The collection of unpaid tax by the Internal Revenue Service (IRS) begins with letters sent to the taxpayer, generally followed by telephone calls and personal contacts by an IRS employee. When these efforts have been taken and the taxpayer has not paid, 26 U.S.C. § 6321 (1994) gives the IRS authority to attach a claim to the taxpayer’s assets for the amount of unpaid tax liabilities. This claim is commonly referred to as a Federal Tax Lien (FTL).

Beginning January 19, 1999, 26 U.S.C. § 6320 (Supp. IV 1998) required the IRS to notify taxpayers in writing that a FTL has been filed. The notice must be provided to the taxpayer within 5 business days after a FTL has been filed and must include an explanation of the taxpayer’s right to request a hearing within the 30 calendar days following the 5 business days.

The IRS Restructuring and Reform Act of 1998 (RRA 98) added 26 U.S.C. § 7803(d)(1)(A)(iii) (Supp. IV 1998), which requires the Treasury Inspector General for Tax Administration (TIGTA) to determine annually if liens issued by the IRS comply with the legal guidelines in 26 U.S.C. § 6320. The first TIGTA report on FTL filing compliance was issued in September 1999. In the Fiscal Year (FY) 1999 audit report, we concluded that the IRS needed to improve procedures to ensure taxpayers’ rights were protected. For that audit, we reviewed a judgmental sample of 473 FTLs requested between January 19 and February 28, 1999, and found that 157 of the cases (33 percent) had 176 potential violations of taxpayers’ rights.

In the FY 2000 audit, we determined if liens filed by the IRS adhered to legal guidelines set forth in 26 U.S.C. § 6320 and related internal guidelines established by the IRS. We reviewed a nationwide statistically valid sample of 473 manual and systemic liens filed between April 1 and December 31, 1999.

The IRS has improved its compliance with legal and internal guidelines for filing FTLs, but it has not yet achieved full compliance with 26 U.S.C. § 6320 and its own internal guidelines. Our review of 473 manually and systemically filed liens identified 80 cases (17 percent) with 87 potential legal violations of taxpayers’ rights and/or violations of internal guidelines. This includes 21 potential violations of taxpayers’ rights and 66 violations of IRS guidelines. Although the overall percentage is much less than that in our FY 1999 audit, we cannot make strict comparisons between the two reviews because our sampling methodologies were different. However, we can conclude that there has been some improvement in the IRS’ compliance with legal and internal guidelines from our FY 1999 audit.

We projected our findings to the total population of 107,934 liens that were filed during our sample period of April 1 through December 31, 1999, and estimate that similar potential legal violations and/or procedural violations could have affected 14,391 taxpayers, assuming that each lien was filed on a different taxpayer. We are 95 percent confident that the range of taxpayers affected by similar potential legal violations and/or procedural violations is between 11,617 and 17,521 taxpayers.

To achieve full compliance with 26 U.S.C. § 6320 and related internal guidelines, the IRS must mail all notices timely, notify taxpayers and their representatives of lien filings, process undelivered notices correctly, properly document actions taken in each case, and maintain supporting documentation of actions taken. From our review of 473 cases, we determined the following:

Legal provisions not followed

Of the 473 cases in our review, 21 (4 percent) had potential legal violations of taxpayers’ rights.

• For 19 taxpayers, no lien due process notice was mailed or the notice was not mailed within 5 business days of the filing of the FTL.
• For two taxpayers’ business partners, no copy of the lien due process notice was mailed, even though the business partners were also assessed the liability.

The IRS has substantially automated the lien process since our FY 1999 audit. However, mailing the lien due process notice to taxpayers is not automated and employee error allowed the potential legal violations of taxpayer rights to occur. At the time of our audit, there were no controls in place to ensure notices were timely mailed or to identify and prevent instances of non-compliance. Delays in mailing the notices can reduce the time taxpayers have to request a hearing to less than the 30-day period allowed by 26 U.S.C. § 6320. This could result in potential violations of taxpayers’ rights if taxpayers appeal the filing of the lien and the IRS denies the request for an appeal.

Of the 473 cases in our review, 60 (13 percent) had 66 violations of IRS internal guidelines.

• In 41 cases, the case history did not indicate that the taxpayer’s representative was provided with a copy of the lien due process notice. IRS procedures require that a copy of the notice be sent to the taxpayer’s representative when a FTL is filed against a taxpayer he or she represents.
• In nine cases, the case history did not indicate that the notice was re-sent to another known address(es) when the original notice was undeliverable. IRS procedures require the notice be sent to a new address if the original notice is returned undeliverable and a new address is available.
• In 16 cases, there were no receipted copies of certified mail listings on file or the listings were not date stamped to substantiate that notices were mailed to taxpayers. IRS procedures require the retention of these listings for 10 years after the end of the processing year.

In 6 of the 80 cases listed above, there were multiple violations of internal guidelines. One case involved both a legal and an internal guideline violation.

During the period October 1999 through January 2000, National Office Collection management made computer programming changes to the Automated Lien System and revised the lien filing procedures. We did not determine the effectiveness of these changes because they were not implemented until either late in or after our FY 2000 audit sampling period. In December 1999, Collection management initiated a Quarterly Lien Compliance Review to help identify and measure non-compliance and to provide recommendations on how to improve compliance with these requirements. During our analysis of the first quarterly compliance review, we identified areas for improvement in the IRS’ methodology for conducting these reviews. The current methodology does not address compliance with IRS procedures for sending copies of the due process notice to spouses, business partners, and taxpayers’ representatives. In addition, the compliance efforts do not determine if undeliverable due process notices are re-sent to other known addresses for the taxpayers.

We recommend that the Assistant Commissioner (Collection) modify the Quarterly Lien Compliance Review to determine the cause and solution for errors that are identified, that Collection group managers ensure compliance with lien notice requirements during their case reviews, and that appropriate actions be taken to correct the potential legal and internal violations that we identified.

Management’s Response: IRS management will modify the Quarterly Lien Compliance Review checksheet to incorporate notification of the taxpayer’s representative, a review of the case file for a new address, and reissuance of the Collection Due Process Notice. Management will prepare a memorandum regarding the new review requirements and will revise their procedures to require group managers to include the notification to the taxpayer’s representative in their case reviews. Management will verify that corrective actions on cases returned to the appropriate district offices have been completed.

Management’s complete response to the draft report is included in Appendix VII.

Office of Audit Comment: IRS management’s response to our second recommendation does not fully address the recommendation. Management’s revision of procedures to require group managers to ensure, during case reviews, lien due process notices are sent to taxpayer’s representatives is appropriate. However, the response did not address requiring group managers to ensure, during case reviews, that lien due process notices are sent to business partners and that undeliverable notices are re-sent to a new address for the taxpayer.