The Internal Revenue Service’s collection employees might not be taking all the actions they could to collect tax debts owed by defunct companies before closing out the cases, according to a new report.
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The report noted that IRS employees did not always complete the required research or obtain necessary financial information, and the cases with missing actions were approved by their managers. TIGTA identified 39 instances involving 30 cases in which the required case actions were not taken. These actions are required to ensure that, before a case is closed as uncollectible, due diligence is exercised to determine whether collection potential exists, according to the report.
Accounts can be reported as currently not collectible for a variety of reasons, one of which is that the entity is defunct, the report noted. This can apply to corporations, partnerships and exempt organizations. The Internal Revenue Manual requires that certain case actions be completed on delinquent corporate accounts prior to closing them as CNC-defunct.
TIGTA also determined that 30 of the 162 sampled cases were closed after 65 weeks, which is considered to be “over-age” by the IRS. In December 2011, however, IRS management removed the requirement for managers to specifically monitor and discuss over-age cases.
In addition, 66 percent of the sampled corporations were already out of business when the case was assigned to the revenue officer. Out-of-business taxpayers are an unlikely source of revenue, TIGTA noted, raising the question of whether the IRS is choosing the most productive cases for its revenue officers. On the other hand, for employment tax cases, the IRS can assess the Trust Fund Recovery Penalty against individual employees of the defunct business. However, 15 percent of these cases did not include delinquent employment taxes, so there was no possibility of this penalty. Trust Fund Recovery Penalties were assessed on only 21 percent of the out-of-business cases.
TIGTA recommended that the IRS ensure that its Field Collection employees and managers are properly trained on the actions they need to take prior to closing cases as CNC-defunct and ensure that case actions are taken timely, including properly documenting the reasons for any delays.
In response to the report, IRS officials agreed with the recommendations and said they have already conducted training to improve CNC closures. IRS management plans to augment the training by issuing a memorandum reminding Field Collection employees to follow the procedures in the Internal Revenue Manual when closing cases as CNC. In addition, IRS management intends to issue a memorandum reminding the Field Collection managers and revenue officers that the Internal Revenue Manual requires revenue officers to document delays in taking timely actions and managers to review cases for timely actions.
“A case is closed as CNC-defunct when, for example, the corporation is no longer operating and all assets have been dispersed,” wrote Karen Schiller, commissioner of the IRS’s Small Business/Self-Employed Division, in response to the report. “In general, we remove a case from active inventory when we have taken all the steps in the collection process and determined that an account receivable is currently not collectible (CNC). We do this to focus our limited resources on cases where we will collect more dollars and thereby protect the government's interest. Although closing a case as CNC removes it from active inventory, the IRS can collect on the tax modules, and does collect, primarily through offsets, provided the collection statute of limitations remains open.”
She noted that the TIGTA report acknowledged a number of steps that the IRS has taken to improve its procedures for processing and closing CNC-defunct cases. “As you noted, we created a checklist that employees can use to ensure all required actions are taken before a case is closed, and we updated the CNC models in the Collection Inventory Delivery System that will allow us to identify cases that are CNC quicker and remove them from inventory earlier,” Schiller wrote. “Also, as noted in your report, the 30 cases where our revenue officers did not complete all required action were likely to have a relatively small collection potential. In fact, our research did not yield additional assets from which we could collect in 17 of the 19 cases we subsequently reviewed.”
She pointed out that unless a delinquent account involves employment taxes, which at least allows the government the possibility of pursuing personal liability under the Trust Fund Recovery Penalty, the likelihood of collecting revenue from defunct corporations is remote. The IRS currently has an initiative underway for employment taxes, in which revenue officers are alerted when an employment tax deposit is missed and then the revenue officer makes timely contact with the taxpayer to pursue collection of these missed amounts in closer proximity to when these amounts were first due.
“Utilizing this approach will allow us to protect the government's interest in these amounts, generally before the corporation has entered the fully delinquent and then defunct stage,” said Schiller.
An IRS spokesman emailed a further statement Wednesday to Accounting Today in response to the report. “The IRS appreciates TIGTA’s acknowledgement of the steps we have taken to improve procedures for processing and closing defunct corporation cases deemed currently not collectible,” said the IRS statement. “In general, a case is not collectible when all steps in the collection process are exhausted. We do this to focus our limited resources on cases where we will collect more dollars and help protect the government’s interest. It is important to note that the likelihood of collecting revenue is remote in these defunct corporation cases unless it involves employment taxes. The IRS also has an initiative underway involving employment taxes to help identify when deposits are missed and making contact earlier in the process before corporations become defunct. We are taking TIGTA’s findings into account as we continue to refine our overall case selection strategy, which will help us make risk-based decisions and efficiently use our limited resources.”
