RESEARCH STUDY #1:
The IRS Can Systemically Identify Taxpayers at Risk of Economic Hardship and Screen Them Before They Enter Into Installment Agreements They Cannot Afford
The IRS should implement an economic hardship indicator on taxpayer accounts when estimates of a taxpayer’s ALEs and income indicate the taxpayer is not likely to afford a streamlined IA. If the indicator shows the likelihood of economic hardship, procedures would direct the IRS to perform a basic financial analysis before entering into the IA to ensure the taxpayer can afford it without causing additional financial hardship and potentially triggering unnecessary defaults.
The IRS currently uses analytics (considering factors known through internal sources) when prioritizing and assigning collection work to the optimal work stream. We also offer a wide range of alternatives for taxpayers who may be facing difficult financial circumstances, including Partial Pay Installment Agreements, temporary suspensions of collection activity (for Currently Not Collectible accounts), and Offers in Compromise.
TAS has proposed a computation using the IRS Allowable Living Expenses (ALEs) to attempt to indicate when a taxpayer has income not in excess of their likely basic living expenses. If a likelihood of economic hardship is indicated, TAS further recommends procedures directing the IRS to perform a basic financial analysis before entering into an installment agreement to ensure the taxpayer can afford it without causing additional financial hardship and potentially triggering unnecessary defaults. The concept of 44 making such a computation a part of the installment agreement acceptance decision is an interesting one, and we have explored this concept in the past and have been engaged with TAS on this issue. We appreciate that our feedback has been heard and is reflected in the NTA’s 2020 Annual Report.
We do not believe income and presumed expenses alone would be sufficient to conclusively state that a taxpayer could not meet the proposed agreement, and the TAS recommendation seems to acknowledge that concern. The computation would not dictate the case outcome, but rather would be used to indicate a need for further inquiry into the taxpayer’s financial condition.
One key concern is that such a practice would lead to more taxpayers being subjected to financial analysis interviews, an often lengthy process which could greatly reduce the number of taxpayers the IRS is able to serve. In light of this concern, further research is necessary in order to determine the utility of TAS’s recommendation, including analysis of the results as they relate to the IRS decision on all types of installment agreements and Currently Not Collectible determinations, extending the analysis to determine the long-term performance of installment agreements and Currently Not Collectible determinations, analysis of the costs and savings associated with developing and implementing the change, and analysis of the performance of existing IRS analytics (like the CFO Recovery Model6) in place of creating a new computation.
We will continue to partner with TAS on this issue, but believe further analysis of the concept and its wider impacts is warranted before we can determine whether such a change would benefit taxpayers and the IRS. Accordingly, we decline to implement the TAS recommendation.