The IRSAC Small Business/Self-Employed (SB/SE) and Wage & Investment (W&I) Subgroup has five members whose varied practices are those of CPAs, enrolled agents, attorneys, academia, small business, and government.
The members’ collective tax experience includes tax return preparation, tax planning and advice, and representation of individual and business taxpayers from many segments of our society with a wide range of income on diverse issues before all levels of the IRS and in the courts. We consider service on the IRS Advisory Council a privilege, and we are pleased to present this report. We thank SB/SE Commissioner Mary Beth Murphy, W&I Commissioner Ken Corbin, and the IRS personnel of their respective divisions for their cooperation and assistance in the development of this report. We especially thank our liaisons for their guidance and facilitation of our efforts during the year.
The SB/SE and W&I divisions requested our assistance with the five topics presented in this report. Our report addresses:
- The W-2 Verification Code pilot program
- The development of a system to allow taxpayers to lock their tax accounts to protect the integrity of their tax returns
- Marketing/promoting priority practitioner service improvements to the practitioner community
- The implementation of a program to engage private debt collectors to collect outstanding inactive tax receivables
- The development of new collection notices to improve taxpayer responsiveness.
These topics share the common themes of protecting taxpayers and ensuring the integrity of the tax collection system, the importance of clear and effective communication to improve the delivery of IRS services, and the development of systems and practices to improve the efficiency of IRS operations.
ISSUE ONE: W-2 VERIFICATION CODES AND ENGAGING TAX PRACTITIONERS
When a fraudulent tax return is filed claiming a refund, it often includes a fraudulent Form W-2, Wage and Tax Statement, to support information on the return. Since the IRS’s ability to match W-2 data on tax returns with employer data in the early part of the filing season is limited, there is significant opportunity for improper refunds to be issued. The IRS employs several filters to screen for fraudulent returns. A return displaying characteristics indicating a possible fraudulent return undergoes additional screening. This additional review delays refunds for those returns that ultimately successfully pass the screening process. W-2 verification codes (VCs) provide another level of security to authenticate claims of wages and withholding on electronically filed tax returns. This will allow the IRS to continue processing returns that might have otherwise been pulled for review and to more quickly process refunds to taxpayers. The IRS asked for the IRSAC’s recommendations on both the functionality and utilization of the W-2 VC and on how to better engage the tax practitioner community to increase usage.
The filing season for submitting electronically filed tax returns generally opens before the IRS can match W-2 data submitted on tax returns with W-2 data submitted by employers and payroll service providers (PSPs). In the Protecting Americans from Tax Hikes Act of 2015 (PATH Act), Congress advanced the deadline for employer W-2 submission to January 31. Even with this earlier filing deadline, and assuming that the employer/PSP information is processed and available by mid-February, there remains a significant gap between the start of the filing season and the time when the IRS can process and use the matching data from legitimate W-2 forms to screen for refund fraud. Thus, there are several weeks during which tax returns are being electronically filed and refunds are being processed by the IRS with limited ability to match W-2 data.
While the PATH Act mandates delaying refunds (until mid-February) for tax returns claiming the Earned Income Credit and Advanced Child Tax Credit, there remains significant opportunity, especially early in the filing season, for fraudsters to submit fraudulent refund claims without claiming these refundable credits.
IRS statistics from the 2017 filing season (for 2016 returns) show the highest number of tax returns, by week, were transmitted during the week ending February 4, 2017, with a close runner-up being the following week ending February 11, 2017. Consequently, even with the PATH Act’s earlier deadlines and the additional provisions for delaying refunds of refundable credits, there is a period during which W-2 information is not available to review for fraudulent returns. The IRSAC believes VCs provide an important means of authenticating W-2 data during this period.
The W-2 VC pilot program developed from discussions between the payroll reporting agent (RA) community and the IRS and was incorporated into the IRS Security Summit. The VC is a 16-character combination of numbers and letters incorporating elements of data unique to each W-2 form. The VC is generated by the RA based on taxpayer and employer data and an algorithm supplied by the IRS. The VC is printed on copies B (federal copy) and C (employee copy) of the W-2 form and is entered into the tax return software by the taxpayer or tax preparer along with other required W-2 data.
The 2016 filing season (for 2015 returns) saw the initial W-2 VC pilot program involve four RAs and two million W-2 forms. The IRS, in post-processing analysis, independently calculated the VCs and compared them with the VC entered by the taxpayer or tax preparer. When the VC was entered, the validation rate was 94 percent. The 2017 filing season (for 2016 returns) expanded the pilot program by including seven RAs and 47 million W-2 forms. If the taxpayer or preparer had a W-2 with a VC, the VC was entered 34 percent of the time. When the VC was entered, it was validated 97 percent of the time. Further expansion is planned for the 2018 filing season.
When generated and used correctly, VCs are an excellent tool to authenticate wages and withholding claimed on e-filed tax returns, particularly in the early part of the tax season when many refund returns are filed. While missing or incorrect VC data will not in itself delay the processing of the tax return, correctly entering the VC allows for speedier processing. After the VC is validated, the return can continue through the processing system, and, if the return is not stopped for other reasons, the taxpayer will receive their refund more quickly.
Despite these benefits, VCs are underutilized. There is a significant gap between VCs issued and VCs entered into the electronically filed tax return. Multiple factors contribute to the underutilization. Some taxpayers who receive Forms W-2 with VCs are not required to file a return; others may file their returns on paper (the VC cannot be used on paper-filed returns). Further, because VCs are not generated and used on all W-2 forms, their entry in an electronically filed tax return cannot be mandated. Additionally, the various software programs used by taxpayers and tax return preparers do not uniformly explain, prompt for, or encourage entry of the VC.
In the 2016 and 2017 filing seasons, there was no dedicated space on the W-2 forms for the VC. This omission is remedied on 2017 W-2 forms (box 9, “Verification Code”) and this standardization should lead to more consistent use of VCs on 2017 tax returns, as tax preparation software will be able to more easily direct users to find the VC.
Taxpayers and tax preparers need to be convinced of the value of entering VCs. The utilization of VCs will increase if the value of these codes in validating claims of wages and withholding on e-filed returns is communicated effectively. The IRSAC believes the tax professional community will embrace and utilize the VC if it perceives that VC data entry is beneficial for both their clients and for the taxpaying public.
To enhance the functionality and utilization of the W-2 verification codes, the IRSAC recommends that:
- The IRS should continue to use and promote the W-2 verification codes as part of its suite to prevent tax related identity theft. These codes serve to ensure the integrity of Forms W-2, especially during the early weeks of the tax return filing season.
- The IRS should expand its outreach efforts to the tax practitioner community to encourage preparers to input the VC data properly. This outreach can be done via the IRS Nationwide Tax Forums, partnering with tax professional membership organizations, enlisting the IRS stakeholder liaisons at the state and local level, and including promotional content in IRS webinars and on the IRS website (www.irs.gov). The IRS should also explore using the PTIN renewal process to inform tax preparers of the purpose, benefit, and importance of correctly entering VCs into their tax preparation software.
- The IRS should expand its outreach efforts to taxpayers. Taxpayers should be made aware that the purpose of VCs is to validate the claims of wages and withholding on their e-filed tax returns, thereby allowing their returns to be processed more quickly and efficiently. Taxpayers should be engaged and strongly encouraged to enter VCs themselves and to remind their tax preparers to enter VCs.
- The IRS should engage the tax software vendors to prominently prompt for and encourage VC data entry. The assistance of software vendors is important in driving behavior of both taxpayers and tax professionals entering the data required to file tax returns electronically. A diagnostic message or other reminder to enter the VC would achieve higher and more accurate utilization of VCs. Preventing refund fraud is important and the software providers should be strongly encouraged to highlight the need for VC data entry.
- The IRS should continue to explore methods of expanding the VC program. Considering budgetary issues and the evolving cybersecurity environment, the IRSAC recommends the IRS work with more payroll software developers and include more RAs. The IRSAC encourages the IRS to consider whether the VC data can be used for other purposes. If the scope of the W-2 VC program expands and additional uses are found, the value of this tool for improving security and reducing fraud will be enhanced.
ISSUE TWO: ACCOUNT LOCK/UNLOCK
Stolen Identity Refund Fraud (SIRF) remains a high concern of the IRS as it works to prevent tax returns claiming fraudulent refunds from being submitted and processed. While the IRS has developed programs that have reduced the number of fraudulent tax returns that have been processed, the agency is constantly looking for additional methods to further reduce the number, just as fraudsters are continually striving to get those returns through the system. A new strategy under consideration by the IRS in this ongoing battle is a system to allow taxpayers to secure their accounts to prevent SIRF returns from being filed and permitting their legitimate returns to be submitted. While this program is in its infancy, the IRSAC was asked to review this concept, called Account Lock/Unlock, and to comment on the issues presented by its implementation.
The electronic filing of income tax returns has been available for many years and is now the most prevalent means of filing. In Fiscal Year (FY) 2005, over 130 million individual tax returns were processed, of which around 68 million were submitted electronically, roughly 51 percent of all these returns. These numbers have increased dramatically. In FY2016, of the more than 152 million individual tax returns submitted, nearly 132 million were transmitted electronically accounting for over 86 percent of all returns. Of the tax returns submitted electronically, the percentage of self-prepared returns has increased from 37 percent in FY2012 to 40 percent in FY2015. One incentive for individuals who prepare their own returns to submit them electronically is that the processing time for issuance of a refund is generally reduced to 2-3 weeks, depending on when the return is submitted. A paper filed return can take twice as long, or longer, to be processed. While the electronic filing of tax returns is efficient and advantageous to taxpayers and the IRS, the system presents opportunities for fraudsters to file returns to claim fraudulent refunds.
Fraudsters tend to submit SIRF returns, reporting few income sources, early in filing season, before the IRS has the information for data matching, especially W-2 information. Legitimate taxpayers often need to wait until March or later in order to gather everything they need to prepare or to have their tax returns prepared. Simplistic SIRF returns, using Form 1040A or 1040EZ, can be prepared and submitted early in the filing season before the actual taxpayer can file their return. Account Lock/Unlock is a way to prevent this type of abuse of the electronic filing system.
As currently envisioned, Account Lock/Unlock would be a voluntary program. The taxpayer would log into the IRS website and create an account. Once created, it would be “locked” to prevent the submission of any tax return with the taxpayer’s social security number until the taxpayer again logs on to the IRS website and “unlocks” the account. There would then be a “window” or limited time period during which the account would remain unlocked to allow the tax return to be filed. After the return is filed, the account would “relock” automatically. In the case of taxpayers who are married and filing jointly, the spouses would need to set up individual accounts, and both accounts would need to be unlocked.
The IRSAC believes Account Lock/Unlock would reduce SIRF, but there are issues to be addressed in the design and implementation of the system:
- Coordination between the taxpayer and the tax return preparer. Not all returns are prepared right in front of the taxpayer. Taxpayers who use professional tax practitioners (i.e., CPAs, EAs, or attorneys) to prepare their returns typically are not present when their returns are prepared. In these situations, the tax return, once prepared is sent to the taxpayer for review. After review, the taxpayer signs and delivers Form 8879 to the preparer, authorizing the preparer to submit the return. The return is then filed electronically by the preparer. Under Account Lock/Unlock, the taxpayer would currently be required to go to the IRS website, unlock the account, and notify the preparer. The preparer would then have to submit the return during the period the account is unlocked. If the return is not filed within the unlock period, the preparer would have to contact the client to have the account unlocked again. Moreover, there are multiple reasons an e-filed tax return might be rejected and need to be corrected and resubmitted. This correction and resubmission process, however, could easily extend beyond the unlock window, placing an additional burden on the preparer and taxpayer. The additional time needed for the tax return preparer to contact the client could be a significant demand on the tax return preparer in the midst of a busy tax season when time is a precious commodity. The Account Lock/Unlock process should minimize the burdens of coordinating between taxpayers and tax return preparers.
- Changes in Filing Status. Questions remain concerning how taxpayers signing up for this program will indicate their filing status. For example, how will two individuals previously registered indicate if they are now married? How will married taxpayers indicate if they will file jointly or separately? How will they indicate a change in their filing status? What if a taxpayer becomes a widow or widower, divorces, or remarries in the same year? Often, divorces are acrimonious. Could one party take advantage of the lock/unlock program to wreak havoc or emotional distress on their soon-to-be ex-spouse by locking them out of filing a tax return?
- Dependents. Would a dependent have to register for and be required to unlock a return in which they were being claimed? Dependents are not just minor children, but can also be elderly or infirm parents. What if the dependent is also filing a tax return? For example, a teenager who has an afterschool or summer job for which they need to file their own return. What if the dependent is even younger? Must the parent create an account for the minor as well?
- Survivors. If a parent becomes incapacitated or dies, how would a representative, guardian, or adult child of the taxpayer gain access to the parent’s account information in order to file a return? In such as case, would the representative be required to paper-file the tax return?
- Fraudulent Returns. When the taxpayer unlocks the account so a return can be transmitted, this also provides a window of opportunity for a fraudulent tax return to be submitted. Tax return fraudsters often submit those returns early in filing season. If locked out of an account they are attempting to use, they could set up a program similar to “robo-calling” to resubmit a fraudulent return continually, until such time as the account is unlocked. If a fraudulent return is filed before the actual return is submitted, what recourse will the taxpayer have to inform the IRS that a fraudulent return got in first?
- Robo-Filing. A fraudster might set up a robo-filing program. Can the IRS detect if a tax return is being submitted repetitiously and where it coming from? Would the IRS contact the taxpayer to confirm the valid submission of a tax return to the account? How long would the taxpayer have to respond, and if they do not respond timely, would the return be automatically rejected?
- Account Setup. If the taxpayer logs on to the IRS website to setup an account, what can the taxpayer do if an account has already been created by a fraudster? What controls would there be for usernames and passwords? What if the taxpayer changes email accounts or other contact information?
The IRSAC commends the Account Lock/Unlock strategy and encourages its further development. In refining the program, the IRS should consider the questions listed above. The IRS should identify as many weaknesses as possible and develop strategies to prevent them from being implemented. The IRS, working with its stakeholders, should consider every possible scenario by which this program, if implemented, might be circumvented by those who would abuse the tax system to defraud the government and taxpayers.
ISSUE THREE: MARKETING/PROMOTING PRIORITY PRACTITIONER SERVICE IMPROVEMENTS TO THE PRACTITIONER COMMUNITY
In 2002, the IRS launched the Practitioner Priority Service® (PPS) which includes a nationwide telephone hotline dedicated to tax practitioners. Specially trained representatives who are intended by the IRS to be the practitioners’ first point of contact staff the PPS. These representatives serve an important role as a conduit between tax professionals and the IRS. Because of budget constraints for fiscal years 2010 through 2015, the IRS reallocated resources from PPS to other priorities, and the level and quality of services provided by PPS decreased. In 2016, the IRS dedicated additional resources to restore PPS, improving practitioner access to the PPS. Yet, surveys showed that practitioners remain dissatisfied with the quality of service.
The IRS asked the IRSAC for suggestions to improve the practitioners’ PPS experience. We reviewed the IRS’s current PPS model and also looked at New York State and California models. The IRSAC recognizes the important role practitioner-focused hotline services play in providing effective and efficient tax administration, and are pleased to submit our recommendations.
Trained IRS customer service representatives handle inquiries concerning taxpayer accounts and staff the PPS hotline. To use PPS, practitioners must have valid authorizations to represent clients and must be actively working with their clients to resolve their clients' tax account issues. Calls outside the scope of PPS are transferred to other IRS areas.
Due to the IRS’s budget cuts between 2010 and 2015, staffing was reduced by more than 12 percent since 2010. During 2014 and 2015, only 45 percent of practitioners’ calls were answered after an average of 45 minutes on hold. According to the Journal of Accountancy and The Tax Adviser’s 2016 “Tax Software Survey,” a majority of CPAs who called the PPS found it difficult or very difficult to reach a representative. (See accompanying chart.)
|How easy was it to get through to an IRS customer service representative?|
In 2016, Congress provided additional funding to improve taxpayer services, and the IRS improved the PPS answer rate to 84 percent and decreased the average wait time to 7.3 minutes. Practitioner perception of the quality of service, however, did not improve. According to a Journal of Accountancy survey titled, “AICPA Members Weigh in on IRS Service Levels,” conducted in April 2016, satisfaction with the quality of PPS remained low. Only one-third of the respondents reported that they received an answer to their question at least “most of the time” without being transferred to another agent. The lack of training of PPS staff seemed to result in poor customer service. In response, the AICPA Tax Executive Committee Chairman Troy Lewis suggested at a forum hosted by the National Taxpayer Advocate that “[t]o ensure that we have meaningful access to the IRS, the agency needs to regularly provide a systematic, reliable, and economical source of training to their employees.”
Dissatisfaction arises when practitioners are transferred to multiple IRS representatives before having their questions addressed, and when the practitioners’ expectations of the scope of service that PPS should provide exceeds what PPS representatives are actually capable of providing. Further, some level of dissatisfaction is likely the residual effect of poor experiences from 2015 and 2016. As Will Rogers observed, “It takes a lifetime to build a good reputation, but you can lose it in a minute.” It will take multiple consistent good experiences with PPS to overcome a single poor one. Some practitioners will need to be encouraged to re-engage with PPS before their opinions, based on prior experience, will improve.
The IRSAC researched services similar to PPS provided by several states for those which may benefit the IRS to review.
The New York State Department of Taxation and Finance has a Tax Practitioner Hotline which efficiently directs the caller to the proper representative. After going through a series of prompts, the calls usually go straight through to a live person who is able to assist the caller.
The State of California Franchise Tax Board provides numerous tax practitioner services, including phone services, self-service information, a secure email service, and a live chat service. These services and information about each is readily available on the Franchise Tax Board website. One of the phone services is the Tax Practitioner Hotline to assist practitioners with their client tax returns or accounts. The website asserts “In most cases we can answer your question the same day we receive it.” After dialing the number, a recorded message states the current average wait time. While on hold, a caller is provided with various recorded messages about other services available to the practitioner.
- Establish a detailed marketing and outreach plan that clearly defines the scope of services provided by PPS, publicizes the improved level of services based upon objective criteria, and encourages practitioners to use the PPS.
- Direct PPS marketing to the English-as-a-second-language (ESL) and Limited English Proficient (LEP) communities. Although English remains the most widely spoken language nationwide, there are more than 25 million LEP individuals as of 2013. Sixty million Americans speak a language other than English at home while more than one fourth of them have limited or no English fluency. In New York City alone, 800 languages are spoken and more than 35 percent of the City’s population is foreign-born. Making PPS better known to the ESL and LEP communities will help engage the participation of the less-involved practitioners whose practices are local and are focused on serving these communities.
- Provide a call-back service. Long hold times and calls not getting answered during periods of high utilization or reduced service are major causes of dissatisfaction with PPS. Instead of requiring practitioners to stay on hold indefinitely, the IRS should implement a callback system. Like the California model, PPS announces a wait time. Additionally, PPS should provide the caller with the option to leave a phone number to receive a call back within an estimated time. For example, “You do not have to stay on the line. Our representatives will call you in approximately 60 minutes if you leave your number after the tone.” Additionally, the instructions should state how many times the representative will attempt to return the call. For example, “If you do not answer when we call, our representatives will attempt to call you three times before you are pushed back to the end of the queue.”
- Monitor practitioner complaints and follow up. Practitioners are the target audience of PPS and addressing their concerns would be the most effective way to improve the system. Develop a system to receive direct immediate feedback from the practitioners that use the service. After each phone call with a practitioner, the representative might ask a series of scripted questions to solicit the practitioner’s feedback on the service received. A section of the IRS website should be dedicated to receiving comments from practitioners regarding their experiences with PPS and their suggestions for improvements. Another direct feedback system would be to hold periodic forums dedicated to practitioners focused on improving practitioner-dedicated services. Additionally, the IRS should monitor surveys, and social media for practitioners’ complaints about the hotline service and follow up on their concerns.
- Provide regular customer service training to PPS representatives in addition to technical tax resolution training.
ISSUE FOUR: TAXPAYER AND PRACTITIONER CONCERNS REGARDING PRIVATE DEBT COLLECTION
The 2015 Fixing America’s Surface Transportation Act (FAST) requires the IRS to use private debt collectors to collect outstanding inactive tax receivables. Thus, the IRS contracted with four private debt collection agencies, and private debt collection commenced in April 2017. Previous efforts to use private debt collectors were generally not considered successful. Considering past experiences and the concerns expressed by a number of public and private interests, including the National Taxpayer Advocate, the IRS requested the IRSAC suggest ways to communicate the program to taxpayers and to provide feedback on public perception. Additionally, the IRSAC was asked for suggestions to mitigate or prevent scams and fraudulent schemes by persons abusing the existence of the private debt collection program.
The FAST Act mandates the assignment of “all outstanding inactive tax receivables” for private debt collection. The terms “inactive tax receivables” and “tax receivables” are specifically defined, and certain tax receivables are not eligible for assignment to private debt collection. The IRS contracted with four private debt collection agencies (PCAs). The PCAs are required to comply with IRS collection practices, to respect taxpayer rights, and to comply with the Fair Debt Collection Practices Act. The PCAs must also operate in accordance with a policy and procedures guide developed by the IRS for the private debt collection program.
The IRS assigned the first accounts to the PCAs in April 2017 with each PCA receiving an initial inventory of 100 accounts per week. After an introductory period, the assigned accounts increased to 1,000 per week. It is estimated that by the end of September 2017 the total number of accounts assigned to PCAs was about 147,000.
This is the third attempt by the IRS to outsource collection of accounts to private contractors. The first attempt was a pilot program tested for 12 months in 1997, and the second was in a three-year program started in 2007. Reviews of the previous programs found that they were not cost effective and, further, that IRS personnel had more options available to assist financially distressed taxpayers to resolve difficult collection cases than their private sector counterparts.
Implementation of the current private debt collection program has been scrutinized by taxpayer representatives, members of Congress, watchdog groups, supervisory public agencies, and the public, all of which have expressed concern regarding a number of issues. The IRSAC notes the following issues.
- Complexity Is Added to the Tax Collection Process. Except for the two limited private debt collection efforts discussed above, taxpayers and taxpayer representatives have dealt solely with the IRS concerning the collection of outstanding tax debts. The tax collection process is subject to complex laws and regulations, and the IRS is monitored by a host of governmental and private interests. The use of PCAs introduces new parties to the collection process and adds an additional layer of complexity, which potentially diminishes transparency. The IRS is the primary watchdog to monitor activities of the PCAs to ensure compliance with lawful collection procedures and respectful treatment of taxpayers. With the involvement of PCAs, taxpayers have new issues about which to be concerned. Is the PCA contact legitimate? What authority does the PCA have? What action can the PCA take? Must the taxpayer work solely with the PCA, or can the taxpayer request that his or her file be returned to the IRS? What payment options can the PCA authorize? To whom is payment to be made? Further, with additional parties now involved in working on a taxpayer’s account, there is increased concern for maintaining the accuracy, integrity, and security of account information.
- Increased Opportunity for Identity Theft, Fraud, and Taxpayer Scams. Fraudsters are likely to take advantage of taxpayer confusion and fear and use a cloak of apparent legitimacy to pose as private debt collectors to scam taxpayers.
- Taxpayer Privacy. Persons not under the direct supervision and control of the IRS will have access to confidential taxpayer information. For taxpayer authentication purposes, the PCA employees will also have access to other private information of the taxpayer. This access increases the taxpayer’s exposure to potential abuse of confidential personal information. Further, taxpayer information will now reside in one or more additional databases, increasing the taxpayer’s exposure to potential identity theft by hackers.
- Authentication of the PCA by the Taxpayer. It is fairly common for taxpayers to receive calls from fraudsters claiming to be from the IRS and seeking to coerce them into making immediate payments to fraudulent accounts. The IRS has expended considerable effort to educate and warn taxpayers regarding such calls, and, optimally, taxpayers are properly wary of callers claiming to be from the IRS. How is a taxpayer to distinguish between a legitimate PCA caller and a fraudulent caller? To address this concern, the IRS sends an initial letter to the taxpayer noting the assignment of the taxpayer’s account to a specific PCA and providing an authentication number that will be used to identify the PCA. The IRS requires the PCA to make the initial taxpayer contact by letter, informing the taxpayer of the assignment of the account and that the PCA will contact the taxpayer by telephone. The IRS assigned authentication number is used by the PCA caller to identify the PCA. This authentication procedure is good, but it can be mimicked and exploited by fraudsters. Wary taxpayers will want, and need, a means to independently confirm the legitimacy of the assignment of their accounts and the identity of the PCA.
- Profit-Motivated Collection Practices. Because PCAs’ compensation is based on a percentage of their collections, there is a concern, and a perception, that PCAs will be motivated to use aggressive tactics to pressure taxpayers to make payments. PCAs are charged with contacting the taxpayer and requesting payment in full. If the taxpayer cannot pay in full, the PCA is authorized to establish a payment plan. Because the PCAs do not collect financial information from the taxpayer, however, and do not make financial determinations of the taxpayer’s ability to pay, they cannot differentiate between taxpayers who have the ability to pay and those who do not. Taxpayers who are experiencing severe financial hardship, and whose circumstances warrant their cases being classified as “Currently Not Collectable” (which under established IRS collection policies may exempt them from collection action) are the very taxpayers most likely to feel pressured or coerced to make payments that they would not otherwise be required to make. Other persons for whom payments may be a financial hardship, and who may perceive any request or suggestion made by the PCA for payment as coercive, are those whose incomes are less than the Federal Poverty Guidelines. While section 6306(c)(1) of the Internal Revenue Code generally requires the assignment of “all outstanding inactive tax receivables,” section 6306(c)(2)(B), by definition, requires only the assignment of receivables the IRS deems to be potentially collectible. By retaining uncollectible receivables, the IRS can prevent those taxpayers who are most susceptible to pressure and intimidation from being subject to the actual or perceived use of aggressive collection tactics by the PCAs.
The above-expressed issues are inherent in the private debt collection program mandated by Congress and have been raised or noted by many others in letters, publications, and blogs. Further, the IRS recognized these issues and has developed procedures to address them. While the issues may not be eliminated, they can be managed to reduce their adverse effect on taxpayers.
Increased effective communication of relevant information to taxpayers is key to managing all the expressed concerns. Second, diligent monitoring of PCA activities by the IRS and strict enforcement of all laws, regulations, and protocols for respectful treatment of taxpayers will mitigate the development of systemic collection practice issues. Further, the IRSAC makes the following specific recommendations:
- Provide additional information at IRS.gov directed to taxpayers whose accounts have been assigned regarding the private collection program. The information should include clear, concise statements of (1) the process for the taxpayer to authenticate the PCA, (2) the authority and actions that may be taken by the PCA, (3) the opportunities and the process for the taxpayer to request the return of his or her account to the IRS, (4) instructions for making payments, and (5) procedures to file complaints.
- Provide instructions for submitting Forms 2848 and 8821, Powers of Attorney documents, authorizing a taxpayer’s representative once an account has been assigned to a PCA.
- Monitor the development of new schemes to defraud taxpayers by persons impersonating PSAs and issue notices advising the public of such schemes.
- Provide a means at IRS.gov for a taxpayer to independently verify the assignment of his or her account to a PCA and the identity of the PCA. Consider adding this information to the transcript of the taxpayer’s account.
- Encourage taxpayers to safeguard the unique authentication numbers assigned to their accounts and advise them to always require the caller or contacting party to accurately provide the first five digits of the number before giving the last five, and before giving any other personal information.
- Require or, at a minimum, encourage PCAs to provide information directed to taxpayers on the PCAs’ websites. A survey of the PCA websites shows very little information directed to taxpayers. Only one PCA provides general information directed to the taxpayer with links to relevant IRS-provided information.
- Do not assign for private debt collection any accounts the IRS deems to be uncollectable based on financial information collected by the IRS. Although the IRS already excludes from assignment those accounts classified as “Currently Not Collectible,” the IRS should additionally consider using historical collection data to determine a level of income measured by the Federal Poverty Guidelines that is statistically uncollectable and exclude such accounts from assignment to PCAs.
ISSUE FIVE: COMMENTS ON PROPOSED REVISED COLLECTION NOTICES
One of IRS’s Future State themes is to “[u]nderstand noncompliant taxpayer behavior, and develop approaches to deter and change it.” Regarding the collection of delinquent taxes, the IRS initiated pilot programs to revise its collection notices. These collection notices are redesigned to understand taxpayer behavior (e.g., what motivates a taxpayer to respond, what draws the taxpayer’s eye, what information gets the taxpayer’s attention, etc.) and to develop approaches to encourage payment of outstanding liabilities. The pilot programs will test the effectiveness of various prototype collection notices. The IRS has requested the IRSAC review the prototypes for two collection notices, the LT16 and the CP14, and provide comments and suggestions regarding the effectiveness of the notices.
The mission of the collection program is to collect delinquent taxes and secure delinquent tax returns through the fair and equitable application of tax laws. At year-end 2014, Collection had an inventory of approximately 15 million potentially collectible tax debt cases representing $143 billion of unpaid tax debt. During the period 2009-2014, the total tax debt inventory rose.
The IRS has a three-phase process for collecting unpaid tax debts. The first phase is the notice phase. The IRS sends automatically-generated notices to the taxpayer regarding outstanding debts or delinquent returns. These notices satisfy the IRS’s statutory requirements and collection goals. The notice phase resolves taxpayers’ debt at the earliest possible opportunity and collects the greatest amount of potentially collectible debt with the least cost.
The goal of issuing a notice is to prompt a payment or response (e.g., taxpayer disputes the debt, inquiries about payment options, or informs the IRS that the taxpayer cannot pay the full amount owed) from the taxpayer. Current collection notices, however, convey a blunt message that may discourage taxpayers from initiating contact with the IRS. For example, the current CP14 employs a curt, matter-of-fact tone that informs the taxpayer of unpaid taxes and emphasizes (in large bold letters) the taxpayer must pay the full amount immediately. The first page of this notice reinforces a “pay in full” message, and the second page provides information on how the taxpayer can contact the IRS to discuss payment arrangements. For many taxpayers, IRS notices are intimidating and often prompt inaction (i.e., ignore it, and it will go away mentality) rather than action.
The IRS’s pilot programs to revise some of its collection notices focus on taxpayer behavior. The revisions include improving the type and amount of information on the notices—attempting a balance between providing the requisite and pertinent information without overwhelming the taxpayer with material. Revisions also include changing the font and layout for ease of reading and understanding, and incorporating color and icons to catch the taxpayer’s eye. The collection notice prototypes are designed to get the pertinent information to the taxpayer in the shortest time and elicit a response from the taxpayer.
The IRS started two pilot programs with prototypes of the LT16 and CP14 notices. Both notices inform a taxpayer of a balance due for a specific tax year. The CP14 is sent to a taxpayer when the taxpayer owes money on unpaid taxes. The LT16 is issued to a taxpayer informing the taxpayer that because he or she has not responded to previous notices sent by the IRS, the IRS may take enforced collection action. The LT16 emphasizes the IRS must hear from the taxpayer about the overdue taxes or tax returns.
For the LT16 notice, six prototypes were created. Each prototype focused on various methodologies to reach the IRS’s goal of understanding taxpayer behavior:
In June 2017, the IRS conducted a pilot program on the LT16 notice prototypes. The IRS issued 8,500 notices for each prototype (LT16 A/B/C/D/E/G) to a pool of taxpayers with an outstanding tax debt of at least $50,000. The pool of taxpayers was randomly drawn and had been in Collection for between five and eight weeks. Preliminary results from the LT16 prototypes were promising. There was an 11-percent increase in voluntary compliance for taxpayers who received an LT16 prototype notice with a $63 increase per notice. There was a 6- to 8-percent decrease in the number of taxpayers with a maximum failure-to-pay penalty. There was a 13- to 31-percent increase in self-service tools (e.g., IRS Online Payment Agreement program) and an 8- to 32-percent decrease in calls and written correspondence to Collection. The increase in online self-services and reduction in calls or correspondence to Collections had a corresponding effect of reducing costs for the IRS (e.g., a 50-percent decrease in paper use). There was an 8- to 20-percent decrease in the average cost to address taxpayer cases. The LT16C (Urgent) and LT16D (Installment Agreement) prototypes were the best performing prototypes. The IRS had received no complaints or taxpayer feedback regarding the LT16 prototype notices.
For the CP14 notice, three prototypes were created: CP14A, CP14B, and CP14D. In September 2017, the IRS conducted a pilot program on the CP14 prototypes, issuing 8,500 per prototype (total of 34,000). The results from the CP14 prototypes were not available as of the time of this report.
In reviewing the prototype notices, the IRSAC notes these issues.
- Taxpayer Rights. All the prototypes for both the CP14s and LT16s provided the taxpayer with pertinent information: the purpose of the notice, debt amount, tax year, and applicable penalty and interest amounts. Also, all the prototype notices provided numerous linksa minimum of seven links to a high of twelve linksto the IRS’s website where the taxpayer can locate additional information on many topics (e.g., payment options, penalties, appeals, etc.) Some prototypes, however, do not provide clear information regarding options for taxpayers who may be experiencing financial hardship or how taxpayers can dispute or appeal a debt. Further, none of the prototype notices provides a telephone number a taxpayer could call regarding the notice itself (i.e., to inquire on how the debt arose, to dispute the debt, etc.). Rather, the telephone number(s) provided on all the prototype notices were referring to whether the taxpayer could not find additional information online. The telephone number provided in the current LT16F refers to whether taxpayers are “unable to resolve [their] tax issue now.” For non-tech savvy taxpayers, a phone call may be the only means of learning there are options other than payment of the debt. Last, none of the LT16 prototypes provide a timeframe in which a taxpayer must respond to avoid collection action. The current LT16F provides for a 10-day response date. Information regarding taxpayer rights and the timing of such rights is critical. A taxpayer should not have to go beyond the notice (i.e., to an IRS website) to learn of such rights.
- Clear Communications. Many taxpayers feel overwhelmed and unprepared when dealing with tax matters and with the IRS. Moreover, many taxpayers have a perverse impression the IRS is “out to get” taxpayers. It is this lack of experience and fear that fraudsters leverage in scams against taxpayers. Consequently, when a taxpayer receives written communication from the IRS, there is potential for misunderstandings. For example, the LT16D prototype provides a monthly payment amount if a taxpayer wants to set-up a streamlined installment agreement. Taxpayers may believe the stated monthly payment amount is an “agreed” amount for a specified time, not understanding the continual accrual of penalties and interest will extend the payment period or that the payment may not cover other tax periods not identified in the notice. Similarly, taxpayers unfamiliar with how penalties and interest accrue may believe such amounts stated on the CP14 prototypes are set. Taxpayers also may not be aware that the failure-to-file and failure-to-pay penalties rates increase the longer the debt remains outstanding. Last, some of the prototype notices state a taxpayer may “delay” the payment of the debt (as opposed to postponing payments during periods of financial hardship). “Delay” typically has a negative connotation in tax administration. As a goal of the prototype notices is to encourage taxpayers to act, it is important there is a consistency between what is reflected in the notice versus what the taxpayer may encounter through the online self-service tools, a call center or Collections to avoid misunderstandings. This is particularly the case for notice prototypes that estimate monthly payment amounts (e.g., LT16D). A taxpayer who receives a notice reflecting an estimated monthly payment amount should also get a similar monthly payment amount through the online self-service tools or installment payment arrangements negotiated with Collections. If not, a taxpayer may feel the notice proposing a monthly payment amount was bait-and-switch.
- Incentivize a Taxpayer to Act. The goal in creating the prototypes was to gauge taxpayer behavior (i.e., what would make a taxpayer take action upon receipt of a notice). Taxpayers should be motivated to respond by an opportunity to reduce their tax debt (e.g., the First-Time Abate (FTA)). Further, considering the above comments regarding misunderstandings, the IRS Online Payment Agreement program should also include the opportunity to seek an FTA waiver. It would be misleading to propose a taxpayer may be eligible for FTA, but not provide the opportunity if the taxpayer acts through online self-service tools. An additional incentive to get taxpayers to act is to let them know they may be eligible for assistance from a low-income tax clinic (LITC).The IRSAC notes that some of the language used in the prototypes could hinder the IRS’s goal of inducing taxpayers to act. For example, in the CP14 prototypes there are several references to the taxpayer “waiting” to pay, implying the taxpayer is making a conscious choice not to pay the debt. While there may be taxpayers with the financial ability to pay a tax debt who nevertheless make the conscious decision not to do so, this is generally not the case. Rather, taxpayers with outstanding tax liabilities generally cannot pay the debt fully or, sometimes, even make installment payments. There are also opportunities in the prototypes to remove language that unnecessarily reflects negatively on the IRS. Specifically, some language can be modified to reflect actions that the IRS must take as opposed to the appearance the IRS is independently taking such action against the taxpayer (e.g., “we assess a penalty” vs. “a penalty is assessed”).
- Reduce the Potential for Fraudsters to Take Advantage of Changes to Collection Notices. As the IRS stated in its IRS Future State, “the world is changing,” and so are IRS collection notices. The CP14 and LT16 prototypes differ significantly from the IRS’s current version of these notices. Taxpayers and practitioners may not recognize the prototypes as being legitimate notices from the IRS. Fraudsters have tried issuing “notices” to steal from taxpayers.
- Taxpayer Rights. Taxpayer’s rights and options must be clearly stated and explained in all collection notices, especially on any deadlines. To further its Future State objectives, the IRS is including links to automated self-services on the notices. These online services must also clearly inform taxpayers of their rights regarding financial hardship considerations, opportunity and process to dispute a debt, appeal rights and procedures, etc. Final versions should include a contact number a taxpayer may use to discuss the actual notice itself, and such number should clearly state it is for questions regarding the notice.
- Clear Communications. Whichever prototype notices are selected to replace the current CP16 and LT14 notices, these final versions should be vetted to avoid the opportunity for misunderstanding by a taxpayer. For example, collection notices should clearly state that penalty and interest amounts continue to accrue until paid in full. Information provided in the notice should also be consistent with IRS online service tools and call centers to minimize misleading information. Further, any links reflected in a notice should be functional.
- Incentivize Taxpayers to Act. The IRS should include a reference to the FTA program to incentivize taxpayers to act in response to a collection notice and ensure the FTA waiver opportunity is also available through Collection’s online self-service tools. Further, the IRS should add to the CP14 and LT16 a reference to the LITC link on its website. Last, the IRS should consider neutral language in the notices so as not to disaffect a taxpayer.
- Reduce Potential for Tax Scams. Although the prototypes are sent to a limited number of taxpayers, the IRS should include on its Understanding Your IRS Notice or Letter website information about the pilot programs and include samples of the prototype notices so taxpayers can verify the authenticity of a prototype notice. The IRS expressed concern about posting samples of prototypes before the results of the pilot programs are complete. To mitigate this concern, the IRS could only post a limited portion (e.g., half of the first page) of a prototype notice to its website. Such a limited portion would be sufficient for a taxpayer or tax professional to verify the authenticity of these prototypes.