Estimating the Impact of Liens on Taxpayer Compliance Behavior and Income

1. Estimating the Impact of Liens on Taxpayer Compliance Behavior and Income Taxpayer Advocate Service Research & Analysis June 2012

2. When the IRS sends a tax assessment and a taxpayer does not pay in full within 10 days, IRS may file a NFTL. IRS must file a NFTL in the appropriate location, such as a county register of deeds. NFTL establishes the priority of the government’s interest in a taxpayer’s property. NFTL places third parties on notice. IRS uses Notice of Federal Tax Lien (NFTL) to facilitate the collection of unpaid tax debts. TAS, Research and Analysis

3. The National Taxpayer Advocate is concerned that lien filings, which are often harmful to taxpayers, have increased without corresponding increases in collections. TAS, Research and Analysis

4. Taxpayers’ payment behavior with respect to the original liabilities incurred in 2002; Taxpayers’ payment compliance in subsequent periods; Taxpayers’ filing compliance in subsequent periods; and Taxpayers’ income in subsequent periods. Research objectives are to determine the impact of IRS lien filing on: TAS, Research and Analysis

5. Research Methods Initial statistical concern: selection bias due to nonrandom filing of tax liens. Addressed by: • Matching approach selected: propensity score matching • Rosebaum and Rubin (1983) • M. Caliendo and S. Kopeinig (2008) • Matching algorithm, nearest available neighbor method, • “Greedy” Algorithm, Kosanke and Bergstralh, Mayo Clinic • SAS program TAS, Research and Analysis

6. Research Methods Taxpayers … • Incurred unpaid tax liabilities in 2002 and had no such liabilities at the beginning of 2002. • Received NFTL between 2002 and 2004. • Comparison Group: no NFTL filed. TAS, Research and Analysis

7. Research Methods Two Phase Analysis • Phase 1 • Logistic regression estimated the propensity for filing a tax lien. • The propensity score variable was used for our matching algorithm. • All taxpayers have a propensity score value in our analysis. • Variables were derived from IRM sections on lien filings. TAS, Research and Analysis

8. IRM NFTL Filing Criteria (in model) • The aggregate unpaid balance of assessment (UBA) is $5,000 or more. • Other indications of non-compliance. • IA that is not guaranteed, streamlined, or in-business. • Currently not collectible. • Property exempt by bankruptcy. TAS, Research and Analysis

9. IRM NFTL Filing Criteria (in model) • Case is closed as a hardship (UBA>=$5,000). • NFTL filed and new liabilities (UBA>=$2,000). • Consider lien filing in any situation where taxpayer has broken a promise. TAS, Research and Analysis

10. Research Methods Two Phase Analysis • Phase 1: • Performed match on propensity scores. • Developed comparable lien and non-lien groups. • Mitigated selection bias issue by establishing a matched set of comparable lien and non-lien cases. TAS, Research and Analysis

11. Research Methods • Phase 2: Compared lien group to non-lien group. Developed logistic regression equations. Used three categories of independent variables • Individual taxpayer (TP) characteristics • Income information • IRS audit and collection activities TAS, Research and Analysis

12. Research MethodsTax Compliance Models • Current Payment model investigated lien’s impact on probability of taxpayer making sufficient payments during study periods to reduce original liability incurred in 2002. • Future Payment model investigated impact of lien on the probability of the taxpayer staying compliant with his payment of tax liabilities in all periods subsequent to 2002. TAS, Research and Analysis

13. Research MethodsTax Compliance Models • Future Filing model investigated the tax lien’s impact on the taxpayer’s timely filing behavior during the study period. • Future Income model investigated the impact of liens on the taxpayer’s future income, measured as change in the taxpayer’s total positive income between the beginning and the end of the study period. TAS, Research and Analysis

14. Phase 2 Tax Lien Results Taxpayers with a NFTL were: • Less likely than comparable taxpayers without liens to reduce their 2002 liabilities. • Less likely to timely file required returns after 2002. • Less likely to generate greater total positive income after 2002. • More likely to pay subsequent liabilities. TAS, Research and Analysis

15. Phase 2 Tax Lien Results • Marginal effects (point estimate) show the impact of tax liens on the probability of the outcome measures. TAS, Research and Analysis

16. Research Limitations • Due to data limitations, not all lien filing criteria in propensity model. • No lien or non-lien cases exist in the top ten percent of propensity scores and few lien or non-lien cases are in the next five percent of propensity scores. • Two matches of lien cases against the sample of non-lien cases were performed. • Matched cases have some non-lien cases used twice and have a weight of two. TAS, Research and Analysis

17. Future Research • Consider only events which occurred before NFTL filing. • Remove CNC taxpayers from the analysis. • Develop models with economic indicators (e.g., state unemployment rates). • Investigate when NFTLs are likely tobe most effective as a collection tool. TAS, Research and Analysis

18. Estimating the Impact of Liens on Taxpayer Compliance Behavior and Income Taxpayer Advocate Service Research & Analysis June 2012