TAS Act Would Require the IRS to Proactively Notify Taxpayers at Risk of Economic Hardship

On January 30, 2025, Senator Mike Crapo, chairman of the Senate Finance Committee, and Senator Ron Wyden, the Committee’s ranking member, introduced a discussion draft of the Taxpayer Assistance and Service Act (TAS Act). This broad and sweeping bill seeks to improve tax administration and address long-standing challenges faced by taxpayers.

One provision of the discussion draft is Section 108, which would require the IRS to identify taxpayers who may be at risk of economic hardship and proactively notify them about relief options. The TAS act would require the IRS to notify taxpayers at risk of economic hardship.

What is Economic Hardship

Taxpayers face economic hardship if the payments they must make toward their tax debt would leave them unable to pay their reasonable basic living expenses such as food, housing, utilities, and healthcare. Although existing laws, regulations, and policies include protections for taxpayers in these circumstances, those protections are helpful only when taxpayers and IRS assisters know to check if the taxpayer qualifies for that relief. Taxpayers may enter into payment arrangements that are not sustainable, exacerbating their financial difficulties and leaving them more vulnerable to collection actions. This problem is particularly acute for low-income taxpayers, many of whom already struggle to make ends meet. Without proactive notification from the IRS, these taxpayers may remain in the dark about alternatives that could help them manage their debt and avoid economic distress.

While the IRS has sufficient financial data on most taxpayers to reasonably estimate their financial condition, the IRS does not use this information to proactively notify taxpayers about their risk of economic hardship and the collection alternatives that may be available to them. The TAS Act provision would be an important step toward ensuring taxpayers have that information.

Many Potential Uses

The TAS Act would direct the IRS to phase in the use of this provision. After the IRS develops a method to reliably identify taxpayers who are at risk of economic hardship and have an unpaid tax debt, the first application of the program would be to provide such taxpayers with information on other collection alternatives when they request to set up an installment agreement, such as offer in compromise, partial payment installment agreement, or currently not collectible status.

The TAS Act provision then requires the IRS to prepare a report, in consultation with the National Taxpayer Advocate, on the accuracy of the program and how the IRS could apply it to other uses.

The First Application: Installment Agreements

With a phased-in approach, installment agreements are a logical starting point since many taxpayers who owe back taxes use them. However, the most frequently used type of installment agreement – “streamlined” installment agreements – do not require the IRS to undertake a financial analysis of the taxpayer’s situation before entering into the agreement.

In fiscal year 2024, taxpayers entered into over 3.3 million streamlined installment agreements. My office estimates that about 36 percent of taxpayers who entered into streamlined installment agreements through the IRS’s Automated Collection System in fiscal year 2024 were at potential risk of economic hardship, i.e., potentially unable to meet their reasonable basic living expenses. Many of these taxpayers would likely have benefited from alternative collection options, such as an offer in compromise or a partial payment installment agreement, if they had known to pursue them.

How the IRS Can Identify Taxpayers at Risk of Economic Hardship: Taxpayer Advocate Service Algorithm

Implementing this provision of the TAS Act would not require the IRS to invent a formula from scratch. The recipe is already available. The Taxpayer Advocate Service has developed an algorithm that analyzes taxpayers’ risk of economic hardship by using income data from prior years and comparing it with the IRS’s published schedules of allowable living expenses. In a 2020 study, the Taxpayer Advocate Service algorithm assessed installment agreement applications that required financial analysis and came to the same conclusion as the IRS’s determination 82 percent of the time. In a 2018 evaluation of the algorithm, when the sample excluded non-streamlined installment agreements where no financial information was found in the case file, the Taxpayer Advocate Service algorithm matched the IRS’s determination 95 percent of the time. The algorithm is an effective tool for flagging taxpayers who may need assistance, without requiring the IRS to reinvent the wheel.

Under Section 108, once the IRS develops a reliable method for identifying these taxpayers, it would begin sending proactive notification when taxpayers request installment agreements. This notification would provide information on other options such as offer in compromise, partial payment installment agreements, or currently not collectible status.

Taxpayers Have the Right to Be Informed

The Taxpayer Bill of Rights includes the right to be informed and the right to a fair and just tax system, the latter of which includes the “right to expect the tax system to consider facts and circumstances that might affect their underlying liabilities, ability to pay, or ability to provide information timely.” The IRS in its Strategic Operation Plan commits to providing taxpayers with “proactive alerts” that “help them meet filing and payment obligations, understand opportunities to claim certain tax incentives and learn about life changes that could impact their taxes.”

It is worth emphasizing that the algorithm in the TAS Act is not meant to produce definitive conclusions as to any taxpayer’s financial situation. The IRS would still need to analyze the taxpayer’s unique economic circumstances before making an actual determination of economic hardship or entitlement to certain collection alternatives. What the TAS Act would require is that the IRS take reasonable steps to identify and flag taxpayers who may be at risk of economic hardship so that both taxpayers and IRS assistors appropriately consider the taxpayer’s financial circumstances. At that point, taxpayers can provide additional information and the IRS can determine whether the taxpayer qualifies for relief.

When taxpayers are informed about their options, they are more likely to make well-informed decisions and enter payment arrangements that they can sustain. By proactively identifying those at risk of hardship and providing them with the necessary information, the IRS can help taxpayers avoid the financial pitfalls that often come with tax debt. This proactive approach also benefits the IRS. By ensuring that taxpayers have access to the right relief options, the IRS can reduce the number of delinquent accounts and the need for costly and time-consuming enforcement actions. As a result, the IRS will expend fewer resources pursuing cases that could have been resolved earlier with the right information.

Bottom Line

People facing difficult economic circumstances should not have to choose between paying tax debts and paying their basic living expenses and deserve to be informed about relief options available to them. Section 108 of the draft TAS Act provides a reasonable approach for notifying vulnerable taxpayers about the relief they may qualify for. Once the IRS has implemented the algorithm and applied it in the context of installment agreements, the next steps will be to consider how to expand the tool to other uses.

When taxpayers know what relief and options are available to them, they can enter into payment arrangements that are realistic and that they can stick with. This helps bring taxpayers into compliance and eventually eliminate the stress of tax debt from their lives. It also helps the IRS allocate its resources more efficiently and minimize time pursuing delinquent accounts. Ultimately, it’s a step towards making the tax system more accessible for all. The TAS act would require the IRS to notify taxpayers at risk of economic hardship. This is a win-win.

Resources

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Source: taxpayeradvocate.irs.gov