IRS Early Interaction Initiative

The IRS has launched its "Early Interaction Initiative," to quickly identify and intervene with employers that miss a scheduled federal tax deposit. The point of the program is to flag the employer immediately when a deposit is missed, rather than continue to work such cases as the IRS has done for many years -- by waiting until the problem has grown to unmanageable size and until there is room in a revenue officer's inventory to address the case. The old approach often meant years would go by between when the employer started falling behind and when the IRS would begin enforcement efforts. The problem is significant; as the IRS new release points out, "[t]wo-thirds of federal taxes are collected through the payroll tax system." The IRS will often pay refund claims by employees claiming credit for withholding that the IRS doesn't succeed in collecting from employers. The result is a "double-whammy" to the Treasury, paying out money they never collected.

In the past, employment tax cases have received the same treatment as other cases: The computer sends notices about the unpaid balances until the total balance gets large enough for the case to be assigned to a revenue officer. But with the continued budget cuts to the IRS, experienced revenue officers are retiring and leaving the Service at an alarming rate. There is now a clear shortage of revenue officers of sufficient grade to work large balance employment tax cases, with the result being that such cases sit unworked, often for years at a time. If the case sits for too long, the IRS will miss out on the limited time they have to assess the Trust Fund Recovery Penalty against persons responsible for the missed deposits. Further, they may miss a significant portion of the ten years they have to collect the unpaid taxes. The new Initiative is designed to reduce the delay between when an employer falls behind and when a revenue officer shows up at the business' door. But with the staffing and inventory-control problems already wreaking havoc, will it work?

Several years ago, the IRS launched a pilot program to experiment with early intervention. One of the offices that participated was the field office in Fairfax, Virginia. Although higher grade revenue officers expressed approval for the intent of the new program, they also recognized that more time spent reviewing cases that came up under the initiative also meant less time working cases already in their inventory, which meant less effort spent collecting the large balances already owed to the IRS and more time out in the field talking to employers who had only missed a single federal tax deposit. This problem does not appear to have been addressed between the end of the pilot program and the launch of the initiative.

Revenue officers have told us that cases assigned to them under the Initiative are worked like any other case, but they get fast-tracked in the inventory control system so that work begins more quickly. In other words, a small balance-due case resulting from a missed deposit can be given higher priority than an employer who has been behind for years and owes millions of dollars in federal employment taxes. And once the revenue officer begins work on the newer, smaller case, he or she is required to work that case like any other case in their inventory. A higher-grade revenue officer (authorized to work on larger unpaid balance and higher complexity cases) spending their time running around town talking to employers who have been a day late on a relatively small federal tax deposit is a waste of talent and resources, taking them away from working on collecting millions of dollars owed to the IRS. This is likely to contribute to the moral problems already existing in an understaffed, overworked, and politically-maligned organization. But if the Initiative is effective at preventing a multi-million dollar case from being created, then perhaps it is resources well-spent.

Categories: Haynes Tax Law Blog

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