TREASURY INSPECTOR GENERAL
FOR TAX ADMINISTRATION
IMPROVEMENTS ARE NEEDED IN RESOLVING IN-BUSINESS TRUST FUND DELINQUENCIES TO PREVENT TAX LIABILITIES FROM PYRAMIDING
Reference No. 2000-30-111
Trust fund taxes include those taxes withheld from employees’ wages. Employers use the Employer’s Quarterly Federal Tax Return (Form 941) to file and establish the tax liability for these trust fund taxes. Employees who have taxes withheld from their wages expect the withheld funds to be properly deposited and credited to their accounts, and employers expect their competitors to also pay their trust fund taxes.
In-business trust fund taxpayer cases with liabilities over a specified amount are one of the highest priorities in a revenue officer’s inventory in the Internal Revenue Service (IRS) Collection Field function (CFf) for Fiscal Year (FY) 2000. Revenue officers in the CFf are responsible for collecting delinquent accounts. Timely and effective collection of these accounts is necessary because these taxpayers are in-business employers and can continue to accrue (pyramid) liabilities every 3 months. Approximately 39 percent of delinquent trust fund account taxpayers had at least 5 delinquent accounts in the CFf inventory, which illustrates how quickly these liabilities can pyramid.
The objective of our review was to determine whether the CFf is effectively using all the tools available to help in-business trust fund account taxpayers comply with their tax payment requirements.
We reviewed 116 delinquent in-business trust fund taxpayer cases where liabilities had pyramided. Although revenue officers collected $4,927,537 while working these cases, a greater amount in additional tax liabilities ($4,990,176) accrued for these taxpayers while the cases were open in the CFf. In fact, there was an aggregate outstanding liability of $10,911,009 still remaining on those cases at the time of our review.
Our case review showed that revenue officers were using certain collection tools effectively. However, in many instances, actions on cases were not taken timely or additional collection tools could have been used more effectively to potentially prevent taxpayers from pyramiding liabilities.
The Collection Field Function Did Not Always Timely Assign Cases
Even though in-business trust fund accounts are a very high priority, CFf procedures do not establish due dates that adequately emphasize this priority. Guidelines state that unassigned group inventory should be limited to the cases that managers expect to assign within 30 days. However, Collection management advised us that unassigned inventory can be held longer than those 30 days depending on the available resources and on inventory levels for revenue officers. Once cases are assigned, guidelines allow revenue officers another 45 days to contact taxpayers. Therefore, the CFf can meet its timeliness goals, but in many cases, an additional quarter of taxes is due from taxpayers before revenue officers contact them.
As a result of the delays in assignment of cases identified during our case review, in 39 (34 percent) of the 116 cases, taxpayers accrued $1,022,855 from the time the CFf received the accounts until the revenue officers first contacted the taxpayers. Not only were the taxpayers allowed to accrue additional liabilities, but the chance of collecting taxes diminished the longer the collection process took.
Revenue Officers Did Not Always Take Effective Collection Actions
Depending on the amount of the quarterly liability, Federal Tax Deposit (FTD) payments are required once, twice, four times, or eight times a month. A revenue officer’s first priority on a delinquent in-business trust fund account is to bring the taxpayer into compliance with requirements for making these FTD payments, thereby preventing the taxpayer from pyramiding liabilities. However, revenue officers did not verify or monitor that FTD payments were made on 40 (34 percent) of the 116 cases reviewed.
If a taxpayer does not make satisfactory arrangements to stay current with FTD payments and pay the delinquent taxes, revenue officers have several tools to help protect the Government’s interest. Some of these tools are considered enforcement actions, such as filing federal tax liens to record the Government’s interest in the taxpayer’s property, levying on assets such as bank accounts, or seizing the taxpayer’s real or personal property for payment of the tax. Our review showed that in 37 (32 percent) of the 116 cases, the revenue officers did not either file a lien, levy on taxpayers’ assets, issue a summons, or seize property when appropriate. Only 1 seizure was made in the 116 cases. Seizures were considered in 2 other cases but were not initiated. We did not attempt to determine whether a seizure was appropriate in all 116 cases reviewed.
In addition, in 59 cases, documentation in the case histories indicated that revenue officers did not perform timely follow-ups on deadlines or taxpayer promises. In particular, in 21 of these cases the revenue officers did not timely follow up on warnings to the taxpayers that they planned to take enforcement actions.
Based on discussions with management and our review of cases, we determined that revenue officers were very aware of the customer service goals of the IRS and worked with taxpayers to try to get voluntary payment from them. However, the revenue officers were reluctant to take enforcement actions. This condition existed because revenue officers and group managers were reacting to adverse publicity from Senate hearings and subsequent legislation. In 1997, the IRS was criticized at Senate hearings when several taxpayers testified that they had been harassed and mistreated. Then, the IRS Restructuring and Reform Act of 1998 (RRA 98) was passed to give taxpayers more rights and protection. The RRA 98 requires revenue officers to perform additional steps when taking certain collection actions; and removal from employment could result from not meeting the Act’s provisions. For example, the willful failure by a revenue officer to obtain required approval signatures on documents authorizing a seizure could result in his/her removal.
Summary of Recommendations
We recommend that Collection management adopt quicker time frames for assigning delinquent in-business trust fund cases, re-emphasize the use of all available enforcement tools from both the group and executive management levels, identify a better way to monitor FTD payments and ensure taxpayers stay current with FTD payments, and gather information on trends for taxpayers who will not comply.
Management’s Response: Management’s response was due on July 14, 2000. As of July 28, 2000, management had not responded to this draft report.