TREASURY INSPECTOR GENERAL
FOR TAX ADMINISTRATION
THE NEW JERSEY DISTRICT NEEDS TO EXECUTE LEVY ACTIONS
CONSISTENT WITH SOUND TAX ADMINISTRATION AND CONCERN
FOR TAXPAYER TREATMENT
Reference No. 199930069
The Office of Audit performed two national audits in Fiscal Year (FY) 1998 that included coverage of the Collection Division in the New Jersey District. One audit focused on the use of Collection performance measures and statistics. The other audit focused on the use of seizure authority in the Collection Field function (CFf). Based on a sample of seizures from 11 districts, 50 percent of the cases with legal and taxpayer contact problems were attributable to the New Jersey District. These practices did not conform to the notice and contact requirements that are designed to protect taxpayers’ rights.
This audit was initiated to determine whether the New Jersey District CFf properly exercised levy authority by following legal and procedural requirements, and by using sound business judgment in the treatment of taxpayers.
To accomplish our objective, we reviewed levy actions other than seizures that occurred in FY 1997. In this regard, the New Jersey CFf issued approximately 71,000 levies in FY 1997; the second highest number of levies issued by any one district. This represented a 164 percent increase from FY 1995, while the national increase was 11 percent over the same period. We also estimated that the New Jersey District issued about 30,000 wage levies as a result of a matching initiative with the New Jersey Department of Labor (DOL).
The New Jersey District systematically violated Internal Revenue Service (IRS) policy and procedural requirements in its use of levy authority. The following are summaries of the significant findings during this audit.
- Required procedures were not followed in 92 percent of the 264 levies we reviewed. These procedures are designed to assess a taxpayer’s ability to pay, ensure that levy is the proper course of action, and ensure that taxpayers are notified prior to levy. Procedural deficiencies included no attempt to contact the taxpayer in person or by telephone in 85 percent of the cases. See Appendix VI for a detailed listing of guidelines governing the use of levy authority.
- In five percent of the levies we reviewed, taxpayers were not afforded their right to legal notification prior to the levy. This occurred because revenue officers were instructed to issue levies without ensuring that valid "Notices of Intent to Levy" were issued before or after assignment to the CFf.
- In 35 of the cases we analyzed, levies were issued on taxpayers who were:
- Experiencing medical or financial hardships.
- Not liable for tax.
- Currently under audit in Examination Division.
- We requested an opinion from the IRS’ Regional Counsel regarding possible remedies to taxpayers who were subjected to improper levy action. In 4 of 19 cases reviewed, Counsel concluded that the taxpayers may have a remedy under 26 U.S.C. § 6343 (1986) and/or 26 U.S.C. § 7433 (1986).
- Seventy-six percent (200 of 264) of the cases we analyzed were disposed of as Currently Not Collectible (CNC) after the levy action. Of those CNC cases, 14 percent (27 cases) were closed as "hardship." Issuing levies in hardship situations without first determining the taxpayer’s financial condition is contrary to IRS policy.
- The District’s practice of levying as the first action on a taxpayer case without attempting to contact taxpayers, conducting initial analyses, or researching case histories was prevalent in most cases we reviewed. This practice violated procedural requirements and led to mistreatment of taxpayers. The practice was most prevalent in the DOL Project, where levies were generally issued as the first action on cases in an effort to close taxpayer cases quickly to help meet statistical goals.
- Because of poor documentation of the DOL Project, we could not determine the actual number of taxpayers who were affected, or identify the individual taxpayers themselves. We estimated that 30,000 levies were issued on 8,500 taxpayers; however, more than 56,000 taxpayers were potentially at risk for improper levy action by the New Jersey District as a result of the DOL matching initiative. The District should have maintained clear documentation on how taxpayers were identified and selected for levy action.
- The objective of the DOL matching initiative was to provide productive work to the CFf. However, our review of 134 DOL cases indicated that the project adversely affected productivity. For example, the District closed 112 of 134 (84 percent) cases as CNC; 91 of the 112 (81 percent) cases were closed "unable to contact" or "unable to locate." In 128 of the 134 (95 percent) cases, there was no documented initial attempt to contact the taxpayer.
- Although the District’s "Best Practice" documentation indicated that the basis for the DOL initiative was to identify "uncooperative" and delinquent taxpayers for enforcement action, there was virtually no attempt to assess taxpayers’ willingness to cooperate and/or their ability to pay prior to the levy actions.
- We found indications that the IRS’ Northeast Region may have had doubts about the use of the DOL initiative as a means for obtaining goals. There are also indications that DOL Project cases were, on paper, retained in the inventory of a previously disbanded group to help meet an overage percentage goal.
Summary of Recommendations
The IRS has a legitimate need to use a levy as an administrative means to enforce collection of taxes. Enforcement is an important element of an effective compliance program. However, when levying taxpayers, the IRS must ensure that appropriate legal and procedural requirements are followed and that taxpayers are treated properly.
The New Jersey District revised levy procedures during our audit to curtail the practice of levying as the first action. The IRS also recently implemented a requirement to warn taxpayers of possible enforcement action before levying if the most recent "Notice of Intent to Levy" is over 180 days old. The above measures plus corrective actions to address findings in our prior audit report titled, Review of Special Projects in the New Jersey District Collection Division (Reference Number 093307), dated March 15, 1999, will address many of the conditions identified in this review.
In response to our recommendations in the Review of Special Projects in the New Jersey District Collection Division, the IRS stated that all special projects in the New Jersey District Collection Division have ended. The response also included the following additional corrective actions:
- Revised review and approval procedures have been instituted regarding all District seizure actions.
- Training will stress the need for prudent use of levies as an enforcement tool.
- District Counsel will review and approve all locally developed notices.
- The New Jersey District will establish review, oversight and documentation procedures for all future special projects.
- District Office Research and Analysis (DORA) Offices will secure sound empirical data to support all future projects.
- Special projects will conform to Compliance Initiative Project guidelines, including requirements to ensure proper initiation and re-authorization.
In addition to the above actions, the New Jersey District should:
- Emphasize the policy and procedural requirements on the use of levy authority, including requirements outlined in Appendix VI of this report.
- Review levy actions taken during the past nine months to identify instances that meet criteria requiring remedies to taxpayers.
Management’s Response: IRS management agreed with our recommendations. The Commissioner responded that all field personnel in the New Jersey District Collection Division were provided reinforcement training on legal and procedural requirements for levies. The District also developed a check sheet to help ensure that applicable levy processes, procedures, and legal requirements are followed. Furthermore, the IRS revised the Internal Revenue Manual to ensure attempted contact with taxpayers prior to levy action. The Collection Quality Management System will check to determine whether revenue officers attempted contact prior to enforcement action.
During case reviews, New Jersey District Collection group managers will check for case defects and take appropriate corrective actions. Collection management will also review levy actions in the New Jersey District during the past 6 months to identify instances that meet criteria requiring remedies to taxpayers.
Management’s complete response to a draft of this report is included as Appendix VII.