Fiscal
Year 2003 Statutory Audit of Compliance With Notifying Taxpayers of Their
Rights When Requested to Extend the Assessment Statute
September 2003
Reference
Number: 2003-40-193
This report has cleared the Treasury Inspector General for Tax Administration disclosure review process and information determined to be restricted from public release has been redacted from this document.
September
11, 2003
MEMORANDUM FOR
COMMISSIONER EVERSON
FROM: Gordon C. Milbourn III /s/ Gordon C. Milbourn III
Assistant Inspector General for Audit (Small Business and
Corporate Programs)
SUBJECT: Final Audit Report - Fiscal Year 2003
Statutory Audit of Compliance With Notifying Taxpayers of Their Rights When
Requested to Extend the Assessment Statute (Audit # 200240065)
This
report presents the results of our review to determine if the Internal Revenue
Service (IRS) is in compliance with Internal Revenue Code (I.R.C.) Section (§) 6501(c)(4)(B) (Supp. IV 1998), which requires the IRS to provide
notice to taxpayers of their right to decline to extend the assessment statute
of limitations or to request that any extension be limited to a specific period
of time or to specific issues.
The
Treasury Inspector General for Tax Administration is required to provide
information annually regarding the IRS’ compliance with I.R.C. §
6501(c)(4)(B). The IRS is required to
advise taxpayers of their rights when requesting an extension of the statute of
limitations on assessment of additional tax and penalties. In passing this law, the Congress expressed
concern that taxpayers were not being adequately advised of their right to
refuse to extend the statute of limitations or to request that a statute
extension be limited to a specific period of time or to specific issues.
In summary, employees
properly advised taxpayers of their right to refuse or to restrict the scope of
the statute extension in 113 (74 percent) of the 153 tax returns sampled. However, for the remaining 40 (26 percent)
tax returns, we could not determine if employees advised taxpayers of their
rights because related case files did not contain a record that taxpayers had
been so advised. In addition, in 37 (63
percent) of the 59 jointly filed returns in our sample of 153 returns, there
was no documentation in the related case files that each taxpayer listed on the
return was separately informed of his or her rights (i.e., dual
notification). Finally, in 57 (52
percent) of the 109 tax returns in which taxpayers had made a declaration of
representation in our sample of 153 returns, there was no documentation in the
related case files that the IRS had provided both the taxpayer and the
representatives with the advice of rights.
Some of the 153 sampled tax returns and related case files met multiple
criteria. At this time, the procedures
and proposed internal guidelines the IRS has provided its employees should
ensure that they adequately document that taxpayers are advised of their right
to refuse or to restrict the scope of the statute extension. Therefore, we are making no recommendations
at this time.
Management’s Response: IRS
management agreed with our conclusion that, in most situations, the IRS is
appropriately advising taxpayers and representatives of their rights. They acknowledged that some case files
lacked specific written documentation, but indicated that during a follow-up
review they found other documentation in the case file that showed the
taxpayers had received satisfactory notification of their rights. Management’s complete response to the draft
report is included as Appendix VII.
Office of Audit Comment: In the
response, IRS management stated that as part of a follow-up review, they found
other documentation in the case files that showed that the taxpayers had
received satisfactory notification of their rights. After further discussion with IRS management, they advised us
that a follow-up review had not been performed.
Copies
of this report are also being sent to the IRS managers who are affected by the
report results. Please contact me at (202) 622-6510 if you have
questions, or your staff may call Michael R. Phillips, Assistant Inspector
General for Audit (Wage and Investment Income Programs), at (202) 927-0597.
Compliance With Dual Notification Requirements Needs Improvement
Compliance With Procedural Regulations Needs Improvement
Appendix I – Detailed Objective, Scope, and Methodology
Appendix II – Major Contributors to This Report
Appendix III – Report Distribution List
Appendix IV – Outcome Measures
Appendix V – Case Review Results by Division
Appendix VII - Management’s Response to the Draft Report
The Internal Revenue Service (IRS) is required by Internal Revenue Code (I.R.C.) Section (§) 6501(c)(4)(B) (Supp. IV 1998) to advise taxpayers of their rights whenever requesting an extension of the statute of limitations on assessment of additional tax and penalties. In passing this law, the Congress expressed concern that taxpayers were not being adequately advised of their right to refuse to extend the statute of limitations or to request that a statute extension be limited to a specific period of time or to specific issues.
In addition, the IRS Restructuring and Reform Act of 1998 (RRA 98) § 3201 requires the IRS to send any notice relating to a jointly filed return separately to each individual filing the joint return. Federal regulations require that any notice or other written communication (or copy) required or permitted to be given to a taxpayer in any matter before the IRS must also be given to the taxpayer and, unless restricted by the taxpayer, to the taxpayer’s representative.
If the IRS examines a tax return and determines there is an additional tax liability, it generally must be assessed within 3 years from the date that a return was due or the date that the return was actually filed, whichever is later. This 3-year assessment statute of limitations normally cannot be extended without the taxpayer’s written agreement.
To extend the assessment statute, the IRS asks the taxpayer to sign a statute extension agreement form (consent). A consent extends the assessment statute of limitations to either a specific date or for an unlimited, indefinite period. The statute is usually extended for a period that both the IRS and the taxpayer agree is reasonable to complete the examination. The consent can also be negotiated to apply only to certain examination issues.
A taxpayer might agree to extend the assessment statute of limitations for the following reasons:
· The taxpayer may want to pursue additional examination issues that are in the taxpayer’s favor in offsetting a proposed tax or that might allow for a tax refund.
· If the remaining time before the statute expires is too short, the IRS may have to prematurely stop the examination process and issue a notice of deficiency that limits the time for the normal appeals process before the taxpayer must file a petition to the United States Tax Court.
There are also certain circumstances when a taxpayer may decide to limit or refuse to extend the assessment statute of limitations:
· The taxpayer may not want to provide the IRS additional time to consider additional examination issues.
· The taxpayer may not want to allow the IRS the opportunity to further develop examination issues already under consideration after the normal statute period has expired.
The Treasury Inspector General for Tax Administration is required to provide information annually regarding the IRS’ compliance with I.R.C. § 6501(c)(4)(B). This report presents the results of our fourth annual review of the IRS’ compliance with the statute extension provisions of the law. In the prior reviews, we evaluated assessment statute extensions processed from January 1 to March 24, 2000; April 1 to September 30, 2000; and October 1, 2000, to September 30, 2001, respectively. See Appendix VI for a list of prior issued reports.
We reported that in the majority of the related case files reviewed, IRS employees advised taxpayers of their rights to refuse or restrict the scope of the statute extension. However, we also reported that improved documentation was needed to ensure taxpayers were informed of their rights. In response, the IRS agreed to update guidelines, revise Extending the Tax Assessment Period (Publication 1035) used to notify taxpayers of their rights, and inform employees of the changes.
For the current audit, we reviewed assessment statute extensions processed from September 30, 2001, to October 5, 2002. This review was performed in the Large and Mid-Size Business Division Headquarters, the Office of Appeals Headquarters, and the Tax Exempt and Government Entities Division Headquarters in Washington, D.C., and the Small Business/Self-Employed (SB/SE) Division in New Carollton, Maryland.
We performed the audit between February and June 2003 in accordance with Government Auditing Standards. Detailed information on the audit objective, scope, and methodology is presented in Appendix I. Major contributors to the report are listed in Appendix II.
For 113 (74 percent) of the 153 tax returns in our judgmental sample, IRS employees advised taxpayers or their representatives of their right to refuse or to restrict the scope of the statute extension. The consents do not currently provide an explanation of the taxpayers’ right to limit or refuse to extend the assessment statute of limitations. Therefore, we considered that IRS employees advised taxpayers of their rights if any of the following documentation was found in the related case files:
· A copy of Request to Extend Statute of Limitation Period (Letter 907 (L-907)), Letter Transmitting Consent Extending Period of Limitation (Letter 967 (L‑967)), or comparable cover letter updated to include an explanation of taxpayer rights.
· A record that Publication 1035 was provided to the taxpayer and/or representative, as documented in the examination activity record or as shown as an enclosure on a cover letter. This publication provides a detailed explanation of taxpayer rights.
· The examination activity record showed the taxpayer and/or representative was given the required notification of rights.
For the remaining 40 (26 percent) of 153 tax returns sampled, the related case files did not contain documentation that taxpayers had been advised of their rights. As a result, we could not determine if the IRS protected the right of these taxpayers to be advised of their statute extension options. This occurred because employees were not following IRS internal guidelines.
For 17 of the 40 tax returns, the IRS requested multiple extensions. Although the IRS advised taxpayers of their rights for extension requests at some time during the examination, there was no record in the related case files documenting that the taxpayers were notified of their rights for the last extensions requested. Even though the IRS did not comply with I.R.C. § 6501 for each and every extension in these cases, we believe the legislative purpose of the section was fulfilled, i.e., the taxpayers had an understanding of their rights.
I.R.C. § 6501 provides that the IRS must notify the taxpayer of his or her rights on each occasion when the taxpayer is requested to consent to an extension. It would be a potential violation of taxpayers’ rights if the IRS did not notify taxpayers of their options when requesting assessment statute extensions. If taxpayers are not notified of their rights, they might not be aware that they have the right to refuse to extend the period of limitations or to limit such extensions to particular items or particular periods of time.
Employees were not always following IRS internal guidelines on the documentation needed to ensure taxpayers were advised of their rights
Although 113 of the 153 related case files contained enough documentation to determine that IRS employees advised taxpayers or their representatives of their right to refuse or to restrict the scope of the statute extension, 114 (75 percent) of the 153 related case files did not contain all the documentation required by the IRS. The Examination function manual covering the examination of tax returns requires that when IRS employees request a taxpayer to extend the assessment statute, they provide the taxpayer with an L-907 (maintaining a copy of the letter in the related case files) and a Publication 1035 as an enclosure. They also must document on an activity record whether the taxpayer was notified of his or her rights. In response to our September 2000 report, the IRS issued guidance stating that, effective February 28, 2002, the L-907, L-967, and executed consent must be attached to each return covered by the extension. The IRS is also in the process of revising its internal procedures manual to include these new guidelines.
The Appeals function manual requires that the L-967 be used to advise the taxpayer that the statute is about to expire and transmit the consent forms for execution. The L‑967 and executed consent are to be attached to each return covered by the extension. While the Appeals manual does not address the documentation required on the case activity record, Appeals/Settlement Officers were reminded in a May 9, 2002, memorandum that they should continue to annotate the case activity record that the taxpayer was provided with an explanation of rights regarding the extension.
At this time, we believe the procedures and proposed internal guidelines
the IRS has provided its employees should ensure that they adequately document
that taxpayers are advised of their right to refuse or to restrict the
scope of the statute extension. Therefore,
we do not believe
the risk warrants additional procedures or reviews and are making no
recommendations at this time.
However, if the errors in documentation do not decline, the IRS might
consider revising the consents to include an explanation of the taxpayers’
rights regarding statute extensions.
For 37 (63 percent) of the 59 jointly filed returns sampled, there was no documentation in the related case files that each taxpayer listed on the return was separately informed of his or her rights (i.e., dual notification). This occurred because employees were not following IRS internal guidelines.
RRA 98 § 3201 requires the IRS to send any notice relating to a jointly filed return separately to each individual filing the joint return. The Congress intended that separate notices would increase the likelihood that separated or divorced spouses receive such notices, as well as increase the likelihood that the IRS will be made aware of address changes that apply to one, but not both, spouses. There could be a violation of taxpayer rights if both taxpayers were not notified of their right to refuse to extend the period of limitations or to limit such extensions to particular items or particular periods of time.
The Examination manual states that any notice relating to a jointly filed return should be separately mailed to each individual filing the joint return. In addition, Examination function management included an article in the January 2003 issuance of the IRS Technical Digest advising employees of the importance of dual notification.
The Appeals manual does not address dual notification. However, IRS officials issued memoranda on October 28, 1998, and May 13, 1999, that required dual notification for all jointly filed returns. Appeals function management informed us during a prior audit that they would revise their manual to include dual notification requirements, but at the time of this review this revision had not been made.
While the Office of Appeals has not yet revised its manual, the IRS is finalizing revisions to the manual providing guidelines to all divisions; these revisions include a requirement to provide notice to both taxpayers on jointly filed returns. We do not believe the risk concerning dual notification warrants additional procedures or reviews and are making no recommendations at this time.
For 57 (52 percent) of the 109 tax returns sampled where taxpayers made a declaration of representation, there was no documentation in the related case files that the IRS had provided both the taxpayers and their representatives with the advice of rights. Again, this occurred because employees were not following IRS internal guidelines.
Current IRS manual guidelines and Federal regulations require that any notice or other written communication (or copy) required or permitted to be given to a taxpayer in any matter before the IRS must also be given, unless restricted by the taxpayer, to the taxpayer’s representative.
Taxpayer rights or taxpayer burden could be affected if the IRS does not follow the Federal regulations and provide both the taxpayer and the taxpayer’s representative with the right to refuse to extend the period of limitations or to limit such extensions to particular items or particular periods of time.
However, we believe the current guidelines are appropriate and adequate. Considering the minimal risk, we are making no recommendations concerning representative notification at this time.
Appendix I
Detailed Objective, Scope,
and Methodology
The overall objective of this review was to
determine whether the Internal Revenue Service (IRS) was complying with Internal Revenue Code (I.R.C.) Section (§)
6501(c)(4)(B) (Supp. IV 1998), which requires the IRS to provide notice to taxpayers of their right to decline to extend the
assessment statute of limitations or to request that any extension be limited
to a specific period of time or to specific issues. To accomplish our objective, we:
I. Determined whether taxpayers were being advised of their rights related to assessment statute extension requests.
A. Reviewed the Examination Internal Revenue Manual (IRM), IRS memoranda and regulations, and the Appeals IRM and other Appeals guidelines to determine the policies and procedures for processing requests to extend the assessment statute of limitations.
B. Reviewed a sample of Business Master File (BMF) and Individual Master File (IMF) tax returns with taxpayer consents to extend assessment statutes processed from September 30, 2001, to October 5, 2002.
1. Obtained BMF and IMF extracts to identify a population of tax returns having extensions of the assessment statute of limitations. The identified tax return populations were 15,242 and 36,403, respectively. We selected those extensions processed during cycles 200140 through 200240, which included September 30, 2001, to October 5, 2002. The IRS processes data in 1-week cycles.
2. Analyzed the BMF and IMF records to identify assessment statute adjustments that could have resulted from extensions by the written consents of taxpayers (assessment statutes are often extended for reasons other than the taxpayer’s written consent). For example, all tax returns for which a Statutory Notice of Deficiency (Letter 3219) has been issued have the assessment statute extended for 150 days by law.
3. Selected a statistical sample of 618 tax returns for review from the category of cases likely to have statute extensions by taxpayer consents from the Examination and Appeals processes. However, we did not receive all requested tax returns and related cases, and time constraints prohibited us from reviewing all selected cases. We reviewed 482 tax returns and related cases, eliminating 329 tax returns from our sample that did not meet our criteria. Therefore, only 153 tax returns and related cases reviewed met the audit criteria. This was not sufficient for a statistical sample. Within this judgmental sample of 153 tax returns, there were 59 jointly filed returns and 109 returns for which the taxpayers had made a declaration of representation.
4. Identified which business unit or function requested the extension and discussed any questionable extensions identified with IRS management for concurrence or an explanation of why the IRS felt that proper procedures were followed.
5. Validated the IMF and BMF data for the following 5 fields on a randomly selected sample of 50 tax returns:
a) Transaction Code (TC) 150 Received Date.
b) TC 560 Transaction Date.
c) Assessment Statute Expiration Date.
d) Tax Period.
e) Taxpayer Identification Number.
II. Reviewed the selected tax returns and case files for documentation verifying that both taxpayers on jointly filed returns were separately advised of their rights related to statute extensions.
III. Determined whether the Examination Quality Measurement System identified instances of noncompliance with the notice requirements when obtaining consent to extend the assessment statute. This sub-objective was included to help determine a possible cause should we have exceptions.
IV. Determined the status of the IRS corrective actions proposed to address the recommendations presented in the prior Treasury Inspector General for Tax Administration audit reports.
Appendix
II
Major Contributors to This Report
Michael R. Phillips, Assistant Inspector General for Audit
(Wage and Investment Income Programs)
Augusta R. Cook, Director
Paula
W. Johnson, Audit Manager
Linda Bryant, Senior Auditor
Lynn Faulkner, Senior Auditor
John Hawkins, Senior Auditor
Sharon
Shepherd, Senior Auditor
Jean
Bell, Auditor
Vacenessia Daniels Brown, Auditor
Patricia Jackson, Auditor
Sylvia Sloan-Copeland, Auditor
Arlene Feskanich, Information Technology Specialist
Appendix III
Deputy Commissioner for Operations Support N:OS
Deputy Commissioner for Services and Enforcement N:SE
Commissioner, Large
and Mid-Size Business Division LM
Commissioner, Small
Business/Self-Employed Division S
Commissioner, Tax
Exempt and Government Entities Division
T
Commissioner, Wage
and Investment Division W
Chief, Appeals AP
Deputy
Commissioner, Large and Mid-Size Business Division LM
Deputy
Commissioner, Tax Exempt and Government Entities Division T
Deputy
Commissioner, Wage and Investment Division
W
Acting Deputy
Commissioner, Small Business/Self-Employed Division S
Director,
Communications & Liaison, Small Business/Self-Employed Division S:M:C&L
Director,
Compliance, Small Business/Self-Employed Division S:C
Director, Exempt
Organizations, Tax Exempt and Government Entities Division T:EO
Director, Field
Assistance, Wage and Investment Division
W:CAR:FA
Director, Field
Specialists, Large and Mid-Size Business Division LM:FS
Director, General
Appeals Program AP:G
Director, Reporting
Compliance, Small Business/Self-Employed Division S:C:CS
Director, Strategy
and Finance, Wage and Investment Division
W:S
Chief Counsel CC
National Taxpayer
Advocate TA
Director, Office of
Legislative Affairs CL:LA
Director, Office of
Program Evaluation and Risk Analysis
N:ADC:R:O
Office of
Management Controls N:CFO:AR:M
Audit
Liaisons:
Commissioner,
Large and Mid-Size Business Division
LM:CL
Commissioner, Tax Exempt and Government
Entities Division T:CL
Chief,
Appeals AP:P:S
Chief,
Customer Liaison, Small Business/Self-Employed Division S:COM
GAO/TIGTA
Liaison W:S:PA
Appendix IV
This appendix presents detailed information on the measurable impact on tax administration that the recommendation from the Treasury Inspector General for Tax Administration’s Fiscal Year 2001 audit report will continue to provide. These benefits will be incorporated into our Semiannual Report to the Congress.
Type and Value of Outcome Measure:
· Taxpayer Rights and Entitlements – Potential; Internal Revenue Code Section (§) 6501(c)(4)(B) (Supp. IV 1998); 40 of 153 taxpayer accounts affected (see page 3).
· Taxpayer Rights and Entitlements – Potential; Internal Revenue Service (IRS) Restructuring and Reform Act of 1998 § 3201; 37 of 59 jointly filed accounts affected (see page 6).
· Taxpayer Rights and Entitlements – Potential; 26 Code of Federal Regulations (C.F.R.) § 601.506; 57 of 109 tax accounts where the taxpayers declared a representative (see page 7).
Methodology Used to Measure the Reported Benefit:
We reviewed a judgmental sample of 153 tax returns with consents to extend the assessment statute of limitations period. The returns were identified from the Fiscal Year 2002 Individual Master File (IMF) and Business Master File (BMF) databases. The review showed taxpayer rights were potentially affected in 64 of 153 tax returns sampled (42 percent). Each sampled tax return and related case file could have multiple findings for each criterion. Related case files were not documented in 40 of the 153 taxpayer accounts to show that the taxpayers or their representatives received their rights to refuse or to restrict the scope of the statute extensions. There was no documentation in the related case files that each taxpayer listed on the return was separately informed of his or her rights in 37 of 59 jointly filed accounts. In addition, in 57 of 109 tax accounts where taxpayers made declarations of representation, there was no documentation in the related case files that the IRS had provided both the taxpayers and the representatives with the advice of rights.
Appendix V
Case Review Results by Division
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Appeals
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LMSB |
SB/SE |
TE/GE |
Total |
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Number of Cases Reviewed
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18 |
30 |
101 |
4 |
153 |
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Compliance With Requirement to |
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Number of Cases Where There Was No Evidence the
Taxpayer Was Advised of Rights |
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Compliance With Internal Guidelines
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Number of Cases Not Meeting Documentation
Requirements (Applicable Cases: 153) |
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Number of Cases Where There Was No Evidence That
Notices Were Given to Both the Taxpayer and Representative (Applicable
Cases: 109) |
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Appendix VI
Listing of Prior Reports on Compliance With
Notifying Taxpayers of Their Rights When Requested to Extend the Assessment
Statute
Information Provided to
Taxpayers When Requesting Extensions of the Assessment Statute of Limitations
Can Be Improved (Reference Number 2000-10-142, dated September 2000).
Most Taxpayers Are Advised
of Their Rights Before Signing an Agreement to Extend the Assessment Statute of
Limitations (Reference Number 2001-10-157, dated September
2001).
Improved Documentation Is
Needed to Ensure Taxpayers Are Informed of Their Rights When Requested to
Extend the Assessment Statute (Reference Number
2002-40-175, dated September 2002).
Appendix
VII
Management’s
Response to the Draft Report
The response was removed due to its size. To see the complete response, please go to the Adobe PDF version
of the report on the TIGTA Public Web Page.