TREASURY INSPECTOR GENERAL
FOR TAX ADMINISTRATION
THE INTERNAL REVENUE SERVICE CAN FURTHER REDUCE THE BURDEN ON TAXPAYERS WHO DISAGREE WITH PROPOSED ASSESSMENTS
Reference No. 2000-10-033
Resolving unagreed tax examinations is a burdensome process for taxpayers and a costly one for the Internal Revenue Service (IRS). In 1997, the IRS Inspection Service (now the Treasury Inspector General for Tax Administration) issued a report titled, Review of Docketed Office Audit Cases in Western Region (Reference Number 980903, dated November 24, 1997). The review focused on actions the IRS could take to reduce the number of taxpayers who petition the United States (U.S.) Tax Court and who do not respond to the final notice of assessment.
Between 1994 and 1995, the Los Angeles, Northern California, and Southern California Districts accounted for a disproportionate number (about 43 percent) of the office audits that were petitioned to the U.S. Tax Court nationwide. This follow-up review was conducted in these three districts to determine whether or not the IRS took the corrective actions it planned and, when taken, whether or not the corrective actions were effective. The Regional Commissioner, Western Region, was responsible for completing corrective actions in response to the prior report.
The number of taxpayers petitioning the U.S. Tax Court from the Los Angeles, Northern California and Southern California Districts has declined significantly since the 1997 review. This decline in petitions reduced taxpayer burden and the IRSí costs of resolving disagreements. However, not all of the previously recommended corrective actions were taken. While the IRS has made considerable progress, we believe it should take additional actions to further reduce the number of taxpayers who petition the U.S. Tax Court and who do not respond to the final notice of assessment.
The Number of Taxpayers Petitioning the United States Tax Court Has Dropped Significantly
During the period April through September 1998, the percentage of office audits petitioned to the U.S. Tax Court from the Los Angeles, Northern California, and Southern California Districts was 39 percent lower than for the same period in 1997. We estimate that this decline has reduced the time taxpayers from these districts spent dealing with the IRS by about 225,000 days. We also estimate that the IRS reduced its costs to resolve disagreements in office audits by almost $800,000.
We attribute the decline in the number of taxpayers petitioning the U.S. Tax Court primarily to more group manager involvement. The initial step in IRS procedures for resolving disagreements with taxpayers about their assessments is for the group manager to discuss the issues with the taxpayer and attempt to settle the disagreement. Unlike the prior review, where only 22 percent of the sampled audits with disagreements showed evidence of managerial involvement, 82 percent of the audits with disagreements examined during this review showed evidence of group manager involvement.
Additional Changes in Correspondence Procedures Can Lead to Further Improvements
A significant number of taxpayers never respond to the IRSí correspondence regarding their examination. When this occurs, the IRS sends a final notice of assessment to the taxpayer, via certified mail, stating that he/she must pay the tax or petition the U.S. Tax Court within 90 days. If the taxpayer does not respond, the IRS assesses the tax. IRS data show that almost 54 percent of the dollars assessed in office audits from these three districts from January 1, 1998, through March 31, 1999, can be traced to taxpayers who did not respond to the final notice of assessment. Taxpayers assessed in this manner are not likely to pay the amounts assessed, which can cause the IRS to expend resources on collection efforts.
The lack of response may not be entirely the fault of the taxpayers. The previous audit report showed that almost 17 percent of letters notifying taxpayers of proposed changes contained addresses different from those on the U.S. Tax Court petitions, indicating the IRS might not have sent the notices to the proper address. Ideally, the IRS would be able to locate the taxpayer and resolve the issue with less correspondence and through less formal procedures than petitioning the U.S. Tax Court. In this regard, the previous audit report recommended that the IRS send letters of proposed changes to taxpayers, via certified mail and with return receipt requested, to help ensure the taxpayers received the notices or to identify incorrect addresses. Before committing to the extra cost of sending the letters by certified mail, the IRS wanted to test the impact certified letters had on reducing the number of taxpayers who ignore the final notice of assessment and who petition the U.S. Tax Court. Unfortunately, the IRS did not perform this test.
We also noted that, contrary to IRS guidelines, district offices did not always issue letters of proposed changes to taxpayers. In other instances, the letters of proposed changes were altered without permission from the National Office. The time given for some taxpayers to respond to the proposed changes was shortened from 30 days to 15 days. In other letters, taxpayers were threatened with a summons. Although the Regional Commissioner, Western Region, issued a memorandum instructing the districts to ensure letters of proposed changes are issued in all unagreed cases, no follow-up reviews were performed by regional officials to ensure the directive was followed. As a result, correspondence procedures were still not consistently followed, which could contribute to taxpayersí perceptions that they are not treated fairly.
Summary of Recommendations
We believe that sending letters of proposed changes by certified mail, with return receipt requested, will enable the IRS to identify cases for which it has incorrect taxpayer addresses. This information will help the IRS avoid mailing final notices of assessment that may not be received by the taxpayers. As a result of this action, the IRS should experience a reduction in the number of taxpayers who do not respond to the final notice of assessment and who petition the U.S. Tax Court. In addition, future management or quality reviews need to evaluate whether audit groups are adhering to correspondence procedures.
Managementís Response: IRS management concurred with our findings and agreed to take corrective action based on our recommendations. With respect to our first recommendation, IRS management proposed an alternative solution that uses additional address research techniques to ensure letters are sent to the taxpayerís most current address. In response to the second recommendation, IRS management will provide additional guidance to IRS employees and managers in the Examination of Returns and the Compliance and Customer Service Managers' Handbooks. Management will also include correspondence procedures in its planned Special Conformance Reviews.
Managementís comments are included in this report where appropriate, and the full text of managementís response appears as Appendix V.