A federal tax lien (FTL) protects the government’s interest by attaching a claim to the taxpayer’s assets for the amount of unpaid tax liabilities. The Internal Revenue Service (IRS) Restructuring and Reform Act, Pub. L. No. 105-206, 112 Stat. 685 (1998) [RRA 98], and Internal Revenue Code 26 U.S.C. § 6320 (1986) require the IRS to notify taxpayers that a FTL has been filed. Additionally, taxpayers may request a hearing with the IRS if they believe that the FTL is not appropriate. These new requirements became effective on January 18, 1999.

The Treasury Inspector General for Tax Administration is required by 26 U.S.C. § 7803(d)(1)(A)(iii) (1986) to determine annually if the IRS is complying with the new FTL requirements. The overall objective of this audit was to evaluate the IRS’ Fiscal Year 1999 compliance with the new FTL requirements, 26 U.S.C. § 6320 (1986), set forth in the RRA 98.

Generally, taxpayers were sent the RRA 98 lien notice. However, during the initial implementation period, the IRS was not consistently implementing RRA 98 FTL provisions and the associated IRS procedures. As a result, the IRS was not always informing taxpayers and their representatives of the taxpayers’ right to a hearing once a FTL is filed. Also, existing IRS management information systems do not measure compliance with the new RRA 98 FTL notification requirements.

The IRS must be more diligent in notifying taxpayer representatives, spouses, and business partners of lien filings; mailing all notices timely; processing returned notices correctly; and properly documenting actions taken in each case.

We reviewed 473 cases, of which 157 cases (33 percent) involved 176 potential violations of taxpayer rights. The majority of the potential taxpayer rights violations were in the following two areas:

• For 78 potential taxpayer rights violations, the taxpayer representative (e.g., accountant, attorney, etc.) was not sent a RRA 98 lien notice. Generally, taxpayers were receiving the RRA 98 lien notice even if the taxpayer representative was not. IRS procedures require that taxpayer representatives be sent a copy of the RRA 98 lien notice when a FTL is filed against a taxpayer they represent.
• For 62 potential taxpayer rights violations, the RRA 98 lien notices were not mailed to taxpayers within 5 business days of the FTL filing, as required by 26 U.S.C. § 6320(a)(2) (1986). No RRA 98 lien notice was late by more than seven days. IRS management revised the guidelines regarding how to measure timeliness after our case review period. The new guidelines to measure timeliness may not protect the government’s interest.

Also, documentation of late requests for FTL hearings was not being maintained and undeliverable RRA 98 lien notice procedures were inefficient and incomplete.

In addition, existing IRS management information systems do not measure compliance with the new RRA 98 FTL notification requirements. Without a compliance measurement process, the IRS will not be able to ensure taxpayer rights are not violated when a FTL is filed and may continue to implement the new RRA 98 provisions and associated IRS procedures inconsistently.

This report includes two recommendations. First, IRS systems should be changed to automate the reissuance of undeliverable RRA 98 lien notices and the sending of RRA 98 lien notices to all responsible taxpayers. Second, procedures should be revised to ensure that the government’s interest is protected, returned mail is completely researched and processed efficiently, adequate documentation is kept, and existing IRS management information systems measure compliance with the new RRA 98 FTL notification requirements.

Management’s Response: The Assistant Commissioner (Collection) and the Assistant Commissioner (Customer Service) agreed with our recommendations and have agreed to take corrective actions. Management's comments have been incorporated into the report where appropriate, and the full text of their comments is included as Appendix VI.