As a normal part of the examination and collection processes, the Internal Revenue Service (IRS) has authority to contact third parties. In some cases, the IRS may have to issue summonses to gather enough information to determine or collect the tax liability. On July 22, 1998, the President signed the IRS Restructuring and Reform Act of 1998 (RRA 98), which expanded taxpayers’ rights in the following areas when the IRS makes third party contacts or issues third party summonses.

• RRA 98 § 3415 requires the IRS to issue a notice to the taxpayer for a summons issued to any third party. This gives the taxpayer an opportunity to contest any summons issued to a third party.
• RRA 98 § 3416 allows the IRS the option of serving a summons to third party recordkeepers either in person or by certified or registered mail.
• RRA 98 § 3417 requires the IRS to provide to the taxpayer a notice before contacting third parties and a periodic record of persons contacted. This gives taxpayers the opportunity to volunteer information so the third party contacts may not be necessary.

Our audit objective was to determine whether the IRS’ processes and controls enable the IRS to protect taxpayers’ rights when issuing third party summonses and making third party contacts during tax return examinations and delinquent tax account collections.

The IRS has properly implemented controls and processes to protect many of the taxpayer rights established by the summons and third party contact provisions of the RRA 98. Training was provided to the IRS employees by briefings, group meetings, and formal classroom settings. IRS group managers review both open and closed cases and make visits to monitor compliance with legal and administrative requirements. In addition, the IRS Chief Operations Officer established the National Resource Center RRA 98 Support Site to provide consistent coordination of policy and issues for effective implementation of all RRA 98 provisions. However, the IRS needs to take additional steps to fully protect taxpayers’ rights. Specific areas in which controls need to be strengthened include: improving notices used to advise taxpayers of their rights when third party contacts are to be made, recording and tracking the number of third party summonses that are issued, and updating Examination and Collection quality measurement systems to evaluate compliance with the new taxpayer rights provisions for third party contacts and third party summonses.

In implementing RRA 98 § 3417, the IRS issued a Notification of Potential Third Party Contact (Notice 1219) or a Third Party Notice (Letter 3164) to all taxpayers during the examination and collection processes. This approach resulted in adverse publicity. Taxpayers were very concerned that the IRS routinely contacted third parties, which could have a negative impact on business relationships. The IRS Commissioner responded by taking action to have a more selective process to issue notices only when it is necessary to contact third parties. In addition, in a written press release issued on March 2, 1999, the IRS Commissioner stated that the IRS would revise the notice, and the new version would use clear and direct language to spell out the rights of the taxpayer. The IRS expected the more customer-friendly notice to be available for use within 90 days of the IRS Commissioner’s statement. However, the revisions were not completed until November 1999 and are not planned for use until February 2000.

A summons is an enforcement tool used by the IRS to obtain needed information from either the taxpayer or third parties related to the determination or collection of tax liabilities. Because of increased concern for taxpayers’ rights, RRA 98 § 3415 requires the IRS to notify the taxpayer of almost all third party summonses. This gives the taxpayer an opportunity to initiate action in United States District Court to quash or nullify the summons. Currently, the IRS does not have a system to record and track summonses issued to third parties. However, the IRS could modify a recently developed computer system that is used to record and track third party contacts to also record and track the issuance of third party summonses.

As part of the Balanced Measurement System, the Examination and Collection quality measurement systems were redesigned to statistically sample a sufficient number of cases to measure organizational performance in four key quality categories: customer service and observation of taxpayers’ rights, technical ability, timeliness of work, and judgment of outcome. However, neither system includes adequate reviews to determine if taxpayers’ rights were observed in accordance with legal requirements for third party summonses and third party contacts.

The IRS needs to improve processes and controls to protect taxpayers’ rights when issuing third party summonses and making third party contacts. Specifically, the IRS should: expedite the development and use of a customer-friendly notice to taxpayers when third party contacts are to be made, modify existing computer systems to record and track summonses issued to third parties, and update both the Examination and Collection quality measurement systems to evaluate compliance with the new taxpayer rights provisions of third party contacts and third party summonses.

Management’s Response: The Assistant Commissioner (Collection) implemented a process to ensure taxpayers’ rights are protected when a new third party contact letter is required. The Chief Information Officer and the Disclosure Officer will determine if the Third Party Contact Command Code Database can be modified to incorporate data regarding third party summonses. In addition, the Assistant Commissioner (Collection) and the Assistant Commissioner (Examination) are working with the Examination Quality Measurement System and Collection Quality Measurement System to incorporate the necessary third party contact and third party summons requirements.