TREASURY INSPECTOR GENERAL
FOR TAX ADMINISTRATION
ADDITIONAL ACTION IS NEEDED TO ELIMINATE ILLEGAL TAX PROTESTER DESIGNATIONS
Reference No. 2000-10-119
The Internal Revenue Service (IRS) Restructuring and Reform Act of 1998 (RRA 98) requires the IRS to stop designating taxpayers as Illegal Tax Protesters (ITP) or any similar designation. This ITP designation was used previously by the IRS to identify individuals and businesses using methods that were not legally valid to protest the tax laws. The Congress was concerned that some taxpayers were permanently labeled and stigmatized by this designation.
Since the ITP designation was recorded on the IRS Masterfile and often became a permanent mark on the taxpayerís record, the RRA 98 specifically required the removal of all existing ITP designations from the IRSí Individual Masterfile. In addition, the RRA 98 stated that the IRS should disregard any such designation not located in the Individual Masterfile.
The United States Code requires the Treasury Inspector General for Tax Administration (TIGTA) to annually evaluate the IRSí compliance with the prohibition to use the ITP or any similar designation. The objective of this audit was to determine if the IRS complied with the provisions of RRA 98 ß 3707 and internal IRS guidelines to not designate taxpayers as an ITP or any similar designation. The TIGTA completed its first review of this provision during Fiscal Year (FY) 1999. In that prior review, we conducted limited testing of the IRS Masterfile, internal documents, employee case files, and local inventory systems to determine whether ITP designations were still being used. In our FY 2000 review, we have expanded testing in each of these areas to better determine the IRSí compliance with the law nationwide.
Since the effective date of the RRA 98, the IRS has taken several actions to comply with the prohibition on the use of the ITP designation. Examination Division management requested a computer programming change to remove and prevent the ITP designation from posting on the IRSí Individual Masterfile. Management in different IRS functions issued employee directives to discontinue, remove, or disregard ITP references within computer systems, case files, operating manuals, and other publications. In addition, heads of offices were required to review all applicable IRS databases, taxpayer cases, training courses, and other documents by June 1999 to certify whether any ITP references existed. The national ITP certification reported no significant issues with respect to ITP references or coding in computer case inventory systems, manuals, other publications, or case files. However, we did identify ITP designations that violated the RRA 98 in several of these areas.
Although IRS management took actions designed to prevent ITP designations, some actions were not properly performed. The IRS was not always in compliance with the RRA 98 or its internal guidelines because ITP designations and references were still used.
The IRS has established two new programs that were previously components of the ITP Program. The Employee Protection System will focus on employee safety, and the Frivolous Return Program will address taxpayers who use frivolous arguments to avoid tax compliance. These programs are still in the development stage and were not fully operational at the time of our review.
The Illegal Tax Protester Designation Was Properly Removed and Controls Were Implemented to Prevent Its Use on the Masterfile
As required by the RRA 98, the IRS removed the ITP designation from its Individual Masterfile in January 1999. Using computer extracts of the IRS Masterfile obtained in August 1999 and April 2000, we verified that the ITP designation does not exist on any taxpayer account.
There were approximately 57,000 taxpayer accounts with the ITP designation on the IRS Masterfile before the removal mandated by the RRA 98. Because the RRA 98 also prohibited the IRS from using any designation similar to the ITP, we reviewed these accounts to determine if there was any movement to another Masterfile designation. The prior ITP designation on the Masterfile was one of eight designations used to accelerate enforcement action on tax accounts. We found that there were no reassignments of the 57,000 taxpayers formerly designated as ITPs to any of the other eight Masterfile designations or to the Potentially Dangerous Taxpayer (PDT) Masterfile designation.
Case Files and Computer Systems Still Contain References to Illegal Tax Protesters That Were Made After the Effective Date of the Prohibition
The RRA 98 directed the IRS to no longer designate taxpayers as ITPs and to disregard all previous references to ITPs. While IRS management issued directives to comply with this provision, case files and computer systems still contain references to ITPs made after the effective date of the law.
From a judgmental sample of 974 case files in the Appeals, Collection, Examination, and Taxpayer Advocate offices in 2 service centers and 2 district offices, we found IRS employees made references to ITPs in 96 case files after the effective date of the RRA 98. In addition, based on a national computer extract of the Automated Collection System (ACS), we identified from a statistical sample 89 case histories with ITP references and projected that IRS employees could have made approximately 450 references to ITPs in the ACS case histories. When we asked employees why they still used the term, they generally replied that although they knew about the change in the law, they sometimes inadvertently still followed the old procedures.
Based on national computer extracts taken from November 1999 through January 2000, two case inventory systems did not have ITP designated codes removed as instructed by management. The Taxpayer Advocate Management Information System (TAMIS) contained 176 records with ITP codes that had been input after the effective date of the RRA 98. The ITP code on the TAMIS was redefined to a reserved status in August 1999; however, due to an application problem and outdated procedures, employees still used the code. The Audit Information Management System (AIMS) contained 687 active records with ITP codes, with 83 of these active cases input after the effective date of the RRA 98. Although management made requests to prevent use of the ITP code on the AIMS, they did not monitor the system to ensure compliance.
Publications That Made References to Illegal Tax Protesters Were Not Revised or Labeled Obsolete
After the effective date of the RRA 98, IRS management issued directives to review and update its various publications to eliminate references to ITP terminology and programs. However, the Internal Revenue Manual (IRM) and other IRS publications still contained references to ITPs.
In our FY 1999 annual review, the IRM on an IRS Intranet site contained 50 sub-sections with references to ITPs. Managementís corrective action stated that all references would be removed by February 2000. However, as of March 2000, there were still 19 IRM sub-sections with ITP references remaining on the Intranet site. Further research of the IRM on that Intranet site identified an additional 115 sub-sections with references to ITPs. References to ITPs were also found in other IRM versions available to IRS employees. The Examination Division was responsible for IRM updates to remove ITP references for all IRS divisions. However, it was difficult for Examination personnel to obtain approvals from the other divisions for the IRM updates.
We also searched the titles of IRS forms, documents, letters, and training materials for ITP references. There were 43 publications with references to ITPs in their titles, of which 15 were available for dissemination to employees. In many cases, employees assigned to update these publications had changed jobs or left the IRS. In addition to the 15 active publications with ITP references in the titles, we identified 4 other publications that contained ITP references not in the titles but in the text of the publications.
New Programs Will Focus on Employee Safety and Taxpayers Using Frivolous Arguments to Avoid Tax Compliance
Congressional committee reports stated that the removal of the ITP designation was not intended to diminish employee safety and provided the IRS with the authority to keep additional records to protect employees. As a result, the IRS developed the Employee Protection System to enhance employee safety when dealing with taxpayers who harass or threaten financial harm to IRS employees. Our review of the programís plans indicates that, if implemented as designed, it should be in conformance with the RRA 98.
The Internal Revenue Code provides for a specific penalty related to frivolous tax returns. The IRS developed the Frivolous Return Program to address taxpayers using frivolous arguments to avoid tax compliance. This program is intended to improve the consistency of taxpayer treatment by centralizing correspondence, education, and tax enforcement actions. It is possible that this new program will be perceived to be similar to the old ITP Program because it can address some of the same taxpayers and compliance issues. However, the IRSí plans are that the new program will address taxpayers who use frivolous arguments to avoid paying taxes. The IRS also plans to implement controls to prevent the use of a permanent label that could stigmatize taxpayers when they become compliant. A future TIGTA review will address this program as it becomes operational.
Summary of Recommendations
We recommend that the IRS complete its initiatives to remove ITP and similar designations from all areas of operation, including applicable IRS databases, taxpayer cases, training courses, and other documents.
Managementís Response: Managementís response was due on September 8, 2000. As of September 15, 2000, management had not responded to the draft report.