PRELIMINARY COLLECTION STEPS

The collection process begins when a tax return is filed at a service center, any one of 10 computerized installations around the country, whose sole function is to transcribe data from millions of tax returns to thousands of magnetic tapes. These magnetic tapes comprise IRS's master files, a nationwide listing of all taxpayers filing the same type of tax return and containing pertinent information on each taxpayer. For example, the individual master file (IMF) is for individual income taxpayers who file forms 1040 and 1040A and is arranged by alphabet and Social Security number. The business master file (BMF) lists all employers having employer identification numbers (KIN) and arranges each account by type of tax return filed. The BMF lists data for the 941,94O,1120, and 1065 type of returns.

The service center process involves these steps:

• All returns are batched into groups of 100 and examined personally by an IRS employee   for signatures, legibility, and accompanying checks.
• Data from the returns is transcribed onto computer tape through the Direct Data Entry   System (DDES).
• Information is then sent to the National Computer Center (NCC) at Martinsburg, West   Virginia.
• NCC tape information relating to accounts of taxpayers expected to have reason to   contact the Service is relayed back to the service center computers. These accounts are   considered to be "potentially active" and include taxpayers who didn't pay in full,   suspected nonfilers, and those who had an error on their return or other problem. This   information appears on computer screens in local IRS offices as part of IDRS, the   Integrated Data Retrieval System.
• The NCC also sends weekly updates back to the service center, where computerized   notices are printed and mailed to delinquent filers or delinquent payers.

Any tax return filed without sufficient payment represents an account receivable to the extent of the underpayment. All account receivables go through the notice process-a series of bills demanding full payment. The first notice alerts the taxpayer of the balance due on the account, plus any assessed interest and penalties. The date of the first notice is the date of assessment, and thus represents the taxpayers' official assessment notice. An assessment takes place when the IRS enters the taxpayer's corrected tax liability into its official records. Assessments are administratively made by an assessment officer at the service center who signs a Form 23-C, a summary register of all weekly assessments.

The assessment date is particularly important in the collection process. It not only establishes the beginning of the six-year statutory period for collections, but it also establishes the date of the IRS's statutory lien. (The federal tax lien will be discussed in more detail in Chapter 3. ) This is the routine procedure for delinquent accounts:

• The first notice is issued on the assessment date and identifies assessments of tax,   penalties, and interest.
• A second notice is issued five weeks later.
• A third notice is issued three weeks later.
• A fourth notice is issued four weeks later.
• If an outstanding balance still exists four weeks after the fourth notice, the computer   prints a TDA, or Taxpayer Delinquent Account. The TDA comprises the assignment for   collection action and is coded to contain information about the account, such as the   taxpayer's responses to the account, and a full transcript of account debits and credits.

While the above process is used in routine cases, the IRS will often bypass some of the notices if the taxpayer was previously delinquent or if the computer processing cycle becomes delayed. Thus, it is common for a taxpayer to receive only two notices.

All notices contain updated penalty and interest charges. The IRS provides a window envelope with the notices to direct the taxpayer's response to the appropriate service center. The first notice requests the taxpayer to send payment to or otherwise call the district office. The second notice is sent with Publication 586, The Collection Process, which briefly explains IRS collection procedures, and the steps necessary for contacting the IRS if full payment cannot be made. The fourth notice, often referred to as the final notice (previously called the "Final Notice Before Seizure"), is titled "Past Due Final Notice-Read Carefully." This notice warns the taxpayer that payment must be made promptly, otherwise:

...enforcement action can be taken at any time after 10 days from the date of this letter without any further notice to you. Salary or wages due you may be levied upon, as provided by section 6331 of the Internal Revenue Code, by serving a notice of levy on your employer. Bank accounts, receivables, commissions, or other kinds of income you have are also subject to levy. Property or rights to property, such as automobiles, may also be seized and sold to satisfy your tax liability.

THE DISTRICT COLLECTION OFFICE

Unless otherwise directed, the service center computer prints a TDA for any delinquency above an undisclosed dollar level. The IRS recognizes that below a certain level the costs of pursuing delinquent accounts are disproportionate to the amount recovered, so collection is deferred until the taxpayer either incurs another delinquency, thereby exceeding the deferred amount, or until the taxpayer receives a refund which offsets the liability. Internal IRS studies show that many small delinquencies are recovered in this manner before the six-year statute of limitations on collections expires.

The TDAs are shipped from the service center to the district office. Within five days of receipt, process reviewers in the district offices examine the TDAs to determine the best course of action; for example, deciding whether to initiate a levy or to contact the taxpayer. TDAs are grouped into "batches" which undergo a series of reviews before being assigned to a revenue officer or a revenue representative for contact and action.

The primary objective of the first review is to ensure that the final notice was issued within the previous 120 calendar days, to serve notices of levy where levy sources are available, and to find levy sources if none are immediately available. Many of the TDAs sent to the district office will already have computer printed notices of levy attached. These notices of levy are generated from three sources:

• If information is available from Combined Annual Wage Reporting (CAWR), a    preprinted levy is generated on the employer source showing the most wages. The    computer will also print a form, to be included with the TDA, naming other levy sources.
• When an installment arrangement is made with the taxpayer, up to two levy sources are    put into the IDRS data base.
• Levies also may be generated from information supplied on Forms 1099,1 099-lNT,    1087,1 087-lNT or other information documents.

IDRS has the capability to print out multiple levies, making it easy for a series of levies to be sent simultaneously on all the taxpayer's known levy sources although process reviewers are required to prevent this from happening.

Process reviewers also may telephone the taxpayer to collect full payment, negotiate an installment agreement, make an adjustment, initiate a payment tracer (many checks are sent without accompanying documentation to identify the proper account), or set up an office appointment. Perhaps most importantly, process reviewers must determine if the IRS should file a Notice of Federal Tax Lien on any account with an aggregate liability of $2,000 or more. The government must protect itself against the priority rights of other creditors and establish its priority by filing a Notice of Federal Tax Lien in the courthouse of the jurisdiction where the taxpayer lives. (A more complete explanation follows in Chapter 3). The tax lien filing determination must be made as soon as possible. If not made within 120 calendar days, the TDA must be transferred to revenue officers.

If the taxpayer is contacted during the batch reviews and the taxpayer promises to pay, the case remains in the collection office function for monitoring. If there is no promise to pay, an interview is arranged to determine the delinquent taxpayer's intent and to review his financial status by securing a Collection Information Statement (Form 433-A). This statement helps determine the taxpayer's true ability to pay. The statement is also valuable to the collection employee because taxpayers are required to reveal levy sources, such as their place of occupation and banking, the makes and models of their automobiles and whether they own a home. If an installment arrangement is made and the taxpayer subsequently defaults, a Notice of Levy is sent to attach the income sources listed on the Collection Information Statement. If the collection information statement reveals that the taxpayer is unable to pay, the collection employee may recommend suspending collection action until the taxpayer's financial situation improves. Taxpayer contacts and levies may satisfy a number of accounts and installment agreements. Routine individual accounts that are not closed within three reviews are usually referred to revenue officers for collection.

THE FIELD COLLECTION OFFICE

Accounts which cannot be collected or resolved by the collection office methods are referred to the field offices. Some cases are referred directly to field collection if they are too complex or too large for collection office employees. These difficult cases usually involve such problems as bankruptcies, decedent's estates, penalty assessments against responsible corporate officers for failure to withhold and pay over employee withholding taxes, and suspected narcotics traffickers.

Taxes are collected in the field offices by revenue representatives and revenue officers. The difficult and large dollar cases are handled by revenue officers who possess a wide range of authority and discretion. They may collect or abate delinquent accounts, seize and sell property, impose and enforce major penalties for noncompliance with revenue laws, and recommend account compromises for less than the balance due. They are charged with protecting the government's revenue by any means necessary, including filing a Notice of Federal Tax Lien, initiating a lawsuit, or making an immediate seizure when tax collection is in jeopardy.

The revenue officer also possesses a wider range of investigative tools than are available to private bill collectors. Revenue of officers are trained to research property records and determine property ownership rights, as well as issue summonses against taxpayers or third parties to compel either the acquisition of information or the production of books and records. In addition, revenue officers are able to obtain information from a myriad of sources, both inside and outside the government.

When a revenue of officer first receives a case he must review the history sheet to determine what actions transpired between the collection office employee and the taxpayer. All correspondence usually is attached to the TDA and a synopsis of conversations with the taxpayer usually are recorded on the history sheet.