IRS offset program: a case study.

Since the Business Master File offset program was resumed, Phillips Petroleum Company has spent considerable time and effort attempting to clear up problems caused by the automatic application of various overpayments to amounts due for different types of taxes and for different tax periods. In addition, considerable time and effort have been spent on the part of IRS personnel in the Oklahoma City District and in the Austin Service Center in getting automatic offsets reversed and straightened out. Although the IRS Service Center and Large Case Examination staff have been helpful, they are becoming as frustrated as the taxpayers in correcting the administrative problems the offset program is creating, particularly for "large case" taxpayers.

There have been a number of occasions since the program was reinstated on which offsets between different types of tax and tax periods have been made on Phillip's account. In none of those instances, was Phillips given a notice to pay the amount due before the offset was made. In addition, whenever the full amount due was completely satisfied with a tax overpayment from another type of tax or period, Phillips never received notice that the amount was even due or that it had been satisfied by an offset in a timely fashion.

Another problem related to this is that over the past year, many of the notices sent to Phillips were not received until after the 10-day period allowed for a response, with some being received more than two weeks after the date on the notice.

The problems and frustrations being experienced by Phillips with the offset program can be illustrated by the following example:

* The IRS conducted an examination of a partnership named "Company M" for 1987, of which a subsidiary included in Phillips's consolidated U.S. income tax return held a 25-percent interest. As a result of the examination, Phillips's share of the tax underpayment was determined to be $837.20.

* In June 1991, the IRS Team Coordinator assigned to Phillips's case on the current examination asked whether the taxpayer preferred (i) to pay the tax due of $837.20 associated with the Company M partnership examination for 1987, or (ii) to keep the partnership statute of limitations open and include the amount due with the results of the Phillips's examination.

* Phillips advised the IRS that the amount due would be paid when the notice was received. In early July, the IRS Team Coordinator contacted Phillips to report that the assessment had been made on June 24, 1991, and a notice should be expected on the same day.

* Phillips did not receive a notice of amount due and, in August, requested that the IRS Team Coordinator follow up with the Austin Service Center about why a notice had not been issued as requested.

* The IRS Team Coordinator was informed by the Phillips's problem resolution contact at the Austin Service Center that no notice was issued because a credit from the March 1991 Form 941 module had been applied to the tax assessed on June 24, 1991, that related to the 1987 Form 1120 module. The effective date of this offset was April 30, 1991. Assessed related interest of $287.67 had been partially offset on June 24 by the remainder of the March 1991 Form 941 credit of $274.96, leaving a balance of $12.71 which was itself offset, effective on December 31, 1990, by a credit from the June 1986 Form 720 module.

* Phillips requested the IRS Team Coordinator to follow up again with Phillips's contact at the IRS Service Center in Austin to reverse all the offsets that had been made, and to send the appropriate notice of the assessment to Phillips so payment could be made as originally agreed.

* The IRS Team Coordinator worked with the Austin Service Center and informed Phillips on August 19, 1991, that all the credits applied through automatic offset had been reversed in the appropriate modules and tax periods, and that the notice should be issued as originally agreed.

* Several more weeks elapsed, however, and Phillips still had not received a notice to pay, so another call was made to the Team Coordinator. The Team Coordinator suggested direct contact be made by Phillips with the Austin Service Center to determine why a notice had not been issued.

* The Phillips's contact at the IRS Service Center was called. The contact printed a copy of the module to make sure it had been properly reversed and found it had. The contact also found, however, that a nonpayment penalty had accrued for $12.56, since the assessment was made on June 24, but now was not satisfied due to the reversal of the automatic offset.

* On September 13, 1991, Phillips received a copy of the transcript printed September 6, reflecting a balance of $837.20 in tax, plus accrued interest and penalty, totaling $1,163.61. The transcript was accompanied by a note from the Service Center apologizing that Phillips had not received a notice of the amount due.

* The Phillips's contact at the Austin Service Center and the Team Coordinator were called and asked why Phillips had received no notice of the underpayment and had not opportunity to pay before the offset was made. The company also asked what the impact would later be from the offset confusion if there is a later determined deficiency on the 1987 examination of Phillips. That is to say, would the nonpayment within 30 days of the assessment made on June 24, 1991 (with respect to which Phillips received no notice of due to the automatic offset program) cause a "triggering" of the hot interest provisions under section 6621(c) on a subsequently determined deficiency?

* The Service Center contact and Team Coordinator expressed frustration with the offset program, but indicated they could not do anything about it. They also told the company that they did not know the answer to the question about the impact of the offset problem on the section 6621(c) trigger date. The IRS Service Center contact stated, however, that a suggestion had submitted to exempt large-case taxpayers from the automatic offset program because the IRS spends so much time reversing manually what the computer offsets automatically. The Team Coordinator suggested that this may be a good topic for a Quality Team made up of both IRS and Taxpayers to address.

* Phillips requested the IRS send a notice of the amount due so payment would not have to be made off of a copy of the 1987 transcript that had been received. The Service Center contact said she would have to call back since it would be necessary to send a manually typed notice, which itself required additional management approvals.

* In the meantime, on September 23, 1991, a computer generated notice was issued stating the amount past due of $1,165.82 (inclusive of related interest and penalty) had not been received, and that a notice of federal tax lien was now being considered if payment was not received within 10 days.

* The Service Center contact called and reported that the notice dated September 23, 1991, could be ignored. The contact told the company that it would receive a notice dated September 24 for tax of $837.20, plus interest of $316.07, that was manually prepared with the $12.55 penalty abated. It was explained that the notice had to go through four levels of approval, which took a day and a half, to get permission to do this.

* On September 26, 1991, the manual police was received by Phillips and was timely paid.

The foregoing example is not the only time Phillips has been frustrated by the IRS's automatic offset program, but it certainly illustrate why the IRS should listen to taxpayers' concerns. In this case, to collect $837.20 -- which the taxpayer was ready and willing to pay -- the IRS incurred a considerable amount of unnecessary cost and caused the taxpayer to do the same in trying to pay it before even being advised that an offset had been made. Furthermore, the expense to both the IRS and Phillips would have been significantly greater if it were not for the cooperation Phillips receives from the company's problem resolution contact in the Austin Service Center.

The problems encountered with the offset program, in the specific case described above, were discussed with the IRS Case Manager and Team Coordinator assigned to the current examination of Phillips Petroleum Company. It was agreed there were problems with the program that needed to be addressed and that a cooperative effort between the IRS and an organization such as TEI should be considered. Reprinted on the previous page is the memorandum written by the IRS Examination Case Manager to his Large Case Examination Branch Chief, which summarizes the problems encountered with the offset program, along with a recommendation to form a joint quality team with the IRS and TEI representatives to develop a solution.