Agreements and streamlined installment agreements – Taxpayers are
entering into agreements they cannot afford.
Taxpayer Advocate (September, 2017)
has posted concerns about
the disturbing long term effects on taxpayers entering into
installment agreements that prevent them paying basic living expenses.
The following are key
Taxpayers are routinely
entering into and making payments on installment agreements despite
having monthly income lower
than their Allowable living Expenses.
Collection alternatives (e.g., Offer in Compromise, installment
agreement, currently not collectible), should be designed to set a
taxpayer up for success in meeting tax obligations. This includes
paying current taxes.
The IRS Allowable Living Expenses do not adequately capture all
Installment agreements are the most common collection
alternative for taxpayers.
Installment agreements that disregard the taxpayer’s ability
to pay AND meet basic living expenses, is an agreement set up for
The “streamlined” installment agreement is the most
frequently used form of installment agreement (in fiscal year 2014, 94.9
percent of installment agreements were streamlined; in fiscal year
2016, 84.4 percent
of installment agreements were streamlined).
Using a Streamlined installment agreement means that
there is NO financial analysis and NO application of the Allowable
Living Expense “standards”. The IRS simply divides the balance due
by 72 or even 84 months. As
a consequence, the required monthly payment bears no relationship to
what the taxpayer can actually afford to pay.
Disturbing long term effects – study found that
40 percent of all taxpayers who entered into installment agreements in
2014 had income levels below their Allowable Living Expenses
– meaning those taxpayers could not meet their basic living
Over 400,000 taxpayer accounts in the study qualified for
Currently Not Collectible. Thus, payments to the IRS created economic
hardship. The taxpayer making payments were thus foregoing basic
living expenses (such as utilities, food and a place to live).
The study found that taxpayers who had gone through a financial
analysis (through the Advocates Office) to determine if the
taxpayer could actually afford the streamline installment agreement
payments (without foregoing basic living expenses) had a lower
default rate than taxpayers who had not. During this financial
analysis, consideration wass given to: the ability to pay basic living
expenses, whether there is sufficient
withholding to make sure current taxes are full paid, and that
self-employed persons have sufficient income to make their estimated
Taxpayer Advocate post
Agreements (IAs): TAS Study Finds Taxpayers Enter IAs They Cannot
this and next week’s blog, I will discuss my recent
Most Serious Problem on Installment Agreements (IAs) and the
Study that was published in my 2016
Annual Report to Congress. Today I will focus my concerns on IAs
and discuss the results of the study; in next week’s posting, I’ll
review the recommendations my office made to address the problems
identified in the study and the IRS’s response to our
taxpayers want to comply with the tax code and voluntarily pay their
taxes. The IRS collects 98 percent of taxes from timely and voluntary
tax payments and only two percent through enforced collection.
However, there are times when taxpayers find themselves unable to pay
their taxes. I recently blogged about
Allowable Living Expenses (ALEs) – it’s difficult to talk
about IAs without also talking about ALEs, as you will read with my
concerns about IAs – and a court case (Leago
v. Commissioner) where the taxpayer was behind on his taxes and
needed life-saving brain surgery. The IRS did not want to allow the
expense because the taxpayer was not currently paying for the surgery.
Here is a situation – a choice between life (or at the very least, a
life without serious disability) and paying taxes – that a taxpayer
should never face.
When a taxpayer cannot timely and fully pay their taxes, several options
exist to assist the taxpayer. Among possible collection
alternatives are offers in compromise (OICs),
or placing a taxpayer in currently not collectible status (CNC).
Collection alternatives should be designed to set a taxpayer up for
success in meeting tax obligations. When a taxpayer is placed in a
collection alternative that is inappropriate for the taxpayer’s
individual facts and circumstances, the IRS violates taxpayer rights,
and wastes its resources as a result of associated rework.
As noted earlier, ALEs and IAs go hand in hand. ALEs are used to
calculate a taxpayer’s ability to make IA payments. However, as
discussed in my recent blog on ALEs, I have many concerns about ALEs
and I do not think they adequately capture all necessary expenses.
Further, and borne out by the data uncovered by my research staff,
taxpayers are routinely entering into and making payments on IAs
despite having monthly income lower than their ALEs.
Taxpayers enter into more than 3,000,000 IAs per year, making IAs the
most common collection alternative for taxpayers who find themselves
unable to meet their full tax obligation. Offering IAs that are
affordable is necessary for promoting future compliance. Offering IAs
that disregard the taxpayer’s ability to pay and meet his or her
basic living expenses would set up such IA for failure, jeopardize the
to Privacy and his or her Right
to a Fair and Just Tax System, in addition to creating compliance
rework for the IRS.
For the study, TAS looked at the more than 3.4 million taxpayers who
entered IAs in calendar year (CY) 2014. TAS selected CY 2014 to be
able to see the picture of the future compliance behavior of these
taxpayers. The study focused on the following questions:
taxpayers who had an IA opened in CY 2014, what was their default
rate and subsequent compliance as of September 2016?
was the subsequent filing and payment compliance behavior of TAS
customers and non-TAS taxpayers who had an IA opened in CY 2010?
used information already available to the IRS, through its own
databases, to answer the study questions. For the first question,
through IRS databases we could identify taxpayers who entered into IAs
in CY 2014, the taxpayers’ total income from their 2014 tax returns,
and the ALEs permitted by the IRS for that period.
While answering the questions above, our research revealed much
information about taxpayers who enter IAs. One of the most concerning
results focused on taxpayers entering IAs that they cannot afford, by
the IRS’s own formula. I previously discussed ALEs in another
blog. The IRS uses ALEs to determine how much a taxpayer can pay
to the IRS via an IA after meeting their basic living needs. However
the most frequently used form of installment agreements is the “streamlined”
installment agreement. In Fiscal Year (FY) 2014, 2,857,043 out of
3,011,636 IAs (94.9 percent) were streamlined IAs; for FY 2016, 84.4
percent of the 3,115,404 IAs the IRS entered into were streamlined.
With streamlined IAs, there is no financial analysis and no
application of the ALEs. The IRS simply divides the balance due by 72
or even 84 months. The resulting required monthly payment bears no
relationship to what the taxpayer can actually afford to pay.
The IRS likes streamlined IAs because they are easier to implement
than a financial analysis and application of the ALEs to the taxpayer.
Moreover, because no complicated financial analysis is required, lower
graded Customer Service Representatives (CSRs), who have limited
training on financial statements, are able to place taxpayers into
streamlined IAs, “saving” the IRS resources. In FY 2016, nearly
one-third of all streamlined IAs were entered into by Toll-free CSRs.
Taxpayers also like streamlined IAs because they are quick to enter
into. But the long-term effects of taxpayers agreeing to streamline
IAs are very disturbing.
TAS research found that almost 40 percent of all individual taxpayers
who entered IAs in 2014 had income levels below their ALEs. For
taxpayers, this means they could not meet their basic living expenses
as determined by the IRS before paying the IRS, yet these taxpayers
still entered IAs.
Further, TAS research discovered that not only are these taxpayers
entering IAs they cannot afford; they are making payments on their IAs.
Over 400,000 taxpayer accounts identified in the study would qualify
for CNC status, meaning these taxpayers have income and assets that do
not allow them to make payments to the IRS at this time without
creating economic hardship for the taxpayers. Yet, of these accounts,
69 percent were resolved by the taxpayers actively making payments,
not through passive collection such as refund offsets. What basic
living expenses (utilities, food, and a place to live) are these
taxpayers foregoing to pay the IRS?
To answer the second study question, TAS research compared two
taxpayer populations: those whose IA was established concurrently with
a TAS IA case closed in CY 2010 (TAS customers) and those who
entered into an IA in CY 2010 without TAS involvement (non-TAS
taxpayers). To eliminate factors that may have led to selection bias
in the taxpayer comparison groups, such as prior compliance history,
TAS selected groups of TAS customers and non-TAS taxpayers who were
identical in income level, age, prior year compliance, tax balance
due, and additional factors.
Our research found that in the first two years after TAS service, TAS
customers were less likely to incur subsequent liabilities after their
IAs were initiated. In tax year (TY) one after service, TAS customers
were more than eight percent less likely to incur a further liability
and in TY two TAS customers were nearly seven percent less likely to
incur a further balance due. These results are statistically
significant. This suggests that TAS service positively influences
future compliance for the first two years following that service.
The study also found a difference in compliance with the IAs granted
for the TAS customer group versus the non-TAS taxpayer group. We
looked at default rates on IAs by year for the TAS customers and the
non-TAS taxpayers. TAS customers had lower default rates on their IAs
in all years and a statistically lower default rates in the second,
third, and fourth years after the IA was established. For instance,
TAS customers defaulted at a rate of 5.4 percent less than the non-TAS
What is the explanation for these results? First, even if a taxpayer
qualifies for a streamlined IA, TAS employees are required to review
the taxpayer’s financial data to ensure the taxpayer can actually
afford the monthly payment per the streamlined IA rules without
foregoing basic living expenses (ALEs). Second, TAS advocates educate
taxpayers on their responsibilities to continue making IA payments and
the responsibility to pay their current tax obligations. Third, our
advocates also ensure that wage earners have sufficient withholding
and that self-employed taxpayers have income sufficient to maintain
their estimated tax payments.
study and the associated Most
Serious Problem I have made recommendations to the IRS to help
reduce the default rates of IAs and ensure that taxpayers are entering
IAs that they can afford. In my next blog, I will explore the
recommendations and the IRS’s response to my recommendations.
blogs from the National Taxpayer Advocate can be found at www.taxpayeradvocate.irs.gov/blog.
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