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Examination Collectibility Consideration: Another Example of IRS Inefficiency

On Behalf of | Feb 3, 2017 | Firm News

I recently read a very interesting report issued by the Treasury Inspector General for Tax Administration (TIGTA) on the topic of the IRS Examination function failing to consider the collectibility of potential assessments. Collectiblity is simply the likelihood the IRS will ever actually collect any tax following an assessment. The report is titled “Examination Collectibility Procedures Need to be Clarified and Applied Consistently.” It is a stinging criticism of IRS inefficiency. The full report can be found here. It’s worth a read.

It is rare for the IRS during an audit to consider whether or not any additional tax assessed at the conclusion of an audit can actually be collected. It’s even more unusual for the IRS Examination function to actually discuss collectability with the taxpayer or their representative. This is contrary to established policy and procedure. The Internal Revenue Manual states “Examiners are expected to consider the collectability during the pre-contact phase as a factor in determining whether to survey the return or limit the scope and depth of examination. Collectibility may also become a factor for consideration during the course of the examination.”

The IRS is failing to follow its own policy to consider collectability determinations in Examination in a majority of cases. The result is an extremely poor use of resources. TIGTA provides the example that in a five year period, the IRS Collection function received over 700,000 tax delinquent account (TDA) cases per year, all of which originated with an exam assessment. A TDA case is a case where the taxpayer owes a seriously delinquent tax debt. The number 700,000 represents nearly 10% of all TDA cases.

The IRS has cried foul about budget cuts over the last few years. Commissioner Koskinen stated a while back the IRS will simply do less with less in light of the on-going budget reductions. This comment was well publicized. I thought that comment was a clear example of poor leadership. Instead of striving to do better with resources available, he just threw his hands up like it was okay to do a crappy job for the U.S. taxpayer.

Examples like the IRS Examination function not following policy to consider collectibilty only solidifies my opinion that the IRS does not really need more money to do its job. They need to use the resources they do have to the fullest. Clearly they are not doing that! In this example, the Examination function simply plows forward to complete assessments of tax that will never be collected. It is completely unproductive work. Once a tax assessment is complete, how many IRS employees does it then take to sort through 700,000 TDA cases per year that land in the lap of the Collection function? A lot! All those employees require a desk or cubicle, chair, computer, etc. Administering these cases requires letters to taxpayers; so there is paper, ink, printing, postage, customer service demands in the form of taking phone calls, processing financial statements from taxpayers, etc., etc. It all adds up to a mind boggling amount of wasted money.

If the IRS corrected just this one example of its failure to follow policy and thereby work more efficiently and effectively, it could save many millions of dollars a year. TIGTA says “If examiners do not follow the IRM procedures to consider and evaluate collectability while working their cases, there is a higher risk of uncollectible assessments and inefficient use of both Examination and Collection functions’ limited resources.”

In other words, a lot of IRS employees are paid for work that does nothing productive. According to the report, “all of the cases that [TIGTA] reviewed were sent to the Collection function. Both Examination and Collection function resources were spent developing the assessment and pursuing collection, but ultimately all of the cases were closed without the taxpayer making any subsequent payments to the IRS.” TIGTA estimates that IRS Revenue Officers spent more than 22,000 hours (yes, twenty-two-thousand hours, that translates to over 10 years of 40 hour work weeks) working on cases where Examination failed to consider collectability. Every one of those cases was closed by Collection without any payment from taxpayers. Ouch!

If the IRS only followed its own policy and procedure, not only would it save a lot of tax dollars, it would almost certainly produce more revenue by turning its attention to focus on more productive work – work that might actually produce payment of some taxes. There are many very good people that work at the IRS who have little to no control over issues like this. Addressing systemic problems takes sound and strong leadership at the highest level, and that is truly lacking at the IRS.