TREASURY INSPECTOR GENERAL FOR TAX ADMINISTRATION

Office of Audit

Procedures for Retirement Account and Thrift Savings Plan Levies Are Not Always Followed By Revenue Officers

Final Report Issued on September 26, 2017

Highlights

Highlights of Reference Number:  2017-30-082 to the Internal Revenue Service Commissioner for the Small Business/Self-Employed Division.  

IMPACT ON TAXPAYERS

To satisfy tax debts, the IRS may levy funds held in retirement accounts.  Special procedures are required before levying retirement accounts because taxpayers may need to rely on those funds, either now or in the near future, to pay living expenses.  In addition, withdrawals from retirement accounts may result in taxpayers owing taxes.

WHY TIGTA DID THE AUDIT

Many taxpayers rely on Individual Retirement Accounts, or defined contribution plans, such as 401(k) or 403(b) plans, or Thrift Savings Plans (TSP) to fund living and other expenses after retirement.  This audit was initiated to determine whether the IRS has adequate controls and procedures in place to properly issue levies on retirement income, retirement accounts, and TSP accounts.

WHAT TIGTA FOUND

Pre-levy procedures for retirement income require managerial approval for Automated Collection System (ACS) employees and more discretion by revenue officers.  TIGTA’s review of a random sample of 30 levies of retirement income issued by ACS employees and 28 levies of retirement income issued by revenue officers showed that pre-levy procedures were properly followed in most cases.  However, TIGTA’s analysis of the financial condition of these taxpayers showed that 11 taxpayers were potentially in economic hardship at the time of the levies.

Revenue officers must follow special procedures prior to levying assets in retirement and TSP accounts, including determining if the taxpayer has other property or non-retirement assets that could be used to collect the liability or if a payment agreement can be reached; has exhibited flagrant behavior; or needs the money in the retirement account (or will in the near future) to pay necessary living expenses.  In addition, revenue officers must obtain Collection function Area Director approval for such levies.

TIGTA’s review of a judgmental sample identified 11 of 27 retirement account levies for which some or all of the required special procedures were not followed.  The IRS levied $140,615 from four retirement accounts.  Taxpayers were burdened because their retirement accounts were improperly levied.  The average age for all 27 sampled taxpayers with retirement accounts was 61 years, so the taxpayers may have relied on these funds in the near future.  These taxpayers would have experienced other resulting tax consequences from the improper levy as well.

TIGTA’s review of a judgmental sample also identified 20 of 31 TSP account levies for which some or all of the required special procedures were not followed.

WHAT TIGTA RECOMMENDED

TIGTA recommended that the IRS revise procedures to clarify that retirement income levy actions should not be taken if it will likely cause economic hardship based on facts and circumstances of the case; consider revising Form 668-A, Notice of Levy, to more clearly indicate whether the levy is on a retirement account; ensure that the planned ICS enhancement to remind revenue officers to determine if Area Director approval is needed is implemented and tested; and provide revenue officers with periodic clarification and reinforcement of the retirement account and TSP levy procedures.

In their response, IRS management agreed with TIGTA’s recommendations and plans to take corrective actions.

READ THE FULL REPORT

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

https://www.treasury.gov/tigta/auditreports/2017reports/201730082fr.pdf.