Fiscal Year 2011 Statutory Review of Restrictions on Directly Contacting Taxpayers
September 16, 2011
Reference Number: 2011-30-090
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 | 202-622-6500
Email Address | TIGTACommunications@tigta.treas.gov
Web Site |
http://www.tigta.gov
HIGHLIGHTS
FISCAL YEAR 2011 STATUTORY REVIEW OF
RESTRICTIONS ON DIRECTLY CONTACTING TAXPAYERS
Highlights
Final
Report issued on September 16, 2011
Highlights of Reference
Number: 2011-30-090 to the Internal Revenue Service
Commissioners for the Large Business and International Division and Small
Business/Self-Employed Division.
IMPACT ON TAXPAYERS
Internal
Revenue Service (IRS) employees are required to stop an interview if the taxpayer
requests to consult with a representative and may not bypass a representative
without supervisory approval. Between
October 2009 and September 2010, TIGTA’s Office of Investigations closed five complaints
involving allegations that IRS personnel improperly bypassed a taxpayer
representative.
WHY TIGTA DID THE AUDIT
This
audit was initiated because TIGTA is required to annually report on the IRS’s
compliance with Internal Revenue Code Sections 7521(b)(2)
and (c). The overall objective of this
audit was to determine whether the IRS complied with the legal guidelines
addressing the direct contact of taxpayers and their representatives.
WHAT
TIGTA FOUND
TIGTA
varied the scope of its review this year to include discussions with, and
analysis of, information received from tax representatives and personnel from
the IRS’s Large Business and International (LB&I) Division who reached out
to TIGTA about concerns they had over potential unreported direct contact
violations. TIGTA also evaluated a
judgmental sample of 20 out of 2,168 large corporate audits that were open in
the LB&I Division at the time of this review. TIGTA’s results indicate the IRS may be at
greater risk of infringing upon the direct contact provisions during audits
than the small number of complaints filed with TIGTA’s Office of Investigations
indicate.
Twelve tax representatives provided written accounts of
their experiences where they believe examiners were starting audits without the
authorized representative or insisting on interviewing taxpayers after they had
secured representation. In addition, three
IRS employees told TIGTA some examiners routinely contact taxpayers initially
when starting an audit regardless of whether a valid Power of Attorney and Declaration of Representative (Form 2848) was
filed with the IRS. Further, TIGTA’s
review of 20 open large corporate audits, found four instances where examiners
contacted taxpayers to begin the audit even though the Form 2848 was in IRS
files.
WHAT TIGTA RECOMMENDED
TIGTA recommended that the Deputy Commissioner
(Operations), LB&I Division, ensure examiners use available information
systems to involve tax representatives in the opening stages of the audit. TIGTA also recommended that the Deputy Commissioner
(Operations), LB&I Division, and the Director, Examination, Small
Business/Self-Employed Division, coordinate in initiating actions to review and
revise, as needed, the language in audit initiation letters so it is clear that
representatives can attend all audit appointments on behalf of the taxpayer and
provide an annual refresher briefing for examiners on the importance of
adhering to the processes designed to recognize taxpayer representation.
IRS officials agreed with two
recommendations. The IRS plans to provide
written guidance on using IRS data systems to review power of attorney
information and review the audit contact letter for needed revisions. IRS officials did not concur with providing
refresher training, citing recent updates to guidelines and possible changes to
the audit contact letter. TIGTA believes
this recommendation remains valid.
September 16, 2011
MEMORANDUM FOR COMMISSIONER, LARGE BUSINESS AND INTERNATIONAL DIVISION
COMMISSIONER, SMALL BUSINESS/SELF-EMPLOYED DIVISION
FROM: (for) Michael R. Phillips /s/ Margaret E. Begg
Deputy Inspector General for Audit
SUBJECT: Final Audit Report – Fiscal Year 2011 Statutory Review of Restrictions on Directly Contacting Taxpayers (Audit # 201130004)
This report presents the results of our review to determine whether the Internal Revenue Service (IRS) complied with legal guidelines addressing the direct contact of taxpayers and their representatives as set forth in Internal Revenue Code Sections 7521(b)(2) and (c). The Treasury Inspector General for Tax Administration is statutorily required to conduct this audit. This audit was conducted as part of our Fiscal Year 2011 Annual Audit Plan and addresses the major management challenge of Taxpayer Protection and Rights.
Management’s complete response to the draft report is included as Appendix V.
Copies of this report are also being sent to the IRS
managers affected by the report recommendations. Please contact me at (202) 622-6510 if you
have questions or Margaret E. Begg, Assistant Inspector General for Audit
(Compliance and Enforcement Operations), at (202) 622‑8510.
Appendices
Appendix
I – Detailed Objective, Scope, and Methodology
Appendix
II – Major Contributors to This Report
Appendix
III – Report Distribution List
Appendix IV –
Previous Audit Reports Related to This Statutory Review
Appendix V –
Management’s Response to the Draft Report
Abbreviations
|
FY |
Fiscal Year |
|
I.R.C. |
Internal Revenue Code |
|
IRM |
Internal Revenue Manual |
|
IRS |
Internal Revenue
Service |
|
LB&I |
Large Business and International |
|
SB/SE |
Small Business/Self-Employed |
|
TIGTA |
Treasury Inspector
General for Tax Administration |
|
|
|
This is the thirteenth year reporting that neither we nor the Internal Revenue Service (IRS) know with any degree of preciseness how well the IRS is complying with direct contact provisions of Internal Revenue Code (I.R.C.) Sections (§§) 7521(b)(2) and (c) because of limitations with its management information systems. As we reported in prior years,[1] the systems are not capable of readily identifying complaints when IRS personnel deny a taxpayer’s right to representation or bypass his or her representative without proper approval.
However, taxpayer complaints that allege IRS employees bypassed their representatives and contacted them directly are tracked by the Treasury Inspector General for Tax Administration’s (TIGTA) Office of Investigations on the Performance and Results Information System.[2] The Office of Investigations closed five direct contact complaints between October 2009 and September 2010 that involved an examiner and four collectors. **********1********
******************************************************1*************************************************************
The Omnibus Taxpayer Bill of Rights,[3] enacted in 1988, created a number of safeguards to protect taxpayers being interviewed by IRS employees as part of an audit or investigation. Specifically, IRS employees are required by the direct contact provisions of I.R.C. §§ 7521(b)(2) and (c) to:
A taxpayer can file
a civil suit against the IRS if an IRS employee intentionally disregards these
provisions by denying a taxpayer the right to appropriate representation.
On July 22, 1998,
the President signed into law the IRS Restructuring and Reform Act of 1998,[4] which required the IRS to revise Your Rights as a Taxpayer (Publication
1) to inform taxpayers of their rights to a) be represented at interviews and
b) suspend an interview pursuant to I.R.C. § 7521(b)(2).
In addition,
Congress included another provision to the IRS Restructuring and Reform Act of
1998 that requires the TIGTA to annually evaluate the IRS’s compliance with the
direct contact provisions. Senate Committee on Finance Report 105-174
(dated April 22, 1998), related to the Act, stated that Congress believes
taxpayers should be more fully informed of their rights to representation in
dealing with the IRS and those rights should be respected.
This review was performed at the IRS National Headquarters
in the offices of the Commissioner, the National Taxpayer Advocate, and the Large
Business and International (LB&I) Division in
Because of the limitations with IRS management information systems, we varied the scope of our review this year to include discussions with tax representatives and personnel from the IRS’s LB&I Division who reached out to the TIGTA about concerns they had over potential unreported direct contact violations. Despite layers of IRS management controls, our work this year surfaced evidence that suggests the IRS may be at greater risk of infringing upon the direct contact provisions during audits than the complaints filed with the TIGTA’s Office of Investigations indicate.
An Array of Internal Controls Help
Ensure Compliance With the Direct Contact Provisions
of the Internal Revenue Code
Ultimately,
the IRS relies on its examiners and collectors to properly consider and protect
taxpayer rights when conducting audits and taking collection actions. To assist examiners and collectors in meeting
these responsibilities, the IRS has an array of policies, procedures, and
techniques (internal controls) that are in line with the Government
Accountability Office’s Standards for Internal Control in the Federal
Government.[5]
The IRS’s mission statement and supporting
policy statements provide guidance nationwide to IRS compliance and other
personnel who have contact with taxpayers.
Figure 1 provides an example of IRS Policy Statement 5-2, which contains
the core principles that underscore the importance of protecting taxpayer
rights as well as providing the public with quality, courteous, and effective
assistance in collecting unpaid taxes.
Figure 1: Core Principles
for Collecting Unpaid Taxes
|
Excerpt From
IRS Policy Statement 5-2 |
|
|
Principles |
Description |
|
OVERARCHING
PRINCIPLES |
All our decisions about collecting must
be guided by these principles. To the
extent that they are, we will succeed in our mission. |
|
SERVICE AND
ASSISTANCE All taxpayers are entitled to
courteous, responsive, and effective service and assistance in all their
dealings with the Service. |
We will actively assist taxpayers who
try to comply with the law and work to continually improve the quality of our
systems and service to meet the needs of our customers. All taxpayers, whether delinquent or fully compliant,
are entitled to prompt and professional service whenever they deal with
Service employees. |
|
TAXPAYER
RIGHTS We will observe taxpayers’ rights,
including their rights to privacy and to fair and courteous treatment. |
This affirms our commitment to observe
both the spirit as well as the letter of all legal requirements, including
the Taxpayer Bill of Rights I and II and the IRS Restructuring and Reform Act
of 1998. Taxpayers will be protected
from unauthorized disclosure of information. |
|
COMPLIANCE The public trust requires
us to ensure that all taxpayers promptly file their returns and pay the
proper amount of tax, regardless of the amount owed. |
The public as a whole is our customer,
not just delinquent taxpayers. Our
customers expect us to promote voluntary compliance by ensuring that all
promptly pay their fair share. |
|
CASE
RESOLUTION While we will actively assist taxpayers to comply, we will also take
appropriate enforcement actions when warranted to resolve the
delinquency. To resolve a case, good
judgment is needed to make sound decisions on the appropriate action needed. |
All taxpayers are required to pay by
the due date of the return. From a
broad range of collecting tools, employees will select the one(s) most
appropriate for each case. Case resolution,
including actions such as lien, levy, seizure of assets, installment
agreement, offer in compromise, substitute for return, summons, and I.R.C.
6020(b), are important elements of an effective compliance program. When it is appropriate to take such
actions, it should be done promptly, yet judiciously, and based on the facts
of each case. |
Source:
Excerpt from IRS Policy Statement 5-2 – Collecting Principles.
These core principles are critical to setting the appropriate tone for agency activities and interactions with taxpayers and their representatives, especially because documentation of the interactions is controlled by examiners. To supplement agency-level mission and policy statements, the IRS uses, and periodically updates, the Internal Revenue Manual (IRM)[6] and numerous taxpayer publications. Both the IRM and taxpayer publications are available online and are designed to provide guidance nationwide to IRS personnel and taxpayers alike.
The
IRM and taxpayer publications are important control components
From a control
perspective, both the IRM and taxpayer publications are important because they
provide detailed explanations and instructions of the statutory, business, and
administrative procedures the IRS follows in administering the tax laws,
including the direct contact provisions of I.R.C. §§ 7521(b)(2) and (c). For example, the IRS uses Publication 1 as
the main document to keep taxpayers informed of their rights and to explain the
audit, collection, appeals, and refund processes. Publication 1 also includes a contact number
for the TIGTA where suspected violations of the direct contact provisions and
other potential misconduct or abuse by IRS employees can be reported. In
addition, Publication 1 includes the following information concerning taxpayers’
rights to be represented at interviews with the IRS and to suspend an interview
pursuant to I.R.C. § 7521(b)(2).
You may either represent yourself or, with proper written authorization,
have someone else represent you in your place.
Your representative must be a person allowed to practice before the IRS,
such as an attorney, certified public accountant, or enrolled agent. If you are in an interview and ask to consult
such a person, then we must stop and reschedule the interview in most cases.
The IRS includes
information on these rights in other publications, such as:
In addition, the
IRS uses Practice Before
the IRS and Power of Attorney (Publication 947) to inform taxpayers of
their representatives’ responsibilities and to notify taxpayers that the IRS
has the authority to bypass representatives that are uncooperative. Specifically, Publication 947 states “After a
valid power of attorney is filed, the IRS will recognize your representative. However, if it appears the representative is
responsible for unreasonably delaying or hindering the prompt disposition of an
IRS matter by failing to furnish, after repeated requests, non-privileged
information, the IRS can contact you directly.”
A number of internal
controls are also in place at the operational level
At the
operational level, the first-line managers over IRS collectors and examiners
(enforcement personnel) are a key control because they are responsible for
ensuring that the personnel they supervise follow procedures and that their
work meets acceptable standards. To
assist managers in ensuring procedures are followed and standards are met, the
IRM requires managers to conduct reviews over the work of the personnel they
supervise, both while it is in process and after it is completed. These control techniques, as we have
previously reported, help identify problems so prompt corrective actions, if
needed, can be taken.
In response to our
reports over the years, the IRS has taken a number of steps to reinforce upon
first-line managers the need to ensure the personnel they supervise are adhering
to the direct contact provisions. For
example, the SB/SE Division issued a memorandum to its first-line managers in
Fiscal Years (FY) 2001 and 2002 directing them to “take whatever steps are
necessary (including discussion in group meetings, case reviews, workload
reviews, on-the-job visits, and taxpayer/POA [Power of Attorney] inquiries) to
ensure these requirements [the requirements mandated by I.R.C. §§ 7521(b)(2) and (c)] are understood and followed by
employees.” In August 2006, April 2010,
and May 2010, the IRS updated the IRM to include specific directions for SB/SE
Division managers in its Collection and Examination functions on how to ensure
compliance with the direct contact provisions of I.R.C. §§ 7521(b)(2) and
(c). The guidance provided in April 2010
directed that initial contact for audits must be made with an authorized
representative.
Besides first-line
management reviews, quality measurement staffs annually review hundreds of
closed enforcement cases to measure and evaluate the quality of audits and
collection actions, communicate areas of concern to upper management, identify
potential training needs, and improve work processes. While these reviews do not specifically
address adherence to the direct contact provisions, they do assess the degree
to which enforcement personnel are complying with procedures for protecting
taxpayer rights. For FY 2010 and the
first quarter of FY 2011, the SB/SE Division’s quality measurement staff
reported that examiners complied with the procedures for protecting taxpayer
rights in 77 percent of the cases reviewed for field audits and 93 percent of
cases reviewed for office audits.
In addition to
reviews by first-line managers and the quality measurement staffs, mid-level
managers may evaluate ongoing work in open audits and collection cases during
their operational reviews. Operational
reviews are required to be performed at least annually to ensure work is being
done in conformance with procedures.
These processes serve as a quality control by identifying managerial,
technical, and procedural problems and providing a basis for corrective
actions.
Multiple Sources
Suggest Additional Actions Are Needed to Reduce the Risk of Infringing Upon
Taxpayer Rights During Audits
It
is important to recognize that the evidence we have obtained from the TIGTA’s
Office of Investigations over the years suggests potential direct contact
violations are small considering that thousands of IRS enforcement personnel
routinely interact with millions of taxpayers and their representatives each
year. However, it is also important to
recognize that the rights of each taxpayer are critical to ensuring the
integrity and fairness of the tax system.
Despite
layers of management controls, available evidence suggests the IRS may be at
greater risk of infringing upon the direct contact provisions than the
complaints filed with the TIGTA’s Office of Investigations indicate. Between October 2009 and September 2010, the TIGTA’s Office
of Investigations closed five complaints involving allegations that IRS
personnel improperly bypassed a taxpayer representative. The National Taxpayer Advocate’s 2010 Annual Report to the Congress
documented practitioner concerns from the Low Income Taxpayer Clinics and
American Institute of Certified Public Accountants about IRS personnel in
various functions bypassing representatives without reason and without regard
for the bypass procedures.
Additionally,
our contacts with tax representatives and LB&I Division personnel during
this review showed that some examiners may not be appropriately involving tax
representatives in audits and other tax administration matters. As summarized below, 2 tax representatives provided
written accounts collected from 12 other representatives where they believe examiners
may have attempted to bypass the representative.
Due
to time constraints, we did not attempt to verify the accuracy of the accounts the
representatives submitted by retrieving and evaluating IRS case files during
this review. However, we did share the
accounts with IRS officials after redacting the personal identifying
information contained in the documents. As
reflected in the following IRS statements, the officials believe there may be
some misunderstanding among the representatives about IRS audits.
Review of the representative’s written accounts indicates
there may be some misunderstandings among the representatives related
to the Service’s rights, responsibilities and policies regarding
interviewing individuals who possess appropriate knowledge of the business;
summonsing when appropriate; and conducting a tour of the business.
Internal Revenue Code Section 7521(c) states that an examiner cannot require a
taxpayer to accompany an authorized representative to an examination interview
in the absence of an administrative summons; however, that does not
prevent examiners from requesting the taxpayer’s voluntary presence at the
interview as a means to facilitate the examination
process. Examiners should not conduct the interview with
representatives who are not knowledgeable regarding the taxpayer’s business
practices and merely serve as a courier, shuttling questions and answers
between the examiner and the taxpayer. This type of arrangement may
obstruct the flow of the examination. If the representative and taxpayer
will not consent to the taxpayer being interviewed for those cases where it is
determined to be appropriate, the examiner and group manager should consider
issuing a summons. The issuance of a summons is not a “threat” as
referenced by some of the representatives but rather an enforcement action
which is sometimes necessary to secure information to resolve a case.
Additionally, a tour of the business and/or the physical
observation of the taxpayer’s operations serve as an integral part of
the examination process. Treasury
Regulation section 301.7605-1(d)(3)(iii) states: “regardless of where an examination
takes place, the Service may visit the taxpayer’s place of business or
residence to establish facts that can only be established by direct visit, such
as inventory or asset verification. The
Service generally will visit for these purposes on a normal workday of the
Service during the Service’s normal tour of duty hours.” From the review
of the written accounts the Service’s requests for tours of the taxpayer’s
business were appropriate.
Besides
the representative accounts, three IRS employees working in its LB&I
Division reached out to the TIGTA this year with concerns that some examiners
routinely contact taxpayers initially when starting audits regardless of
whether a valid Form 2848 was filed with the IRS. Interviewing taxpayers initially without the
presence of the representative presents an opportunity to obtain more
spontaneous and unrehearsed responses from taxpayers that might not have otherwise
been provided about their financial situation, tax records, and business
operations. IRS personnel also told us
that the practice of initiating audits with taxpayers, rather than involving
tax representatives, was emphasized by instructors in an examiner training
class. Moreover, our review of a
judgmental sample of 20 out of 2,168 large corporate audits that were open in
the LB&I Division at the time of this review seemed to corroborate the
assertions of IRS personnel about LB&I Division examiners initiating audits
with taxpayers. Of the 20 cases
reviewed, 4 were initiated with the taxpayer even though a Form 2848 was
recorded in IRS files.
A
combination of at least three factors likely contributed to the concerns
First,
our review of the 20 cases showed that examiners are not taking advantage of the
IRS’s automated information systems to identify and involve tax representatives
during the initial stages of audits. In
reviewing the 20 audit case files, we accessed the IRS’s automated information
systems[7] to determine if the taxpayers
filed a Form 2848 with the IRS. For 12
of the 20 audits, we saw
no documentation that this resource was used to determine if a Form 2848 was on
file with the IRS before the audit was initiated.
In addition, we found that only 5 of 20 examiners involved in the cases
we reviewed had the capability to access the systems. IRS officials told us that it is common for
examiners to have clerical personnel access the IRS automated systems and
secure needed documentation for them.
Second,
the language in the audit contact letter (Letter 2205) used by field examiners
to initiate audits could be confusing taxpayers and examiners alike because it
seemingly creates an expectation that taxpayers need to attend the first
appointment. For example, in addition to
identifying and including sources of information that explain the rules,
procedures, and processes the IRS follows during the audits, the Letter informs
taxpayers that they may have someone represent them during any part of the
audit. However, the Letter also requests
taxpayers to submit a completed Form 2848 at the first appointment, or prior to
it, if they want someone to represent them during the audit. In contrast, the language in the audit
contact letter (Letter 2202) used by office examiners informs taxpayers that if
they are not attending their first audit appointment, they must submit a
completed Form 2848 in advance.
Third,
there is a concern that some examiners may believe it is more efficient to
initiate audits directly with taxpayers rather than involve tax
representatives. Field examiners typically
conduct detailed interviews during the first appointment and request to see the
business facilities of the taxpayer under audit. From an examiner perspective, the interview
process and business tour are critical components of the audit process because
they are designed to provide information about the taxpayer’s financial
condition, business operations, and books and records. They also help set the scope and depth of the
audit and are used to obtain leads, develop information, and establish
evidence. However, despite the
importance to field examiners, taxpayers have the right under the tax laws to
have a representative attend the first appointment and all other appointments
on their behalf.
The
National Taxpayer Advocate’s report expressed the need to provide annual training
for IRS employees who routinely interact with taxpayers and representatives. Given the risk that a number of potential
direct contact violations may be occurring and not being reported, we believe
the National Taxpayer Advocate’s recommendation to provide annual training
could be a cost-effective solution to help alleviate these concerns. This training would be in-line with the IRS
learning and education policy, which requires all employees to complete short,
mandatory refresher training in critical areas of tax administration such as
ethics and information security. It
would also be consistent with internal control standards, which require all
personnel to possess and maintain a level of competence that allows them to
accomplish their assigned duties.
Recommendations
Recommendation
1: The Deputy Commissioner (Operations), LB&I
Division, should ensure examiners and their immediate managers take advantage
of the IRS’s automated information systems to identify and involve tax
representatives during the initial stages of audits.
Management’s
Response: IRS officials
agreed with this recommendation. The
Deputy Commissioner (Operations), LB&I Division, will provide written
guidance to examiners and frontline managers on their responsibility to take proper
steps to review the power of attorney information from the IRS data systems
prior to contacting taxpayers.
The Deputy Commissioner (Operations), LB&I Division, and
the Director, Examination, SB/SE Division, should coordinate in initiating
actions:
Recommendation 2: To review the
language in Letter 2205 and use the review results to revise the language, as
needed, so it is clear that tax representatives can attend all audit
appointments on behalf of taxpayers.
Management’s
Response: IRS officials agreed
with this recommendation. The Director,
Examination, SB/SE Division, will coordinate with the Deputy Commissioner
(Operations), LB&I Division, to review the language in Letter 2205 and
revise the language, if needed, so it is clear that tax representatives can
attend all audit appointments on behalf of taxpayers.
Recommendation 3: Needed to provide periodic
refresher briefings for examiners on
the importance of adhering to the processes designed to recognize taxpayer
representation.
Management’s Response: IRS officials did not concur with this recommendation. In April 2010, the SB/SE Division revised two IRM sections to provide additional directions to staff regarding the importance of adhering to the processes designed to recognize taxpayer representation. IRS officials indicated they believe the recent updates to the IRM, as well as any revisions made to the initial appointment letter as determined from Recommendation 2, will provide the appropriate guidance.
Office of Audit Comment: TIGTA
believes this recommendation remains valid and is not alone in its position. As
discussed in the report, the National Taxpayer Advocate has reported receiving practitioners
concerns about IRS personnel bypassing representatives without reason and has
similarly concluded there is a need for additional training. In their response to TIGTA’s report, IRS
officials indicated that they believe the report may overstate the number of
occurrences of potential direct contact violations because we used unverified
anecdotal accounts from taxpayer representatives to cite possible violations. They further stated that they believe these
representatives may have misinterpreted IRS normal audit procedures to request
to interview the taxpayer, when appropriate, and tour the taxpayer’s business
location as an attempt to bypass the representative’s valid power of attorney
which is not the case. As noted in the
report, we did not attempt to verify the accuracy of the accounts the
representatives provided due to the time constraints imposed upon us for
completing this review. However, we did
refer the written accounts provided by the representatives to TIGTA’s Office of
Investigations for appropriate action.
Appendix I
Detailed Objective, Scope, and Methodology
The overall objective of this review was to determine whether the IRS complied with legal guidelines addressing the direct contact of taxpayers and their representatives as set forth in I.R.C. §§ 7521(b)(2) and (c). To accomplish this objective, we:
I. Determined if an IRS system and/or process has been implemented since our last review to identify those cases where taxpayers have requested to consult with a representative or where IRS employees bypassed a representative and directly contacted the taxpayer.
A. Interviewed IRS management personnel in the SB/SE and LB&I Divisions.
B. Reviewed
a judgmental sample of 20 of 2,168 LB&I Division open industry cases where
the taxpayers had a power of attorney in the audit and the cases were open in
the third and fourth quarters of FY 2010.
This sample was taken to validate concerns raised by LB&I Division personnel
who reached out to the TIGTA concerning examiners making first contacts with
taxpayers. We also evaluated the cases
to identify any indication of the following potential violations of I.R.C.
§§ 7521(b)(2) or (c):
a. The examiner denied the taxpayer the opportunity to obtain representation.
b. The examiner bypassed the representative and contacted the taxpayer directly.
c. The examiner mandated the appearance of the taxpayer with an authorized representative.
II. Determined if any systems or processes have been modified since our last review to track taxpayer complaints relating to IRS violations of I.R.C. §§ 7521(b)(2) and (c).
A. Interviewed IRS personnel responsible for the Taxpayer Advocate Management Information System[8] and the e-trak System[9] to determine if these two systems have been modified to track taxpayer complaints relating to IRS violations of I.R.C. §§ 7521(b)(2) and (c).
B. Reviewed the TIGTA Office of Investigations’ complaint and investigation cases that were closed in FY 2010 and tracked on the Performance and Results Information System[10] to determine the validity of these cases and what actions the IRS has taken as a result, as well as the potential number of taxpayers that may have had their rights and entitlements infringed upon.
III. Evaluated the complaints received by the Deputy Inspector General for Audit to gain an understanding of the issues raised and determine if the IRS has proper controls to address the concerns identified.
A. Interviewed two tax representatives about the concerns they had raised on IRS employees bypassing taxpayers’ representatives and reviewed documentation they provided regarding direct contact complaints.
B. Contacted TIGTA Office of Investigations personnel to determine if there are investigations that have started as a result of forwarding these allegations to them and the current status of any related investigation.
C. Researched the pertaining IRMs and training materials to identify the LB&I Division audit process and determine if the LB&I Division has proper procedures/guidelines and trainings in response to I.R.C. §§ 7521(b)(2) and (c).
IV. Reviewed information on the actions taken by the IRS in response to I.R.C. §§ 7521(b)(2) and (c) to determine the impact of these code sections on IRS programs.
A. Reviewed prior TIGTA audit reports to identify recommendations and the IRS’s planned corrective actions.
B. Evaluated the procedures in the IRM to determine whether the IRS has completed the corrective action in response to our FY 2009 report.[11] The planned corrective action was to update IRM Section 1.4.40, Resource Guide for Managers - SB/SE Compliance Field Examination Group Manager, to include specific guidance for Examination function group managers to ensure that the requirements of I.R.C. §§ 7521(b)(2) and (c) are understood and followed.
C. Researched the IRS Intranet to identify additional guidance to IRS employees for meeting the direct contact provisions and determine the impact on IRS programs.
D. Reviewed www.IRS.gov and the related IRS publications to identify how the IRS informs taxpayers of its prohibition against directly contacting taxpayers and evaluated whether they provide adequate guidance for taxpayers and their representatives.
Internal controls methodology
Internal controls
relate to management’s plans, methods, and procedures used to meet their
mission, goals, and objectives. Internal
controls include the processes and procedures for planning, organizing,
directing, and controlling program operations.
They include the systems for measuring, reporting, and monitoring
program performance. We determined the
following internal controls were relevant to our audit objective:
· The agency level internal control activities:
a. The IRS’s mission statement and supporting policy statements along with the IRM guidelines provide guidance to IRS employees to ensure compliance with direct contact provisions.
b. Numerous publications keep taxpayers informed of their rights.
·
The operational level internal control activities:
the first line managers are responsible
for ensuring the personnel they supervise follow procedures and that their work
meets acceptable standards. They will
need to review the work of the
personnel they supervise, both while it is in process and after it is
completed, which helps identify problems so prompt corrective actions, if
needed, can be taken.
Appendix II
Major Contributors to This Report
Margaret E.
Begg, Assistant Inspector General for Audit (Compliance and Enforcement
Operations)
Frank Dunleavy, Director
Alan Lund, Audit Manager
Jean Kao, Lead Auditor
Appendix III
Commissioner C
Office
of the Commissioner – Attn: Chief of Staff C
Deputy
Commissioner for Services and Enforcement SE
Deputy Commissioner (Operations), Large Business and International Division SE:LB
Deputy Commissioner, Small Business/Self-Employed Division SE:S
Director, Collection, Small Business/Self-Employed Division SE:S:C
Director, Communications, Liaison, and Disclosure, Small Business/Self-Employed Division SE:S:CLD
Director, Examination, Small Business/Self-Employed Division SE:S:E
Director, Pre-Filing and Technical Guidance, Large Business and International Division SE:LB:PFTG
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 Internal Control OS:CFO:CPIC:IC
Audit Liaisons:
Commissioner, Small Business/Self-Employed Division SE:S
Commissioner, Large Business and International Division SE:LB
Appendix IV
Previous Audit Reports Related to This Statutory Review
The Internal Revenue Service Needs to Enhance Guidance on and Monitoring of Compliance With Procedures for Directly Contacting Taxpayers and Their Representatives (Reference Number 1999-10-076, dated September 30, 1999).
Letter Report: Improvements Have Been Implemented for Directly Contacting Taxpayers and Their Representatives (Reference Number 2000-10-132, dated September 18, 2000).
Letter Report: The Internal Revenue Service Has Not Implemented a Process to Monitor Compliance With Direct Contact Provisions (Reference Number 2001-10-116, dated July 23, 2001).
The
Internal Revenue Service Cannot Monitor Its Compliance With the Direct Contact
Provisions
(Reference
Number 2002-40-177, dated September 11, 2002).
Fiscal
Year 2003 Statutory Review of Restrictions on Directly Contacting Taxpayers
(Reference Number 2003-40-131, dated June 16, 2003).
Fiscal
Year 2004 Statutory Review of Restrictions on Directly Contacting Taxpayers (Reference Number
2004-40-059, dated February 24, 2004).
Fiscal
Year 2005 Statutory Review of Restrictions on Directly Contacting Taxpayers (Reference Number
2005-40-040, dated February 22, 2005).
Fiscal Year 2006 Statutory Review of Restrictions on
Directly Contacting Taxpayers (Reference Number 2006-40-136, dated August 28,
2006).
Fiscal Year 2007 Statutory Review of Restrictions on
Directly Contacting Taxpayers (Reference Number 2007-40-118, dated July 13,
2007).
Fiscal Year 2008 Statutory Review of Restrictions on
Directly Contacting Taxpayers (Reference Number 2008-40-090, dated March 27,
2008).
Fiscal Year 2009 Statutory Review
of Restrictions on Directly Contacting Taxpayers (Reference Number 2009-30-054,
dated March 24, 2009).
Fiscal Year 2010 Statutory
Review of Restrictions on Directly Contacting Taxpayers (Reference Number 2010-30-060, dated June 3,
2010).
Appendix V
Management’s Response to the Draft Report
DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
WASHINGTON, D.C. 20224
Commissioner
Small
Business/Self-Employed Division
August 8, 2011
MEMORANDUM
FOR MICHAEL R. PHILLIPS
DEPUTY INSPECTOR GENERAL FOR AUDIT
FROM: Faris R. Fink
/s/ Faris R. Fink
Commissioner, Small Business/Self-Employed
Division
SUBJECT: Draft Audit Report -
Fiscal Year 2011 Statutory Review of Directly Contacting Taxpayers (Audit #
201130004)
Thank you for
the opportunity to review your draft report titled: "Fiscal Year 2011
Statutory Review of Directly Contacting Taxpayers." Preservation of
taxpayer rights is of upmost importance to the IRS. We appreciate your
acknowledgement that IRS has an array of policies, procedures, and techniques
(internal controls) that are in line with the Government Accountability
Office's Standards for Internal Control in the Federal Government to
assist examiners and collectors in meeting their responsibilities to properly
consider and protect taxpayer rights when conducting audits and taking collection
actions.
At the
operational level, first-line managers over IRS collectors and examiners are a
key control as they are responsible for ensuring the personnel they supervise
follow procedures and their work meets acceptable standards. To assist managers
in ensuring procedures are followed and standards are met, the Internal Revenue
Manual (IRM) requires managers to conduct reviews over the work of the
personnel they supervise, both while it is in process and after it is
completed. These control techniques help identify problems so prompt corrective
actions, if needed, can be taken.
As noted in
your report, our quality measurement staffs annually review hundreds of closed
enforcement cases to measure and evaluate the quality of audits and collection
actions, communicate areas of concern to upper management, identify potential
training needs, and improve work processes. These reviews assess the degree to
which enforcement personnel are complying with procedures for protecting
taxpayer rights.
In addition
to reviews by first-line managers and the quality measurement staffs, mid-level
managers evaluate ongoing work in open audits and collection cases during their
operational reviews. Operational reviews are required to be performed at least
annually to ensure work is being done in conformance with procedures. These
processes serve as a quality control by identifying managerial, technical, and
procedural problems and providing a basis for corrective actions.
We appreciate
the recognition in your report that the evidence obtained from TIGTA's Office
of Investigations over the years suggests potential direct contact violations
are small considering that thousands of IRS enforcement personnel routinely
interact with millions of taxpayers and their representatives each year. We
take seriously every potential direct contact violation and while the potential
number of direct contacts is small, we believe that your report may overstate
the number of potential occurrences.
During your
annual audit for this year, you utilized unverified anecdotal accounts from
taxpayer representatives to cite possible indications of violations of taxpayer
rights. We believe these representatives may have misinterpreted our normal
audit procedures to request to interview the taxpayer, when appropriate, and
tour the taxpayer's business location as an attempt on our part to bypass the
representative's valid power of attorney which is not the case.
As discussed,
preservation of taxpayer rights is of utmost importance to the IRS and we continue
to take steps to ensure our employees are aware of direct contact provisions.
We concur with recommendations one and two and partially concur with
recommendation three. Attached is a detailed response outlining our corrective actions.
If you have
any questions, please contact me, or a member of your staff may contact Shenita Hicks, Director, Examination, at (859) 669-5526.
Attachment
Attachment
RECOMMENDATION 1:
The Deputy
Commissioner (Operations), LB&I Division, should ensure examiners and their
frontline managers take advantage of IRS's automated information systems to
identify and involve tax representatives during the initial stages of audits.
CORRECTIVE ACTION:
We concur
with this recommendation. The Deputy Commissioner (Operations), Large Business
and International (LB&I Division), will ensure that examiners and their
frontline managers follow current procedures regarding the direct taxpayer
contact provisions of the Internal Revenue Code (I.R.C.) §§ 7521 (b) (2) and
(c). The LB&I Division will provide written guidance to examiners and
frontline managers on their responsibility to take proper steps to review the
power of attorney information from the IRS automated systems prior to
contacting taxpayers.
IMPLEMENTATION DATE:
September 15,
2012
RESPONSIBLE OFFICIAL(S):
Director,
Pre-Filing and Technical Guidance (PFTG), LB&I Division
CORRECTIVE ACTION MONITORING PLAN:
We will
monitor this action as part of our internal management control process.
RECOMMENDATION 2:
The Deputy
Commissioner (Operations), LB&I Division, and the Director, Examination,
SB/SE Division, should coordinate in initiating actions to review the language
in the audit contact letter (Letter 2205)
and use the review results to revise the language, as needed, so it
is clear that tax representatives can attend all audit appointments on behalf
of taxpayers.
CORRECTIVE
ACTION:
We concur
with this recommendation. The Director, Examination, Small
Business/Self-Employed (SB/SE) Division, will coordinate with the Deputy
Commissioner (Operations), LB&I Division, to review the language in the
Initial Contact Letter (Letter 2205)
and revise the language, if needed, so it is clear that tax
representatives can attend all audit appointments on behalf of taxpayers.
IMPLEMENTATION DATE:
September 15,
2012
RESPONSIBLE OFFICIAL(S):
Director,
Examination Policy, SB/SE Division
Director, PFTG, LB&I Division
CORRECTIVE
ACTION MONITORING PLAN:
We will
monitor this action as part of our internal management control process.
RECOMMENDATION
3:
The Deputy
Commissioner (Operations), LB&I Division, and the Director, Examination,
SB/SE Division, should coordinate in initiating actions needed to provide
periodic refresher briefings for examiners on the importance of adhering to the
processes designed to recognize taxpayer representation.
CORRECTIVE
ACTION:
We agree that
it is important that examiners and managers have the appropriate guidance. In
April 2010, SB/SE revised the Internal Revenue Manual (IRM) 4.10.2 and 4.11.55
to provide additional directions to staff regarding the importance of adhering
to the processes designed to recognize taxpayer representation. We believe the
recent updates to the IRM, as well as any revisions made to the initial
appointment letter as determined from recommendation 2 above, will provide the
appropriate guidance.
IMPLEMENTATION
DATE:
September 15,
2012
RESPONSIBLE
OFFICIAL(S):
Director,
Examination Policy, SB/SE Division
Director,
PFTG, LB&I Division
CORRECTIVE
ACTION MONITORING PLAN:
We will monitor this action as part of our
internal management control process.
[1] See Appendix IV for a list of previous audit reports related to this review.
[2] The Performance and Results Information System is a management information system that provides the TIGTA with the ability to manage complaints received and investigations initiated.
[3] Pub. L. No. 100-647, 102 Stat. 3730 (1988) (codified as amended in scattered sections of 5 U.S.C. and 26 U.S.C.).
[4] Pub. L. No. 105-206, 112 Stat. 685 (codified as amended in scattered sections of 2 U.S.C., 5 U.S.C. app., 16 U.S.C., 19 U.S.C., 22 U.S.C., 23 U.S.C., 26 U.S.C., 31 U.S.C., 38 U.S.C., and 49 U.S.C.).
[5] GAO/AIMD-00-21.3.1, dated November 1999.
[6] This is a manual containing the IRS’s internal guidelines.
[7] These include, among others, IRS Business Master File and Centralized Authorization File. The Business Master File is a database that consists of Federal tax-related transactions and accounts for businesses. The Centralized Authorization File is a computerized system of records which houses authorization information from both powers of attorney and tax information authorizations.
[8] The Taxpayer Advocate Management Information System is an electronic database and case inventory control system used by Taxpayer Advocate Service function employees.
[9] The e–trak application is a web-based data tracking application that enables meaningful data management, tracking, retrieval, and reporting.
[10] The Performance and Results Information System is a management information system that provides the TIGTA with the ability to manage complaints received and investigations initiated.
[11] Fiscal Year 2009 Statutory Review of Restrictions on Directly Contacting Taxpayers (Reference Number 2009-30-054, dated March 24, 2009).