The IRSAC Small Business/Self-Employed Subgroup (hereafter “Subgroup”) consists of eight tax professionals from wide-ranging backgrounds. Its members include attorneys, certified public accountants, enrolled agents and a certified business valuation professional. The Subgroup’s membership reflects the broad range of taxpayers served by the SB/SE Division of the Internal Revenue Service (hereafter “SBSE”).
This subgroup enjoys a close working relationship with the professionals within SBSE. The relationship has granted this subgroup the opportunity to consult with SBSE leadership on many issues over the past year. The Subgroup and SBSE consulted both formally and informally on all of the issues contained in this report.
This subgroup respectfully recommends the following seven actions relating to the seven issues raised in this report:
- The Filing Requirements for the Report of Foreign Bank and Financial Accounts (FBAR) are Confusing and Extremely Overbroad
FBAR reporting should be streamlined and made consistent with the timing and methodology familiar to taxpayers. Policies should be developed to encourage compliance, particularly with respect to people who wish to cure inadvertent past failures to file, and exceptions from filing should be made where reporting should not be required.
- Collection Standards Should be Revised to Enhance Collection and to Reduce Installment Payment Default Rates
Collection efforts can be enhanced by revising collection standards to reduce installment payment defaults.
- Tools and Techniques Should be Developed to Enhance Effectiveness of the Automated Collection Service
Collection efforts can be enhanced by developing tools and techniques to expand the effectiveness of individuals working within the Automated Collection Service process.
- The IRS Should More Effectively Communicate the Appropriate use of Partial Payment Installment Agreements and Offers In Compromise to Maximize Collections and Manage Affordability
Collection efforts can be enhanced by effectively communicating the availability of Partial Payment Installment Agreements and Offers In Compromise to maximize IRS collections and minimize taxpayer costs.
- The Reformed Lien Process Should be Made More Effective Through Further Enhancements
Collection efforts can be enhanced by revising the lien process so that liens will most likely increase the collection of tax.
- Incentivize Businesses and Workers to Request a Determination of a Person’s Worker Status
Worker classification uncertainty can be resolved cooperatively by providing taxpayers with opportunities to remove the uncertainty of worker classification through incentivizing businesses and workers to voluntarily request a determination of a person's status as an employee or independent contractor.
- Reduce the Universe of Unresolved Worker Classification Issues by Providing Incentives for Businesses not Currently Under Audit to Properly Classify Workers Prospectively
Worker classification uncertainty can be resolved cooperatively by providing taxpayers with opportunities to remove the uncertainty of worker classification through providing an incentive for businesses to classify workers to reduce the universe of uncertain, unresolved worker classification issues.
ISSUE ONE: THE FILING REQUIREMENTS FOR THE REPORT OF FOREIGN BANK AND FINANCIAL ACCOUNTS (“FBAR”) ARE CONFUSING AND EXTREMELY OVERBROAD
The FBAR is required to be filed on Form TD F 90-22.1 each calendar year by each U.S. person who has a financial interest in or signature or other authority over foreign financial accounts, including bank, securities, or other types of financial accounts, in a foreign country if the aggregate value of these financial accounts exceeds $10,000 at any time during the calendar year. It is due by June 30 of the following year.
The FBAR filing requirements should be modified to improve reporting compliance and IRS administrative efficiency. Thus, we recommend streamlining and integrating FBAR reporting so that it is consistent with the federal income tax self-assessment system. Our summarized recommendations include: (a) extending the due date to October 15 to coincide with the final filing deadline for most income tax returns; (b) providing coordinated electronic filing for income tax filers, developing an easy to use electronic filing portal for non-income tax filers, and adopting the well established “mailbox” rule for paper filers, (c) requesting guidance in connection with a reasonable cause penalty relief to encourage and accommodate filings when accounts have been disclosed and income has been substantially reported; (d) changing the filing threshold, and (e) providing an exemption from the filing requirement for employee benefit plans and U.S. officers and employees of publicly traded corporations and their subsidiaries.
The Bank Secrecy Act of 1970 was enacted, in part, to require reports or records where they “have a high degree of usefulness in criminal, tax, or regulatory investigations or proceedings.” Section 241 (31 U.S.C. §5314) provides statutory authority for the FBAR. In 1990, the Treasury Secretary established the Financial Crimes Enforcement Network (FinCEN), whose mission is to support the detection, investigation, and prosecution of domestic and international money laundering and other financial crimes.
In 2001, the USA Patriot Act was enacted. Section 361(a) made FinCEN a bureau in the Treasury Department, and section 361(b) instructed the Treasury Secretary to study methods for improving compliance with the reporting requirements under 31 U.S.C. §5314. As a result of the study, FinCEN and the IRS announced in 2003 that FBAR enforcement authority would be delegated to IRS. The FinCEN director stated, “Unlike other Bank Secrecy Act reports, FBARs are filed mainly by individuals and are more closely related to tax enforcement.”
The American Jobs Creation Act of 2004 revised the penalties for failure to file a fully completed FBAR. As a result of these revisions, the penalty for non-willful violations is $10,000, and there is a very narrow exception that may eliminate penalties only if the account balance was properly reported. The penalty for willful violations is the greater of $100,000 or 50 percent of the account balance, and there are no exceptions. Other penalties, including a fine of up to $500,000 and up to five (5) years of imprisonment, may apply.
In October 2008, due to an increase in IRS enforcement activity relating to foreign financial accounts, the FBAR and its instructions were revised to expand who
must file and increase the amount of information required to be included, effective for FBARs filed by June 30, 2009, for calendar year 2008. Significant changes included the following:
- Any person in and doing business in the U.S. with such financial interest or signature authority would be required to file the FBAR. Thus, a nonresident alien for income tax purposes could be required to file.
- A U.S. beneficiary of a trust whose trustee had a financial interest or signature authority would also be required to file if the beneficiary either had a present beneficial interest in more than 50 percent of the assets or from which the beneficiary received more than 50 percent of the current income.
- A U.S. person who established a trust whose trustee had a financial interest or signature authority would be required to file if a trust protector had been appointed.
- Filers would be required to report the exact maximum value in each foreign account during the year, and to identify the type of account.
- The definition of financial account would include foreign mutual funds, debit card accounts and prepaid credit card accounts, in addition to any bank, securities, securities derivatives or other financial instruments accounts.
In response to comments, the IRS subsequently released updated guidance several times:
- On June 5, 2009, Announcement 2009-51 suspended the FBAR reporting requirement with respect to those persons who are not U.S. citizens, residents, or domestic entities, but only for FBARs due on June 30, 2009.
- On June 24, 2009, the IRS published a revised version of frequently asked questions (FAQs) on its website concerning voluntary disclosure of Foreign Bank Account Reports. According to FAQ #43, U.S. persons who reported and paid tax on all their 2008 taxable income, or would timely report all their 2008 taxable income, but only recently learned of their FBAR filing obligation could file the delinquent FBARs in accordance with the directions contained in the FAQ by September 23, 2009. According to the FAQ, a U.S. person who meets the requirements of FAQ #43 would not be assessed a penalty for failure to file the FBAR. In all other circumstances, the deadline for filing calendar year 2008 FBAR was June 30, 2009.
- On August 7, 2009, Notice 2009-62 provided further relief to certain U.S. persons with signature authority but no financial interest in a foreign account and persons with a financial interest in, or signature authority over, a foreign financial account in which the assets are held in a foreign commingled fund. Such U.S. persons were given until June 30, 2010, to meet their FBAR filing requirements for calendar years 2003 to 2008.
- On February 26, 2010, Notice 2010-23 granted persons with signature authority over, but no financial interest in a foreign financial account until June 30, 2011, to report those financial accounts, applicable for FBARs for the 2010 and prior calendar years. Persons with a financial interest or signature authority over a foreign commingled fund that was a mutual fund would be required to file an FBAR, unless subject to some other exception, but the IRS would not interpret
- Also on February 26, 2010, Announcement 2010-16 suspends the requirement to file the FBAR for 2009 and earlier years for any person who is not a U.S. citizen, resident or domestic entity. All persons were permitted to rely on the definition of a U.S. person found in the July 2000 version of the FBAR instructions, and were permitted to disregard the current instructions that include a person in and doing business in the U.S. Under the July 2000 version of the instructions, a U.S. person was defined as (1) a citizen or resident of the U.S., (2) a domestic partnership, (3) a domestic corporation, or (4) a domestic estate or trust. Again, this applies for 2009 and earlier years. All other requirements of the 2008 version of the FBAR remained in effect.
- The filing deadline should coincide with or be later than the time for filing income tax returns so that the individual’s tax advisor will be able to timely discuss the filing with taxpayers. By using October 15th, all filers will have a consistent due date.
- FBAR reporting should be accommodated through the IRS’s electronic filing system, just as state tax returns are similarly accommodated. A separate electronic filing portal should be available to non-income tax return filers. Some filers will have hundreds of accounts, making manual filing needlessly cumbersome.
- The well-established “mailbox rule” should apply to paper FBAR filings, just as it applies to federal income tax filings (see IRC § 7502). It is unreasonable to hold individuals responsible for delivery delays beyond their control.
- Disregarded entities should be respected so that filing responsibility is with the “tax owner” of the account.
- To simplify prior year filings, prior year late filing for inadvertent non-filers should be limited to six years with the IRS agent able to take advantage of the ability to require additional returns if necessary consistent with Policy P-5-133. This would include cases in which income from the account has been reported and existence of the account has been noted on the annual income tax filing either by checking the box for its existence in the case of income tax returns that do not include balance sheets or by reporting on the entity’s balance sheet for other persons. The existing relief from penalties is not sufficient to encourage compliance when prior years’ filings are numerous and compiling information is excessively burdensome.
- The IRS should provide guidance that revenue agents have greater authority to exercise discretion in waiving/abating FBAR related penalties based on well-founded reasonable cause exceptions applicable to the person’s facts and circumstances. The minimum $10,000 penalty for non-willful violations is too severe and does not encourage compliance in many cases.
- The IRS should consider supporting a legislative change for an exemption from FBAR filing for accounts with de minimis balances and minimal activity during the year. The cost of compliance for these accounts outweighs the benefit of the
information collected. In addition, the current limits should be adjusted annually for cost of living increases.
- There should be an exemption for employee benefit plans (both retirement and welfare plans). The purposes of the Bank Secrecy Act of 1970 are not served by requiring employee benefit plans to file FBARs, and these plans are already subject to detailed reporting obligations under the Employee Retirement Income Security Act of 1974 (ERISA).
- U.S. officers and employees of publicly-traded corporations and their subsidiaries should be exempt from filing because other controls exist to prevent abuse. Further, the term “publicly-traded corporations” should be broadly defined to include non-U.S. public exchanges.
ISSUE TWO: COLLECTION STANDARDS SHOULD BE REVISED TO ENHANCE COLLECTION AND TO REDUCE INSTALLMENT PAYMENT DEFAULT RATES
When a taxpayer requests an installment agreement for larger tax liabilities or proposes an offer in compromise, the IRS applies allowable expense standards. Total allowable expenses include those expenses that meet the necessary expense test. The necessary expense test is defined as expenses that are necessary to provide for a taxpayer's and his or her family's health and welfare and/or production of income. The expenses must be reasonable. The total necessary expenses establish the minimum a taxpayer and family needs to live and serve as the basis for granting installment agreements and offers in compromise.
The current standards fail to provide adequate expenses for taxpayers residing in high cost communities. The IRS should revise its standards to allow cost of living adjustments for taxpayers in high cost communities that are equivalent to those provided to federal employees residing in those communities.
Many IRS collection employees fail to exercise discretion as allowed by the Code and the Internal Revenue Manual when applying the standards. Employees in Automated Collection Service (ACS) are even less likely to be flexible than revenue officers when applying the standards. The failure to exercise discretion results in more defaulted installment agreements, reduces the number of accepted offers in compromise, and incentivizes taxpayers to seek bankruptcy relief from tax obligations.
The IRS should empower its employees to exercise greater flexibility in applying the standards and thereby increase total tax collections.
When taxpayers owe taxes, the IRS has established collection standards for budgeting taxpayer expenses for purposes of establishing installment agreements and establishing taxpayer’s ability to pay when considering offers in compromise.
In October 2007, the IRS revised its allowable expense standards to make them less flexible. In 2008, 2009 and 2010, the IRS again revised the standards but did not vary significantly from its 2007 standards. Instead of establishing national standards to recognize the need for higher living expenses appropriate for the production of income for certain higher income families, it began a system of one size fits all. The current standards also fail to recognize the varying cost of living in different regions and communities. Surprisingly, beginning in 2007, the IRS eliminated differentials for Hawaii and Alaska, our two most expensive states. In 2007, the IRS added a new category of expenses for out-of-pocket health care expenses. Although the Internal Revenue Manual and the Code allow the IRS collection personnel to vary from the standards, its employees rarely use this option because most are not adequately trained to do so and do not feel empowered to vary from the standards.
Total allowable expenses include those expenses that meet the necessary expense test. The necessary expense test is defined as expenses that are necessary to provide for a taxpayer's and his or her family's health and welfare and/or production of income. The expenses must be reasonable. The total necessary expenses establish the minimum a taxpayer and family needs to live.
There are four types of necessary expenses:
- National Standards
- Out of pocket health care
- Local Standards
- Other Expenses
National Standards: These establish standards for (1) Food, Clothing and Other Items and (2) Out-of-Pocket Health Care Expenses.
The Food, Clothing and Other Items standard establishes reasonable amounts for five necessary expenses, included in one total national standard expense: food, housekeeping supplies, apparel and services, personal care products and services, and miscellaneous. These standards come from the Bureau of Labor Statistics (BLS) Consumer Expenditure Survey. Taxpayers are allowed the total National Standards amount monthly for their family size, without questioning the amounts they actually spend.
The Out-of-Pocket Health Care standard establishes reasonable amounts for out-of-pocket health care costs including medical services, prescription drugs, and medical supplies (e.g., eyeglasses, contact lenses). The table for health care allowances is based on Medical Expenditure Panel Survey data. Taxpayers and their dependents are allowed the standard amount monthly on a per person basis, without questioning the amounts they actually spend.
Local Standards: These establish standards for two necessary expenses: housing and utilities and transportation. Taxpayers will normally be allowed the local standard or the amount actually paid, whichever is less. 87
A. Housing and Utilities - Standards are established for each county within a state and are derived from Census and BLS data. The standard for a particular county and family size includes both housing and utilities allowed for a taxpayer’s primary place of residence. Housing and utilities standards include mortgage (including interest) or rent, property taxes, insurance, maintenance, repairs, gas, electric, water, heating oil, garbage collection, telephone and cell phone.
B. Transportation - The transportation standards consist of nationwide figures for loan or auto lease payments (referred to as ownership costs) and additional amounts for automobile operating costs broken down by Census Region and Metropolitan Statistical Area. Operating costs include maintenance, repairs, insurance, fuel, registrations, licenses, inspections, parking and tolls. If a taxpayer has a car payment, the allowable ownership cost added to the allowable operating cost equals the allowable transportation expense. If a taxpayer has a car, but no car payment only the operating cost portion of the transportation standard is generally used to figure the allowable transportation expense. There is a single nationwide allowance for public transportation for taxpayers with no vehicle. If the taxpayer owns a vehicle and uses public transportation, actual expenses incurred may be allowed if necessary for the health and welfare of the individual or family, or for the production of income.
Note: Vehicle Operating standards are based on actual consumer expenditure data obtained from the United States Bureau of Labor Statistics (BLS) which are adjusted with Consumer Price Indexes (CPI) to allow for projected increases throughout the year (These CPI are used to adjust all allowable living expenses (ALE) standards.). Vehicle operating standards are not based on average commuting distances. Fuel costs, which are part of Vehicle Operating Costs, have a separate fuel price adjustment which is based on Energy Information Administration (EIA) data which allows for projected fuel price increases.
The Internal Revenue Manual (IRM) specifically notes that national and local expense standards are guidelines. If it is determined a standard amount is inadequate to provide for a specific taxpayer's basic living expenses, allow a deviation.
To support a deviation, the taxpayer must provide reasonable substantiation, which must be documented in the case file. Although deviation is allowed by the IRM, it is rare for a collection employee to vary from the standards. Many employees are not thoroughly trained in procedures and most do not feel empowered to vary from them.
Other expenses may be allowed if they meet the necessary expense test. The amount allowed must be reasonable considering the taxpayer's individual facts and circumstances.
A. Conditional expenses. These expenses do not meet the necessary expense test. However, they are allowable if the tax liability, including projected accruals, can be fully paid within five years.
B. Generally, the total number of persons allowed for national standard expenses should be the same as those allowed as exemptions on the taxpayer's current year income tax return. However, reasonable exceptions are permitted if fully
documented, e.g., to accommodate for foster children or children for whom adoption is pending.
C. A deviation from the local standard is not allowed merely because it is inconvenient for the taxpayer to dispose of valued assets or reduce excessive necessary expenses.
Five Year Test
The amount allowed for necessary or conditional expenses depends on the taxpayer's ability to pay the liability in full within five years. If the liability can be paid within five (5) years, it may be appropriate to allow the taxpayer the excessive necessary and conditional expenses. If the taxpayer cannot pay within five (5) years, it may be appropriate to allow the taxpayer the excessive necessary and conditional expenses for up to one year in order to modify or eliminate the expense. (See IRM 5.14.1, Installment Agreements) [IRM 22.214.171.124]
With respect to offers in compromise, IRC §7122(d)(2) (A) & (B) provides:
“In General – in prescribing guidelines under paragraph (1), the secretary shall develop and publish schedules of national and local allowances designed to provide for basic living expenses.”
(B) Use of schedules. The guidelines shall provide that officers and employees of the Internal Revenue Service shall determine, on the basis of the facts and circumstances of each taxpayer, whether the use of the schedules published under subparagraph (A) is appropriate and shall not use the schedules to the extent such use would result in the taxpayer not having adequate means to provide for basic living expenses. (Emphasis added)
With respect to installment agreements, the Internal Revenue Manual provides:
“Guidelines are designed to account for basic living expenses. In some cases, based on a taxpayer's individual facts and circumstances, it may be appropriate to deviate from the standard amount when failure to do so will cause the taxpayer economic hardship.” (1 IRM 126.96.36.199.6 91)
Application of the Standards
In practice, it is rare for an IRS collection employee to vary from the standards. The problem is most apparent when a taxpayer is the subject of an ACS investigation. In contrast, Appeals is much more likely to vary from the standards. Individual employees lack confidence that they are empowered to vary from the standards and in many instances are unfamiliar with their right to use judgment in applying the standards.
Federal employees in high cost Metropolitan Statistical Areas (MSA’s) are granted Cost of Living Allowances (COLA’s) to account for those higher costs. A similar application of COLA allowances overlaid on the adjustments to the standards would be fairer to taxpayers in high cost areas like New York, Alaska and Hawaii.
The IRS should implement the following changes to enhance the fairness and effectiveness of its Allowable Expense Standards:
1.Implement a system to apply COLA’s to the National Standards for each MSA.
2.Publish the COLA adjustment standards on the IRS website with the standards. Train each IRS collection employee on the application of COLA’s to the
standards. Clearly note on the website that IRS employees have discretion to vary from the standards.
3.Implement a system that rewards employees who apply judgment to the individual facts and circumstances of each taxpayer. The current system discourages employees’ use of judgment in reviewing the complex circumstances of individual taxpayers creating cases of undue hardship.
4.Create a range of expenses within which individual ACS employees could vary from the standards without managerial approval. This would empower employees to make decisions on allowable expenses based upon the individual facts and circumstances of the taxpayer.
5.Revise Publication 594 “The Collection Process” to reflect the changes noted above and to emphasize that IRS employees may exercise discretion when applying the Collection Standards.
6.Implement an extensive training system to apprise collection employees of their duty to review the individual facts and circumstances of a taxpayer before routinely applying the Standards. Each employee should be empowered to vary from the standards in appropriate circumstance.
7.Frontline collection managers must encourage their subordinates to apply the Collection Standards fairly and to vary from those standards in appropriate cases.
ISSUE THREE: TOOLS AND TECHNIQUES SHOULD BE DEVELOPED TO ENHANCE EFFECTIVENESS OF THE AUTOMATED COLLECTION SERVICE
The Automated Collection Service (ACS) can more efficiently resolve delinquent tax accounts to the mutual benefit of the taxpayer and the IRS by centralizing certain functions, and by providing more consistent training throughout all call centers. The system should be modified to synchronize the IRS call centers with incoming and outgoing correspondence and Powers of Attorney information to allow faster access to such information, and reduce duplication of effort. Establishing a practitioner division within ACS, or simply providing practitioners with direct call numbers can reduce excessive hold times and multiple call transfers to cut down on ACS call handling time and duplication of efforts.
The ACS is the first line of contact for most taxpayers dealing with either a tax balance that cannot be immediately paid in one lump sum, or a delinquent tax account. Typically, a taxpayer is directed to call ACS after receiving correspondence from the IRS regarding a balance due. He may also be directed to call ACS if he does not qualify to use the streamline Installment Agreement (IA) system available on the IRS website.
Raise the Maximum for Streamline Installment Agreements:
The existing IRS streamline process allows taxpayers to make arrangements themselves to pay tax balances of less than $25,000. This system has been very successful in arranging for the vast majority of IAs. In fact, the streamline system has
been so effective that the IRS should consider adjusting the maximum collection amount higher, to $50,000, and then possibly to adjust this amount for inflation going forward. Raising the maximum agreement amount would allow additional taxpayers to participate in the streamline system while freeing up the ACS representatives to be available for more difficult taxpayer cases.
Allow Direct Dial Numbers for ACS Divisions:
The telephone numbers provided on IRS correspondence (e.g. 800-829-1040 or 800-829-0922) are often not the appropriate numbers to call (large case, issue other than liability, etc.). This initially creates a long initial wait time for the first stop of 10-20 minutes or more for a representative, if the call is not dropped at some point during the waiting period. Then there is a second or third equally long wait time after the initial screening by an ACS representative. Although many practitioners work with the large case division, there is no way to access a specific department directly without going through the initial customer service number. This inefficiency requires time and effort on the part of both the IRS and the practitioner since each ACS representative is required to request identical identification information from the caller. A call information screen that would transfer this information from one representative to another would dramatically reduce the time it takes for this screening effort.
Provide Practitioner Priority Function Within ACS:
Creating a tax practitioner priority function within ACS to allow direct communication with the correct department and avoid numerous call routing inquiries could dramatically cut down on call handling times for regular ACS users, such as practitioners. Even when the experienced caller knows where the call should be routed, there is currently no way to avoid the initial screening process or to move such a practitioner call ahead in the queue.
Provide Central Processing for Correspondence and Powers of Attorney:
Mail sent in response to IRS correspondence is often lost or delayed in being posted to the system. Correspondence should be entered into the ACS upon receipt so that the letter, or at least the date of receipt of the letter, is made available to all ACS representatives. This will cut down in duplicate correspondence. Likewise, Powers of Attorney Forms 2848 (POAs) are often not available to the ACS representative, requiring the practitioner to fax and re-fax the POA each time a call is made to a new representative. The ACS representative should be instructed to input the POA into the ACS after receiving the fax so that it is available for future calls. This does not occur in most cases. From time to time, the representative does not allow the practitioner to fax the POA directly to them resulting in the need to call back again to speak with another representative or with another call center later in the day. Sometimes escalation to a supervisor resolves the problem if a supervisor is available. Not inputting such information requires additional call time that involves searches for information, consultations with supervisors, runs to the fax machine, et cetera; as well as additional and time consuming extra steps.
ACS generates letters from a number of offices (e.g., Cincinnati, Fresno, Holtsville). It is evident that these offices do not communicate with each other because a call to one of the offices often does not stop mail being generated from another. If responses to such multiple IRS correspondence are sent to more than one office, it then becomes more difficult for the two offices to resolve the issue. Centralizing this function will result in more efficient response processing and resolution.
Train ACS Representatives to Use Discretion When Resolving a Collection Matter:
While the name ACS connotes a computer driven system without a human factor, it requires both. Using ACS computers is efficient to track deadlines, account for tax balances due (including interest and penalties), process Powers of Attorney, track correspondence, issue notices (from a simple installment plan payment reminder to notices of levy), but they are only as efficient as the people who provide them with input. This is where the breakdown in efficiency at ACS occurs.
ACS representatives vary widely in their approach to the taxpayer or his agent and this should not be the case. Some are very collector-like and not willing to discuss the account except from a collection viewpoint while others are willing to work with the taxpayer’s unique issues and work out a “best possible” solution for future tax compliance. The differences can sometimes be traced to the location of the call center since calls made at different times during the day are handled differently.
Because taxpayers with tax balances over $25,000 are not currently able to utilize the streamline process, they require IRS assistance to file for an IA. After completing the financial information on Forms 433A and B, the taxpayer and the IRS representative discuss the taxpayer’s assets, income and monthly expenses, and ACS compares the taxpayer reported amounts with the National Standard tables in order to arrive at the greatest monthly amount the taxpayer can afford to pay.
The IRM allows the IRS representative to exercise discretion in allowing certain verified expenses over the National Standards allowances, but this does not often occur. Again, the amount of discretion used in negotiating a final monthly amount varies from call center to call center.
ACS training is uniform for all call centers. However, in actual practice, such training is implemented differently. Although ACS representatives have the ability to use their discretion in arriving at a solution to a taxpayer’s payment arrangement, they often do not. In this economy, unemployed people are having trouble keeping up with payments of all kinds, including taxes. Most people want to maintain compliance with the IRS, but they need assistance from ACS to resolve their payment issues. It is to the benefit of both the IRS and the taxpayer for management to allow ACS representatives some flexibility to use discretion when deciding whether to place liens, delay levy notices, or adjust installment payments to maintain taxpayer compliance and reduce the chance of default.
- Expand streamline level Installment Agreements by increasing the threshold of availability to $50,000, and then consider adjustment for inflation each year.
- Provide practitioners with direct dial numbers for ACS divisions in order to cut down on excessive transfers and hold times and the need to provide screening information numerous times during one call to more than one ACS representative.
- Provide a practitioner priority function within ACS to allow for resolution of high dollar or otherwise complex, practitioner assisted cases.
- Provide a system for scanning correspondence and Powers of Attorney so that each ACS representative can access it when speaking with a taxpayer or agent.
- Issue mail and route correspondence through a centralized clearing system to minimize lost mail, overlap, or conflicting outgoing correspondence.
- Train ACS representatives to encourage Installment Agreements, Partial Payment Installment Agreements and Offers in Compromise2 in a manner that gives the taxpayer or his agent the option of choosing the best possible solution that will allow compliance and maximize payment of tax.
- Train representatives and their supervisors from all call centers to use discretion in applying the National Standards and imposing liens3, and to be consistent in their approach to taxpayers’ accounts. Encourage flexibility when an agent uses discretion in reviewing expenses.
(2 Offers in Compromise and Partial Payment Installment Agreements are addressed in a separate Section of this Report.
3 Liens are addressed in a separate Section of this Report.)
ISSUE FOUR: THE IRS SHOULD MORE EFFECTIVELY COMMUNICATE THE APPROPRIATE USE OF PARTIAL PAYMENT INSTALLMENT AGREEMENTS AND OFFERS IN COMPROMISE TO MAXIMIZE COLLECTIONS AND MANAGE AFFORDABILITY
The Partial Payment Installment Agreement (PPIA) and Offers in Compromise (OIC) programs for larger tax balances can be more effectively used by the IRS to resolve many otherwise negotiable tax accounts if the IRS follows through with the taxpayer to arrive at a mutually beneficial arrangement. More efficient use of such already available programs would allow taxpayers to avoid more drastic solutions such as bankruptcy or allowing the Collection Statute Expiration Date (CSED) to run while the account is unassigned in the ACS queue, thus increasing the ability for the IRS to collect the taxes due. The IRS should make information regarding the use of these programs readily available to taxpayers and practitioners.
Under IRC §7122(a), the IRS has discretion to compromise any civil or criminal liability for taxes, interest, or penalties. If a taxpayer is unable to fully pay his tax under an Installment Agreement (IA), the taxpayer’s Reasonable Collection Potential is less than the liability owed. If this is the case, but the taxpayer otherwise has some ability to pay, the IRS can enter into either a PPIA or an OIC, although an OIC may generally only be considered after all other payment options have been exhausted.
Partial Payment Installment Agreement Program:
If the taxpayer is unable to pay the tax owed in the remaining months allowed before the CSED, a PPIA may be requested. This arrangement is somewhat of a hybrid between an IA and an OIC, since the amount of the tax is not reduced during the time allowed for collection of the tax but the IRS allows it to be paid over the remaining months leading to the CSED whether the entire balance will be fully paid or not. A PPIA gives flexibility by allowing lower payments in the first part of the arrangement, when necessary, possibly increasing to larger payments later. This collection vehicle seems particularly well suited for today’s economic environment of unemployment.
IRC §6159 requires that PPIAs be reviewed every two years. At the two year review, the taxpayer’s tax balance and finances are assessed to see if there is an ability to full pay the tax, or whether the monthly payments should be adjusted. There is, therefore, no apparent risk to the IRS in entering into a PPIA unless the CESD is two (2) years or less. If no determination can be made at the 2 year milestone (due to lack of information or otherwise), the case will simply be sent back to ACS, and the taxpayer has the option of filing an OIC.
Offer In Compromise Program:
The OIC has become more difficult for taxpayers to use effectively in recent years. Although there are three categories of OICs, the most frequently attempted OIC is based on the taxpayer’s inability to pay the full tax due when it has already been determined that the taxpayer is liable for the tax. These situations can be handled more efficiently. An OIC is best suited for taxpayers who owe an excessive amount of tax (a balance that is unlikely to be repaid during the statutory period), relative to their assets and income, and/or for those taxpayers who are elderly or in ill health with little likelihood of increased or substantial future income to allow full payment of the tax. However, due to the increased frequency of rejection, this type of collection remedy has actually become more costly to the IRS since, if rejected, in addition to the time it takes to process the OIC, it then requires additional time to review updated documentation for an IA, the account might be put back into the ACS queue to eventually become uncollectible, or the taxpayer may file for bankruptcy. In substance, transaction costs and time reduce the amount of resources available to satisfy legitimate, but currently unaffordable, tax liabilities. If a rejection is warranted, an automatic default to an IA or PPIA would avoid some of these costs, shrinkage and perils.
Revenue Procedure 2003-71 states that an OIC amount may be accepted if it reasonably reflects what the IRS would expect to collect through litigation, which includes an analysis of the hazards of litigation. However, it does not appear that the IRS is weighing the costs of collectability against its lost revenues when statistics show that fewer and fewer OICs are being accepted each year.
The average taxpayer is inundated daily with television and radio ads placed by national taxpayer assistance companies that brag of their ability to obtain “pennies on the dollar” tax relief from the IRS. The IRS can reduce the negative impact that these companies have on both the taxpayer and the IRS by posting simple and easily available information on its website to educate the taxpayer in readily available collection options.
- Promote use of the Partial Payment Installment Agreement and Offers in Compromise programs. These underused programs can effectively assist taxpayers resolve tax debts that might otherwise end up uncollectible or in bankruptcy.
- The IRS should use its website to educate taxpayers in available choices for collection alternatives and make such information easily locatable for the taxpayer and tax practitioners.
- The IRS website information for Installment Agreements should list dollar limits, length of time to pay, refer the taxpayer to the National Standards tables to see if they qualify for such an agreement, explain how to use the online streamlined IA, and when to contact an IRS representative.
- The IRS website information for a Partial Payment Installment Agreement and Offer in Compromise should explain the qualification criteria so that a taxpayer can see if he qualifies prior to contacting the IRS or a tax practitioner.
ISSUE FIVE: THE REFORMED LIEN PROCESS SHOULD BE MADE MORE EFFECTIVE THROUGH FURTHER ENHANCEMENTS
With unemployment at an alarming rate of 10 percent, and an influx of liens as a result of the economic downturn, the IRS has begun to effectively and efficiently enhance its lien process in order to improve collection efforts. In 2009, the Subgroup made several recommendations to streamline the current lien process, as well as provided feedback that conveyed the economic concerns of taxpayers as a result of IRS liens used as the ultimate means of collection. While it is understood that the IRS has a duty to collect taxes as effectively and efficiently as possible, there is a window of opportunity for the IRS to improve and enhance its lien process to promote the charge of the Commissioner, … “to assist in economic recovery as well as design programs that will assist the struggling taxpayer through difficult economic times.” In its continued effort to streamline and be most effective with the Lien Process, the IRS should consider enhancing its collection efforts by (1) training employees to use their discretionary abilities when considering filing a lien, (2) emphasizing that it is the collection agent’s responsibility to use all collection tools rather than automatically filing liens, and (3) increasing training and continued education to empower Revenue Officers to use judgment about when to withdraw or discharge a lien.
Historically, the lien process created inefficiencies and complexities in its efforts to collect tax dollars from the taxpayer. The recommended forms from 2009 for the subordination, subrogation, discharge, release, and withdrawal of liens facilitated lien
processing; however the need to educate the IRS employees on the IRS’s general lien policies remains. The IRS employees should be empowered to use sound and knowledgeable discretion when analyzing each case. The agents should be advised of their ability to view the totality of the circumstances of each individual case, rather than applying a “one-size-fits-all” operating standard to all taxpayers.
In the 2009 IRSAC report, the Subgroup recommended the IRS revisit its policies regarding the lien process. However, the reformed lien process creates the need to review the variables that trigger liens in the Automated Processing system which automatically decides lien filings based upon aging and other nonhuman triggers. In addition, the reformed process creates the need for case-by-case analysis by its employees, all of which creates the need to revisit IRSAC’s recommendation of increasing the available option of lien withdrawals versus lien discharges once the lien has been satisfied.
In 2010, statistics show that the number of lien withdrawals has not kept pace with the number of impoverished taxpayers affected by the economic downturn. In this time of financial turmoil and unemployment, and in following the intent of our government’s focus on economic stimulus, it is imperative that the IRS recognize the need to assist the taxpayers with tools that will help boost the taxpayers’ creditworthiness, help maintain tax compliance, and assist in igniting the economy as a whole. The National Taxpayer Advocate has made this same plea to IRS and Congress when it made clear the urgency to change the Lien processes, especially in the area of lien withdrawal.
"The IRS is aware of the need for making efficiencies in the lien process, but deems that such changes will require significant resources and study time to operate in
the most effective and efficient manner. As quoted in National Taxpayer Advocate, Report to Congress Fiscal Year 2011, the Deputy Commissioner proclaimed:
“The IRS fully appreciates the views and concerns expressed by the Office of the National Taxpayer Advocate [and other advisory groups]. However, making significant fundamental changes to lien policies and procedures such as those directed in TAD 2010-1 have the potential to materially affect the revenue collected for the United States. Thus, any potential changes should be carefully considered and supported by clear and consistent data as to the effect of the changes including rights and obligations of taxpayers, effective and efficient resource allocation and revenue collected or foregone. In order to consider the specific directives of TAD 2010-1, additional study is necessary.”4
4 Memorandum to Nina E. Olson, National Taxpayer Advocate, from Steven T. Miller, on TADs 2010-1, 2010-2, 2010-3 (June 10, 2010).
A sense of urgency is missing from the above statement of the Deputy Commissioner. In light of the taxpayers’ current and continuing state of economic turmoil, there is an urgent need for the IRS to escalate the need to streamline its reformed lien processes.
Provide extensive training and continued education to IRS employees, reinforcing the IRS employees’ discretionary abilities in deciding whether or not to file a lien.
Reinforce and emphasize in the training process the employee’s responsibility to use all collection tools and the discretionary authority granted rather than automatically filing liens as the first option to collectability.
Provide extensive training and continued education to its Revenue Officers to empower its Officers to use discretion on whether to withdraw or discharge a lien based upon the taxpayers’ unique circumstances to enhance collectability, all the while being sensitive to how a lien discharge or lien withdrawal may affect the taxpayers’ creditworthiness and affect the overarching goal of economic recovery.
ISSUE SIX: INCENTIVIZE BUSINESSES AND WORKERS TO REQUEST A DETERMINATION OF A PERSON’S WORKER STATUS
The SS-8 process is perceived to be biased toward a conclusion of employee status with the result that it is only very infrequently used by service recipients. To encourage the use of Form SS-8 by service recipients, taxpayers need to believe that facts are properly understood. Classification for arrangements that have only recently begun is most difficult. By giving the IRS the ability to make a tentative conclusion of worker status under a specific fact pattern and the ability to review that tentative conclusion after a number of years, the IRS may be able to more accurately define worker status and taxpayers will be more confident that the arrangement being evaluated is dependent on actual facts and circumstances, thereby reducing current negative perceptions.
A Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding (Form SS-8) is used by a business or worker to request a determination regarding a worker’s employment tax status as an employee or independent contractor. The information on the Form SS-8 is reviewed by a tax examiner in the SS-8 Program, and a determination is made based upon the common law relating to employment relationships. Employers believe that IRS determination is biased toward the conclusion that workers at issue are employees. In addition, there is a concern that the SS-8 process increases audit exposure.
Proper worker classification, whether as an employee or independent contractor, is critical. The effects of worker misclassification have significant consequences.
Workers may not be qualified for certain benefits, taxes are not collected as quickly as they otherwise would be and businesses may face unanticipated taxes and penalties.
- Waive prior year taxes that could apply if classification was applied retroactively for SS-8 filers or reduce them by applying the IRC Section 3509 rates if employee status is determined for an individual previously classified and reported as an independent contractor. (5 Under IRC section 3509, if the business filed information returns as if its workers were independent contractors, then the income tax withholding rate is reduced to 1.5 percent of wages and the employee-share FICA/Medicare rates are equal to 20 percent of the full rates. If it did not file information returns, then the income tax withholding rate is reduced to 3 percent and the employee-share FICA/Medicare rates are equal to 20 percent of the full rates. In either case, the employer gets no reduction for the employer's share of FICA and Medicare.)
- Allow taxpayers to apply for a provisional IRS review and determination based on expected facts and circumstances posed in good faith such that certain temporary conclusions are made with a later determination of facts as they develop.
ISSUE SEVEN: REDUCE THE UNIVERSE OF UNRESOLVED WORKER CLASSIFICATION ISSUES BY PROVIDING INCENTIVES FOR BUSINESSES NOT CURRENTLY UNDER AUDIT TO PROPERLY CLASSIFY WORKERS PROSPECTIVELY
The IRS Worker Classification Settlement Program (CSP) has helped to resolve many worker classification issues. However, this voluntary program is currently available only to businesses facing an IRS audit. We recommend that the CSP be expanded to businesses that are not being audited by the IRS, but are seeking resolution to worker classification issues. We also recommend that the IRS publicize the expanded CSP to businesses and tax professionals.
No simple or objective test exists to distinguish whether a worker is an employee or an independent contractor. The tests used to determine whether a worker is an independent contractor or an employee are complex and subjectively applied. Significant tax consequences results from the classification of a worker as an employee or independent contractor.
Under the CSP, the examiner must first determine whether the employer is entitled to relief under the guidelines for determining the employment status of a worker as set forth in §530 (a) of the 1978 Act, as amended by §269(c) of the Tax Equity and Fiscal Responsibility Act of 1982 (“Section 530”). Section 530 generally allows a service recipient to treat a worker as not being an employee for employment tax purposes, regardless of the worker’s actual status under the common-law test, unless the service recipient has no reasonable basis for such treatment or fails to meet certain requirements. Section 530 was permanently extended by the Tax Equity and Fiscal Responsibility Act of 1982.
If the service recipient is entitled to §530 relief, under CSP there is no assessment and the service recipient can continue to treat the workers in question as independent contractors.
If the service recipient desires to begin treating the workers as employees, it can agree to do so in the future (no later than the beginning of the next year) without giving up its claim to §530 relief for earlier periods.
If the examiner determines that the service recipient is erroneously treating employees as independent contractors, a series of two graduated CSP settlement offers can occur. If the service recipient has met the reporting consistency requirement of §530 but clearly has no reasonable basis for its treatment of the workers as independent contractors or has been inconsistent in its treatment of the workers, the offer will be a full employment tax assessment under IRC §3509 (with the employer agreeing to reclassify the workers as employees on a prospective basis, ensuring future compliance).
In the event of a recharacterization of workers as employees from independent contractors under CSP or otherwise, no interest will be due on the additional liability arising as a result of the recharacterization if: (i) the employer agrees to the recharacterization with either the Examination Division or the Appellate Division of the IRS (following a timely Protest), and (ii) the additional FICA tax is paid in full before the date the current Form 941 would be due for the quarter within which there is an agreement with the IRS as to the recharacterization. See Revenue Ruling 75-464 and
IRC §6205. The foregoing represents a significant economic incentive for the employer to promptly agree to the recharacterization and satisfy the resulting liability.
Under present law, the determination of whether a worker is an employee or an independent contractor is generally made under a facts and circumstances test that seeks to determine whether the worker is subject to the control of the service recipient, not only as to the nature of the work performed, but the circumstances under which it is performed.
Before a service recipient can know how to treat payments made to workers for services, they must first know the business relationship that exists between the service recipient and the person performing the services. The person performing the services may be: (a) A common-law employee, (b) A statutory employee, (c) A statutory nonemployee, or (d) An independent contractor.
Under common-laws rules, a worker may generally be subject to classification as an employee if the service recipient can control what will be done and how it will be done. An individual is generally treated as an independent contractor if the person for whom the services are performed has the right to control or direct only the result of the work and not the means and methods of accomplishing the result. In Rev. Rul. 87-41, the IRS developed a list of 20 factors that may be examined in determining whether an employer-employee relationship exists. The degree of importance of each factor varies depending on the occupation and the factual context in which the services are performed. In 1996, the IRS published a training manual for examiners, entitled “Independent Contractor or Employee? Training Materials” which grouped the common factors in three categories: (1) behavioral control; (2) financial control, and (3) relationship of the parties. In recent years, the IRS has addressed these 3 categories by focusing on the existence of entrepreneur behavior, thereby focusing on the less subjective financial control category.
The Subgroup has observed that worker classification and employment tax issues will become increasingly controversial with pressure put on businesses with respect to the 2014 requirement for employer-provided health insurance. In addition, the IRS has an employment tax initiative in which it is targeting this issue. The longer misclassification as an independent contractor continues, the more onerous correction becomes. Congress has provided relief from reclassification in circumstances which meets certain requirements outlined in §530 of the Revenue Act of 1978 and decreased the amount of employment taxes that can be assessed, many businesses are still reluctant to address this issue. Because of the decreased taxes on assessment, employers have little incentive to approach the IRS with an offer to confirm an individual’s treatment or resolve prior years. By opening up the CSP to taxpayers not currently under audit, the IRS will be reducing future audit issues and accelerating resolution of unpaid taxes.
Businesses should be encouraged to take whatever steps are necessary to properly classify workers. Such proper classification will likely result in more workers being classified as employees, in accelerated future tax payments through income and employment tax withholding, less unreported income and fewer inappropriate income tax deductions.
- Expand the CSP by making it available as a voluntary disclosure program modeled after other IRS voluntary tax compliance programs. The employment
tax /worker classification voluntary disclosure program could provide for graduated CSP treatment for employers who voluntarily contact the IRS before:
- The IRS has initiated an examination or investigation of the service recipient, or has notified the service recipient that it intends to commence such an examination or investigation;
- The IRS has received information form a third party (e.g. informant, other governmental agency, or the media) alerting the IRS to the specific service recipient’s potential noncompliance;
- The IRS has initiated a civil examination or investigation that is directly related to the employment tax liability of the service recipient.
- Publicize the expanded CSP to the business and tax professional communities.
- To incentivize compliance, the IRS should consider sending letters to service recipients in industries having a history of noncompliance, offering a way to avoid penalties through an employment tax voluntary disclosure program. Service recipients should be encouraged to self-comply by receiving educational information regarding worker status and being given the opportunity to correct prior classification errors outside the traditional examination process.
- To increase taxpayer’s awareness of this issue, the IRS should publish the Top 10 employment tax issues discovered on audit. This should include meaningful examples setting forth potential liabilities for taxes and penalties, both upon audit and under the voluntary CSP. Examples of
employees could include seasonal workers (such as retail help at holidays) and replacement workers for employees on long-term leave of absences.