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IRS Pauses Automated Substitute for Return Case Selection

Posted on September 28, 2017 by William Hoffman

The IRS has paused selection of new cases for its automated substitute for return (ASFR) program because of resource constraints, the agency confirmed to Tax Analysts September 27.

“Like many operations across the IRS, work on the ASFR program has been affected by resource limitations,” the IRS statement said. “These resource constraints have forced us to make difficult decisions, even on programs that provide clear benefits to tax administration.”

The IRS said it is continuing to work on active ASFR cases and ASFR reconsiderations. “In addition, we are committed to taking many actions in 2018 to improve methods of allocating nonfiler cases across our potential compliance treatment streams, and this includes the ASFR program,” it stated.

The IRS statement partially confirms a September 26 post on the Procedurally Taxing blog reporting that a Treasury Inspector General for Tax Administration official had announced suspension of the ASFR program. The post was authored by Carlton M. Smith, a retired professor from the Benjamin N. Cardozo School of Law.

Smith told Tax Analysts that Matthew Weir, assistant inspector general at TIGTA, told a New York County Lawyers’ Association seminar September 26 that the IG hesitated to make public the ASFR shutdown for fear of disclosing information to potential tax evaders. But Weir told the group that TIGTA believed the ASFR shutdown news was too important to keep quiet, Smith said.

Another TIGTA official confirmed that the agency plans to issue a report on the ASFR program, probably in October.

The ASFR program produces automatic tax return filings for individuals whose income reported to the IRS indicates a responsibility to file. The system calculates payments and liabilities, and it produces a letter to the taxpayer with the result. The IRS produced 184,776 ASFRs in fiscal 2015, according to National Taxpayer Advocate Nina Olson’s 2016 annual report to Congress.

The IRS said in its statement that the goal of its nonfiler strategy “will be identifying productive nonfiler work that maximizes cases worked while minimizing staff resources and promoting continued filing compliance through programs built to encourage voluntary taxpayer filing and payment.”

Reprogramming ASFR

Olson told Tax Analysts that she hopes the IRS will use the ASFR case selection pause as an opportunity to address some of the program’s deficiencies.

“To me, it’s a rational business decision with a compelling business case to put the program on pause, except for the most egregious, outlying cases,” Olson said. “And then have a really quick, laser-like focus on how to do better filters and then put it back up online, much improved from the taxpayer’s perspective and the IRS’s perspective.”

Olson said she suggested an ASFR pause to IRS Commissioner John Koskinen and that she also met this year with an IRS executive-candidate to discuss the ASFR program. Other agency executives also were discussing the issue, she said.

The Taxpayer Advocate Service declared the ASFR program one of its “Most Serious Problems” in its 2015 annual report to Congress, complaining that the program’s case selection criteria imposed undue burdens on taxpayers and created extra work for the IRS.

The ASFR system appears to be programmed to assume as much as possible in favor of the government’s position, not taking into account deductions, dependency exemptions, or credits that might lower a taxpayer’s final bill, Olson wrote in her 2015 annual report. The IRS ends up wasting money because so many ASFRs are appealed, she wrote.

Olson told Tax Analysts that while it is difficult to make definitive cost-benefit analyses given available IRS data, the ASFR program collects only about one-third of taxes assessed, while almost one-third of assessments are abated. “The cost of the program sort of dwarfs the [revenue] of the program,” she said.

Return on Investment?

Smith said the ASFR program holds taxpayers whose income exceeds a specific threshold to their obligation to file a tax return, but he wondered whether ending the program would save more money than it produces. “I can’t say how many dollars of IRS employee time generates how much revenue out of this program,” he said.

Frank Agostino, president of the tax controversy firm Agostino & Associates, who was in attendance for Weir’s remarks September 26, agreed that there is some question about the ASFR’s return on investment. But there is no dispute about the value of IRS information reporting and matching to keep small business owners and other independent taxpayers honest with their tax obligations, Agostino said, noting that the tax compliance rate of those workers is a fraction of wage workers’, whose income is reported by employers on Form W-2 and matched by the IRS. 

Smith concurred. “It’s certainly educational when [taxpayers] get a [30-day substitute for return] letter,” he said. “It scares them often. And often the letters get ignored, which results in penalties.” 

Agostino said the IRS should consider looking elsewhere to save resources in light of its budget cuts. “I understand that there’s no money, and you’ve got to always make choices,” he said. “But not filing a return, which is what the [ASFR] program was designed to capture, is low-hanging fruit. Not reporting all of your credit card sales is the low-hanging fruit.”