IRS RESPONSE TO RECOMMENDATION: Supervisors are already required to review the entire case file when a Correspondence Examination Technician (CET) proposes the two-year ban. The Notice of Deficiency does not address specific audit issues or bans. It addresses the deficiency amounts, penalties or addition to tax, and appeal rights.

CORRECTIVE ACTION: N/A

TAS RESPONSE: Although managers are required to review the case file, TAS Research found that managers did so in only 24 percent of cases reviewed where the ban was not imposed systemically. Further, TAS Research found that the explanation as to why the two-year ban was imposed was inadequate in Form 886-A, Explanation of Items, 81 percent of the time and 86 percent of the time in the Statutory Notice of Deficiency. IRM 4.19.14.7.1, 2/10 Year Ban – Correspondence Guidelines for Examination Technicians (CET), provides that examiners must give taxpayers a clear explanation as to why the two-year ban is being proposed.

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 32(k), 24(g), and 25A(b) allow the IRS to disallow the related credit for the two taxable years after the most recent taxable year for which there was a final determination that the taxpayer’s claim of credit under one of those sections was due to reckless or intentional disregard of rules and regulations. The phrase, “addresses the same rule under consideration”, strictly defines the circumstances under which a two-year ban can be considered, which is limiting to the examiner’s judgement. Auditing Standard 2 (IRM 4.19.13), Examination Depth and Conclusions Reached, requires the conclusion to be, in part, derived from the developed facts and circumstances (to establish reckless or intentional disregard of the rules and regulations for assertion of the two-year ban).

All initial contact letters contain enclosures that explain the documentation and requirements to support a taxpayer’s claim for the credits. Existing IRS procedures require CETs to consider all the facts and circumstances of a case before proposing the ban (on non-systemically proposed ban cases). They also call for CETs to document the reasons for the ban and obtain supervisory approval. In all cases, taxpayers are provided their due process and given the opportunity to establish their entitlement for credits.

CORRECTIVE ACTION: N/A

TAS RESPONSE: The two-year ban is a consequence for taxpayers when they do not follow the rules set out for claiming a refundable credit, such as the EITC, CTC, or AOTC. The logic behind the ban is the taxpayer previously was subject to an examination and during that time was made aware of the rule with which they failed to comply. After that examination, the expectation is the taxpayer will comply with that rule in the future. However, these credits involve a number of rules, and if the taxpayer later violates a rule that wasn’t covered in the prior examination, then the rationale for the ban doesn’t apply (i.e., the taxpayer wasn’t educated on this rule, so their failure to comply cannot be viewed as reckless based on that fact alone).

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: The IRS’s decision to assert (or not) the two-year ban for each credit must be documented to include the reason for the determination on Form 4700, Examination Workpapers. The CET is required to review the documentation submitted by the taxpayer, determine whether the two-year ban should be asserted based on applicable tax law, the taxpayer’s documentation, taxpayer contact, Integrated Data Retrieval System (IDRS) research, and prior year Correspondence Examination Automation Support (CEAS) workpapers. If the two-year ban is asserted, the CET must obtain supervisory approval prior to asserting the two-year ban.

Auditing Standard 2 (IRM 4.19.13), Examination Depth and Conclusions Reached, requires the conclusion to be in part, derived from the developed facts and circumstances (to establish reckless or intentional disregard of the rules and regulations for assertion of the two-year ban). This analysis should not be limited to a specific time period, since some taxpayers do not file a tax return every year.

Therefore, a complete audit may require research to be conducted more than three years from the date of the current audit.

CORRECTIVE ACTION: N/A

TAS RESPONSE: One rationale for applying the two-year ban when certain refundable credits have been improperly claimed is that the taxpayer had a previous audit and should be aware of the rules surrounding these credits. However, this rationale is eroded when the prior audit was more than three years before the current audit to which the two-year ban is being proposed. First, it’s possible the rules surrounding these credits have changed since the last time the taxpayer was audited; therefore, it would be unfair for the IRS to base the imposition of the two-year ban on the rationale that the taxpayer was previously made aware of these rules.

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: The IRS asserts the two-year ban when the taxpayer demonstrates reckless or intentional disregard of the rules and regulations. Intentional disregard is demonstrated when the taxpayer has knowledge of the requirements and continues to claim a credit for which they are not entitled. The two-year ban is mainly considered by a CET in the second or subsequent year of audit, after the taxpayer has responded and participated in the audit process. The systemic assertion of the two-year ban is proposed in the third year after having Earned Income Tax Credit (EITC) or Child Tax Credit (CTC)/Advanced CTC denied for two prior years or in the fourth year, after the taxpayer was unable to substantiate the credit for three prior years, if one of the examinations was undeliverable. The IRS notifies taxpayers by letter or telephone when the IRS proposes a two-year ban. If the CET proposes the ban during the first year of the audit, the IRM requires the CET to speak with the taxpayer before the assertion of the two-year ban is recommended. Supervisory approval is required on cases where the CET proposes the two-year ban.

The CET proposes the ban based on the facts and circumstances of each case, the taxpayer’s response, and a prior audit history that demonstrates whether the taxpayer has recklessly or intentionally disregarded the rules and regulations when claiming the credits. A pattern of reckless or intentional disregard is established when the taxpayer has been informed in the first audit that they were not entitled to the credit, but continues to claim the credit. The analysis used to determine the pattern of filing behavior includes review of prior year audits, workpapers, and Correspondence Examination Automation Support (CEAS) notes, the taxpayer’s response, or any telephone calls received.

CORRECTIVE ACTION: N/A

TAS RESPONSE: TAS’s study found that the explanation as to why the two-year ban was imposed was inadequate in Form 886-A, Explanation of Items, 81 percent of the time and 86 percent of the time in the Statutory Notice of Deficiency. Further, out of 352 cases reviewed, 162 taxpayers (or 46 percent) never responded to the audit, and 16 percent of the notices were undeliverable. One possible explanation for this high no-response rate is that the inadequate explanations provided on the Form 886-A and the Statutory Notice of Deficiency leave taxpayers perplexed as to how they should respond. Considering the stakes are so high for these taxpayers, many of whom are low-income (i.e., they could be losing about $3,619 in Earned Income Tax Credit each year), it seems reasonable the IRS would agree to contact the taxpayer via phone to ensure they received and understood the notice.

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: Supervisory approval is already required for cases where the CET proposes the two-year ban. Managers already conduct a minimum of two evaluative reviews (phone or paper) for each employee per month. The number and times for monitoring is set by the Operation or Department Manager. When an employee works in a blended environment (phone or paper), managers strive for a proportionate mix to review throughout the rating period. Additionally, the National Embedded Quality Program conducts a random statistically valid sample from all closed cases to determine overall program quality.

CORRECTIVE ACTION: N/A

TAS RESPONSE:

Considering the number of problems TAS identified in the study, namely insufficient managerial review of case files and inadequate explanation of the bans in both the Form 886-A and the Statutory Notice of Deficiency, TAS believes this program could benefit from additional managerial review to ensure it protects taxpayer rights.

Considering that the imposition of this ban could mean the loss of thousands of dollars for these low-income taxpayers, it is imperative the IRS act prudently and in full observation of the Taxpayer Bill of Rights when moving forward with imposing this ban.

ADOPTED, PARTIALLY ADOPTED or NOT ADOPTED: Not Adopted

OPEN or CLOSED: Closed

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