TREASURY INSPECTOR GENERAL FOR TAX ADMINISTRATION

Highlights

Direct Debit Installment Agreement Procedures Addressing Taxpayer Defaults Can Be Improved

Final Report issued on February 5, 2016

Highlights of Reference Number:  2016-30-011 to the Internal Revenue Service Commissioner for the Small Business/Self-Employed Division.

IMPACT ON TAXPAYERS

Direct debit installment agreements (DDIA) give taxpayers a convenient way to make payments on their installments while eliminating the need for checks or paper forms and IRS resources to process the payments each month.  During Fiscal Year 2014, more than 500,000 taxpayers entered into DDIAs, and approximately $2.8 billion was collected.  Revising DDIA procedures to automatically add new liabilities to existing DDIAs could increase revenue collection and reduce taxpayer burden.

WHY TIGTA DID THE AUDIT

Taxpayers are required to remain in tax compliance as a condition of entering into an installment agreement, and systemic processes exist to default an installment agreement if a taxpayer incurs and fails to pay a new tax liability.  These defaults may occur even if the taxpayer would have preferred adding the new liability to the installment agreement.  This audit was initiated to determine whether the systemic default of DDIAs due to new tax liabilities causes unnecessary burden on taxpayers and the IRS or improves taxpayer compliance.

WHAT TIGTA FOUND

DDIAs provide benefits for both the taxpayer and the IRS.  Taxpayers benefit from establishing DDIAs because they do not have to manually write a check and mail it in order to fulfill their obligations.  The IRS benefits because taxpayer payments can be posted faster and do not require IRS employee involvement.  In addition, taxpayers who enter into DDIAs are less likely to default on their agreement compared with taxpayers who enter into traditional installment agreements. 

In order to maintain a DDIA, taxpayers must pay any new tax liability when due or the DDIA will systemically default.  When defaulted, the IRS stops automatic collection from the taxpayer’s financial accounts.  TIGTA found that when DDIA defaults are due to a new tax liability, most taxpayers want to include the new balance due into their existing DDIA.  In addition, the IRS has a procedure that eliminates the need to default the DDIA if a taxpayer incurs a new tax liability, but it is only used when taxpayers request it. 

As a result, systemic DDIA defaults increased taxpayer burden because taxpayers incurred additional interest on their unpaid balances.  In addition, revenue collection was suspended until the DDIAs were restructured, and some DDIAs were not reestablished.

WHAT TIGTA RECOMMENDED

TIGTA recommended that the IRS:  1) consider establishing systemic programming to allow DDIA taxpayers who incur a new unpaid tax liability to absorb the new liability into the current agreement without stopping the automatic payment in qualifying situations; 2) in the interim, provide taxpayers with information as to how they can avoid a default of their DDIA in the event of a new unpaid liability on Form 9465, Installment Agreement Request, and Form 433‑D, Installment Agreement; and 3) for taxpayers who cannot absorb their liabilities in existing DDIAs, establish procedures so that direct debit payments do not stop while the DDIA is suspended and the IRS actively addresses the new balance due.

IRS management agreed that systemically adding a new tax liability to an existing DDIA could save time and collect additional revenue, but did not commit to ensuring that qualifying new liabilities would be absorbed into existing DDIAs or discontinuing the practice of stopping automatic collection when the DDIA is suspended due to a new liability.  Management did agree to provide taxpayers with more information on how to avoid default.  TIGTA believes that all of the recommendations would benefit the IRS and taxpayers.

READ THE FULL REPORT

To view the report, including the scope, methodology, and full IRS response, go to:

http://www.treasury.gov/tigta/auditreports/2016reports/201630011fr.pdf.