TREASURY
INSPECTOR GENERAL FOR TAX ADMINISTRATION
Delays in Transferring Innocent Spouse Claims Have Resulted in Some Inappropriate Collection Actions
September 14, 2007
Reference Number: 2007-40-175
This report has cleared the Treasury Inspector General for Tax Administration disclosure review process and information determined to be restricted from public release has been redacted from this document.
Redaction Legend:
1 = Tax Return/Return Information
Phone Number |
202-927-7037
Email Address | Bonnie.Heald@tigta.treas.gov
Web Site |
http://www.tigta.gov
September 14, 2007
MEMORANDUM FOR COMMISSIONER, SMALL BUSINESS/SELF-EMPLOYED DIVISION
COMMISSIONER, WAGE AND INVESTMENT DIVISION
FROM: Michael R. Phillips /s/ Michael R. Phillips
Deputy Inspector General for Audit
SUBJECT: Final Audit Report – Delays in Transferring Innocent Spouse Claims Have Resulted in Some Inappropriate Collection Actions (Audit # 200740005)
This report presents the results of our review to evaluate
the controls over forwarding Innocent Spouse[1]
claims for processing. This audit was
included in our Fiscal Year 2007 Annual Audit Plan.
Impact on the Taxpayer
The Cincinnati Centralized Innocent Spouse Operations
(CCISO) in
Synopsis
Our analysis of the Innocent Spouse Tracking System determined that various IRS campuses and/or field functions took more than 30 days (74 days average) to forward to the CCISO 7,765 (23 percent) of the 33,389 Innocent Spouse claims they had received in Fiscal Years 2003 through 2006. Review of a sample of claims received in Fiscal Year 2006 and transferred to the CCISO more than 30 days after initial receipt by the IRS showed 71 percent were handled by 2 or more functions.
Once the CCISO receives an Innocent Spouse claim, it is required to systemically control the taxpayer’s account within 15 days unless the claim fails to meet the basic requirements for processing.[3] It is critical for this control to be input timely, to ensure no inappropriate collection actions[4] are taken on the taxpayer requesting relief.
Recommendations
The Commissioner, Wage and Investment Division, should
coordinate with the Commissioner, Small Business/Self-Employed Division, to
establish a 10-workday Innocent Spouse claim transfer standard for claims not
sent directly to the CCISO by taxpayers; establish an evaluation and feedback process
to identify transfer delay causes and trends for functions not meeting this new
standard; and issue a memorandum to all compliance, field assistance, and
submission processing employees reminding them of the importance of timely sending
Innocent Spouse claims to the CCISO and stopping inappropriate collection
actions on all taxpayers requesting Innocent Spouse relief. In addition, the Commissioner, Wage and
Investment Division, should ensure any money being held inappropriately as a
result of these transfer delays is immediately released to the taxpayers.
Response
IRS management agreed with the recommendations. Wage and Investment Division management will coordinate with Small Business/Self-Employed Division management to establish a 10-workday Innocent Spouse claim transfer standard for any claims not sent directly to the CCISO by taxpayers. They will also develop a monthly evaluation and feedback report that will include the noncompliant operation(s), original claim received date, and CCISO received date and will list any incorrect collection action resulting from the lateness. This report will be distributed monthly to the headquarters staff responsible for that operation and will be monitored by the CCISO.
Wage and Investment Division management will prepare a memorandum to be shared with the Small Business/Self-Employed Division and all compliance, field assistance, and submission processing function employees reminding them of the importance of (1) timely transferring Innocent Spouse claims to the CCISO and (2) stopping inappropriate collection actions on all taxpayers requesting Innocent Spouse relief. They also agreed to conduct an immediate review to ensure there are no monies currently being withheld incorrectly on delayed claims from the campus and field functions. Management’s complete response to the draft report is included as Appendix VI.
Copies of
this report are also being sent to the IRS managers affected by the report
recommendations. Please contact me at
(202) 622-6510 if you have questions or Michael E. McKenney, Assistant
Inspector General for Audit (Wage and Investment Income Programs), at (202)
622-5916.
Delays in Transferring
Innocent Spouse Claims Have Resulted in Some Inappropriate Collection Actions
Appendices
Appendix
I – Detailed Objective, Scope, and Methodology
Appendix
II – Major Contributors to This Report
Appendix
III – Report Distribution List
Appendix
IV – Outcome Measures
Appendix
V – Glossary of Terms
Appendix
VI – Management’s Response to the Draft Report
Abbreviations
|
CCISO |
|
|
IRS |
Internal Revenue Service |
The IRS
received approximately 102,000 Innocent Spouse claims in Fiscal Years 2003
through 2006.
In Fiscal Year 1998, the Internal Revenue Service (IRS)
created the Cincinnati Centralized Innocent Spouse Operations (CCISO)[5]
in
To request Innocent Spouse relief, taxpayers must submit a Request for Innocent Spouse Relief (Form 8857). Once an Innocent Spouse claim is received by the CCISO, it is screened to ensure it meets the basic qualifications for processing.[6] The claim is then reviewed by IRS employees who have had specialized training in evaluating Innocent Spouse claims. These employees use information supplied by the taxpayer and the Individual Master File to evaluate whether the taxpayer qualifies for Innocent Spouse relief, relief by separation of liability, equitable relief, or relief from liability arising from community property law.
In a prior Treasury Inspector General for Tax Administration report,[7] we reported that Innocent Spouse claims were not always timely processed because there were no timeliness requirements for handling the Forms 8857 received by the various campuses and field functions. We recommended the establishment of a timeliness benchmark for these Innocent Spouse claims. However, the IRS disagreed that the benchmark was necessary, stating other actions it was taking should significantly decrease the number of claims received in the campuses and field functions.
This review was performed in the Reporting Compliance
function at the Wage and Investment Division Headquarters in
Delays in Transferring Innocent Spouse Claims Have
Resulted in Some Inappropriate Collection Actions
Our analysis of the Innocent Spouse Tracking System determined that various IRS campuses and/or field functions took more than 30 calendar days[8] (74 days average) to forward to the CCISO 7,765 (23 percent) of the 33,389 Innocent Spouse claims they had received in Fiscal Years 2003 through 2006. Figure 1 provides the results of our analysis.
Figure 1:
Analysis of Innocent Spouse Claims Received by the CCISO
More Than 30 Calendar Days After Initial Receipt
|
Fiscal Year |
Total Claims Transferred to the CCISO |
Claims Taking Longer Than |
Percentage of Claims Transferred Taking Longer Than 30 Days |
Average Days to Transfer Claims to the CCISO |
|
2003 |
4,580 |
1,430 |
31% |
101 |
|
2004 |
10,610 |
2,232 |
21% |
74 |
|
2005 |
9,552 |
2,079 |
22% |
70 |
|
2006 |
8,647 |
2,024 |
23% |
61 |
|
Totals |
33,389 |
7,765 |
23% |
74 |
Source: Our analysis
of the Innocent Spouse Tracking System.
To identify the cause of the delays in transferring Innocent Spouse claims, we selected and analyzed a statistically valid attribute sample of 129[9] of the 2,024 claims that were received in the CCISO more than 30 days after initial receipt in various IRS campuses and/or field functions in Fiscal Year 2006. We obtained copies of the Innocent Spouse claims; reviewed them for IRS functional receipt dates, dates of routing memoranda, and fax dates; and determined the length of time the various IRS functions kept the claims before forwarding them.
Applying these percentages to the Fiscal Year 2006 population of Innocent Spouse claims that were received in the CCISO more than 30 days after initial receipt by the IRS, we estimate that, at a minimum, 1,437 (71 percent) of the 2,024 delayed claims were handled by 2 or more functions.
Once the CCISO receives an Innocent Spouse claim, its goal is to systemically control the taxpayer’s account within 15 days unless the claim fails to meet the basic requirements for processing. It is critical for this control to be input timely, to ensure no inappropriate collection actions[10] are taken on the taxpayer requesting relief. Extended delays in transferring an Innocent Spouse claim increase the risk that the IRS will take against the taxpayer some inappropriate collection actions that should have been prevented.
In 36 of the Innocent Spouse claims in our sample, IRS employees determined the claims either did not meet the basic requirements for processing or were transferred to another function to process as an Injured Spouse claim. Delays in receiving notification that their Innocent Spouse claims were rejected may cause taxpayers to delay seeking payment options as an alternative to enforced collection actions. Also, additional interest continues to accrue on these accounts until they are fully paid by the taxpayers or determined to be uncollectible by the IRS.
Figure 2: Filing Instructions for Form 8857
Figure 2 was removed due to its size. To see Figure 2, please go to the Adobe PDF
version of the report on the TIGTA Public Web Page.
Instructions on Form 8857 tell taxpayers to send Innocent Spouse claims directly to the CCISO unless (1) they are meeting with an IRS employee about an examination, examination appeal, or collection action or (2) they have received a notice of deficiency and the 90-day response period has not yet expired. In those instances, the taxpayers are to provide the IRS employee with the Form 8857, and the employee is to forward it to the CCISO for processing. Based on detailed analysis of 110 sampled claims, we believe employees were either (1) not properly identifying the Innocent Spouse claims when they came into the employees’ function and/or (2) not aware that transferring Innocent Spouse claims to the CCISO is an IRS priority. Most of the delays occurred in various units in the campus functions. Many of these misidentifications may have occurred because the Innocent Spouse claims were attached to tax returns or other correspondence. These causes were confirmed by interviews with various campus and field personnel.
IRS functions have procedures for handling the receipt and transfer of Innocent Spouse claims. Most functional procedures stress the importance of timely transferring the Innocent Spouse claims to the CCISO. However, Innocent Spouse Program management does not provide feedback to the originating function on untimely claim transfers.
After we discussed the results of our review with the IRS
management, they revised Form 8857 instructions to tell taxpayers to send their
Innocent Spouse claims directly to the CCISO.
We believe this clarification may help to significantly reduce the
number of Innocent Spouse claims that are untimely transferred from the various
campuses and/or field functions to the CCISO.
In a separate analysis of all Fiscal Year 2006 Innocent Spouse claims received in the CCISO more than 30 days after initial receipt by the IRS, ****1**** In addition, the IRS inappropriately withheld refunds and/or levied $83,374 from 51 taxpayers claiming Innocent Spouse relief. The IRS eventually released $43,112 back to some of the taxpayers and paid an additional $850 in interest.[11] However, it is not treating all taxpayers filing Innocent Spouse claims fairly and consistently.
The Internal Revenue Code and IRS policy require that all taxpayers requesting relief be protected from inappropriate collection actions while their Innocent Spouse claims are being considered by the IRS. This guidance does not provide for an exclusion of Innocent Spouse claims that are delayed due to IRS case transfer procedures. Delays in placing controls on the accounts of taxpayers claiming Innocent Spouse relief have resulted in inappropriate collection actions. The IRS should make every effort to quickly release these funds to the taxpayers and ensure all taxpayers claiming Innocent Spouse relief are treated fairly. If controls are not timely placed on taxpayers’ accounts, the IRS compliance functions will not know that certain compliance actions should be stopped, which will result in taxpayers continuing to be burdened with inappropriate collection actions.
Recommendations
Recommendation 1: The Commissioner, Wage and Investment Division, should coordinate with the Commissioner, Small Business/Self-Employed Division, to establish a 10-workday Innocent Spouse claim transfer standard for any claims not sent directly to the CCISO by taxpayers. An evaluation and feedback process should be established within the CCISO to identify transfer delay causes and trends for functions that are not meeting this new standard.
Management’s Response: IRS management agreed with this recommendation. Wage and Investment Division management will coordinate with Small Business/Self-Employed Division management to establish a 10-workday Innocent Spouse claim transfer standard for any claims not sent directly to the CCISO by taxpayers. However, taxpayers who mail their forms to Submission Processing sites during peak processing from January to June each year and not to the CCISO, as required, may continue to realize some delays. Wage and Investment Division management will develop a monthly evaluation and feedback report, which will be maintained and monitored by the CCISO. The report will include the noncompliant operation(s), original claim received date, and CCISO received date. It will also list any incorrect collection action resulting from the lateness. This report will be distributed monthly to the headquarters staff responsible for that operation.
Recommendation 2: The Commissioner, Wage and Investment Division, should coordinate with the Commissioner, Small Business/Self-Employed Division, to issue a memorandum to all compliance, field assistance, and submission processing employees reminding them of the importance of (1) timely transferring Innocent Spouse claims to the CCISO and (2) stopping inappropriate collection actions on all taxpayers requesting Innocent Spouse relief.
Management’s Response: IRS management agreed with this recommendation. Wage and Investment Division management will prepare a memorandum to be shared with the Small Business/Self-Employed Division and all compliance, field assistance, and submission processing employees reminding them of the importance of (1) timely transferring Innocent Spouse claims to the CCISO and (2) stopping inappropriate collection actions on all taxpayers requesting Innocent Spouse relief.
Recommendation 3: The Commissioner, Wage and Investment Division, should ensure employees immediately release to taxpayers requesting Innocent Spouse relief any money inappropriately withheld as a result of delays in transferring their claims to the CCISO.
Management’s Response: IRS management agreed with this recommendation. Wage and Investment Division management will conduct an immediate review to ensure there are no monies currently being withheld incorrectly on claims received late from campus and field functions. They will ensure the report, developed as part of their corrective action to Recommendation 1, is reviewed and monitored by the CCISO to ensure no monies are being inappropriately held. A monthly analysis will be conducted.
Appendix I
Detailed Objective, Scope, and Methodology
The overall
objective of this review was to evaluate the controls over forwarding Innocent
Spouse[12]
claims for processing. Our limited tests
of the reliability of data obtained from the Innocent Spouse Tracking System
did not identify any errors. We tested
the reliability of the data by scanning the data received for blank,
incomplete, illogical, or improper data.
In addition, we traced 25 cases from the Innocent Spouse Tracking System
to the source IRS files to ensure accuracy.
We did not perform any testing of internal controls over the system that
was the source of the data. To
accomplish the objective, we:
I. Determined how timely the various IRS functions were in forwarding Innocent Spouse claims to the CCISO.
A. Analyzed the Fiscal Year 2006 Innocent Spouse Tracking System claim data to determine the number of calendar days it took for each claim to be received by the CCISO after initial receipt in a campus and/or field function.
B. Determined where the delays occurred in the transfer of Innocent Spouse claims.
1. Selected a statistically valid attribute sample of 129[13] of the 2,024 claims that were received in the CCISO more than 30 calendar days[14] after initial receipt by the IRS in Fiscal Year 2006. We used a 95 percent confidence level, a +5 percent precision rate, and a 10 percent estimated error rate.
2. Reviewed the sampled case documentation to identify:
a. Which campus, field function, and/or employee(s) appeared to have caused the claim transfer delays.
b. Any events documented in the case history that may have affected the timely transfer of the claim.
C. Determined what effect the delay in transferring the Innocent Spouse claims to the CCISO may have had on taxpayers and the Federal Government.
1. Analyzed the Individual Master File data for the 2,024 Innocent Spouse claims identified in Step I.B.1. to determine if any of these taxpayers were burdened by inappropriate collection actions (e.g., refund offsets, levies, or seizures) and/or if the Federal Government lost revenue as a result of delays in transferring these claims.
2. Analyzed the Fiscal Years 2003 through 2006 Innocent Spouse claim data.
a. Determined the number of calendar days it took to transfer each claim from the campus and/or field function to the CCISO (stratified results by 0 days - 30 days and greater than 30 days).
b. Trended the yearly results to determine if the IRS’ comment that timeliness benchmarks for campus and/or field function transfers are not required because other actions being taken “should significantly decrease the number of claims received in the field” is still correct.
II. Identified the controls in place to ensure Innocent Spouse claims are timely transferred from the campuses and/or field functions to the CCISO.
A. Determined the controls that have been established by the Innocent Spouse Program for transferring Innocent Spouse claims to the CCISO by interviewing program management and obtaining and reviewing documentation. We identified:
1. The controls in place to monitor the transfer of Innocent Spouse claims from the campuses and/or field functions.
2. The directions or guidance provided to the field functions regarding timely transfers of Innocent Spouse claims.
B. Determined what controls have been established by the campuses and/or field functions for transferring Innocent Spouse claims by interviewing various campus and/or field personnel from those functions with the highest number of Innocent Spouse claims transferred to the CCISO and obtaining and reviewing documentation. We identified:
1. The controls in place to monitor the transfer of Innocent Spouse claims from the campuses and/or field functions.
2. The directions or guidance they have received or established regarding timely transfer of Innocent Spouse claims.
3. The feedback that has been provided to them concerning untimely Innocent Spouse claim transfers.
Appendix II
Major Contributors to This Report
Michael
E. McKenney, Assistant Inspector General for Audit (Wage and Investment Income
Programs)
Mary
V. Baker, Director
Marybeth
Schumann, Director
Bryce
Kisler, Acting Director
Alan
Lund, Acting Audit Manager
Kristi
Larson, Lead Auditor
James
Traynor, Senior Auditor
Jean
Kao, Auditor
Craig Pelletier, Auditor
Appendix III
Acting Commissioner C
Office of the Commissioner – Attn: Acting Chief of Staff C
Deputy Commissioner for Services and Enforcement SE
Deputy Commissioner, Small Business/Self-Employed Division SE:S
Deputy Commissioner, Wage and Investment Division SE:W
Director, Compliance, Wage and Investment Division SE:W:CP
Director, Strategy and Finance, Wage and Investment Division SE:W:S
Chief, Performance Improvement, Wage and Investment Division SE:W:S:PI
Director, Reporting Compliance, Wage and Investment Division SE:W:CP:RC
Chief, Headquarters Discretionary Examination, Wage and Investment Division SE:W:CP:RC:EX (DISCR)
Field Director, Compliance Services (Andover), Wage and Investment Division SE:W:CP:CS:AN
Chief
Counsel CC
National
Taxpayer Advocate TA
Director,
Office of Legislative Affairs CL:LA
Director,
Office of Program Evaluation and Risk Analysis
RAS:O
Office of
Internal Control OS:CFO:CPIC:IC
Audit
Liaison: Senior Operations Advisor, Wage
and Investment Division SE:W:S
Appendix IV
This appendix presents detailed information on the measurable impact that our recommended corrective actions will have on tax administration. These benefits will be incorporated into our Semiannual Report to Congress.
Type and Value of Outcome Measure:
· Revenue Protection – Actual; ****1**** (see page 3).
Methodology Used to Measure the Reported Benefit:
Based on an analysis of refunds issued during Fiscal Year 2006 to the spouses (or former spouses) of the 2,024 taxpayers whose Innocent Spouse claims were received in the CCISO[15] more than 30 calendar days[16] after initial receipt by the IRS, ****1****
Type and Value of Outcome Measure:
· Taxpayer Rights and Entitlements – Actual; $83,374 in funds inappropriately taken from 51 taxpayers requesting Innocent Spouse relief during Fiscal Year 2006 (see page 3).
Methodology Used to Measure the Reported Benefit:
Based on an analysis of all 2,024 Fiscal Year 2006 Innocent Spouse claims that were received in the CCISO more than 30 days after initial receipt by the IRS, the IRS inappropriately withheld refunds and/or levied $83,374 from 51 taxpayers claiming Innocent Spouse relief.
Type and Value of Outcome Measure:
· Funds Put to Better Use – Actual; $850 in interest paid on funds inappropriately taken from taxpayers requesting Innocent Spouse relief during Fiscal Year 2006 (see page 3).
Methodology Used to Measure the Reported Benefit:
Based on an analysis of all 2,024 Fiscal Year 2006 Innocent Spouse claims received in the CCISO more than 30 days after initial receipt by the IRS, the IRS paid $850 in interest to taxpayers claiming Innocent Spouse relief that had had their refunds inappropriately withheld and/or levies on their accounts.
Appendix
V
|
Term |
Definition |
|
Campus |
The data processing arm of the IRS. The campuses process paper and electronic
submissions, correct errors, and forward data to the |
|
|
IRS function located in |
|
Equitable Relief |
A taxpayer that does not qualify for Innocent Spouse relief or relief by separation of liability may still be relieved of responsibility for a portion or the entire amount of tax, interest, and penalties through equitable relief. Unlike with Innocent Spouse relief or relief by separation of liability, the taxpayer can receive equitable relief from an understatement of tax or an underpayment of tax. |
|
Individual Master File |
The IRS database that maintains transactions or
records of individual accounts. |
|
Injured Spouse |
A taxpayer that filed a joint tax return and for whom all or part of his or her portion of the overpayment was, or is expected to be, applied (offset) to his or her spouse’s legally enforceable past-due Federal tax, State income tax, child or spousal support, or a Federal nontax debt (e.g., a student loan). |
|
Innocent Spouse Program |
IRS program responsible for determining if taxpayers qualify for Innocent Spouse relief, as well as determining if taxpayers qualify for relief by separation of liability, equitable relief, or relief from liability arising from community property law. |
|
Innocent Spouse Relief |
A taxpayer can be relieved of responsibility for paying tax, interest, and penalties if his or her spouse (or former spouse) improperly reported items or omitted items on their tax return. |
|
Innocent Spouse Tracking System |
A computerized inventory system that tracks Innocent Spouse claims from receipt to closing. |
|
Levy |
A legal seizure of property to satisfy a tax debt. |
|
Relief by Separation of Liability |
A taxpayer allocates (separates) the understatement of
tax (plus interest and penalties) on his or her joint return between the
taxpayer and his or her spouse (or former spouse). The understatement of tax allocated to the
taxpayer is generally the amount for which he or she is responsible. This type of relief is available only for
unpaid liabilities resulting from understatements of tax. Refunds are not allowed. |
Appendix
VI
Management’s Response to the Draft Report
The response was removed due to its
size. To see the response, please go to
the Adobe PDF version of the report on the TIGTA Public Web Page.
[1] See Appendix V for a glossary of terms.
[2] Unless otherwise stated, all days referred to in this report are calendar days.
[3] Basic qualifications for processing an Innocent Spouse claim include, but are not limited to, (1) filed a joint tax return, (2) properly signed the claim form, (3) made the claim for a tax year in which a tax return was filed, and (4) provided a valid Social Security Number.
[4] These would include the filing of levies and the initiation of judicial proceedings. IRS policy also considers withholding taxpayer refunds an inappropriate action.
[5] See Appendix V for a glossary of terms.
[6] Basic qualifications for processing an Innocent Spouse claim include, but are not limited to, (1) filed a joint tax return, (2) properly signed the claim form, (3) made a claim for a tax year in which a tax return was filed, and (4) provided a valid Social Security Number.
[7] Improvements Are Needed to Ensure Innocent Spouse Claims Are Accurately and Timely Processed (Reference Number 2003-40-136, dated June 2003).
[8] Unless otherwise stated, all days referred to in this report are calendar days.
[9] For 19 (15 percent) of the 129 Innocent Spouse claim files sampled, the Forms 8857 had already been returned to the taxpayers or forwarded to the appropriate functions for processing. As a result, we were able to perform a detailed analysis on only 110 (85 percent) of the 129 Innocent Spouse claims.
[10] These would include the filing of levies and the initiation of judicial proceedings. IRS policy also considers withholding taxpayer refunds an inappropriate action.
[11] See Appendix IV.
[12] See Appendix V for a glossary of terms.
[13] For 19 (15 percent) of the 129 Innocent Spouse claim files sampled, the Requests for Innocent Spouse Relief (Form 8857) had already been returned to the taxpayers or forwarded to the appropriate functions for processing. As a result, we were able to perform a detailed analysis on only 110 (85 percent) of the 129 Innocent Spouse claims.
[14] Unless otherwise stated, all days referred to in this report are calendar days.
[15] See Appendix V for a glossary of terms.
[16] Unless otherwise stated, all days referred to in this report are calendar days.