The office of the IRS National Taxpayer Advocate Service (TAS) in its June 2017 report to Congress focused on two provisions embedded within the Fixing America’s Infrastructure (FAST) Act, signed into law in December 2015. Directly effecting taxpayers is the requirement that the IRS use private collection agencies to try to collect “inactive tax receivables.” In addition, the Act provides that the State Department may deny or revoke the passport of a taxpayer with a “seriously delinquent tax debt.” These provisions immediately raised concerns at the Taxpayer Advocate’s office. The mid-year report provides a status on the developments in these areas.
Private Debt Collectors
The IRS has been pushed by Congress to “do more with less”, and within the FAST Act, Congress thought it would help its cause by mandating that the IRS use private collection agencies (PCAs) to go after accounts that are “inactive.” This strategy has been tried twice in the past, and failed both times. No additional funds were collected over the course of the last experiment with PCAs, which was shut down in 2009. It is interesting to note that the bill was sponsored by Senators Schumer (New York) and Grassley (Iowa). Of the four approved PCAs, two are in New York, and one is in Iowa.
The section of the Internal Revenue Code on this enactment requires the IRS to assign PCAs to all inactive receivables. A “tax receivable” is defined as “any outstanding assessment which the IRS includes in potentially collectible inventory.” The statute does not define “potentially collectible inventory.” The IRS is to identify such accounts, and initiate this process by sending a letter to the taxpayer informing them that the account is going to be assigned to a PCA. It will then send a second letter confirming the case transfer.
TAS raised concerns immediately on the target cases, pointing out that hardship cases are the ones most likely to be affected. If a taxpayer has a delinquent account, and has hired a representative, it is doubtful that his case is “inactive.” Further, most representatives are aware of the Fair Debt Collection Practices Act which provides that with written notice, a taxpayer does not have to deal with an outside collection agency. The concern is for taxpayers who are unable to pay, and vulnerable to being harassed into paying. There is statutory relief for taxpayers who are unable to pay their tax debts, such as offers in compromise, installment agreements, and placing an account in “currently not collectable” status. These tools are available to the IRS. They are not available to the private collectors. PCAs make money when they collect. They have no incentive to consider the personal circumstances surrounding the debt they are trying to collect, and in any case, they do not have access to the same tools as the IRS.
TAS has begun its review of the cases assigned to the PCAs during the first half of 2017. It reviewed the assigned accounts of delinquent taxpayers, whose returns were filed in 2014 and later. The results found that 23% of the taxpayers reported income below the federal poverty level, and 53% reported incomes below 250% of the federal poverty level, which is the threshold set by Congress to receive assistance from a low income tax clinic. Keep in mind the following numbers that constitute household income below and proportionate to poverty level (relative to how many persons per household):
1 person - $12,060
2 persons - $16,240
3 persons - $20,420
4 persons - $24,600
Computed at the 250% rate equates as follows:
1 person - $30,1503
2 persons - $40,600
3 persons - $50,050
4 persons - $61,500
The TAS report states that among the elderly, the median income on returns for taxpayers who received social security benefits in 2016 was $13,200.
The difficulty arises in that the PCAs are not authorized to collect financial information in order to make a determination on collectability. Again, they are collection agencies whose job it is to collect a debt. There is no negotiation. Based on the preliminary data gathered by TAS, economically challenged individuals and families will be adversely affected by the actions of the PCAs. TAS has indicated that it will monitor this process closely, and we will look for additional information on the activities of the PCAs as the year goes on.
Another enactment within the FAST Act being closely monitored by TAS is the restriction it placed on passports, and consequently travel. The code provision requires the State Department to deny an individual’s application for a passport if they have a “seriously delinquent tax debt.” It may limit the reapplication approval as well, as long as the IRS certifies the debt. At this time, the threshold for certification is a tax debt above $50,000.
The concern here is that certain taxpayers will be taken by surprise when they are faced with an inability to travel, or if they are in another country planning to return to the U.S. The “certification” process, and a final determination, is not necessarily disclosed to the taxpayer. There is also some concern as to whether this is a constitutional violation in placing restrictions on an individual’s right to travel.
There are provisions for exceptional circumstances within the code section. These primarily deal with family emergencies. It remains to be seen how the IRS will handle requests for exceptions, and under what circumstances they will be allowed. The issue of restricted passports and travel is a significant restriction on taxpayers, of which clients should be made aware. This is another area closely monitored by TAS, and we are certain to hear more about it as it is implemented this year.
The Taxpayer Advocate
The office of the Taxpayer Advocate is a part of the Internal Revenue Service that operates completely independently, and is an advocate and protector of taxpayers’ rights. A taxpayer’s first course of action if an IRS issue occurs is to quickly respond to any IRS contact letter or notice she receives. However, if continuing efforts are made to resolve a matter with field personnel or the Service Center (ACS), and the taxpayer (or you as a representative of the taxpayer) reaches an impasse, the TAS office is there to assist you in working with field personnel or ACS to resolve your matter.
Each state has a local TAS office. Contact information including local telephone and fax numbers may be found on the IRS website. Generally, assistance from TAS is initially requested by filing Form 911, Request for Taxpayer Assistance Order. This may be faxed to the local office, which is the avenue for the quickest response. TAS is a valuable resource in assisting with taxpayer issues that are not easily resolved, as well as monitoring actions such as the above legislation recently passed, which directly impacts taxpayers, and may impact taxpayers’ rights.
Kathleen M. Lach is a Partner in the Tax and Litigation Departments of Arnstein & Lehr LLP. She represents clients before a variety of different tax authorities, including the Internal Revenue Service, the Illinois Department of Revenue, and the Illinois Department of Employment Security.