TREASURY
INSPECTOR GENERAL FOR TAX ADMINISTRATION
Fiscal Year 2006 Statutory
Audit of Compliance With Legal Guidelines Prohibiting the Use of Illegal Tax
Protester and Similar Designations
July 13, 2006
Reference Number: 2006-40-098
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.
Redaction Legend:
1 = Tax Return/Return Information
Phone Number |
202-927-7037
Email Address | Bonnie.Heald@tigta.treas.gov
Web Site |
http://www.tigta.gov
July 13, 2006
MEMORANDUM FOR DEPUTY COMMISSIONER FOR SERVICES AND ENFORCEMENT
DEPUTY COMMISSIONER FOR OPERATIONS SUPPORT
FROM: Michael R. Phillips /s/ Michael R. Phillips
Deputy Inspector General for Audit
SUBJECT: Final Audit Report – Fiscal Year 2006 Statutory Audit of Compliance With Legal Guidelines Prohibiting the Use of Illegal Tax Protester and Similar Designations (Audit # 200540039)
This report presents the results of our review to determine whether the Internal Revenue Service (IRS) complied with IRS Restructuring and Reform Act of 1998 (RRA 98)[1] Section (§) 3707 and internal IRS guidelines that prohibit IRS officers and employees from referring to taxpayers as Illegal Tax Protesters (ITP) or any similar designations.
Synopsis
Prior to enactment
of the RRA 98, taxpayers could be designated as ITPs if their tax returns or correspondence
contained specific indicators of noncompliance with the tax law, such as the
use of arguments that had been repeatedly rejected by the courts. Once a taxpayer’s account was coded with an
ITP indicator, certain tax enforcement actions were accelerated. The designation was also intended to alert
IRS employees to be cautious so they would not be drawn into confrontations
with taxpayers.
RRA 98 § 3707
prohibits the IRS from using the ITP or any similar designations. The Treasury Inspector General for Tax
Administration is required to annually evaluate IRS compliance with this
prohibition on the use of ITP or any similar designations.[2]
In 287
instances, IRS employees referred to taxpayers as ITPs and similar designations
in case narratives, which other IRS employees may view as negative during
subsequent contacts with taxpayers.
The IRS has not
reintroduced past ITP codes on the Master File,[3] and formerly coded ITP taxpayer accounts
have not been assigned similar Master File designations. In addition, the IRS does not have any
current publications with ITP references and has initiated actions to remove the
one remaining ITP reference from the various formats of the Internal Revenue
Manual.[4]
However, in 287
instances, IRS employees referred to taxpayers as ITPs or other similar
designations in case narratives.
In our Fiscal Year
2002 report, we noted that IRS employees were still using ITP or similar
designations in their case narratives, and recommended that IRS management
reinforce that taxpayers should not be referred to as ITPs or similar
designations and consult with its Office of Chief Counsel on the use of
these designations. In August 2002, the
IRS responded that it requested guidance from its Office of Chief Counsel
regarding the designations. Once guidance
was received, the IRS planned to issue a memorandum to all employees
reinforcing the importance of not referring to taxpayers as ITPs. However, the IRS’ Office of Chief Counsel did
not agree that employee use of ITP or similar designations in case narratives
were potential violations of the RRA 98 §
3707. As such, we are in
disagreement with IRS management over this issue and we will continue to report
these instances of IRS employees using ITP
or similar designations in their case narratives. We have consistently advised Department of
the Treasury management of our concern over IRS management’s position on this
matter.
We continue to believe that using the ITP or other similar designations in case narratives may stigmatize taxpayers and may cause IRS employee bias in future contacts with these taxpayers. Electronic case narratives are available to other IRS employees for future reference and may impact the opinions and the actions of employees working the taxpayers’ cases.
Recommendation
We recommended IRS management issue a memorandum to all employees to reinforce that taxpayers are not to be referred to as “tax protesters,” “ITPs,” “constitutionally challenged,” or any other similar designations.
Response
IRS management will issue a memorandum to all employees to reinforce compliance with RRA 98 § 3707. In addition, they stated they would work with Treasury Inspector General for Tax Administration management to reconcile differences regarding the IRS’ legal guidance and take actions as appropriate.
In their general discussion of our report, IRS management also stated the following:
You identified
130 cases in which IRS employees used the term “tax protestor” or similar
designation because taxpayers described themselves as such. Although you did not consider these history
references to be violations, and noted that no taxpayer rights were violated,
you were concerned that these references could stigmatize these taxpayers in
future contacts with the IRS.
Management’s complete response to the draft report is included as Appendix VI.
Office of Audit Comment
We are concerned that the IRS response misinterprets the issue we reported. As we stated in our report, we did not include any instances of employees only documenting statements made by a taxpayer and/or his or her representative. The 130 instances we noted did not relate to taxpayers’ self-descriptions, but rather to case narratives in which employees made references about the taxpayers’ actions (e.g., taxpayer sent letters containing “typical protester language” or responded with “protester jargon,” etc.). While we believe this practice should be discouraged, we did not take exception to these instances because making references to a taxpayer’s actions does not necessarily constitute a designation prohibited by this statutory provision.
Our primary concern is
with 287 instances in which employees had referred to taxpayers as “tax
protesters,” “ITPs,” “constitutionally challenged,” or other similar
designations in case narratives. We
believe these references in case narratives are prohibited by RRA 98 § 3707. Our recommendation was to address this
concern.
We are also concerned about IRS management’s delay in resolving the issue related to its legal guidance on RRA 98 § 3707. We advised IRS and Department of the Treasury management in April 2006, well in advance of the issuance of our final report, so that the resolution could be properly noted in this report. We believe this issue must be resolved before the IRS can provide appropriate guidance to its employees to reinforce compliance with RRA 98 § 3707.
Copies of this report are also being sent to the IRS managers affected by the report recommendation. Please contact me at (202) 622-6510 if you have questions or Michael E. McKenney, Assistant Inspector General for Audit (Wage and Investment Income Programs), at (202) 622-5916.
Illegal Tax Protester Codes Were Not Used on the Master File
Internal Revenue Service Publications Do
Not Contain Illegal Tax Protester References
In Some Instances, Employees Used Illegal
Tax Protester or Similar Designations in Case Narratives
Appendices
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 – Examples of Illegal Tax Protester and Similar Designations Found in Case
Narratives
Appendix
VI – Management’s Response to the Draft Report
The Internal Revenue Service (IRS)
Restructuring and Reform Act of 1998 (RRA 98)[5] Section
(§) 3707 prohibits the IRS from using the Illegal Tax Protester (ITP) or any
similar designations. In addition, the
RRA 98 requires the removal of all existing ITP codes from the IRS Master File[6] and
instructs IRS employees to disregard any such designation not located on the
Individual Master File.[7]
Prior
to enactment of the RRA 98, the IRS had the ITP Program to identify individuals
and businesses using methods that were not legally valid to protest the tax
laws. IRS employees identified taxpayers
for referral to the ITP Program when their tax returns or correspondence
contained specific indicators of noncompliance with the tax law, such as the use of arguments that had been
repeatedly rejected by the courts. There
were IRS tax protester coordinators who were responsible for determining
whether a taxpayer should be included in the ITP Program. If a taxpayer was classified as an ITP, the
taxpayer’s record was coded as such on the IRS’ Master File. Once a taxpayer’s account was coded as an ITP,
certain tax enforcement actions were accelerated. The designation was also intended to alert
IRS employees to be cautious so they would not be drawn into confrontations with
taxpayers.
Congress was concerned that some taxpayers were being permanently labeled and stigmatized by the ITP designation. There were many instances of taxpayers who subsequently complied with the tax laws but continued to be labeled as ITPs. The concern was that this label could bias IRS employees and result in unfair treatment.
The TIGTA is required to
annually evaluate IRS compliance with the prohibition against using the ITP or
any similar designations.
The RRA 98[8] requires the Treasury Inspector General for
Tax Administration (TIGTA) to annually evaluate IRS compliance with the
prohibition against using the ITP or any similar designations. This is our eighth review since Fiscal Year
(FY) 1999. These reviews have identified
areas for improvement to help the IRS comply with the ITP designation
prohibition.
This review was
performed in the Appeals function, Criminal Investigation function, National
Taxpayer Advocate function, and Office of Chief Counsel in
Prior to the RRA 98, the IRS used ITP codes on the Master File to accelerate collection activity for taxpayers who were delinquent in filing tax returns or paying their taxes. These codes were also intended to alert IRS employees that there might be problems encountered when dealing with these types of taxpayers.
Congress was concerned about the use of the ITP designation because:
RRA 98 § 3707 required the IRS to remove the existing ITP designations from taxpayers’ accounts on the Master File beginning January 1, 1999.
In prior reviews, we reported the IRS had removed the ITP codes from the Master File as required by the RRA 98. Based on our analysis of approximately 1.2 million taxpayer accounts coded for accelerated collection activity, the IRS has not reintroduced these ITP designation codes on the Master File. RRA 98 § 3707 also prohibits using any designation similar to the ITP. We reviewed the approximately 57,000 taxpayer accounts formerly coded as ITPs on the Master File and confirmed that the IRS had not input any other Master File designations similar to the ITP on these accounts.
To help promote compliance with RRA 98 § 3707, IRS management issued directives for employees to update various publications to eliminate references to ITP terminology and programs. The TIGTA reviews prior to FY 2002 identified several publications that contained ITP references. When notified of the problem, the IRS had either revised the publication or labeled it as being obsolete. Our review of available IRS publications on the Servicewide Electronic Research Program (SERP),[9] the IRS public Internet web site, the IRS’ Electronic Publishing web site, and the IRS 2004 Federal Tax Products CD-ROM did not identify any current ITP references. By eliminating the ITP references from IRS forms, documents, letters, and training materials, the IRS prevents employees from using or following these outdated references or guidelines.
The picture was
removed due to its size. To see the picture,
please go to the Adobe PDF version of the report on the TIGTA Public Web Page.
In each of our seven prior reviews, we identified ITP references in multiple subsections throughout the various formats of the Internal Revenue Manual (IRM).[10] The IRM is maintained in various electronic and manual formats, such as the Official IRM on the IRS’ Electronic Publishing web site, the IRM online, the IRM on the SERP, the IRM on IRS.gov, the IRM on CD-ROM, and the paper IRM. The graphic to the right shows the relationship between the Official IRM and the various formats of the IRM available to IRS employees.
The picture was
removed due to its size. To see the picture,
please go to the Adobe PDF version of the report on the TIGTA Public Web Page.
During our FY 2005 review, we reported there were 19 unique ITP references throughout the various formats of the IRM.[11] In response to our last report, the IRS stated it had initiated actions to remove these remaining ITP references from the IRM.
In our current review, we still found one unique ITP reference throughout the various formats of the IRM. This reference was previously identified and brought to the attention of SB/SE Division management during our last audit.[12] We have been told by SB/SE Division Compliance Policy management that as of October 1, 2005, this reference has been removed from the SB/SE Division version of the IRM. However, due to delays in publishing, the Official IRM and all other subsidiary IRMs have not yet been updated.
Removing all ITP references from the various formats of the IRM helps to avoid any inappropriate implication that the use of this label is permitted. Based on the actions taken by the IRS, we believe no further recommendations are warranted at this time.
We found 287 instances in which 242 employees
had referred to taxpayers as “tax protesters,” “ITPs,” “constitutionally
challenged,” or other similar designations in case narratives on the following computer
systems we sampled.
We believe these references are prohibited by
RRA 98 § 3707. Examples of the
inappropriate comments can be found in Appendix V. The following chart contains the number of ITP
or similar designations identified in computer system case narratives during
our FYs 2005 and 2006 reviews.
Figure
1: Illegal Tax Protester and Similar
Designations in Case Narratives
|
Computer System |
Fiscal Year 2005 |
Fiscal Year 2006 |
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|
Employees Involved |
Protester Designation Used |
Similar Designation Used |
Employees Involved |
Protester Designation Used |
Similar Designation Used |
|
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ACDS |
****1**** |
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****1**** |
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ACS |
****1**** |
****1**** |
****1**** |
****1**** |
****1**** |
****1**** |
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CIMIS |
****1**** |
****1**** |
****1**** |
****1**** |
****1**** |
****1**** |
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ICS |
****1**** |
****1**** |
****1**** |
****1**** |
****1**** |
****1**** |
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TAMIS |
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