IRS RESPONSE TO RECOMMENDATION: Our current procedures require the examiner/officer to initially request information pertaining to an audit/collection process from the taxpayers to eliminate or reduce the need to conduct a TPC. These procedures are outlined in Internal Revenue Manual (IRM) Sections 4.10.2.8.1.1.2,  4.10.2.8.2.1.2, and  5.1.10.3.2. Taxpayers receive a Form 4564, Information Document Request (Examination), or a Form 9297, Summary of Taxpayer Contact (Collection), specifying what records are needed as well as the due date for the information. During the audit/collection process, if additional information is needed, subsequent requests will be provided in writing and due dates determined on a case-by-case basis. Taxpayers can also ask clarifying questions regarding the information requested.

CORRECTIVE ACTION: N/A

TAS RESPONSE: The IRS response does not address the concerns that prompted the recommendation 12-1.  As described in the MSP, IRS procedures (including those cited in the IRS response) do not require employees to request the information from the taxpayer before requesting it from third parties, and a review of IRS case files conducted by TAS found that employees did not do so in 22.8 percent of field exam cases and in 11.1 percent of field collection cases.  The IRS response seems to ignore the problem that employees are tarnishing taxpayers’ reputations by contacting third parties without first giving them an opportunity to provide the information that the IRS needs.  However, we hope the IRS will address this problem in the training that it provides to employees.

ADOPTED, PARTIALLY ADOPTED or NOT ADOPTED: Not Adopted

OPEN or CLOSED: Closed

DUE DATE FOR ACTION (if left open): N/A

IRS RESPONSE TO RECOMMENDATION: According to current procedures for Examination and Collection, the number of days granted to provide requested information is determined on a case-by-case basis. While examiners/officers generally allow more than 10 days, the time for requested information to be presented is discussed and adjusted/increased as needed on a case-by-case basis related to the individual taxpayer needs and complexity of the examination or collection situation.

CORRECTIVE ACTION: N/A

TAS RESPONSE: The IRS’s response does not appear to address the concerns that prompted recommendation 12-2.

As noted above, TAS found that employees did not request information from taxpayers before requesting it from third parties in 22.8 percent of field exam cases and in 11.1 percent of field collection cases that TAS reviewed.  When they did request the information, they did not always wait ten days before requesting it from a third party.  TAS has also received complaints from practitioners that employees do not provide taxpayers with enough time to provide information. The IRS response suggests it has declined to address this problem.  However, we hope the IRS will address this problem in the training that it provides to employees.

ADOPTED, PARTIALLY ADOPTED or NOT ADOPTED: Not Adopted

OPEN or CLOSED: Closed

DUE DATE FOR ACTION (if left open): N/A

IRS RESPONSE TO RECOMMENDATION: IRC §7609 (third-party summonses) is a mandatory request for information guided by specific legal, time, and response requirements. IRC §7602 (third-party contacts) is a voluntary request for information. Examination currently follows Procedure and Administration Regulation § 301.7602 for guidance on reporting requirements for IRC §7602 (c)(3), Exceptions.

The following paragraph, from the preamble, appears on page 2 of the regulations:

[T]hese final regulations do not finalize the provisions in the proposed regulations regarding periodic reports. Subsequent to the issuance of the proposed regulations, the IRS determined that the issuance of periodic reports may result in harm to third parties and, accordingly, has determined that periodic reports should not be issued. Taxpayers will continue to receive pre-contact notice and may specifically request from the IRS reports of persons contacted.

The IRS is following the current guidance and procedures as listed in the Treasury Regulation.

CORRECTIVE ACTION: N/A

TAS RESPONSE: The IRS’s response does not address the concerns that prompted recommendation 12-3.  Rather, the IRS reiterates that it is ignoring IRC § 7602(c)(2), which requires that it send TPC reports to taxpayers “periodically” rather than only upon request. The response does not justify its continued violation of the statutory requirement, nor does it address the National Taxpayer Advocate’s observation that providing a copy of nonexempt TPCs to taxpayers could save resources, as employees would not have to track and report those already disclosed to the taxpayer.

ADOPTED, PARTIALLY ADOPTED or NOT ADOPTED: Not Adopted

OPEN or CLOSED: Closed

DUE DATE FOR ACTION (if left open): N/A

IRS RESPONSE TO RECOMMENDATION: TPC reports are currently being provided by the most current guidance as stated in Procedure and Administration Regulation § 301.7602-2 (e)(1). The preamble to the final Regulations states, “[T]he IRS determined that the issuance of periodic reports may result in harm to third parties and, accordingly, has determined that periodic reports should not be issued. Taxpayers will continue to receive pre-contact notice and may specifically request from the IRS reports of persons contacted.”

CORRECTIVE ACTION: N/A

TAS RESPONSE: The IRS’s response does not address the concerns that prompted to recommendation 12-4.  It does not explain the IRS’s implicit conclusion that a preamble to a regulation can trump a statutory mandate.  Nor does it explain how withholding periodic reports, which would only contain the names of third parties who have no fear of reprisal and whose identities would be disclosed upon request by the taxpayer, actually addresses its concerns about “harm to third parties.”

ADOPTED, PARTIALLY ADOPTED or NOT ADOPTED: Not Adopted

OPEN or CLOSED: Closed

DUE DATE FOR ACTION (if left open): N/A

IRS RESPONSE TO RECOMMENDATION: NTA Recommendation Not Adopted as Written, but IRS Actions Taken to Address Issues Raised by NTA.  Publication 1 explains the TPC report is available upon request, and we are adhering to our current procedure as discussed in recommendations  #3 and #4 (§ 301.7602-2 (e)(1)). The suggestion to explain “how to request reports” is actually a process improvement recommendation from the Exam TPC Program Review conducted in October 2015, where it was determined that our existing guidance was not communicated adequately. The SB/SE Examination function is currently updating our IRM and future TPC training modules to instruct examiners to explain to taxpayers how to request reports.

Update: IRM 25.27.1.5, Providing Taxpayers with TPC List, (2) states, “Employees are responsible to ensure taxpayers understand their rights to receive post third party contact reports.  This may require explanation and assisting the taxpayer with requesting the report.  A taxpayer can request a list of TPCs at any time.  The request can be made either orally or in writing.” and  “Note: Employees are required to advise the taxpayers of their rights to receive post third-party contact reports and explain to the taxpayers how to request the reports.  This communication should be documented in the case file.”

November 2016, Third Party Contacts refresher training was included as a topic of Revenue Officers CPE training, Course 63663-0102, Taxpayer Contact and Investigations, Pages 1-8 thru 1-14.

Collection Letters 3164, Third Party Notice, updated to inform taxpayers of their right to receive post-TPC reports and how to request TPC reports.

September 2017, Publication 1 was revised with instructions on how to secure TPC listings.

February 2018, Refresher training on 3rd Party Contacts (TPC) was developed to instruct all employees in Collection to explain to taxpayers how to request reports (Course 69509, SBC-CXF: Third Party Contacts (TPC) – A Refresher for All Collection Employees. Note that training material for call site, correspondence, and field employees is included in this file).

CORRECTIVE ACTION: Updating the IRM (Examination) and future TPC training modules (Examination and Collection) to instruct employees to explain to taxpayers how to request reports.

TAS RESPONSE: The National Taxpayer Advocate appreciates that the IRS is updating the IRM and instructing employees to inform taxpayers how to request TPC reports.  However, employees do not always communicate directly with taxpayers.  If the TPC notices do not specify how taxpayers may request TPC reports, fewer taxpayers will not know how to request them.  The IRS’s reluctance to inform taxpayers of their rights violates the taxpayer’s right to be informed.

ADOPTED, PARTIALLY ADOPTED or NOT ADOPTED: Partially Adopted

OPEN or CLOSED: Closed

DUE DATE FOR ACTION (if left open): N/A

IRS RESPONSE TO RECOMMENDATION: Examiners/Officers are following the current procedures in regards to reprisal considerations (Procedure and Administration Regulation §301.7602-2 (f)). Requiring the IRS to investigate each claim of potential reprisal would intrude into the third party’s affairs and require IRS employees to make judgments that they are not well positioned to make.

IRS employees are instructed to take reprisal determinations very seriously. Commissioner Rossotti testified, “We have instructed our employees to take reprisal claims by third parties at face value. We made this decision to avoid a situation, where by virtue of our second-guessing of a claimed fear of reprisal, we make the wrong call and disclose the contact, only to have the third party suffer harm as a result.” The adoption of Procedure and Administration Regulation 301.7602-2 offers additional protection to all individuals involved in a TPC changing the original periodic reporting practices outlined in IRC §7602(c).

CORRECTIVE ACTION: N/A

TAS RESPONSE: The IRS misconstrues recommendation 12-6.  The IRS has delegated the authority to make reprisal determinations to low-graded (GS-4 and GS-5) employees.  When IRS employees make reprisal determinations, they must have a “good cause” for the determination.  In addition, they “should document the case file with the facts surrounding the decision and complete a Form 12175 as outlined above to document the reprisal determination,” according to expired IRS training materials.36   As described in the MSP, however, none of the IRS employees who made reprisal determinations in the files that TAS reviewed recorded the facts surrounding the decision (i.e., reasons for why they made them). This is unsurprising because the current IRM does not echo the expired training materials, and the IRS’s current quality reviews do not check to see if there is any basis for reprisal determinations. At present, it appears that an IRS employee could label every TPC as “reprisal” to avoid the reporting requirements. No inaccurate determination could be detected because the employee is not required to document the basis for the determination. This lack of oversight and accountability violates the right to privacy, which includes the right to “expect that any IRS inquiry… will comply with the law.”

ADOPTED, PARTIALLY ADOPTED or NOT ADOPTED: Not Adopted

OPEN or CLOSED: Closed

DUE DATE FOR ACTION (if left open): N/A

IRS RESPONSE TO RECOMMENDATION: NTA Recommendations Not Adopted As Written, But IRS Actions Taken To Address Issues Raised By NTA.  Exam completed a review on the TPC Program in October of 2015. The review concluded that increased guidance and/or training are necessary to improve examiner awareness of TPC requirements.

Quality Review Attribute 607 (Taxpayer Rights) is evaluated on 100% of cases reviewed by the National Quality Review System (NQRS) program, and they specifically look for any third party contacts and related documentation. Managers also review this attribute when conducting case reviews to ensure third party reporting procedures are followed

Update: In November 2016, Third Party Contacts refresher training was included as a topic of Revenue Officers Continuing Professional Education (CPE) training;   Course 63663-0102, Taxpayer Contact and Investigations, Pages 1-8 thru 1-14.

In March 2017, Third Party Contacts refresher training was included as a topic of Examiner Continuing Professional Education (CPE) training; ELMS course 65260, Third Party Contacts.

IRM 4.11.57 Examining Officers Guide (EOG), Third Party Contacts, has been updated.

Collection Quality Review Attribute 607 (Taxpayer Rights) is evaluated on 100% of cases reviewed by the National Quality Review System (NQRS) program, and they specifically look for any third party contacts and related documentation. Managers also review this attribute when conducting case reviews to ensure third party reporting procedures are followed.

CORRECTIVE ACTION: The IRS is developing refresher training and IRM updates for the SB/SE Examination and Collection functions.  We are also updating review practices and working with the NQRS program on system updates to capture TPC occurrences and errors during reviews of SB/SE Examination cases.

TAS RESPONSE: The National Taxpayer Advocate is pleased that the IRS is developing refresher training, updating its IRM, and working with the NQRS program to capture TPC errors.  The IRS response is unclear about whether these changes will address the concerns that prompted recommendation 12-7.  TAS found that for violations of Exam Quality Review Attribute 617 (Taxpayer Rights), the IRS does not associate a “reason code” with third party contact rule violations.  As a result, the only way to determine if a failure for “other” reasons is due to third party contact problems is to review the narrative provided by the reviewer.  When the IRS searched the narratives for FYs 2012-2014 cases closed by SB/SE Division Revenue Agents (RAs) and Tax Compliance Officers (TCOs) that failed Attribute 617 for “other” reasons, it found no mention of third party contact violations.  This may suggest that reviewers were not looking for such violations, perhaps because there was no reason code for them or because they were difficult to detect. TAS found it challenging to review violations of TPC procedures because IRS employees are not always required to include the TPC’s identity on Form 12175 or the TPC database.  Nonetheless, TAS’s review found that in 42.1 percent of the field exam cases and in 48.5 percent of the field collection cases that it reviewed non-exempt TPCs were missing from the TPC database.39   Similarly, SB/SE found that in 36 percent of the field exam cases with TPCs that it reviewed, examiners did not properly document TPCs reflected in case histories on Form 12175. We hope the changes the IRS is making will address these problems.

ADOPTED, PARTIALLY ADOPTED or NOT ADOPTED: Adopted

OPEN or CLOSED: Closed

DUE DATE FOR ACTION (if left open): N/A