TREASURY INSPECTOR GENERAL FOR TAX ADMINISTRATION

 

 

Fiscal Year 2012 Statutory Audit of Compliance With Notifying Taxpayers of Their Rights When Requested to Extend the Assessment Statute

 

 

 

September 4, 2012

 

Reference Number:  2012-30-102

 

 

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.

 

 

Phone Number  /  202-622-6500

E-mail Address /  TIGTACommunications@tigta.treas.gov

Website           /  http://www.tigta.gov

 

HIGHLIGHTS

FISCAL YEAR 2012 STATUTORY AUDIT OF COMPLIANCE WITH NOTIFYING TAXPAYERS OF THEIR RIGHTS WHEN REQUESTED TO EXTEND THE ASSESSMENT STATUTE

Highlights

Final Report issued on September 4, 2012

Highlights of Reference Number:  2012-30-102 to the Internal Revenue Service Deputy Commissioner for Services and Enforcement.

IMPACT ON TAXPAYERS

The IRS is required to notify taxpayers of their rights when requesting an extension of the statute of limitations for assessing additional taxes and penalties.  Based on the results of our review, TIGTA believes the IRS is complying with the intent of the law; however, there were some instances in which IRS employees did not document whether taxpayers or their representatives were advised of these rights.  Taxpayers might be adversely affected if the IRS does not follow requirements to notify both the taxpayers and their representatives of the taxpayers’ rights related to statute extensions.

WHY TIGTA DID THE AUDIT

TIGTA is required by law to annually determine whether the IRS complied with Internal Revenue Code Section 6501(c)(4)(B).  This requires the IRS to notify taxpayers of their rights to decline to extend the assessment statute of limitations or to request that any extension be limited to specific issues or a specific period of time.

WHAT TIGTA FOUND

TIGTA’s review of a statistical sample of 115 closed taxpayer audit files with statute extensions found that the IRS is compliant with Internal Revenue Code Section 6501(c)(4)(B).  However, four of the taxpayer audit files did not contain documentation to indicate whether taxpayers were directly advised of their rights before consenting to extend the time to assess tax.  In each of the four instances, the taxpayers’ representatives signed Form 872, Consent to Extend the Time to Assess Tax, and was notified of taxpayer rights regarding extending the assessment statute of limitations.  Although notification to the taxpayers’ representatives appears to meet the intent of the law, the IRS’s internal procedures require notification to be provided to both the taxpayer and the representative. 

In addition, TIGTA’s review found instances in which there was no documentation to support that the IRS complied with IRS procedures related to notifying taxpayers’ representatives when an authorization for third-party representation existed.  Our review included 100 taxpayer audit files that had authorizations for third-party representation and found that three of the taxpayer audit files did not contain documentation that the taxpayers’ representatives were provided with the required notifications.  

WHAT TIGTA RECOMMENDED

TIGTA did not make any recommendations in this report because the number of errors was relatively small and recommendations made in our previous audit reports are still valid for the issues reported.  Although we made no recommendations in this report, we did provide IRS officials with an opportunity to review the draft report.  IRS management did not provide any report comments.

 

September 4, 2012

 

 

MEMORANDUM FOR DEPUTY COMMISSIONER FOR SERVICES AND ENFORCEMENT

 

FROM:                       Michael E. McKenney /s/ Michael E. McKenney

                                  Acting Deputy Inspector General for Audit

 

SUBJECT:                  Final Audit Report – Fiscal Year 2012 Statutory Audit of Compliance With Notifying Taxpayers of Their Rights When Requested to Extend the Assessment Statute (Audit # 201230004)

 

This report presents the results of our review to determine whether the Internal Revenue Service (IRS) was complying with Internal Revenue Code Section 6501(c)(4)(B), which requires that the IRS provide notice to taxpayers of their rights to decline to extend the assessment statute of limitations or to request that any extension be limited to a specific period of time or specific issues.  The Treasury Inspector General for Tax Administration is statutorily required to provide information annually regarding the IRS’s compliance with this provision.[1]  The review is part of our Fiscal Year 2012 Annual Audit Plan and addresses the major management challenge of Taxpayer Protection and Rights.

We did not make any recommendations in this report because the number of errors was relatively small and the recommendations made in our previous audit reports are still valid for the issues reported.  Although we made no recommendations in this report, we did provide IRS officials with an opportunity to review the draft report.  IRS management did not provide us with any report comments.

Copies of this report are also being sent to the IRS managers affected by the report.

Please contact me at (202) 622-6510 if you have questions or Frank Dunleavy, Acting Assistant Inspector General for Audit (Compliance and Enforcement Operations), at (213) 894-4470 (Ext.128).

 

 

Table of Contents

 

Background

Results of Review

The Internal Revenue Service Is Compliant With Legal Requirements; However, Some Employees Are Not Following Internal Procedures to Notify Taxpayers

Some Audit Files Lacked Documentation to Support That Taxpayers’ Representatives Were Appropriately Notified of Taxpayers’ Rights As Required by Internal Revenue Service Procedures

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 – Error Rate Analysis

Appendix VI – Prior Reports on Compliance With Requests to Extend the Assessment Statute

Appendix VII – Audit Review Results by Division

 

 

Abbreviations

 

BMF

IMF

I.R.C.

Business Master File

Individual Master File

Internal Revenue Code

IRS

Internal Revenue Service

RRA 98

Restructuring and Reform Act of 1998

TIGTA

Treasury Inspector General for Tax Administration

 

 

Background

 

The IRS is required to advise taxpayers of their rights when requesting an extension of the statute of limitations for the assessment of additional taxes and penalties.

The Internal Revenue Service (IRS) is required by the IRS Restructuring and Reform Act of 1998 (RRA 98)[2] and the Internal Revenue Code (I.R.C.)[3] to advise taxpayers of their rights when requesting an extension of the statute of limitations for the assessment of additional taxes and penalties.  When the IRS audits a tax return and determines that there is an additional tax liability, the additional tax assessment must generally be processed within three years from the date the return was due or from the date on which the return was actually filed, whichever is later.  This three-year assessment statute of limitations normally cannot be extended without the taxpayer’s written consent.[4]  To extend the statute, the IRS generally requests that the taxpayer(s) provide a signed consent form, either Form 872, Consent to Extend the Time to Assess Tax, or Form SS-10, Consent to Extend the Time to Assess Employment Taxes.[5]

These consents extend the assessment statute of limitations to either a specific period of time or an unlimited, indefinite period.  The statute is usually extended for a period of time that both the IRS and the taxpayer agree is reasonable to complete the examination.  The consent can also be negotiated to apply only to certain audit issues.

In passing the RRA 98, Congress expressed concern that taxpayers had not always been fully aware of their rights to refuse to extend the statute of limitations or to request that a statute extension be limited to specific issues or a specific period of time.  Some taxpayers might believe that they are required to agree to an extension upon the request of the IRS.  Congress wanted to ensure that taxpayers were informed of their rights to refuse the proposed statute extension or to have it limited.

A taxpayer might agree to extend the assessment statute of limitations for the following reasons: 

A taxpayer might decide to limit or refuse to extend the assessment statute of limitations because the taxpayer might not want to:

The RRA 98 requires taxpayers to be informed of their rights to refuse to extend the period of limitations or to limit the extension to specific issues or a period of time.

RRA 98 Section (§) 3461(b)(2)(B) requires the IRS to “. . . notify the taxpayer of the taxpayer’s right to refuse to extend the period of limitations, or to limit such extension to particular issues or to a particular period of time, on each occasion when the taxpayer is requested to provide such consent.”  To implement this statutory requirement, the IRS revised its procedures to direct IRS employees to provide the taxpayer with a Letter 907, Request to Extend Assessment Statute, or Letter 967, Letter Transmitting Consent Extending Period of Limitation.  Included with these Letters should be the actual consent forms to be signed and Publication 1035, Extending the Tax Assessment Period.

The consent forms were revised to include a prominent statement informing taxpayers of their rights regarding assessment statute extensions and to provide information about Publication 1035.  Figure 1 shows that the revised consent forms also include a statement for the taxpayers’ representatives to sign, confirming they were notified of their rights regarding assessment statute extensions and the taxpayers were made aware of the same rights.

Figure 1:  Excerpt From Form 872

Figure 1 was removed due to its size.  To see Figure 1, please go to the Adobe PDF version of the report on the TIGTA Public Web Page.

Note:  The wording in the Form SS-10 is consistent with that shown in Form 872.

Source:  IRS Form 872.

IRS procedures require that any notice or other written communication required to be given to a taxpayer also be given to the taxpayer’s representative (unless restricted by the taxpayer).[6]  IRS employees are instructed to document in their audit file activity log whether the taxpayer was notified of his or her rights each time the IRS requested an assessment statute extension.  In addition, IRS internal procedures require employees to provide copies of any correspondence with a taxpayer’s representative to the taxpayer.

The Treasury Inspector General for Tax Administration (TIGTA) is required by the RRA 98 to provide information annually regarding the IRS’s compliance with I.R.C. § 6501(c)(4)(B).  This report presents the results of our thirteenth annual review of the IRS’s compliance with the statute extension provisions of the law.[7]  As in the previous 12 reports, we continued to identify some noncompliance with the required IRS procedures.

This review was performed at the Office of Appeals Headquarters, Large Business and International Division Headquarters, Small Business/Self-Employed Division Headquarters, Tax Exempt and Government Entities Division Headquarters, and Wage and Investment Division Headquarters in Washington, D.C., during the period October 2011 through April 2012.  We conducted this performance audit in accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objective.  We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objective.  Detailed information on our audit objective, scope, and methodology is presented in Appendix I.  Major contributors to the report are listed in Appendix II.

 

 

Results of Review

 

The Internal Revenue Service Is Compliant With Legal Requirements; However, Some Employees Are Not Following Internal Procedures to Notify Taxpayers

Our review of 115 taxpayer audit files[8] with statute extensions showed that the IRS is compliant with I.R.C. § 6501(c)(4)(B).  However, the audit files for four (4.77 percent)[9] of the 115 taxpayers in our statistical sample did not contain documentation to indicate whether taxpayers were directly advised of their rights.  Although legal requirements were satisfied when the taxpayers’ representatives signed Form 872 and were notified of the taxpayers’ rights regarding extending the assessment statute of limitations, there was no documentation in the audit files to show that taxpayers were directly informed of their rights.  Figure 2 shows the trends in the error rate from Fiscal Year 2007 to Fiscal Year 2012.  Appendix V provides additional details regarding the significance of the error rates.

Figure 2:  Error Rate – No Documentation on the

Taxpayer Being Informed

Figure 2 was removed due to its size.  To see Figure 2, please go to the Adobe PDF version of the report on the TIGTA Public Web Page.

Source:  Prior TIGTA audit reports (see Appendix VI).

IRS procedures require employees to provide copies of any correspondence with the representative to the taxpayer.  Specifically, the Internal Revenue Manual[10] states that “. . . notification must be made to the taxpayer…and the taxpayer’s representative. . .

The notification process is also explained in Publication 947, Practice Before the IRS and Power of Attorney, in which the IRS informs the taxpayer:

If you have a recognized representative, you and the representative will receive notices and other correspondence from the IRS. . . the IRS will send your representative(s) a duplicate of all computer-generated correspondence that is sent to you. . . .  The IRS employee handling the case is responsible for ensuring that the original and any requested copies of each manually-generated [sic] correspondence are sent to you and your representative(s) in accordance with your authorization.

Although notification to the taxpayer’s representative appears to meet the intent of the law, the failure to notify both the taxpayer and the representative violates the IRS’s internal procedures.  IRS procedures and publications are clear that both the taxpayer and the taxpayer’s representative be provided notices, including notification of the taxpayer’s rights.

We determined whether employees had advised taxpayers of their rights and considered the notification sufficient if any of the required documentation appeared to have been given to the taxpayers, or a log entry to that effect was found in the related taxpayer audit files.  The fact that we could not identify the required documentation in the audit file does not mean the taxpayers were not informed of their rights.  However, based upon the information available to us, we could not determine if the taxpayers were informed directly by the IRS.

Taxpayers could be negatively affected if the IRS does not comply with internal procedures requiring that taxpayers be directly notified of their rights related to extensions on the assessment statute of limitations.  Based on our sample results, from a universe of 9,175 taxpayer audit files with statute extensions, we projected there were 438 taxpayers[11] for which audit files did not contain documentation to show the taxpayers were directly advised of their rights when assessment statutes were extended.  We are 95 percent confident that the range of procedural errors is between 22 and 853 taxpayers.  However, because the number of errors was relatively small and consistent with prior years, we are not making any recommendations for this issue.

Some Audit Files Lacked Documentation to Support That Taxpayers’ Representatives Were Appropriately Notified of Taxpayers’ Rights As Required by Internal Revenue Service Procedures

IRS procedures require that any notice or other written communication required to be given to a taxpayer should also be given to the taxpayer’s representative (unless restricted by the taxpayer).[12]  IRS employees are instructed to document in their audit file activity log whether the taxpayer was notified of his or her rights each time the IRS requested an assessment statute extension.  This requirement applies to all computer-generated or manually generated notices or other written communications.

While IRS employees documented that the taxpayers were informed of their rights and the taxpayers signed the extensions, we found instances where there was no documentation to support that the IRS complied with IRS procedures related to notifying taxpayers’ representatives of the taxpayers’ rights when an authorization for third-party representation existed.  Our review of a statistical sample of 115 taxpayer audit files included 100 taxpayers[13] who had authorizations for third parties to represent the taxpayers before the IRS.  Of these 100 taxpayers, three (3.43 percent)[14] of the taxpayer audit files did not contain any documentation supporting that the taxpayers’ representatives were provided with the required notifications.  Based on our sample results, from a universe of 9,175 taxpayer audit files with statute extensions, we projected there were 268 taxpayers whose related audit files[15] did not contain documentation that the taxpayers’ representatives were provided with the required notifications.  We are 95 percent confident that the range is between three[16] and 583 taxpayers.  For these taxpayers, IRS management officials informed us that some employees may have overlooked the fact that the required information was not documented in the taxpayer audit files or the documents were separated from the taxpayer audit files.  Figure 3 shows the trends in the error rate from Fiscal Year 2007 to Fiscal Year 2012.  The error rates were calculated as a percentage of the number of taxpayers sampled who had authorized representatives for the identified year.  Appendix V provides additional details regarding the significance of the error rates.

Figure 3:  Error Rate – No Documentation on the Representative Being Informed

Figure 3 was removed due to its size.  To see Figure 3, please go to the Adobe PDF version of the report on the TIGTA Public Web Page.

Source:  Prior TIGTA audit reports (see Appendix VI).

Without the required documentation, we could not determine if the IRS properly notified the taxpayers’ representatives in these three taxpayer audit files.  Taxpayers might be adversely affected if the IRS does not follow requirements to notify both the taxpayers and their representatives of the taxpayers’ rights related to statute extensions.  Historically, the Federal Government expressed concern that in some cases taxpayers were not fully aware of their right to refuse to extend the statute of limitations and felt that they had no choice but to agree to the extension, after it had been signed.  However, because the number of errors was relatively small and recommendations made in our previous audit reports are still valid for the issues reported, we are not making any recommendations.

 

Appendix I

 

Detailed Objective, Scope, and Methodology

 

Our overall audit objective was to determine whether the IRS was complying with I.R.C. § 6501(c)(4)(B), which requires that the IRS provide notice to taxpayers of their rights to decline to extend the assessment statute of limitations or request that any extension be limited to a specific period of time or specific issues.  To accomplish this objective, we:

I.                 Determined whether taxpayers and their designated representatives are being advised of their rights when the IRS requests to extend the assessment statute of limitations.

A.    Reviewed the Internal Revenue Manual,[17] IRS memoranda, IRS Counsel Opinions, and Appeals guidelines to determine if there were any changes to existing policies and procedures for processing requests to extend the assessment statute of limitations since our last audit.

B.    Identified a universe of 6,344 Individual Master File (IMF)[18] and 2,831 Business Master File (BMF)[19] taxpayer audit files from the combined IMF and BMF with closed examinations for which the assessment statute was extended.  The period for the IMF and BMF taxpayer audit files was from January 1 through June 30, 2011.

1.     Validated the IMF and the BMF data by examining a random sample of 30 (15 from each Master File extract) taxpayers.  This random sample was used for data validation and not for projecting or reporting results.  The validation test results demonstrated that the data were reliable and could be used to meet the objective of this audit.

2.     Developed a statistical sampling plan using a 95 percent confidence level, an expected error rate of 8 percent, and a precision of ±7 percent, which resulted in a minimum sample size of 115 taxpayer audit files.  The 115 audit files consisted of 58 IMF and 57 BMF taxpayers.  A statistical sample was taken because we wanted to estimate the number of taxpayers in the universe for which taxpayer rights were potentially affected.

3.     Used RAT-STATS[20] to select 300 (150 IMF and 150 BMF) taxpayer audit files from the universe identified in Step I.B.  We selected more than our sample of 115 taxpayer audit files in the event that some of the files received were incomplete (e.g., did not include all related tax years, audit file history notes, etc.), which would prevent us from performing our review of such files. 

4.     Screened the taxpayer audit files in Step I.B.3. until we obtained our valid sample of 115 taxpayer audit files.  Specifically, we screened 227 of the taxpayer audit files received.  Of those 227 taxpayer audit files screened, we identified 115 files that were complete taxpayer audit files. 

C.    Reviewed the 115 selected taxpayer audit files and related audit files for the necessary documentation to verify whether taxpayers and their representatives, if applicable, were properly advised of their rights regarding assessment statute extensions.  We then discussed exceptions with the various business unit coordinators for agreement to the facts.

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 policies, procedures, and practices used by the Office of Appeals, Large Business and International Division, Small Business/Self-Employed Division, Tax Exempt and Government Entities Division, and Wage and Investment Division as they relate to notifying taxpayers of their rights to decline to extend the assessment statute of limitations or request that any extension be limited to specific issues or a specific period of time.  We evaluated these controls by reviewing applicable manuals and documentation, interviewing management from these functions, and reviewing a statistical sample of 58 individual and 57 business taxpayer audit files, for a total sample of 115 taxpayer audit files.

 

Appendix II

 

Major Contributors to This Report

 

Margaret E. Begg, Assistant Inspector General for Audit (Compliance and Enforcement Operations)

Frank Dunleavy, Acting Assistant Inspector General for Audit (Compliance and Enforcement Operations)

Michelle Philpott, Acting Director

Alberto Garza, Acting Audit Manager

Donna Saranchak, Lead Auditor

Mike Della Ripa, Senior Auditor

Ashley Weaver, Auditor

Joseph L. Katz, Ph.D., Contractor, Statistical Sampling Consultant

 

Appendix III

 

Report Distribution List

 

Commissioner  C

Office of the Commissioner – Attn:  Chief of Staff  C

Commissioner, Large Business and International Division  SE:LB

Commissioner, Small Business/Self-Employed Division  SE:S

Commissioner, Tax Exempt and Government Entities Division  SE:T

Commissioner, Wage and Investment Division  SE:W

Chief, Appeals  AP

Chief Counsel  CC

Deputy Commissioner, Large Business and International Division  SE:LB

Deputy Commissioner, Small Business/Self-Employed Division  SE:S

Deputy Commissioner, Tax Exempt and Government Entities Division  SE:T

Deputy Commissioner, Wage and Investment Division  SE:W

Director, Communications and Liaison, Tax Exempt and Government Entities Division 

SE:T:CL

Director, Communications, Liaison and Disclosure, Small Business/Self-Employed Division  SE:S:CSO

Director, Examination, Small Business/Self-Employed Division  SE:S:E

Director, Exempt Organizations, Tax Exempt and Government Entities Division  SE:T:EO

Director, Field Specialists, Large Business and International Division  SE:LB:FS

Director, Communication and Liaison, Large Business and International Division  SE:LB:M:CL

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, Large Business and International Division  SE:LB

Commissioner, Small Business/Self-Employed Division  SE:S

Commissioner, Tax Exempt and Government Entities Division  SE:T

Commissioner, Wage and Investment Division  SE:W

Chief, Appeals  AP

Chief Counsel  CC

 

Appendix IV

 

Outcome Measures

 

This appendix presents detailed information on the measurable impact that current findings will have on tax administration.  These benefits will be incorporated into our Semiannual Report to Congress.

Type and Value of Outcome Measure:

Methodology Used to Measure the Reported Benefit:

To determine the number of taxpayers for which there was no documentation to support that the taxpayers were directly advised of their rights, we identified 6,344 taxpayer audit files from the universe of IMF and 2,831 taxpayer audit files from the universe of BMF taxpayer audit files in which the assessment statute was extended and the examination closed as shown in Figure 1.  The time period was January 1 through June 30, 2011.  For both universes, we used a 95 percent confidence level, an expected error rate of 8 percent, and a ±7 percent precision to determine our sample size of 115 taxpayer audit files (58 individual and 57 business taxpayers).

Figure 1:  Statistical Sampling Data

Strata

Universe Size

Sample Size

IMF Taxpayer Audit Files

6,344

58

BMF Taxpayer Audit Files

2,831

57

Totals

9,175

115

Source:  TIGTA analysis of an extract from the IMF and BMF to identify the universe of closed
 IMF  and BMF records having assessment statutes of limitations extended by taxpayer consent.

Figure 2:  Weight of Strata in Universe

Strata


Universe Size per Stratum

Weight of Each Stratum in Universe
(Stratum Universe Size/
Total Universe Size)
[21]

IMF Taxpayer Audit Files

6,344

69.1%

BMF Taxpayer Audit Files

2,831

30.9%

Totals

9,175

100.00%

Source:  TIGTA sampling plan and methodology.

Figure 3:  Error Rate per Stratum

Strata

Number
of Errors per Stratum

Sample Size per Stratum

Error Rate per Stratum

IMF Taxpayer Audit Files

4

58

6.90%

BMF Taxpayer Audit Files

0

57

0.00%

Totals

4

115

 

Source:  TIGTA sampling plan and taxpayer audit file analysis.

Figure 4:  Weighted Average Error Rate Calculation for Stratified Sample

Strata

Error Rate per Stratum

Weight in Universe per Stratum

Weight of Error Rate per Stratum

IMF Taxpayer Audit Files

6.90%

69.1%

4.77%

BMF Taxpayer Audit Files

0.00%

30.9%

0.00%

Weighted average error rate for sample

4.77%

Source:  TIGTA analysis of:  1) an extract from the IMF and BMF to identify the universe of closed IMF and BMF records having assessment statutes of limitations extended by taxpayer consent and 2) results of audit file testing.

Type and Value of Outcome Measure:

Methodology Used to Measure the Reported Benefit:

To determine the number of taxpayers for which there was no documentation to support that the taxpayers were directly advised of their rights, we identified 6,344 taxpayer audit files from the universe of IMF and 2,831 taxpayer audit files from the universe of BMF taxpayer audit files in which the assessment statute was extended and the examination closed, as shown in Figure 5.  The time period was January 1 through June 30, 2011.  For both universes, we used a 95 percent confidence level, an expected error rate of 8 percent, and a ±7 percent precision to determine our sample size of 115 taxpayer audit files (58 individual and 57 business taxpayers).

Figure 5:  Statistical Sampling Data

Strata

Universe Size

Sample Size

IMF Taxpayer Audit Files

6,344

58

BMF Taxpayer Audit Files

2,831

57

Totals

9,175

115

Source:  TIGTA analysis of an extract from the IMF and BMF to identify the universe of closed
IMF and BMF records having assessment statutes of limitations extended by taxpayer consent.

Figure 6:  Weight of Strata in Universe

Strata

Universe Size per Stratum

Weight of Stratum in Universe (Stratum Universe Size/
Total Universe Size)
[22]

IMF Taxpayer Audit Files

6,344

69.1%

BMF Taxpayer Audit Files

2,831

30.9%

Totals

9,175

100.00%

Source:  TIGTA sampling plan and methodology.

Figure 7:  Error Rate per Stratum

Strata

Number
of Errors per Stratum

Sample Size per Stratum

Error Rate per Stratum

IMF Taxpayer Audit Files

2

49

4.08%

BMF Taxpayer Audit Files

1

51

1.96%

Totals

3

100

 

Source:  TIGTA sampling plan and taxpayer audit file analysis.

Figure 8:  Weighted Average Error Rate Calculation for Stratified Sample

Strata

Error Rate per Stratum

Weight of Stratum in Universe

Weight of Error Rate

IMF Taxpayer Audit Files

4.08%

69.1%

2.82%

BMF Taxpayer Audit Files

1.96%

30.9%

0.61%

Weighted average error rate for sample

3.43%

Source:  TIGTA analysis of:  1) an extract from the IMF and BMF to identify the universe of closed IMF and BMF records having assessment statutes of limitations extended by taxpayer consent and 2) results of audit file testing.

Figure 9:  Error Rate per Overall Sample Stratum

Strata

Number
of Errors per Stratum

Sample Size per Stratum

Error Rate per Stratum

IMF Taxpayer Audit Files

2

58

3.45%

BMF Taxpayer Audit Files

1

57

1.75%

Totals

3

115

 

Source:  TIGTA sampling plan and taxpayer audit file analysis.

Figure 10:  Weighted Average Error Rate Calculation for Overall Stratified Sample

Strata

Error Rate per Stratum

Weight of Stratum in Universe

Weight of Error Rate

IMF Taxpayer Audit Files

3.45%

69.1%

2.39%

BMF Taxpayer Audit Files

1.75%

30.9%

0.54%

Weighted average error rate for sample

2.93%

Source:  TIGTA analysis of:  1) an extract from the IMF and BMF to identify the universe of closed IMF and BMF records having assessment statutes of limitations extended by taxpayer consent and 2) results of audit file testing.

We shared the methodology for our outcome measures with a contracted statistical expert who confirmed the accuracy of our methodology and projections.

 

Appendix V

 

Error Rate Analysis

 

This appendix presents information on the sample error rates identified during this review, as well as those identified in prior TIGTA reviews.[24]  As shown in Figures 1 and 2, the sample error rates identified in Fiscal Years 2007 through 2012 include a confidence band and corresponding confidence intervals.[25]  We are 95 percent confident that the true error rates fall within the lower and upper limit[26] error rates.

As noted in this report, we found that the taxpayer audit files for four (4.77 percent) of the 115 taxpayers in our statistical sample did not contain documentation to indicate whether taxpayers were directly advised of their rights.  Our statistical sample was based on a 95 percent confidence level and, as a result, we calculated the lower and upper limit error rates to show the confidence interval boundaries related to this fiscal year’s error rate, as well as the error rates for the past five fiscal years.  For example, as shown in Figure 1, the error rate for our sample of Fiscal Year 2012 taxpayer audit files was 4.77 percent, and we are 95 percent confident that the true error rate falls between the 0.24 percent (lower limit) and 9.3 percent (upper limit). 

Figure 1:  Error Rate – No Documentation on the Taxpayer Being Informed

Figure 1 was removed due to its size.  To see Figure 1, please go to the Adobe PDF version of the report on the TIGTA Public Web Page.

Source:  Prior TIGTA audit reports.

In addition, our review of the stratified random sample of 115 taxpayer audit files included a stratified subsample of 100 taxpayers who had authorizations for third parties to represent the taxpayers before the IRS.  We have no reason to believe that this subsample of taxpayer audit files with taxpayer representatives in each stratum is biased.  We estimate that 3.43 percent of the taxpayer audit files did not contain any documentation supporting that the taxpayers’ representatives were provided with the required notifications.  We calculated the lower and upper limit error rates to show the confidence interval boundaries related to this fiscal year’s error rate, as well as the error rates for the past five fiscal years.  For example, as shown in Figure 2, the error rate for our sample of Fiscal Year 2012 taxpayer audit files was 3.43 percent, and we are 95 percent confident that the true error rate falls between the 0.03 percent (lower limit) and 7.48 percent (upper limit).  If the stratified subsample of taxpayer audit files with taxpayer representatives were biased, then the error rate projection for Fiscal Year 2012 could be substantially higher.

Figure 2:  Error Rate – No Documentation on the

 Representative Being Informed

Figure 1 was removed due to its size.  To see Figure 1, please go to the Adobe PDF version of the report on the TIGTA Public Web Page.

Source:  Prior TIGTA audit reports.

 

Appendix VI

 

Prior Reports on Compliance With Requests to Extend the Assessment Statute

 

The TIGTA has previously performed 12 mandatory audits in this subject area.  These audits were:

TIGTA, Ref. No. 2011-30-055, Fiscal Year 2011 Statutory Audit of Compliance With Notifying Taxpayers of Their Rights When Requested to Extend the Assessment Statute (Jun. 2011).

TIGTA, Ref. No. 2010-30-103, Fiscal Year 2010 Statutory Audit of Compliance With Notifying Taxpayers of Their Rights When Requested to Extend the Assessment Statute (Aug. 2010).

TIGTA, Ref. No. 2009-30-113, Fiscal Year 2009 Statutory Audit of Compliance With Notifying Taxpayers of Their Rights When Requested to Extend the Assessment Statute (Aug. 2009).

TIGTA, Ref. No. 2008-40-127, Fiscal Year 2008 Statutory Audit of Compliance With Notifying Taxpayers of Their Rights When Requested to Extend the Assessment Statute (Jun. 2008).

TIGTA, Ref. No. 2007-40-167, Fiscal Year 2007 Statutory Audit of Compliance With Notifying Taxpayers of Their Rights When Requested to Extend the Assessment Statute (Aug. 2007).

TIGTA, Ref. No. 2006-40-163, Fiscal Year 2006 Statutory Audit of Compliance With Notifying Taxpayers of Their Rights When Requested to Extend the Assessment Statute (Sept. 2006).

TIGTA, Ref. No. 2005-40-112, Fiscal Year 2005 Statutory Audit of Compliance With Notifying Taxpayers of Their Rights When Requested to Extend the Assessment Statute (Jul. 2005).

TIGTA, Ref. No. 2004-40-108, Fiscal Year 2004 Statutory Audit of Compliance With Notifying Taxpayers of Their Rights When Requested to Extend the Assessment Statute (Jun. 2004).

TIGTA, Ref. No. 2003-40-193, Fiscal Year 2003 Statutory Audit of Compliance With Notifying Taxpayers of Their Rights When Requested to Extend the Assessment Statute (Sept. 2003).

TIGTA, Ref. No. 2002-40-175, Improved Documentation Is Needed to Ensure Taxpayers Are Informed of Their Rights When Requested to Extend the Assessment Statute (Sept. 2002).

TIGTA, Ref. No. 2001-10-157, Most Taxpayers Are Advised of Their Rights Before Signing an Agreement to Extend the Assessment Statute of Limitations (Sept. 2001).

TIGTA, Ref. No. 2000-10-142, Information Provided to Taxpayers When Requesting Extensions of the Assessment Statute of Limitations Can Be Improved (Sept. 2000).

 

Appendix VII

 

Audit Review Results by Division

 

Compliance With Requirement to Notify Taxpayers of Their Rights

Division[27]

Totals

 

 IMF/BMF

Appeals

 

 IMF/BMF

LB&I

 IMF/BMF

SB/SE

 IMF/BMF

TE/GE

 IMF/BMF

W&I

 

 IMF/BMF

Number of Taxpayer Audit Files That Did Not Contain Documentation That Taxpayers Were Directly Informed of Their Rights as Required by Internal Procedures

0/0

0/0

4/0

0/0

0/0

4/0

Number of Taxpayer Audit Files Reviewed

5/9

1/18

48/27

0/3

4/0

58/57

Total Number of IMF and BMF Taxpayer Audit Files Reviewed

14

19

75

3

4

115

 

Compliance With Requirement to Notify Representatives of Taxpayer Rights

Division

Totals

 

IMF/BMF

Appeals

 

 IMF/BMF

LB&I

 

IMF/BMF

SB/SE

 

IMF/BMF

TE/GE

 

IMF/BMF

W&I

 

 IMF/BMF

Number of Taxpayer Audit Files That Did Not Contain Documentation That Taxpayers’ Representatives Were Provided With Copies of the Notification of the Taxpayers’ Rights

0/0

0/1

2/0

0/0

0/0

2/1

Number of Taxpayer Audit Files Reviewed

5/8

0/17

40/24

0/2

4/0

49/51

Total Number of IMF and BMF Taxpayer Audit Files Reviewed

13

17

64

2

4

100

 



[1] Internal Revenue Code Section 7803(d)(1)(c).

[2] RRA 98 § 3461(b)(2)(B), 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.).

[3] I.R.C. § 6501(c)(4)(B).

[4] There are some exceptions to the three-year statute of limitations.  For example, I.R.C. § 6501(c)(1) extends the assessment statute indefinitely when false or fraudulent returns are filed.

[5] IRS employees who often request assessment statute extensions are examiners in the various Examination functions of the business divisions and appeals officers in the Office of Appeals.

[6] Conference and Practice Requirements, Statement of Procedural Rules, 26 C.F.R. § 601.506 (2002).

[7] See Appendix VI for a list of our prior reports.

[8] Consisting of 58 individual and 57 business taxpayers.

[9] The error rate of 4.77 percent is based on the weighted average error rate that has been rounded to the nearest percent, with a 95 percent confidence interval between 0.24 percent (lower limit) and 9.3 percent (upper limit).  See Appendix IV for the calculation.

[10] Internal Revenue Manual 25.6.22 (Aug. 26, 2011).

[11] See Appendix IV for details.

[12] Conference and Practice Requirements, Statement of Procedural Rules, 26 C.F.R. § 601.506 (2002).

[13] Consisting of 49 individual and 51 business taxpayers.

[14] The error rate of 3.43 percent is based on the weighted average error rate that has been rounded to the nearest percent, with a 95 percent confidence interval between 0.03 percent (lower limit) and 7.48 percent (upper limit).  We have no reason to believe that the subsample of taxpayer audit files with taxpayer representatives in each stratum is biased.  If the subsample were biased, then the error rate projection could be substantially higher.  See Appendix IV for the calculation and Appendix V for additional details regarding the significance of the error rates.

[15] Although we were able to determine that there were 100 taxpayer representatives in our sample of 115 taxpayer audit files, we were unable to determine the true number of taxpayer representatives in our universe of 9,175 taxpayer audit files with statute extensions.  Therefore, this projection is based on the 115 taxpayer audit files reviewed, which is further explained in Appendix IV.  

[16] Under the normal approximation, we obtained a lower limit of a negative number for the range.  We know there are at least three errors and have used that number as our lower limit.

[17] Internal Revenue Manual 25.6.22 (Aug. 26, 2011).

[18] The IRS database that maintains transactions or records of individual tax accounts. 

[19] The IRS database that consists of Federal tax-related transactions and accounts for businesses.  These include employment taxes, income taxes on businesses, and excise taxes.

[20] RAT-STATS is a statistical software package.  The software was initially developed by the Regional Advanced Techniques Staff (RATS) in San Francisco, of the Office of Inspector General for the Department of Health and Human Services.

[21] Percentages are rounded.

[22] Percentages are rounded.

[23] Under the normal approximation, we obtained a lower limit of a negative number for the range.  We know there is at least three errors and have used that number as our lower limit.

[24] See Appendix VI for a list of our prior reports.

[25] A confidence band represents the uncertainty in an estimate over several periods of time.  The confidence interval represents the uncertainty in an estimate at a single time period.

[26] Confidence limits are the lower and upper boundaries of a confidence interval; that is, the values that define the range of a confidence interval.  The upper and lower boundaries of a 95 percent confidence interval are the 95 percent confidence limits.

[27] Office of Appeals, Large Business and International (LB&I) Division, Small Business/Self-Employed (SB/SE) Division, Tax Exempt and Government Entities (TE/GE) Division, and Wage and Investment (W&I) Division.