenue Service Collection and Lien Filing Processes
Appendix VII
– Management’s Response to the Draft Report
The Internal Revenue Service (IRS) attempts to collect Federal taxes due from taxpayers by sending letters, making telephone calls, and meeting face to face with taxpayers. When initial contacts by the 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. The IRS files a Notice of Federal Tax Lien (NFTL), which notifies people that a lien exists.
Since January 19, 1999, Internal Revenue Code Section (I.R.C. §) 6320 has required the IRS to notify taxpayers in writing within 5 business days of the filing of an NFTL. The IRS is required to notify taxpayers the first time an NFTL is filed for each tax period. The Notice of Federal Tax Lien Filing and Your Right to a Hearing Under IRC 6320 (lien notice) is used for this purpose and advises taxpayers they have 30 calendar days, after that 5-day period, to request a hearing with the IRS Appeals function. The lien notice indicates the date this 30-day period expires.
The law also requires that the lien notice explain, in simple terms, the amount of unpaid tax, administrative appeals available to the taxpayer, and the provisions of the law and procedures relating to the release of liens on property. The lien notice must be given in person, left at the taxpayer’s home or business, or sent certified or registered mail to the taxpayer’s last known address.
A synopsis of the IRS collection and lien filing processes is included in Appendix V. A description of IRS computer systems used in the filing of liens is included in Appendix VI.
The IRS is filing an increasing number of NFTLs to protect the Federal Government’s interest. The number of NFTLs filed increased significantly from 287,517 in Fiscal Year (FY) 2000 to 544,316 in FY 2003. In FY 2004, the number dropped slightly to 534,392. Figure 1 shows the number of NFTLs filed in the last 5 fiscal years.
Figure 1 was removed due to its size. To seeFigure 1, please go to the Adobe PDF version of the report on the TIGTA Public Web Page..
The Treasury Inspector General for Tax Administration (TIGTA) is required to determine annually whether NFTLs filed by the IRS comply with the legal guidelines set forth in the law. This review included a site visit to the Compliance Collection Policy function within the IRS Small Business/Self-Employed (SB/SE) Division Headquarters in New Carrollton, Maryland. We performed our audit work during the period August 2004 through March 2005.
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.
This is the seventh annual audit performed to determine if the IRS complied with the legal requirements of I.R.C. § 6320. In the prior years, we reported that the IRS had not yet achieved full compliance with the law and its own internal guidelines. Figure 2 shows that, in FYs 2000, 2001, 2002, 2003, and 2004, we reported 4, 8, 9, 4, and 5 percent, respectively, of the NFTLs reviewed involved potential violations of taxpayer rights.
Figure 2 was removed due to its size. To seeFigure 2, please go to the Adobe PDF
version of the report on the TIGTA Public Web Page.
Our review of a statistically
valid sample of 150 NFTLs identified 7 NFTLs (4.67 percent) for which the IRS correctly mailed the lien
notices; however, it did not mail the lien notices timely, as required
by I.R.C. § 6320. For the 7 NFTLs, lien notices were not mailed
within 5 business days after the day of the filing of the liens. The notices were mailed from 1 to 9 days
late. We estimate 22,604 NFTL notices prepared from
August 1, 2003, through July 31, 2004, could have been mailed late. See Appendix IV for details.
Although we could not identify the
specific reasons for the delays, employees did not use the information on the Automated
Lien System (ALS) to prepare the required notices timely. Therefore, there were delays in sending lien
notifications to taxpayers. Delays in mailing the
lien notices can reduce the time the taxpayers have to request a hearing to
less than the 30-day period allowed by the law.
These errors could result in taxpayers not being able to appeal the lien
filing in court, although the IRS still provides a process for the taxpayer to
appeal within the IRS.
Timeliness
of lien filing determinations could not always be verified
We could not determine if the IRS complied with the law
in another 35 of the 150 NFTLs (23.3 percent) because SB/SE Division management
either could not provide proof of timely mailing or a legible copy of the
certified mailing list. IRS procedures
require the retention of the date-stamped copy of the certified mail listings
for 10 years after the end of the processing year. Without the dated proof of mailing, the IRS
may be unable to protect itself against a taxpayer’s claim that he or she did
not receive timely notice of the lien filing and was unaware a Federal Tax Lien
existed against his or her assets.
The process for mailing the notices and obtaining the date stamp on the
certified mail listings varies among offices.
Some ALS units take the certified mail listings and notices directly to
the United States Postal Service for mailing while others rely on the IRS
Mailroom function to process the mail and obtain a date stamp on the listings. Beginning in FY 2004, the listings were shipped
for storage to the Centralized Case Processing (CCP) function at the Cincinnati
Campus where they were placed in boxes.
However, Cincinnati Campus management was unable to locate all of the
cases in our sample. Also, some
certified mail listings from one office were lost during either transport to or
within the CCP function. This new
process significantly increased the number of listings that the IRS could not
locate to verify the mailing of the NFTLs.
Last year’s audit report indicated that management could locate all but
3.85 percent of the cases in our sample.
The IRS National Headquarters NFTL compliance review identified a similar
potential violation of the law
The IRS annually performs a Compliance Lien Collection Due Process Review
to ensure IRS procedures are being followed and taxpayers’ rights are being
protected. The review includes analyses
to determine if the IRS timely notified taxpayers, business partners, spouses,
and taxpayer representatives of the filing of an NFTL and timely processed
undelivered mail.
In May 2004, the IRS completed its FY 2003 review of NFTLs filed from
January through August 2003. For one
notice, IRS management could not determine if the notice was mailed timely
because the certified mail listing was not retained. SB/SE Division management attributed this to employee
error. As of March 8, 2005, the IRS had
taken appropriate corrective action.
The Director, Collection, SB/SE Division, should:
1. Consult with the Office of Chief Counsel to identify any actions necessary to correct the potential legal violations we identified in this audit.
Management’s Response: SB/SE Division management consulted with the Office of Chief Counsel to identify any actions necessary to correct the potential legal violations.
The Director, Campus Compliance Services, SB/SE Division, should:
2.
Ensure
effective controls and adequate procedures are implemented for transferring,
storing, and safeguarding certified mail listings at the CCP function.
Management’s Response: SB/SE Division management reviewed the process for controlling Certified Mail Listings (Form 3877). While they complete the transition to the centralized lien processing, management will list any remaining Forms 3877 on Document Transmittals (Form 3210), which require acknowledgment of receipt of listed documents.
In 11 (7.33 percent) of the 150 NFTL cases reviewed, the IRS did not follow its own internal guidelines when issuing lien notices, including its guidelines for notifying taxpayer representatives (8 cases) and resending notices when they are returned as undeliverable (3 cases). As a result, taxpayers and representatives may not be aware of their right to a hearing.
Notices
were not always sent to taxpayer representatives
For 8 (29.6 percent) of 27 NFTLs for which the taxpayer had a representative, a copy of the lien notice was not sent to the representative as required by IRS internal guidelines. The IRS stated this happened because of various reasons, such as the employees did not forward the taxpayer representative’s information to the ALS units or ALS unit employees did not send the notice although they had received the taxpayer representative’s information.
IRS procedures require
that a copy of the notice be sent to the taxpayer’s representative not later
than 5 days after the notice is sent to the taxpayer when an NFTL is
filed. IRS employees requesting the NFTL
and lien notice through the Automated Collection System (ACS) are responsible
for electronically forwarding the taxpayer representative information to the
ALS units, so a copy of the lien notice can be sent. Revenue officers using the Integrated
Collection System (ICS) may choose to send the taxpayer representative
information to the ALS unit by facsimile or to send the lien notice directly to
the taxpayer representative without using the ALS. The ALS units are responsible for printing
and mailing NFTLs and related lien notices.
Of the 8 NFTLs, 3 liens (37.50 percent) were initiated
through the ACS. Although the ACS
had taxpayer representative information for these three liens, the IRS did not
send lien notifications to the taxpayer representatives. The ACS has the ability to directly send an
electronic file of taxpayer representative information to the ALS unit, where
it is printed and manually keyed in by ALS unit personnel; therefore, there are
few errors.
Although the representative information must still be
manually input by ALS unit employees to the ALS, there is a software
enhancement planned that could further alleviate the manual process and enable
fully automated notification to taxpayer representatives on the ALS. However, the IRS has postponed this
enhancement due to other priorities.
The other five of eight NFTLs were initiated through the ICS. The revenue officer using the ICS did not document that he or she had requested a lien notice be sent to the taxpayer representative. Revenue officers are required to document in the case history when they request a lien notice for taxpayer representatives. Revenue officers’ managers are also required to review case files for this documentation.
The IRS is in the process of designing a programming enhancement to the ICS similar to the ACS change that will electronically forward taxpayer representative information to the ALS units. The scheduled completion date for the ICS enhancement was postponed from its targeted date of middle of FY 2005 and now is slated for completion during FY 2008 due to other priorities.
Undelivered
notices were not always sent again to taxpayers
The IRS procedures require an undeliverable lien notice be sent to a new address if the initial mailing is returned because it could not be delivered and a different address is available. For 20 of 150 NFTLs, the first notice was returned to the IRS as undeliverable. Revenue officers and/or ALS unit employees did not resend notices for 3 (33.33 percent) of the 9 NFTLs for which there was another address available. Two of the notices were initiated by revenue officers through the ICS, and one notice was initiated by an employee in the ACS function.
When another address is available, employees are responsible for certain actions when notices are returned undeliverable. For liens processed through the ICS, employees in the ALS units research the IRS computer system for a new address. If a new address exists, they will resend the notice. If there is no new address available, the employee forwards the notice to the revenue officer for his or her action. For liens processed through the ACS, the ALS unit employees research if a new address is available and resend it to the new address. If they cannot find a new address on the IRS computer system, the notice will be shredded and the lien case will be closed.
SB/SE Division management is planning to propose and include in their guidelines a 60-day time period within which this process of resending the notice should be completed.
The
IRS National Headquarters NFTL compliance review identified similar instances
of noncompliance with internal guidelines
As stated previously, the IRS conducts its own annual compliance review. During this review, the IRS identified instances of taxpayer representatives not receiving a copy of lien notice. The review noted that, although the failure to issue a notice to the taxpayer’s representative is not a potential legal violation, the IRS should follow its own internal guidelines. These results are similar to those of this and prior TIGTA audits. As of March 6, 2005, SB/SE Division management certified that the appropriate corrective action has been completed on those instances in which notices were not sent to representatives.
We are making no recommendations
at this time regarding internal guidelines.
As part of corrective actions to a prior TIGTA report, the IRS has
partially implemented systemic changes to improve the notification of taxpayer
representatives.
Appendix I
Detailed
Objective, Scope, and Methodology
The objective of this audit was to determine whether the Notices of Federal Tax Lien (NFTL) issued by the Internal Revenue Service (IRS) complied with legal requirements set forth in Internal Revenue Code Section (I.R.C. §) 6320. Specifically, we:
I. Determined whether lien notices issued by the IRS complied with legal requirements set forth in I.R.C. § 6320 (a) and related internal guidelines.
A. Obtained from the IRS Automated Lien System (ALS) Project Team an extract of liens prepared by the IRS nationwide from August 1, 2003, through July 31, 2004. The ALS extract contained 484,364 liens and excluded refiled liens. We compared the total population for accuracy to the Collection Report of Liens for the same period. We validated the sample selected in Test I.B. by accessing the ALS database and verifying that the extract information was accurate. We also compared taxpayer data to the IRS Integrated Data Retrieval System.
B. Selected a statistically valid sample of 150 NFTLs for review from the ALS extract in Test I.A. We used a statistical sample because we wanted to project the number of errors. We used attribute sampling and the following formula to calculate the minimum sample size (n) of 143 which we rounded to 150:
n = (NZ2 p(1-p)) / (NE2 + Z2 p(1-p))
N = Population (484,364) lien notices)
Z = Desired Confidence Level (90 percent)
p = Expected Error Rate (5 percent)
E = Precision Level (3 percent)
C. Analyzed 150 liens using data from the ALS, Integrated Collection System, Automated Collection System, and Integrated Data Retrieval System to determine whether the IRS adhered to the legal and internal guidelines.
1.
Obtained
certified mail listings (CML) (also called United States Postal Service Forms
3877) for 115 of the 150 sample cases (35 of the
150 CMLs were not available) and compared the lien-filed date to the postal
mail date on the CML to determine whether the lien notice was sent to taxpayers
timely.
2.
Determined
whether taxpayers, spouses, partners, and taxpayer representatives received
notices.
3.
Determined
whether the lien notices were mailed to correct addresses and the undeliverable
notices were appropriately processed.
D.
Discussed all exception cases with Small
Business/Self-Employed Division Compliance function management for agreement to
potential violations and corrective action, if appropriate.
II. Determined whether internal guidelines have been implemented or modified since our last review by discussing procedures and controls with appropriate IRS personnel in the Small Business/Self-Employed Division Compliance function. Our review included quality review procedures and the centralization of the ALS units.
III. Determined the status of the Integrated Collection System and Automated Collection System enhancements as planned and any problems encountered.
Appendix II
Major Contributors to This
Report
Philip
Shropshire, Director
Parker Pearson, Director
Lynn Wofchuck, Audit
Manager
Pillai Sittampalam, Lead
Auditor
James Dorrell, Senior
Auditor
Appendix III
Commissioner C
Office of the Commissioner – Attn: Chief of Staff C
Deputy Commissioner for Services and Enforcement SE
Deputy Commissioner, Small Business/Self-Employed Division SE:S
Director, Collection, Small Business/Self-Employed Division SE:S:C
Director, Campus Compliance Services, Small Business/Self-Employed Division SE:S:CCS
Director, Collection Policy, Small Business/Self-Employed Division SE:S:C:CP
Chief Counsel CC
National Taxpayer Advocate TA
Director, Office of Legislative Affairs CL:LA
Director, Office of Program Evaluation and Risk
Analysis RAS:O
Office of Management Controls OS:CFO:AR:M
Audit Liaison: Commissioner, Small Business/Self-Employed Division SE:S
Appendix IV
This appendix presents detailed information on the measurable impact that our recommended corrective actions 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 – Potential; 22,604 Notices of Federal Tax Lien (NFTL) with legal violations of taxpayers’ rights (see page 3).
Methodology Used to Measure the Reported Benefit:
From the nationwide statistically valid sample of 150 NFTLs, we identified 7 NFTLs (4.67 percent) with potential legal violations of taxpayers’ rights. The sample was selected based on a confidence level of 90 percent, a precision level of +3 percent, and an expected error rate of 5 percent. After reviewing the 150 NFTLs in our sample, we determined that the actual error rate was 4.67 percent, which caused us to have to change the precision level to +2.84 percent. We projected the findings to the total population provided by the Internal Revenue Service of 484,364 NFTLs prepared by the Automated Lien System from August 1, 2003, through July 31, 2004. We estimated that similar taxpayer rights could have been affected in 22,604 NFTLs (7/150 x 484,364 population). We are 90 percent confident that the range of NFTLs affected by similar errors is between 21,962 and 23,246.
Taxpayer rights could be affected because the taxpayer not receiving a notice or receiving a late notice might not be aware of the right to appeal or have less than the 30-day period allowed by the law to request a hearing. In addition, taxpayer rights could be affected when the taxpayer appeals the filing of the lien and the Internal Revenue Service denies the request for the appeal.
Appendix V
The collection of unpaid tax begins with a series of letters (notices) sent to the taxpayer advising of the debt and asking for payment of the delinquent tax. The Internal Revenue Service (IRS) computer systems are programmed to mail these notices when certain criteria are met. If the taxpayer does not respond to these notices, the account is transferred for either personal or telephone contact. A description of IRS computer systems used in the filing of lien notices is included in Appendix VI.
· IRS employees who make personal (face-to-face) contact with taxpayers are called revenue officers and work in the IRS Area Offices. The computer system used in most of the Area Offices to track collection actions taken on taxpayer accounts is called the Integrated Collection System.
· IRS employees who make only telephone contact with taxpayers work in call sites in IRS Customer Service offices. The computer system used in the call sites to track collection actions taken on taxpayer accounts is called the Automated Collection System.
When these efforts have been taken and the taxpayer has not paid the tax liability, designated IRS employees are authorized to file a Notice of Federal Tax Lien (NFTL). Liens protect the Federal Government’s interest by attaching a claim to the taxpayer’s assets for the amount of unpaid tax liabilities. The right to file an NFTL is created by Internal Revenue Code Section 6321 (1994) when:
· The IRS has made an assessment and given the taxpayer notice of the assessment, stating the amount of the tax liability and demanding payment.
· The taxpayer has neglected or refused to pay the amount within 10 days after the notice and demand for payment.
When designated employees request the filing of an NFTL using either the Integrated Collection System or Automated Collection System, the NFTL requests from both systems are transferred to the Automated Lien System (ALS). All NFTLs are processed by the ALS unless there is an expedite situation, in which case the NFTL is manually prepared. Although they are manually prepared and not printed through the ALS, manual NFTLs are tracked and controlled on the ALS and the lien notice is processed through ALS. The ALS maintains an electronic database of all open NFTLs and updates the IRS primary computer records to indicate an NFTL has been filed.
Most lien notices are mailed to
taxpayers by certified or registered mail rather than being delivered in
person. To maintain a record of the
notices, the IRS prepares a certified mail listing (United States Postal
Service (USPS) Form 3877), which identifies each notice that is to be
mailed. The notices and a copy of the
certified mail listing are delivered to the USPS. A USPS employee ensures all notices are
accounted for, then date stamps the listing and returns a copy to the IRS. The stamped certified mail listing is the only
documentation the IRS has that certifies the date the notices were mailed. IRS guidelines require that the stamped
certified mail listing be retained for 10 years after the end of the processing
year.
Appendix VI
Internal Revenue Service Computer Systems Used in the Filing of
Notices of Federal Tax Lien
The Automated Lien System (ALS) is a comprehensive database that prints Notices of Federal Tax Lien (NFTL) and lien notices, stores taxpayer information, and documents all lien activity. Lien activities on both the Integrated Collection System and the Automated Collection System cases are controlled on the ALS by Technical Support or Case Processing functions in Area Offices. Employees in these Area Offices process NFTLs and lien notices and respond to taxpayer inquiries using the ALS.
The Integrated Collection System (ICS) is an Area Office computer system with applications designed around each of the main collection tasks, such as opening a case, assigning a case, building a case, performing collection activity, and closing a case. The ICS is designed to provide management information, create and maintain case histories, generate documents, and allow online approval of case actions. Lien requests made using the ICS are uploaded to the ALS. The ALS generates the NFTL and related lien notices and updates the Internal Revenue Service’s (IRS) primary computer files to indicate an NFTL has been filed.
The Automated Collection System (ACS) is a computerized call site inventory system that maintains balance due accounts and return delinquency investigations. The ACS employees enter all of their case file information (online) on the ACS. Lien notices requested using the ACS are uploaded to the ALS, which generates the NFTL and related lien notices and updates the IRS’ primary computer files to indicate an NFTL has been filed.
The Integrated Data Retrieval System (IDRS) is an online data retrieval and data entry system that processes transactions entered from terminals located in both campuses and Area Offices. The system enables employees to perform such tasks as researching account information, requesting tax returns, entering collection information, and generating collection documents. The IDRS serves as a link from campuses and Area Offices to the Master File for the IRS to maintain accurate records of activity on taxpayers’ accounts.
The Master File
is the IRS database that stores various types of taxpayer account
information. This database includes individual,
business, and employee plans and exempt organizations data.
Appendix VII
Management’s Response to the Draft Report
The
response was removed due to its size. To
see the response, please go to the Adobe PDF version of the report on the TIGTA
Public Web Page.