Installment Agreements (IAs): Adopting National Taxpayer Advocate Recommendations Could Assist the IRS to Ensure Taxpayers Enter IAs They Can Afford

September 21, 2017

Previously, I discussed my concerns about installment agreements (IAs) and the study TAS Research conducted on IAs. Today I will discuss the recommendations I have made to the IRS to ameliorate some of my concerns about IAs, both in the study and in the associated Most Serious Problem, both published in the National Taxpayer Advocate’s 2016 Annual Report to Congress. Per the TAS arrangement with the IRS, the IRS responds to recommendations I present in the Most Serious Problems in the Annual Report. I will also focus on the IRS responses to these recommendations.

Let’s begin with the recommendations I made in conjunction with the IA research study. Providing as much information as possible to taxpayers in advance of making a decision about collection alternatives is key to ensuring that the taxpayers’ right to be informed, right to quality service, right to pay no more than the correct amount of tax, right to finality, and right to a fair and just tax system are protected. Taxpayers may not understand all the options available to address their tax balances, and it is essential that the IRS help taxpayers explore the best possible option for the taxpayers based on their individual facts and circumstances to resolve existing tax debts and promote future voluntary compliance as well as reduce downstream rework for the IRS. 

First, I recommend that the IRS create an online calculator for taxpayers to use when they are contemplating an IA. Most taxpayers (84 percent in fiscal year 2016) enter into streamlined IAs, that is, they owe under a certain amount of tax and indicate they can pay that tax in installments in six years or less. These streamlined IAs are guaranteed and can be applied for online and require no interaction between the taxpayer and the IRS. An online calculator that prods the taxpayer to consider, at a minimum, the allowable living expenses for their family size/location may help the taxpayer see if their proposed payments are actually affordable rather than just considering the payment based on the delinquency divided by generally up to 72 payments. The IRS already provides an offer in compromise (OIC) pre-qualification tool which prompts taxpayers to answer questions regarding eligibility and enter information about their financial obligations to determine if an OIC is the right solution. This tool could easily be modified for IAs to allow taxpayers to think about their necessary expenses before committing to an IA that is simply their tax obligation divided by generally up to 72 payments.

Hand in hand with this recommendation, the IRS must consider taxpayers who are not comfortable using online resources, so I recommend that the IRS provide a basic financial analysis for taxpayers who call the IRS seeking streamlined IAs. The IRS has income and tax return information for all taxpayers who are eligible for IAs (you can’t get an IA unless you have filed all required tax returns). It could develop an algorithm that would automatically populate with the taxpayer’s family composition, income, and ALEs based on available data. Toll-free assistors, campus collection employees, and Revenue Officers could easily use this tool to identify taxpayers who would experience economic hardship if they agreed to the streamlined IA required monthly payment. At the very least, the tool would prompt a conversation between the IRS and the taxpayer.

Finally, in the study, I recommend that the IRS place taxpayers into currently not collectible (CNC) status if a basic financial analysis shows that the taxpayers allowable living expenses exceed their income. You may recall that our research study found in FY 2014 over 400,000 taxpayers who should have qualified for CNC instead entered IAs in my previous blog.

Now, we’ll turn to the recommendations that I made in the Most Serious Problem in my 2016 Annual Report to Congress. As I mentioned above, per agreement with the IRS, the IRS provides written responses to these recommendations, which are published in the National Taxpayer Advocate’s Objectives Report to Congress each June. Additionally, TAS tracks the recommendations and the IRS progress in addressing any recommendations it has agreed with and publishes the results in an annual “report card.” 

My first recommendation echoed the recommendations from another Most Serious Problem, on allowable living expenses (ALEs), which were also published in the 2016 Annual Report to Congress. As I noted in my previous blog on IAs, ALEs and IAs go hand-in-hand and I have many concerns about the current state of IRS ALEs. Therefore, I recommended in the IA Most Serious Problem that the IRS modify the ALEs in accordance with my recommendations in that Most Serious Problem, which you can read more about in my blog on ALEs

Second, I recommended that the IRS develop an internal ability-to-pay estimator that would populate automatically with the taxpayer’s most current information for use by employees in granting IAs. The IRS rejected my recommendation, citing the fact that by the time a taxpayer proposes an IA, the tax return information the IRS has may be outdated and would increase the burden on the IRS employee reviewing the IA. I believe that the IRS misconstrued my recommendation as requiring contact with every taxpayer who proposes a streamlined IA. I was not recommending such an approach nor was I suggesting that a pre-populated estimator be used to determine the amount a taxpayer should pay. Rather, I am proposing a pre-populated estimator for use by employees as a quick check as to whether the taxpayer can pay at all, or whether the “quick and dirty” streamlined approach actually harms the taxpayer. 

For example, a taxpayer owes a balance of $10,800 and proposes 72 payments of $150. When the employee reviewing the streamlined IA pulls up the pre-populated estimator, it would display the taxpayer’s income from the previous return and the taxpayer’s ALEs based on most recent family size and location. In my hypothetical, let’s assume our taxpayer’s last reported income was $28,000 a year and her ALEs are $30,000. Therefore, the taxpayer has no positive income. This should then prompt the Customer Service Representative to contact the taxpayer prior to granting the IA. 

I do not understand why the IRS, in the 21st century would not want to leverage technology to identify situations where a quick glance at available information reveals a taxpayer may not be able to afford the payments proposed. Completing this step up front would allow the IRS to educate the taxpayer on other collection alternatives, help the taxpayer find a solution that fits individual circumstances, and decrease back-end rework when the taxpayer defaults on an unaffordable IA. This approach would also be in accord with core taxpayer rights.

My final recommendation was that the IRS review its Internal Revenue Manuals (IRMs) and employee training to require use of the estimator I described above even in streamlined IA applications and to provide employees with a decision tree indicating where other collection alternatives (such as CNC or an offer in compromise (OIC)) are more appropriate than IAs. The IRS declined to adopt my recommendation as written, but indicated it would remind employees to use the already existing streamlined IA calculator or a collection information statement where a taxpayer had defaulted on an IA in the last 12 months.  

While I appreciate the effort to remind employees, I am again struck that the IRS missed the point of my recommendation. The calculator I am recommending is what I described above – a pre-populated calculator that can be quickly used as a reality check before ever granting an IA. Providing that calculator (and the training necessary to use it) in conjunction with a decision tree to point employees to the proper collection alternative will ease taxpayer burden and result in less rework for the IRS on defaulted IAs. This is particularly important because almost 28 percent of all IAs are entered into by IRS Toll-free assistors who are not collection employees and have limited financial analysis training.

This prepopulated tool could also be used to screen which cases should be sent over to Private Collection Agencies (PCAs) under IRC § 6306. As we discussed in a earlier blogs(Part 1, Part 2, Part 3), the IRS is not referring to the PCAs taxpayers who are in Currently Not Collectible (CNC) status. The recommended tool could systemically identify taxpayer cases who would probably be placed in CNC status if the IRS actually called them and talked to the taxpayers. Why would we want to send these taxpayers to the PCAs, risking an intimidated taxpayer making a payment that he or she cannot afford, just to keep the PCAs away?

Again, I don’t understand why the IRS doesn’t use technology and the vast information it has at its disposal to minimize the burden to taxpayers (and in the process reduce re-work for itself). My recommendations are designed to provide more information to the IRS and taxpayers as they pursue mutually agreeable solutions to resolving outstanding tax debts. I strongly believe that more information and individual solutions will lead to lower default rates for taxpayers and less rework for the IRS.

TAS accepts cases to assist taxpayers who are experiencing economic hardship and have defaulted on IAs they cannot afford. To contact your Local Taxpayer Advocate office – we have at least one in each state as well as the District of Columbia and Puerto Rico – go to our website. Low income taxpayers – including veterans – can also receive free help from Low Income Taxpayer Clinics, which are independent nonprofits that represent low income taxpayers for free before the IRS. 

Additional blogs from the National Taxpayer Advocate can be found at www.taxpayeradvocate.irs.gov/blog.

The views expressed in this blog are solely those of the National Taxpayer Advocate. The National Taxpayer Advocate is appointed by the Secretary of the Treasury and reports to the Commissioner of Internal Revenue. However, the National Taxpayer Advocate presents an independent taxpayer perspective that does not necessarily reflect the position of the IRS, the Treasury Department, or the Office of Management and Budget.