2015 IRSAC Small Business/Self-Employed and Wage & Investment Subgroup Report
The IRSAC Small Business/Self Employed (SB/SE) and Wage & Investment (W&I) subgroups (hereafter “Subgroup”) were combined for the 2015 cycle. The Subgroup consists of a diverse group of tax professionals including attorneys, enrolled agents, certified public accountants, educators, general tax practitioners, a certified payroll professional, and persons with financial backgrounds. The members of this Subgroup have a wide range of experience in taxation, including both preparation of tax returns and representation of taxpayers. We are honored to serve on the IRS Advisory Council and appreciate the opportunity to submit this report.
The Subgroup wants to thank SB/SE Commissioner Karen Schiller and W&I Commissioner Debra Holland for their recognition of the value of the Subgroup as an integral part of their leadership teams. The Subgroup enjoys a close working relationship with the professionals within various operating divisions of the IRS; this year was no exception as we found them helpful in providing the information, resources, guidance, and IRS personnel necessary to develop our report. We also appreciate the support provided by our designated liaisons that did a masterful job of navigating the IRS and ensuring that we generally had access to the necessary information to develop our analysis and issue our report.
The Subgroup researched and is reporting on the five issues listed below. While the Executive Summary is limited to only a few of the recommendations, the full report presents them all.
1. Identity Authentication of 1040 Forms
Recommendations to provide the most cost effective method of individual taxpayer authentication to ensure a high level of confidence and to minimize taxpayer burden include implementing a system where IRS has access to W-2 information on the same date as required to be sent to taxpayers (January 31) and expanding the Identity Protection PIN process to anyone who requests one, including spouses and dependents.
2. Review of Automated Online Self-Service and TeleTax Telephone Application/Tools
IRSAC was asked to review the new online self-service and TeleTax telephone interactive application options and to provide suggestions on enhancement and/or improvements. The review was expanded to include other areas of taxpayer outreach. Recommendations include continuing various existing online applications, enhancing the TeleTax phone tool topics so the core of the 150 topics currently used can be incorporated into one of the existing online tools, expanding outreach to the English as a Second Language (ESL) community to increase their participation in various IRS programs, and increasing the number of languages available on online tool applications to include those presently offered in the Online Payment Agreement tool.
3. Third-party Payer Arrangements for Employment Taxes
To help mitigate fraud by payroll service providers (PSP), the IRS should require all new employers to sign up for an Electronic Federal Tax Payment System (EFTPS) account regardless of whether they will be remitting taxes on their own, or using a PSP. In order to keep employers informed of potential issues with their account, all notices regarding payroll tax filings, where the address has been changed to the PSP address, should be sent in duplicate to the actual business location. The “New Employer Toolkit” should be updated to provide pertinent information regarding the tax filing/remittance process.
4. Reducing Taxpayer Burden by Improving the Taxpayer Experience
The members of IRSAC recognize that taxpayer education is a continual process, so information on how to avoid the most common IRS notices and how to best communicate with the IRS when notices are received should be available via all communication channels (irs.gov, YouTube videos, etc.) that explain specifically what information should be included with tax filings to avoid notices. Under the current budget environment it often takes longer to process taxpayer communication, but taxpayers should not be faced with larger tax burdens due to IRS delays. The accrual of penalties and all collection activities, including subsequent notices and liens, should be suspended if the IRS requests additional time to process correspondence or responses to notices or IRS actions.
Increasing the number of Nationwide Tax Forums presented each year can reach a greater number of tax professionals who will benefit from the affordable training, allowing them to provide better service to taxpayers. Expanding the VITA program to reach more geographic locations will give more deserving taxpayers valued assistance with their tax returns.
5. Review of Offer in Compromise (OIC) Form and Booklet 656-B, and Collection Information Forms 433-A, 433-B, and 433-F to Improve Taxpayer Compliance and Successful Utilization
The Form 656-B booklet, Form 433-F, and related documents were reviewed to make these documents easier for the user to understand and complete; as a result numerous revisions in both the forms and their instructions are recommended to clarify financial terms. Adoption of the recommendations will save both the taxpayer and the IRS time and make the OIC program more efficient.
Issue One: Authentication of 1040 Forms
The members of IRSAC were asked to recommend methods of authentication to reduce filing of fraudulent returns. The methods must be efficient, cost effective and will not overburden the taxpayer. Recommendations include matching information from the Form 1040 with employer-provided W-2 forms before issuing taxpayer refunds, coordination of federal and state employment information reporting in a year-round exchange, and expanding the availability of Identity Protection PINs (IP PINs) and use of IP PINs for spouses and dependents on the Form 1040.
A strong system to authenticate tax returns filed by true taxpayers is needed to stop the many fraudulent returns filed to receive fabricated refunds. In processing year 2014, the IRS detected 1,071,691 Identity Theft returns using its model and filtering systems, and stopped $6.5 billion in fraudulent refunds. An unknown number of fraudulent returns are also filed each year that the IRS is currently unable to identify and stop before a refund is issued. These fraudulent returns cause frustration and burden for legitimate taxpayers and are a drain on the United States Treasury.
Authentication of taxpayer information on the Form 1040 can be achieved using a system that incorporates the verification of taxpayer data to determine if the information is being reported accurately, or is falsely reported for fraudulent tax refund purposes. IRSAC found two means may be helpful to authenticate the correct return: matching employer-provided W-2 information with that reported on the tax return and utilizing existing information provided to government agencies. Another validation method increases the scope of the IP PIN program; reporting on the tax return any spouse or dependent IP PIN received during the year will help ensure that only those who are legitimately claimed are properly included on a tax return.
Matching employer-provided information with the W-2 information stated on the taxpayer’s Form 1040 is an effective means of authenticating a return that imposes little burden on the taxpayer. If a taxpayer’s name, social security number, and date of birth are stolen — which is not a rare occurrence — a fraudster can electronically file a fraudulent return. At present, the IRS is not able to match information from employer-provided W-2s until after most refunds have been issued because of the time it takes to receive the processed information from the Social Security Administration. To authenticate suspicious returns, the IRS uses “manual verification techniques” that often require calling or faxing employers, which are difficult and time consuming to process. The IRS could more efficiently authenticate returns before issuing refunds if it had access to employer-provided W-2 information at the same time it is provided to the employees. Under IRC §6071(b), employers are currently required to issue W-2s to employees by January 31 but do not submit them to the IRS (through the Social Security Administration) until late February (by mail) or late March (electronic submissions). By changing the employer deadline so employee W-2 information is submitted to taxpayers and to the IRS and Social Security Administration by January 31, the IRS could match the information from the employer-provided W-2 with the Form 1040 return provided by the taxpayer; this gives the IRS another means of authenticating the return to reduce the number of fraudulent refunds that are released.
The IRS should also utilize other information about taxpayers that is or can be provided to the IRS on a continual basis, often before the start of tax season. Sharing of information with states or other federal agencies may be in the common interest of all. One example is receiving shared information from state employment or department of revenue agencies who receive quarterly employment data from employers throughout the year. The IRS may use this information, acquired throughout the year and ready for the individual filing season, to help authenticate the information on Form 1040. Quarterly payroll/unemployment returns often include the employee’s name, social security number and gross wages along with the employer’s Employer Identification Number (EIN), which provides the IRS with another validation point that a person was employed by a particular firm and that a subsequent W-2 is appropriate. Information received from the states and other agencies is helpful to the investigation process and if it can be matched, it is even more helpful. Currently, taxpayer data flows into IRS using existing channels such as the one used between Department of Health and Human Services (HHS), prior to the contract discontinuance, and Return Integrity and Compliance Services (RICS) from National Directory of New Hires (NDNH) which provided IRS authenticating and verifying information for Earned Income Tax Credit (EITC). Under the Social Security Act provisions, the IRS may access NDNH data for two purposes: administering the EITC and verifying employment reported on a tax return. If a false return is detected, it should be sent to the appropriate division within IRS for investigation before a refund is released.
The third method to authenticate returns increases use of the Identity Protection PIN (IP PIN). The IP PIN is a form of identification, issued by the IRS, for the sole purpose of ensuring that a tax return has been filed by the taxpayer to whom the IP PIN has been assigned. Traditionally, it is limited to taxpayers victimized by identity theft. When identity theft has occurred, the true taxpayer submits Form 14039, Identity Theft Affidavit, with the tax return and includes documents verifying the taxpayer’s identity to receive an IP PIN. The taxpayer’s IP PIN is changed annually and the taxpayer is notified by mail of the new number to use on the next tax return.
Currently, there is a pilot program in Florida, Georgia, and the District of Columbia, the locations with the highest rates of identity theft, that allows taxpayers to apply for an IP PIN even if they are not yet the victim of ID Theft with regard to the IRS. This is beneficial to the IRS because the individual taxpayers participating in the pilot program are taking steps to ensure they do not become victimized.
Despite the success of the IP PIN, the program has not prevented fraudsters from using a stolen identity to claim a dependent on Form 1040 because taxpayers have not been required to list an IP PIN for a dependent claimed on a tax return. IRSAC believes that many fraudulent returns have been filed claiming as individuals (with and without assigned IP Pins) as dependents inappropriately.
IRSAC intended to recommend including all IP PINS on Form 1040 and related schedules for all who have an IP PIN requirement, including spouses and dependents. We are pleased to see the recent announcement that IRS will require an IP PIN for anyone who “has an IP PIN requirement” starting January 1, 2016. Including an IP PIN section on Form 1040 for dependents and spouses should deter this and we support this action.
We commend the efforts of the IRS to stem fraudulent returns and support efforts to develop effective authentication systems that are cost effective and minimize taxpayer burden. We encourage the IRS to develop additional pilot projects to test and fine tune ways to stop identity theft. Many of these recommendations and other efforts will require changes to IRS processes and may require new technology, infrastructure, and staff. We recommend financial support and legislative changes as needed so the IRS is able to develop programs to stop identity theft that meet these criteria.
- Implement a system that gives the IRS access to W-2 information on the same date it is required to be sent to taxpayers (January 31). Such a system will likely require employers to file their W-2 information forms by January 31.
- Match information from employer-provided W-2 forms with wages on a taxpayer’s Form 1040 before issuing refunds unless it is not possible to do so.
- Implement a system that allows IRS to match information about taxpayers it receives throughout the year from states or other federal agencies.
- Continue to pay refunds on the current schedule, unless a return has been identified as potentially fraudulent.
- Develop systems that may include new technology, legislative, and financial support to implement the above recommendations. Legislative changes include, but are not limited to, changing the employer deadline for submitting W-2 forms to January 31.
- Expand the Identity Protection PIN process:
- All individuals who request an IP PIN should be given one. Once the IRS receives Form 14039, Identity Theft Affidavit,” an IP PIN should be assigned to the individual submitting the affidavit.
- If Form 14039 is submitted with a joint return, the taxpayer or spouse who was not the victim should be assigned an IP PIN as well.
- Include all assigned dependent and spouse IP PINs on Form 1040 and related schedules. The spouse IP PIN should be required on the signature block of page 1 of Form 1040 so both spouses are included. Dependent IP PINs should be reported on a modified Page 1, Line 6 of Form 1040. IRS plans implementation of IP PIN inclusion on January 1, 2016, but that should include these elements.
ISSUE TWO: REVIEW OF AUTOMATED ONLINE SELF-SERVICE AND TELETAX TELEPHONE APPLICATION TOOLS
The members of IRSAC were asked to review the new self-service telephone interactive application options and to suggest enhancement and improvements. There are currently six different self-service online tools offered to the taxpayer, which include Where’s My Refund, Where’s My Amended Return, Get Transcript, TeleTax, Online Payment Agreement, and Free File. These online tools reduce the burden on IRS call centers and positively influence taxpayer accessibility. All six of these tools can be accessed in Spanish, but only one, the Online Payment Agreement tool, is accessible in six different languages. The members of IRSAC expanded the recommendation to include other areas of taxpayer outreach.
The Get Transcript online tool has been temporarily suspended. Since all online tools have produced great results for the taxpayer, IRSAC examined how to incorporate the benefits of these applications into existing services and tools, and also to explore expanding its outreach to include more of the ESL (English as Second Language) community.
Taxpayers have long been afforded the opportunity to obtain free tax help in several ways, including by telephone, in person, and via the internet where information and free advice is available 24 hours a day, 7 days a week. The IRS provides a variety of channels of communication and assistance to taxpayers by various means to ensure that the taxpayer has all necessary tools to get the help and answers needed to stay in compliance with tax filing and paying requirements. In a world of fraud, identity theft, and deceptive refund practices, it is essential that the taxpayer remain vigilant and informed because if not, they can easily be victimized.
The IRS must remain a stable and reliable source of timely information for the taxpayer to get answers to questions on how to prepare and file their annual tax returns accurately, how to respond to an IRS notice, how to make a payment on income taxes due, and how to understand their appeal rights. These are just a few of the 150 topics currently available under the TeleTax phone tool. Although a taxpayer cannot speak with an IRS representative through TeleTax, the TeleTax phone tool was instrumental in advising a taxpayer how to speak to an assistor and what time that assistor would be available.
It is imperative that the taxpayer receives answers to these topics; the vital information previously disseminated in TeleTax can also be incorporated into other online tools so taxpayers can remain informed and involved in his or her tax reporting and in compliance with tax law changes. By expanding TeleTax topics to online applications, the information becomes readily available to taxpayers.
Get Transcript is another tool that is popular with taxpayers since many financial and educational institutions use the tax transcript to verify the taxpayer’s reported wages. This tool was recently suspended from the online tool applications but is expected to be reinstated when possible. Taxpayers are still able to get a copy of their account or wage transcript by mail or by visiting a Taxpayer Assistance Center (TAC) located in many of our major cities.
The Where’s My Refund tool remains an online tool that taxpayers use to trace and track their refunds. With this tool, taxpayers obtain an immediate reply on the progress of a tax refund. This tool is updated every 24 hours giving the taxpayer the most current information after the tax return was received electronically or four weeks after mailing a paper return.
The Where’s My Amended Return tool remains an online tool taxpayers can use to track and trace the progress of their amended tax returns. This tool provides a status report of the 1040X Amended Tax Return for the current tax year as well as for the three prior tax years. This tool completely tracks the progress of the 1040X filing as early as three weeks from the date the IRS receives it into their system.
The Online Payment Agreement tool can be used by both individuals and businesses. Once the application is transmitted to the IRS, the taxpayer receives an immediate notification that the installment agreement is accepted, which eliminates the waiting period to receive a letter approving or denying their request.
The Free File online tool provides taxpayers with the ability to use brand-name software or use the free fillable forms to file their federal tax returns up to and including the extension periods.
Many taxpayers are not native English speakers. They can be disadvantaged by not having access to understandable information about tax compliance in other languages beside English and Spanish.
We applaud the efforts of the IRS in its outreach to taxpayers in providing these online tools and recommend enhancing self-service online tools so taxpayers can continue to receive assistance on tax compliance matters in this important way.
- Continue the online tool applications for Where’s My Refund, Where’s My Amended Tax Return, Free File, Online Payment Agreement, and Get Transcript.
- Incorporate the core of the 150 topics currently provided in the TeleTax phone tool into one of the existing online tools so this valuable information continues to be available to taxpayers.
- Increase outreach to the ESL community to participate in various IRS programs, establish Public Service Announcements or media campaigns that include the ESL community and expand the online tool applications to include all the languages that are currently offered in the Online Payment Agreement tool.
- Continue to brainstorm with future members of IRSAC to find new, creative methods of communicating with individual taxpayers.
ISSUE THREE: THIRD-PARTY PAYER ARRANGEMETNS FOR EMPLOYMENT TAXES
The IRS requested feedback on the tools provided to clients of third-party payroll service providers, including the Electronic Federal Tax Payment System (EFTPS) inquiry PINS (Personal Identification Number) and Dual Address Change notices, and their effectiveness in mitigating fraud.
Employers can appoint or enter into an agreement with a third-party to assume some or all of the employer’s federal employment tax withholding, tax return preparation, reporting, and tax payment responsibilities. There are four types of common third-party payer arrangements:
- Payroll service provider (PSP). A PSP typically prepares employment tax returns for signature by the employer and processes the withholding and payment of associated employment taxes. An employer’s use of a PSP or any other third-party does not relieve the employer from responsibility of ensuring that all of its federal employment tax responsibilities are met.
- Reporting agent. A reporting agent is a type of PSP. An employer and a third-party file Form 8655, Reporting Agent Authorization, with the IRS to designate a PSP as a reporting agent. An employer may authorize a reporting agent to sign and file certain tax returns. The reporting agent files separate employment tax returns for each employer and may also deposit and pay taxes on the employer’s behalf.
- Section 3504 agent. An employer and a third-party file Form 2678, Employer/Payer Appointment of Agent, with the IRS to authorize the third-party as an IRC Section 3504 agent of the employer. A Section 3504 agent performs acts such as withholding, reporting and paying employment taxes. The aggregate tax is paid under the Section 3504 agent’s EIN, unlike with a PSP or reporting agent, where the tax is paid under the employer’s EIN. A Section 3504 agent also becomes jointly and severally liable for the taxes that the employer is responsible for if the employer reported such wages to the 3504 agent.
- Professional employer organization (PEO). A PEO, sometimes referred to as an employee leasing organization, enters into an agreement with an employer to perform some or all of the employment tax withholding, reporting, and payment activities related to workers performing services for the employer. The aggregate tax is paid under the PEO’s EIN.
Of the four most common types of third-party payer arrangements, only reporting agents and Section 3504 agents are required to submit an authorization form that discloses the relationship between an employer and a third-party. The IRS does not require a similar authorization for employers that use a PSP or PEO.
If a third-party payroll provider mismanages or embezzles funds that it should have paid to the IRS, the employer may end up paying the amount equal to the tax twice: once as the employer actually owed to the IRS, and again to the service provider who failed to remit those payments to the IRS as they were responsible to do. Employers cannot delegate their responsibility for filing and paying employment taxes to a third-party.
The IRS has and continues to develop tools to enable employers to monitor the actions of their third-party payers, but improvements are needed to the IRS safeguards to protect employers and the government when third-party payroll providers are not compliant with payment and filing requirements.
The IRS requested recommendations specifically for the first of the four types of third-party arrangements, Payroll Service Providers (PSPs). IRSAC’s recommendations are:
- The IRS should require all new employers to sign up for an EFTPS account regardless of whether they will be remitting taxes on their own, or using a PSP, Reporting Agent, Section 3504 agent, or PEO. This enables the employer to either pay payroll taxes directly or to verify that taxes have been paid by the third-party.
- The IRS should provide an updated “New Employer Toolkit.” When a new employer registers for an EIN, the IRS would send a toolkit with pertinent information regarding the tax filing or remittance process. The IRS could distribute the notice in the same manner the employer applied for the EIN so if the employer applied for an EIN online, the notice would be sent electronically with the EIN letter. For example, the toolkit might include:
- Information on the implications of the employer’s choice to hire a third-party PSP to remit taxes.
- Information or a notice explaining not only the importance of remitting payroll withholding taxes in a timely and efficient manner, but also confirming that the employer cannot delegate the responsibility for depositing payroll taxes regardless who is responsible for remitting the funds.
- Information that it is possible to use EFTPS to ensure that payroll deposits have, in fact, been made.
- Links to useful tools on irs.gov, such as http://www.irs.gov/Government-Entities/Federal,-State-&-Local-Governments/Public-Employers-Toolkit.
- Revisions to the Employment Taxes for Business web page should be made so that the information about employer responsibilities is closer to the top of the page, rather than listed last. While all of the information on the Toolkit webpage is important to some degree, IRSAC members believe that employment taxes have a higher priority than some of the other items listed.
- Create a catalog of YouTube videos that a new employer may access to learn more about employer responsibilities and how to handle them.
- The IRS should develop processes and procedures that require PSPs to provide and have their client sign:
- Form 8655, Reporting Agent Authorization, if the new employer is going to have the PSP remit taxes; or
- A disclaimer or other official notice (to be determined) if the PSP is not going to remit tax payments to the IRS.
- In either case, the IRS should require the employer (client) to sign a document with the PSP indicating that they understand their role (such as using EFTPS to verify tax deposits are being made) and the employer’s responsibility for the payroll tax deposit. The PSP could actually help the client log into and create an EFTPS account, and show the client-employer how to verify payment of taxes.
- The IRS should work with the tax practitioner community and professional associations to provide information on the tools available to employers to monitor their tax remittances.
- Regarding the change of address notices, the IRS should develop an algorithm to determine if the address change is substantial enough to warrant a letter about the change. For example, if the only change was “Street” to “St.”, or “North” or “N.”, no letter should be sent. However, if the street name, city, or zip code were actually changed, a letter is warranted.
- In order to keep employers notified of potential issues with their account all notices regarding payroll tax filings, if an address has been changed to the PSP address, notices should also be sent in duplicate to the actual business location.
ISSUE FOUR: REDUCING TAXPAYER BURDEN BY IMPROVING THE TAXPAYER EXPERIENCE
Taxpayer compliance has long been an issue providing countless challenges to the IRS. The members of IRSAC have been asked to provide input to assist in ensuring taxpayer compliance with their filing and payment obligations by providing a positive taxpayer experience and reducing the burden of compliance.
On June 10, 2014, the IRS announced the adoption of a Taxpayer Bill of Rights. This document collects and clarifies numerous rights that are found throughout the Internal Revenue Code (IRC) which previously may have been difficult to locate and were hard to understand. IRSAC commends the IRS in its efforts to provide fair treatment to all taxpayers and to make these rights easier to see and understand.
Among the 10 provisions outlined are the right to Quality Service and the Right to be Informed. In recent years providing quality service and information has become a challenge because of budgetary constraints faced by the IRS. In her most recent report to Congress, Nina Olson, the Taxpayer Advocate reported some alarming statistics:
- During the 2015 tax filing season, only 37 percent of the calls routed to telephone assisters were answered with average hold times of 23 minutes.
- The Practitioner Priority lines were answered 45 percent of the time with average hold times of 45 minutes.
- Disconnects (where the call is terminated by the IRS because of its inability to answer) increased from approximately 544,000 in 2014 to about 8.8 million in 2015, an increase of approximately 1500 percent.
- 25.1 percent of taxpayer correspondence was not processed within a normal time frame.
- Taxpayer Assistance Center (TAC) services were significantly decreased, including a reduction in the hours, narrowing of the scope of questions that would be answered and discontinuation of tax preparation services for low income, disabled and elderly taxpayers.
The end result is that the Right to Quality Service has suffered. The inability to achieve effective two-way communication burdens taxpayers in their efforts to comply with their tax filing and taxpaying obligations. A secondary result is that the reduction in communication erodes the taxpayers’ Right to be Informed, which can lead to higher instances of noncompliance. This can be particularly troublesome for small sole proprietors who should be filing a Schedule C but who are confused about their filing requirements.
With the added responsibilities related to the Affordable Care Act (ACA) and the Foreign Account Tax Compliance Act (FATCA), combined with less funding and reduced staffing, the IRS is in the extremely difficult position of trying to find ways to provide more quality service and information to taxpayers who are trying to meet their compliance and tax filing requirements. In light of these restrictions, we commend the IRS on the increased amount of information that is available to taxpayers through irs.gov. This website provides taxpayers with a significant amount of resources at their fingertips.
The IRS has two programs currently in place that can be expanded to better serve taxpayers and to increase their satisfaction. The first, the Nationwide Tax Forums is intended to provide tax professionals with continuing professional education and guidance on various tax preparation and tax controversy topics. Recently the IRS reduced the number of Tax Forums, which potentially reduces the number of tax professionals who can take advantage of this valuable resource. While the Nationwide Tax Forum does not impact a taxpayer directly, it benefits them by providing their return preparers with accessible and affordable education. The second, the Volunteer Income Tax Assistance (VITA) program helps taxpayers by providing free tax preparation assistance to those who need it, including the elderly, disabled, and low-income taxpayers.
We also commend the IRS’ efforts to work with various stakeholder groups to reach the largest number of taxpayers possible. IRSAC recognizes that the dedicated staff at the IRS is working to address the taxpayers’ Right to Quality Service and their Right to be Informed and offers the following recommendations to help achieve these goals.
- The IRS frequently communicates with taxpayers through notices. Taxpayer education regarding how to avoid the most common IRS notices and how to best communicate with the IRS when notices are received could reduce taxpayer burden. Information provided through various channels (irs.gov, YouTube videos, etc.) explaining specifically what information should be included with tax filings to avoid notices could reduce the need for communication. If resources already exist that contain this information, they need to be publicized and highlighted in a prominent location on the website during the filing season.
- Many taxpayers, including those who are self-employed, do not understand their need to file a Schedule C for certain types of income received. For example, taxpayers may not understand that most cash received while conducting business is actually taxable, or that all income received is subject to income tax reporting, not just what is reported on Form 1099-MISC. Taxpayers may be confused about what to do when they receive an unexpected Form 1099-MISC and when they mistakenly believe they did not have to report income. IRSAC recommends that information should be prominently displayed in the recipient instructions on the back of Form 1099-MISC to indicate that “IRS will attempt to match information reported on this form to your tax return” and to direct taxpayers to information on the IRS website that explains their filing requirements and answers questions such as “Why did I receive this form?”, “Where do I go to find Schedule C reporting instructions?”, and “Why didn’t my employer withhold taxes?”, among others. This information could also be included in the letter issued to taxpayers when they receive an employer identification number for a new business and on the Form W-9 that payers use to request identifying information on payees. There is a web page referenced on the back of the Form 1099 recipient copy for latest information on legislative changes (www.irs.gov/form1099misc), but that link is broken as of the date of this writing and requires additional search on the website; if a link provided on a form no longer exists, the web page should redirect the inquiry appropriately. The members of IRSAC understand and appreciate that the back of Form 1099 is filled with information for recipients, but the font is small and very difficult to read. By also linking this information to a web page and providing answers to other frequently asked questions it will reduce taxpayer confusion about their tax requirements for income received, whether it is reported on Form 1099-MISC or not. In conjunction with this information, we also recommend the following:
- Reaching taxpayers with this same information through state and local business licensing agencies.
- Developing free and or low-cost public announcements and media attention regarding the taxability of cash payments (possibly working with the Ad Council).
- Reaching out to high school and college students with Understanding Taxes curriculum to educate future taxpayers on their true filing and paying requirements, especially when they are self-employed.
- Because of delays in resolving many tax issues due to budget constraints that impacts staffing, we recommend suspension of the accrual of penalties and all collection activities, including issuance of subsequent notices and liens, if the IRS requests additional time to process taxpayer correspondence or forms submitted in response to an IRS request. Taxpayers should not be faced with a larger financial burden because of the inability to communicate effectively with the IRS, especially when that inability is not created by the taxpayer.
- Expand the online tools to address many taxpayer issues that could be effectively handled through means other than phone calls or correspondence. In particular, we recommend:
- Live Chat
- An online Power of Attorney application process to replace the Disclosure Authorization program that was discontinued approximately two years ago. At this time a tax professional must either fax their Power of Attorney (Form 2848) to the Centralized Authorization File (CAF) or fax or hand it directly to an IRS employee, which often significantly delays the opportunity to assist taxpayers. By being able to process a Power of Attorney and obtain transcripts without delay, tax professionals can begin assisting taxpayers more quickly and effectively.
- The irs.gov website currently contains an extensive list of Frequently Asked Questions, but they are scattered throughout various pages of the website. IRSAC recommends consolidating this area on one page with search capabilities and highlighting this on the main landing page. We also suggest including cross references to IRS instructional videos (where applicable) within the various answers.
- Expand tools available on the IRS2Go cell phone app to provide taxpayer access to information on demand on their paying and filing requirements, and topics such as their paying and filing requirements among others.
- Continue exploring use of online tools for taxpayers and tax professionals.
- Enhance the IRS Nationwide Tax Forums by expanding the Forum locations to reach more tax professionals who need the education and guidance provided by this valuable resource.
- Expand the current VITA program to reach more geographic locations so this important resource is available to additional taxpayers who need it.
ISSUE FIVE: REVIEW OF OFFER IN COMPROMISE (OIC) FORM AND BOOKLET 656-B, AND COLLECTION INFORMATION FORMS 433-A, 433-B, AND 433-F TO IMPROVE TAXPAYER COMPLIANCE AND SUCCESSFUL UTILIZATION
The members of IRSAC were asked to review the Form 656 Booklet, Offer in Compromise, Form 656 Offer In Compromise, and Forms 433-A (OIC) Collection Information Statement for Wage Earners and Self-Employed Individuals) 433-B (OIC) Collection Information Statement for Businesses, and 433-F Collection Information Statement, for the purpose of identifying any possible changes to encourage taxpayer utilization and improve successful resolution and payment of tax liabilities consistent with the Fresh Start Initiative.
An Offer in Compromise (OIC) allows a taxpayer to settle tax debt for less than the full amount owed. OICs may be granted based upon the taxpayer’s unique facts and circumstances, and the IRC enumerates three acceptable taxpayer arguments for OIC acceptance: whether the tax liability is owed (doubt as to liability), whether the taxpayer can pay the debt (doubt as to collectability), or whether a public policy or equity ground exists to compromise the debt (effective tax administration). The IRS expanded and streamlined the OIC program as part of its Fresh Start initiative to cover a larger group of struggling taxpayers. First announced in 2008, the Fresh Start program is intended to make it easier for individual and small business taxpayers to pay back taxes and avoid tax liens. A taxpayer unfamiliar with the terminology used in Form 656, its instructions, and Forms 433-A (OIC), 433-B (OIC), and 433-F may find the forms confusing, and consequently may submit incomplete or inaccurate applications, or be otherwise discouraged from completing and submitting an OIC. Further, there sometimes is confusion in distinguishing between income tax liabilities that arise from conducting a business that is assessed against an individual and other tax liabilities, such as employment and excise taxes, which arise from conducting the same business activity but that are assessed against the business entity.
Some terms with differing commonly accepted meanings, and defined meanings, are used in contexts where it is not clear which meaning of the term applies. For example, the term “individual shared responsibility payment” may be confused with other terms such as “joint liability” or “trust fund recovery penalty.”
While an OIC should settle all of the outstanding tax debt of a taxpayer, taxpayers may be confused by the number of offers that must be submitted and the number of application fees that must be paid.
IRSAC questions a policy decision regarding the calculation of acceptable offers. A taxpayer submitting a “lump sum” offer, which may be paid in five months or less, considers only 12 months of monthly income, while any other offer, including those that may be paid sooner than by lump sum, considers 24 months of income. IRSAC also questions the requirement that married taxpayers who have joint and separate tax liabilities must file multiple OICs.
Taxpayers needing to prepare an OIC or collection information statements are often under emotional and financial stress, and confusing terminology, lack of clarity in instructions, and the need to parse terms and phrases exacerbate the taxpayer’s fear and uncertainty of providing comprehensive financial information to the IRS. A taxpayer struggling with these forms is a taxpayer attempting to comply with the tax laws. Any clarification that can be provided would ease the taxpayer’s anxiety and frustration and would encourage better participation in the collection process and use of the OIC. Accordingly, the members of IRSAC offer the following recommendations.
A. Form 656 (Offer In Compromise)
1. Prominently placed, in bold print, the first question asks if the taxpayer used the Pre-Qualifier tool on irs.gov before filling out the form. The prominence of this question implies that use of the tool is a prerequisite for submitting an offer. While intended to assist a taxpayer in making an offer, use of the Pre-Qualifier tool is not required. The results indicated by the tool do not make the final determination of an acceptable offer, nor is the tool likely to produce the same result as the offer amount that results from using Forms 433-A (OIC) or 433-B (OIC). IRSAC agrees that the tool can be helpful and instructive, and its use should be encouraged, but recommends that language be added to Form 656 and its instructions, to clarify that neither use of the tool nor obtaining indication of a successful offer, is required. To enhance access to and use of the tool, both the form and the instructions should provide a full URL for the Pre-Qualifier tool (i.e., http://irs.treasury.gov/oic_pre_qualifier).
2. The purpose of an OIC is to settle all unpaid tax liabilities of the applicant whether the taxpayer is an individual or a business entity. All tax liability assessed against a taxpayer, regardless of its source, should be included in a single offer with a single fee. An individual may have personal income tax liability from conducting business as a sole proprietor, a single member Limited Liability Companies (LLC) (as a disregarded entity or as a partnership), a partner in a partnership, or a stockholder in an S corporation. In addition to personal income tax liability, an individual may have other personal tax liability arising from conducting the business such as trust fund recovery penalty and employer payroll tax liability. These same business entities may have their own tax liabilities, such as employment and excise taxes, which are not assessed against an individual. The format and presentation of Sections 1 and 2 cloud the distinctions between the tax liabilities of an individual and those of business entities, and should be revised to clarify that an applicant should complete either Section 1A or Section 1B, but not both. If Section 1A is completed, Section 2A should also be completed; if Section 1B is completed, Section 2B should be completed. Sections 1A and 2A should be completed by individuals applying to compromise tax assessed against them personally, and sections 1B and 2B should be completed by business entities applying to compromise tax assessed against, and owed by, the business entity taxpayer.
3. The trust fund penalty may be imposed on a person who is found to be a responsible person with respect to any business employer regardless of the form of the business. The second box under Section 2A refers only to the trust fund recovery penalty imposed on a responsible person of a corporation, and should be clarified by using “business” or “employer” or “business employer” instead of “corporation.”
4. A taxpayer might bear the financial burden of payroll tax liability in more than one capacity, such as a stockholder of an S Corporation and as a responsible person. Knowing how the OIC payment will be allocated to satisfy a payroll tax liability assessed against multiple persons would assist the taxpayer to prepare a viable offer. The instructions should explain how an OIC payment will be allocated with respect to a trust fund recovery penalty that is compromised along with other tax liabilities, and the extent to which the taxpayer may direct application of OIC payments to the trust fund recovery penalty.
5. Section 4 presents a chart of the gross monthly household income limits for purposes of low-income certification and waiver. The chart reflects total monthly income that is 250 percent of the poverty guidelines published by the Department of Health and Human Services. The poverty guidelines are adjusted in January each year, so the chart in the printed forms is out of date. A chart date and a complete URL should be added so that a taxpayer may easily access a current, relevant chart.
6. The instructions state that the low income waiver does not apply to businesses other than sole proprietorships. A taxpayer conducting business as a single member LLC (a disregarded entity for income tax purposes and taxed as a sole proprietorship) should be permitted to apply for the low income waiver, and the instructions should be revised to clearly permit such taxpayers to do so.
7. Section 6, Designation of Down Payment and Deposit, uses terms not previously used to refer to components of an offer. The term “down payment” is first used in Section 6 while Section 5 refers to an “Initial Payment” made with respect to a lump sum offer, and a “first month’s installment” made with respect to a periodic payment. Section 6 also refers to “the required payment” to be submitted with an offer. A clear understanding of these terms is essential for purposes of determining whether a taxpayer is submitting a “deposit” with the offer. In common usage, these terms have similar meaning and might be used interchangeably. Sections 5 and 6 should be revised to define and consistently apply terminology.
8. The terms “individual shared responsibility payment” and “shared responsibility payment” appear at least three times in the OIC booklet and three times in Form 656 before a definition is given in the last paragraph of Form 656. The terms, sometimes in bold print, are scattered throughout the booklet to discuss exceptions to tax liens and the effect of payment defaults, but these references do not assist the taxpayer to complete an OIC, and are a distraction. The final paragraph of Section 8 addresses issues relating to shared responsibility payments. It contains the only definition of the term, which is imbedded in a sentence that is unduly long, complicated, and incomprehensible. The final paragraph of Section 8 and the various references to “shared responsibility payment” should be deleted, and should be replaced with a single, well-placed paragraph that defines the term and discusses its relevance to and effect on the OIC.
9. The final paragraph of Section 8, Offer Terms, shifts perspectives from first-person to second-person, shifting the IRS to first-person and the taxpayer to second-person. Because the Offer Terms are presented as being the agreement of the taxpayer, references to the taxpayer should be consistently in first-person for all paragraphs included in the Offer Terms section.
10. In the Form 656 Booklet section “Can You Pay in Full?” the term “lump sum” is used in a context appearing to apply its commonly understood meaning of a single payment in full. For purposes of an OIC, however, “lump sum” has a statutory definition under IRC section 7122 of payments made in five or fewer months. To avoid confusion, the term “lump sum” should not be used in this paragraph.
11. Form 656 Booklet uses various phrases that all appear to refer to the same period of time — the period between filing of the OIC by the taxpayer and a final determination on the OIC by the IRS — including “during the offer investigation,” “offer evaluation process,” “through final decision,” “during consideration of your offer,” “while the IRS is evaluating your offer,” and “after your offer is pending.” The context may require slight variations, but consistent use of a standard term or phrase would be less confusing to taxpayers.
12. Form 656 Booklet, section “Other Important Information,” addresses the effect of filing an OIC on an existing installment agreement and states that “you will not be required to make payments during the consideration of your offer.” To avoid confusion with the requirement that proposed periodic payments must be made during the consideration of the OIC, this paragraph should be revised to make it clear that only the payments under the installment agreement are suspended.
13. Form 656 Booklet, section “How To Apply,” instructs spouses with joint and separate tax liabilities to file multiple OICs and pay multiple application fees. IRSAC recommends reconsideration of this requirement. While each separate OIC requires consideration of the household income of both spouses, the household income should not multiply with the number of OICs that must be submitted. All necessary parties will be parties to an OIC that settles the joint and separate tax liabilities of both spouses. Even though a spouse cannot settle or compromise the separate tax liabilities of the other spouse, the liable spouse will be a party to the OIC. Married taxpayers who share a common household income should be allowed to jointly submit a single OIC, with a single application fee, to settle the common household tax debt, including all of their joint and separate tax liabilities.
14. Form 656 Booklet, section “If You Owe Individual and Business Tax Debt,” instructs that separate OICs must be submitted for individual and business tax debts. A business is defined in the paragraph as being “any business operated as other than a sole-proprietorship.” In this context, it is not clear how a single member LLC, a disregarded entity taxed as a sole proprietorship, is treated. Income tax liabilities from a disregarded entity taxed as a sole proprietorship should not require an OIC separate from that of the individual who bears the tax liability of the single member LLC; the instructions should be revised to clarify that no separate OIC submission is required.
15. Form 656 Booklet, section “Important Information,” instructs that if “the option to make monthly payments” was selected, the taxpayer “must continue to make the payments during the evaluation of your offer.” This statement is not accurate. Both the lump sum option and the periodic payment option require monthly payments, but the lump sum monthly payments are suspended pending acceptance of the OIC. This paragraph should be revised to refer to the option to make periodic payments rather than to monthly payments.
16. The Application Checklist should provide specific instructions on how to complete Forms 2848 and 8821 for purposes of an OIC.
B. Forms 433-A (OIC), 433-B (OIC), and 433-F
1. All of the Forms 433 assume that reported assets are wholly owned by the taxpayer (or a taxpayer and spouse) and do not account for taxpayers who jointly own assets with someone who does not owe tax debt. By not accounting for non-party’s interests, the forms do not accurately reflect the taxpayer’s actual liquidity and net worth. The forms should be revised with instructions that explain how a taxpayer should describe and value assets that are jointly owned with someone other than the person’s spouse.
2. Transmitting Form 433 to the IRS takes a significant amount of time and effort, and it creates significant problems that inhibit the taxpayer’s ability to effectively utilize the form. The frustration experienced by the taxpayer while attempting to communicate at a critical juncture in the collection process creates stress and contributes to issues between the taxpayer and the IRS agent principally handling the account. For example, low income taxpayers often cannot afford the cost of professional assistance when a significant amount of professional time is attributable to delays in communicating with the IRS because of extended hold time, disconnects because the system is overloaded, or transmission of documents through a slow fax machine network.
There are a few possible solutions to this problem. The first is to have a pilot program for practitioners that allows them to email or upload forms (via a secure email or online system), such as a Form 2848, Power of Attorney, or 433-F, to the IRS employee with whom they are speaking. This would reduce the amount of lag time required by fax machines, allowing the existing IRS resources to connect with more taxpayers per day.
Another possibility is to create a pilot program that allows practitioners to upload the required forms to the IRS’s database. The IRS should halt collection action pending review of Form 433-F by an IRS automated collection service (ACS) representative when collection would create a hardship which leaves the taxpayer unable to meet necessary living expenses. Then, after the information is processed, either the practitioner could call the IRS and an agent would immediately be able to access the forms, or, after the agent has reviewed the forms, the agent could call the practitioner to discuss the case. This would reduce the amount of time transmitting the documents while providing agents with more time to update themselves on the case. Under the current system, agents are expected to familiarize themselves with a case very quickly. By allowing agents more time to look at the information, both parties will be able to have a more meaningful and detailed conversation.
C. Form 433-A (OIC)
1. Add to the bold faced print instructions to Section 2 of Form 433-A (OIC) an instruction to “Complete this section if you or your spouse received income from employment (that is, either or both of you received a Form W-2).”
2. Section 3, Personal Asset Information, provides a section for “other valuable items” but is not clear whether regular household contents such as personal effects, clothing, furniture, entertainment equipment, and computers should be included. Provide a clarifying statement on the face of the form or in the instructions to guide the taxpayer in properly accounting for such items or to otherwise confirm that such items may be omitted.
3. Section 5, Business Asset Information (for Self-Employed), requests information for assets similar to information requested in Section 3 for personal assets. Modify the instructions so an asset is included only once, under either Section 3 or Section 5.
4. Section 6 has a line item for “Other secured debts (not credit cards).” This wording suggests there was a previous request for secured debt when no other request is made in Section 6 for secured debts of any kind. The word “other” should be deleted. Further, this line item is in the section for business expenses. In accounting terms, a debt is not an expense. It appears that this item is intended to request debt service (monthly payment) information. The form or instructions need to clarify what information is required for this line item.
5. Section 7, Monthly Household Income and Expense Information, has a section for income information of a Spouse. The next line solicits income information of a “non-liable spouse.” If income information of a spouse is relevant, and is to be included regardless of the spouse’s personal tax liability, there is no need to imply there is a distinction between liable and non-liable spouses, and the reference to “non-liable” spouse should be removed.
6. Section 7, Monthly Household Expenses, refers to IRS Collection Financial Standards found at irs.gov. The reference should be to a complete URL (i.e., http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Collection-Financial-Standards ).
7. The calculation of the Offer Amounts determined per Section 8 of 433-A (OIC) and Section 5 of 433-B (OIC) are not clear. If the offer is to be paid in five months or less, the offer requires inclusion of 12 months of monthly income. If the offer is to be paid in more than five months, the offer requires inclusion of 24 months of income. There is no clear indication of when the five-month count begins. By statutory definition, a lump sum offer is one that requires a 20-percent down payment with the balance paid in five or fewer monthly installments. Per Form 656, the 20-percent down payment submitted with the offer does not count as one of the five installments. All five of the installment payments on a lump sum offer are suspended pending acceptance of the OIC. Depending on the delay in accepting a lump sum offer, the final installment easily could be well beyond five months. It should be clarified which OICs may include only twelve months income and which require twenty-four months.
8. Section 5 of Form 656 defines a periodic payment offer as one that is paid in full in 6 to 24 months. A periodic payment offer must be accompanied by a down payment, and all proposed installments must be paid timely while the offer is pending acceptance. It is possible, in some cases, for periodic payment offers of 6 to 12 months to result in full payment prior to a comparable lump sum offer of five or fewer installments, because payment of the lump sum installments are suspended while the OIC is being considered by the IRS. While a lump sum offer must include only 12 months of income, a periodic payment offer, which might fully pay sooner than a comparable lump sum offer, must use 24 months of income. The policy should be revised to permit periodic payments of not more than 12 months to be based on the inclusion of 12 months of income rather than 24.
D. Form 433-B (OIC)
Instructions on the face of Form 433-B (OIC) clearly direct that this form is to be completed if the taxpayer’s business is a “single member LLC.” Next, it instructs that business conducted as a sole proprietorship (filing Schedules C, D, E, F, etc.) should not use this form, but should use Form 433-A (OIC) instead. For income tax purposes, there is no distinction between a sole proprietorship and a single member LLC that is a disregarded entity taxed as a sole proprietorship because in both cases the business’s income tax liabilities are the individual’s liability. A single member LLC should not be required to file Form 433-B (OIC) while its single member is required to file 433-A (OIC). An individual taxpayer should be permitted to file one OIC to settle all of the tax liabilities assessed against him or her including those attributable to a single member LLC. Instructions on the face of Forms 433-A (OIC) and 433-B (OIC) should be revised to clearly direct which form is to be used for a single member LLC.
E. Form 433-F
Title loans and payday loans, often used by low income taxpayers, carry a high interest rate and consume a significant amount of monthly income and cash flow. Because of the high interest rates, the balance of the loan and the required payment can change significantly from month to month. The volatility of alternative forms of credit are not adequately accounted for, which is of particular concern with Form 433-F, the form most frequently used by the IRS with respect to low income taxpayers to determine if the account is “Currently Not Collectible,” or to determine the terms of an installment agreement. Further, if one of these loans is secured, aggressive collection practices present a very real possibility of collateral being repossessed by the lender. These loans are a significant burden on low income taxpayers and on their ability to pay tax debt. Form 433-F should be revised to separately identify title and payday loans and to account for the effect of their volatility on the taxpayer’s ability to pay.