TREASURY INSPECTOR GENERAL
FOR TAX ADMINISTRATION
PROCEDURES FOR INSTALLMENT AGREEMENTS WITH IN-BUSINESS TAXPAYERS NEED TO BE STRENGTHENED
Reference No. 2000-30-123
According to Internal Revenue Service (IRS) records, businesses incurred more than $11 billion in tax delinquencies (unpaid accounts) during Fiscal Year 1999. Of these new delinquencies, almost $7 billion were for unpaid Employer’s Quarterly Federal Tax Return (Form 941) liabilities. This return reports Social Security, Medicare, and withheld income taxes on wages of employees.
Revenue officers (RO) in the Collection Field function (CFf) first try to collect full payment from delinquent in-business taxpayers. If the taxpayers do not have the cash or other assets to full pay these liabilities, the ROs consider allowing the taxpayers to make periodic payments on their accounts under an "installment agreement." If the IRS accepts an installment agreement, penalties and interest continue to accrue. Because in-business taxpayers may also accrue additional Form 941 liabilities every 3 months while in an installment agreement, IRS procedures require close manual monitoring of this type of case.
The objective of our review was to determine whether the IRS is effectively using installment agreements to resolve in-business taxpayer delinquent accounts.
Installment agreements can be a useful collection tool for the IRS, especially in those cases in which the taxpayer has no other means to resolve his/her liability. For example, in our judgmental sample of 85 in-business installment agreements, 50 (59 percent) did not have sufficient liquid assets to quickly satisfy even 10 percent of their liabilities. However, we identified three areas in which procedures could be improved to help minimize the risk involved in these agreements and to enhance management information to monitor the effectiveness of the program. During our review, the Collection Division began actively drafting revised in-business taxpayer installment agreement guidelines and considered our input during this process.
The Internal Revenue Service Does Not Always Verify Basic Financial Information When Allowing Installment Agreements
The IRS did not have adequate guidance to help ensure ROs perform sufficient research to accurately determine the taxpayer’s suitability for installment agreements. Basic financial information regarding these taxpayers is not always verified prior to granting installment agreements. For example, ROs did not review taxpayers’ bank statements to substantiate their claimed cash receipts and disbursements in 59 (69 percent) of the 85 cases we reviewed. Confirmation of taxpayer-provided information helps ensure critical IRS decisions about installment agreement terms are based on accurate and reliable information, especially in cases where the taxpayer is unable to quickly repay his/her liability. In addition, identifying assets early in the process assists ROs to quickly take further collection action if the taxpayers do not make installment payments.
The Internal Revenue Service Does Not Consistently Monitor Installment Agreements With In-Business Taxpayers
The IRS’ controls over installment agreements with in-business taxpayers did not ensure the agreements were timely and consistently monitored. Thirty-two (38 percent) of the 85 agreements we reviewed were not manually monitored consistently for compliance with the terms of the installment agreements. The cases had unmonitored periods ranging from 3 to 12 months and total agreement amounts ranging from under $2,000 to over $150,000. Periodic and timely monitoring of in-business taxpayer installment agreements is critical to help prevent the accruing of additional new tax liabilities.
The Internal Revenue Service Does Not Gather Sufficient Data to Monitor the Installment Agreement Program
The IRS does not have sufficient management information for manually monitored installment agreements with in-business taxpayers. The management information systems do not track the number of agreements, the amount of outstanding liabilities currently covered by agreements, or the overall default rate of agreements with in-business taxpayers. Therefore, management cannot determine how frequently agreements are granted and how many dollars are affected. Without timely, comprehensive, and accurate information, management cannot adequately monitor program effectiveness and make informed program decisions.
Summary of Recommendations
We recommend IRS management develop additional guidance to ensure sufficient research is performed to accurately determine in-business taxpayers’ suitability for installment agreements, and revise current agreement monitoring procedures to improve their effectiveness and efficiency. In addition, management should implement a uniform methodology for coding manually monitored installment agreements with in-business taxpayers, so essential management information, such as the default rate or the number of open cases, can be easily obtained and evaluated.
Management’s Response: IRS management agreed with our recommendations and has issued revised procedures addressing the issues we identified. A complete copy of their response is attached to this report in Appendix IV.