Opportunities to Improve Timeliness of IRS Lien Releases
Gao ID: GAO-05-26R January 10, 2005Among the Internal Revenue Service's (IRS) many tools to collect outstanding taxes is its ability to use the property of a taxpayer as security for an outstanding tax debt. IRS exercises this power when it files a federal tax lien against the property of a taxpayer. As part of its tax collection activities, IRS reported filing more than 548,000 tax liens against taxpayer property in fiscal year 2003. Since a lien encumbers taxpayer property, IRS's ability to file a lien is a powerful tool in enforcing the tax laws. With this power, however, comes the responsibility to ensure that liens are released timely once taxpayers satisfy their tax debt. The Internal Revenue Code (IRC) addresses timeliness by requiring IRS to release liens within 30 days of the tax debt's satisfaction. If IRS fails to timely release federal tax liens, taxpayers can suffer undue hardship and burden. Because federal tax liens appear on commercial credit reports, (1) businesses may be unable to obtain necessary credit because lenders may assume they are bad credit risks, (2) individuals may miss an opportunity to buy a home or an automobile because they are unable to obtain financing, and (3) individuals may be unable to sell their home because of the presence of a tax lien on their property. Failure to timely release liens this conflicts with IRS's mission of providing top-quality service to the nation's taxpayers. This report discusses deficiencies we identified in IRS?s use of exception reports.
We found problems with IRS's use of three types of exception reports. First, IRS produces a weekly exception report for lien filings that fail to post to taxpayer accounts. The key is to timely resolve any items on the exception report so that the lien can be released. As of May 21, 2004, IRS had more than 8,500 liens that could not post to taxpayer accounts, 74 percent of which predated 2004. IRS produces a second exception report weekly when taxpayer accounts with liens have been fully satisfied and identified for lien release but the taxpayer accounts do not match accounts in IRS's lien system. We found that IRS was also not timely resolving these "unmatched exception reports" and, as a result, the number of unresolved lien cases from these reports had increased, from almost 1,800 at the end of 2003 to 3,180 by mid-June 2004. A third weekly exception report lists all taxpayer accounts identified for lien release that have manually calculated interest or penalties. We found that IRS was also not timely resolving items on this exception report. In addition to untimely resolution of lien cases on these exception reports, all of which ultimately affect the timely release of tax liens, we found that one report had a serious design flaw in that it was not cumulative, meaning that accounts from one week's report that were not resolved did not carry over to the following week's report. This flaw in the design of the unmatched exception report contributed significantly to the fact that 99 percent of the taxpayer accounts listed on the report at the end of 2003 were still unresolved as of the end of June 2004. We were unable to definitively quantify the extent to which IRS's failure to resolve cases showing up on these exception reports contributed to the overall number of liens IRS failed to timely release. Based on the nature of IRS's delays in releasing liens that we found in our fiscal year 2004 sample, however, we estimate that about 30 percent of the delayed releases likely resulted from IRS's failure to effectively resolve exception reports. IRS's inability to promptly resolve the lien exception reports has contributed to its inability to ensure that tax liens are timely released. This condition can negatively affect taxpayers, adversely affect IRS's mission of providing top-quality customer service, and result in noncompliance with the legal requirement that liens be released within 30 days after satisfaction of the related tax debt. Although IRS has begun to take steps to address untimely resolution of lien exception reports, critical steps remain to be taken and backlogs of unresolved exception reports remain to be resolved.
RecommendationsOur recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.
Director: Steven J. Sebastian Team: Government Accountability Office: Financial Management and Assurance Phone: (202) 512-9521GAO-05-26R, Opportunities to Improve Timeliness of IRS Lien Releases
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January 10, 2005:
The Honorable Mark W. Everson:
Commissioner of Internal Revenue:
Subject: Opportunities to Improve Timeliness of IRS Lien Releases:
Dear Mr. Everson:
Among the Internal Revenue Service's (IRS) many tools to collect
outstanding taxes is its ability to use the property of a taxpayer as
security for an outstanding tax debt. IRS exercises this power when it
files a federal tax lien against the property of a taxpayer.[Footnote
1] As part of its tax collection activities, IRS reported filing more
than 548,000 tax liens against taxpayer property in fiscal year
2003.[Footnote 2] Since a lien encumbers taxpayer property, IRS's
ability to file a lien is a powerful tool in enforcing the tax laws.
With this power, however, comes the responsibility to ensure that liens
are released timely once taxpayers satisfy their tax debt. The Internal
Revenue Code (IRC) addresses timeliness by requiring IRS to release
liens within 30 days of the tax debt's satisfaction.[Footnote 3]
If IRS fails to timely release federal tax liens, taxpayers can suffer
undue hardship and burden. Because federal tax liens appear on
commercial credit reports,
* businesses may be unable to obtain necessary credit because lenders
may assume they are bad credit risks,
* individuals may miss an opportunity to buy a home or an automobile
because they are unable to obtain financing, and:
* individuals may be unable to sell their home because of the presence
of a tax lien on their property.
Failure to timely release liens thus conflicts with IRS's mission of
providing top-quality service to the nation's taxpayers.
Every year since our audit of IRS's fiscal year 1999 financial
statements, we have reported on IRS's inability to consistently release
tax liens within 30 days of the tax debt's satisfaction, as required by
law. When we first identified the lack of timely release of tax liens
as a compliance issue, we recommended that IRS monitor the release of
tax liens to ensure that they were released within 30 days of the date
the related tax liability was fully satisfied.[Footnote 4] In our April
2004 report to IRS on the status of our financial management-related
recommendations, IRS agreed with us that this issue had still not been
effectively addressed.[Footnote 5]
Subsequently, we continued to find a high level of noncompliance with
the lien release requirements of the IRC during our audit of IRS's
fiscal year 2004 financial statements. In the first 9 months of fiscal
year 2004, IRS identified 103,000 taxpayers who had satisfied their tax
liability and should have had a lien released. Based on a statistical
sample of taxpayers who had resolved their tax debt during the first 9
months of fiscal year 2004, performed as part of our audit of IRS's
fiscal year 2004 financial statements, we estimated that 22 percent--
almost 23,000--of taxpayers with liens who resolved their tax debt in
fiscal year 2004 did not have their liens released within 30
days.[Footnote 6]
In our recent audit report on IRS's fiscal year 2004 financial
statements, we again highlighted the issue, and we identified as a
contributing factor IRS's failure to timely resolve problems noted on
certain lien exception reports. Lien exception reports are generated
when (1) lien data are transmitted from one system to another and the
data do not match and (2) accounts have manually calculated interest or
penalties. If used effectively, exception reports can serve as a
critical internal control to help IRS ensure that liens are accounted
for and timely released and that outstanding tax debt has been
collected before liens are released. If exception reports are not
resolved promptly, however, the lien release process is delayed.
This follow-on report discusses in greater detail deficiencies that we
identified in IRS's use of exception reports, and includes our
recommendations for corrective action.
Results in Brief:
We found problems with IRS's use of three types of exception reports.
First, IRS produces a weekly exception report for lien filings that
fail to post to taxpayer accounts. The key is to timely resolve any
items on the exception report so that the lien can be released. As of
May 21, 2004, IRS had more than 8,500 liens that could not post to
taxpayer accounts, 74 percent of which predated 2004. IRS produces a
second exception report weekly when taxpayer accounts with liens have
been fully satisfied and identified for lien release but the taxpayer
accounts do not match accounts in IRS's lien system. We found that IRS
was also not timely resolving these "unmatched exception reports" and,
as a result, the number of unresolved lien cases from these reports had
increased, from almost 1,800 at the end of 2003 to 3,180 by mid-June
2004. A third weekly exception report lists all taxpayer accounts
identified for lien release that have manually calculated interest or
penalties.[Footnote 7] We found that IRS was also not timely resolving
items on this exception report.
In addition to untimely resolution of lien cases on these exception
reports, all of which ultimately affect the timely release of tax
liens, we found that one report had a serious design flaw in that it
was not cumulative, meaning that accounts from one week's report that
were not resolved did not carry over to the following week's report.
This flaw in the design of the unmatched exception report contributed
significantly to the fact that 99 percent of the taxpayer accounts
listed on the report at the end of 2003 were still unresolved as of the
end of June 2004.
We were unable to definitively quantify the extent to which IRS's
failure to resolve cases showing up on these exception reports
contributed to the overall number of liens IRS failed to timely
release. Based on the nature of IRS's delays in releasing liens that we
found in our fiscal year 2004 sample, however, we estimate that about
30 percent of the delayed releases likely resulted from IRS's failure
to effectively resolve exception reports.[Footnote 8]
IRS's inability to promptly resolve the lien exception reports has
contributed to its inability to ensure that tax liens are timely
released. This condition can negatively affect taxpayers, adversely
affect IRS's mission of providing top-quality customer service, and
result in noncompliance with the legal requirement that liens be
released within 30 days after satisfaction of the related tax debt.
Although IRS has begun to take steps to address untimely resolution of
lien exception reports, critical steps remain to be taken and backlogs
of unresolved exception reports remain to be resolved.
We are making nine recommendations to IRS to assist it in strengthening
controls over the lien release process.
In its comments, IRS agreed with our recommendations and described
actions it was taking or planned to take to address the control
weaknesses described in this report. At the end of our discussion of
each of these issues, we have summarized IRS's related comments and
provided our evaluation.
Background:
Congress granted IRS the power to file a lien against the property of
taxpayers who neglect or refuse to pay all their assessed federal
taxes. The lien becomes effective when IRS provides notice of its lien
interest by filing the lien with a designated office, such as a
courthouse in the county where the taxpayer's property is located. The
lien serves to protect the interest of the federal government and as a
public notice to current and potential creditors of the government's
interest in the taxpayer's property.
IRS has established separate offices, known as lien units, to handle
lien processing, including the release of tax liens. The lien units'
responsibilities also include answering inquiries from taxpayers and
other IRS personnel regarding liens and lien releases. As of June 1,
2004, IRS had 33 lien units located throughout the United States. IRS
is currently reorganizing the physical structure and management of its
lien units. By mid-2005, IRS plans to have consolidated the lien units
into one physical location at its Cincinnati Campus. IRS's goal in
centralizing these units' core functions and standardizing lien
processing is to reduce operating costs, increase efficiency, and
improve customer service. IRS believes the consolidation will enhance
management of lien processing and provide for uniform guidance and
operations for all lien processing.
The collection of unpaid taxes begins with IRS sending up to three
notice letters to the taxpayer advising the taxpayer of the debt and
requesting payment. If after proper notification the taxpayer fails to
pay the tax debt, and the delinquency does not meet the criteria that
require IRS to make in-person contact with the taxpayer,[Footnote 9]
IRS sends the taxpayer another notice letter explaining that a lien
will be filed if the taxes owed are not promptly paid. If the taxpayer
fails to promptly pay the taxes, IRS generally files a lien. IRS
personnel initiate the creation of a lien with IRS's Automated
Collection System (ACS),[Footnote 10] which sends the information
necessary to file a lien, such as the taxpayer's name and address and
the dollar amount of the lien, to IRS's Automated Lien System
(ALS).[Footnote 11] If the delinquency meets the criteria requiring IRS
to make in-person contact with the taxpayer and after such contact IRS
decides to file a lien, IRS personnel initiate creation of a lien with
IRS's Integrated Collection System (ICS),[Footnote 12] which sends the
information necessary to file a lien to ALS. ALS generates a physical
lien document. After ALS prints the lien, the lien unit mails it to the
taxpayer's local courthouse,[Footnote 13] where it is recorded as a
legal lien against the taxpayer's property. Until the lien is recorded
at the courthouse, it is not legally enforceable and does not preserve
IRS's rights with respect to the taxpayer's property. Concurrent with
generating the lien document, ALS electronically updates the taxpayer's
account in IRS's Masterfile[Footnote 14] to show that a lien was
filed.[Footnote 15] A weekly exception report is generated for liens
that cannot post to Masterfile because the ALS and Masterfile account
data do not match. Figure 1 provides an overview of the lien recording
process.
Figure 1: Overview of the Lien Recording Process:
[See PDF for image]
[End of figure]
IRS's automated lien release process begins when a taxpayer's
Masterfile account is paid in full or otherwise settled. Each week,
Masterfile automatically downloads to ALS all the satisfied taxpayer
accounts with liens. The taxpayer's account in Masterfile must have a
lien recorded against it in order to trigger the automated lien release
process. When notified via the Masterfile download that a taxpayer
account with a lien has been fully paid or otherwise satisfied, ALS
generates a lien release document.[Footnote 16] Upon generating the
lien release document, ALS updates the taxpayer's account in Masterfile
to show that the lien has been released. Lien unit personnel then
access ALS to print a lien release certificate, which they then mail to
the courthouse, where it is recorded in the public record and provides
conclusive evidence that the lien has been extinguished.
Two types of exception reports are generated when Masterfile downloads
to ALS all the satisfied taxpayer accounts with liens. One report lists
taxpayer accounts whose Masterfile information (e.g., taxpayer
identification number, Masterfile tax code, tax period) does not match
taxpayer account information in ALS. The second exception report
consists of taxpayer accounts with manually calculated interest or
penalties. IRS removes these accounts from the automated lien release
process because the interest and penalty calculations are more prone to
error. For these accounts, IRS must verify that taxpayers have paid the
full amount of interest and penalties due. The lien units must manually
research and resolve these exception reports before the liens on the
taxpayer accounts listed on the reports can be released. Therefore,
timely processing of these exception reports is an important control in
ensuring the timely release of liens. Figure 2 provides an overview of
the automated lien release process.
Figure 2: Overview of the Automated Lien Release Process:
[See PDF for image]
[End of figure]
Scope and Methodology:
We reviewed the tax lien release process in conjunction with our audits
of IRS's fiscal years 2003 and 2004 financial statements to better
understand the potential causes of continuing delays in IRS's release
of tax liens. We focused our review on the use of exception reports by
IRS lien units because of their integral role in identifying issues
that would affect the timely release of tax liens. We did not review
activities affecting liens that occur before or after the activities
that take place within the lien units. For example, we did not review
processes in Masterfile that can cause delays in releasing tax liens,
nor did we review the process of transport and delivery of lien
releases from lien units to courthouses.
In conducting our review, we selected the 3 lien units with the most
lien release activity,[Footnote 17] and we selected 2 additional lien
units judgmentally. In total, the 5 lien units we reviewed were
responsible for resolving exception reports for 11 lien units
(including themselves),[Footnote 18] and these 11 units released 39
percent of the reported tax liens released in fiscal year 2003.
At the three lien units we reviewed, we interviewed management and key
staff and observed the various lien processes. In addition to these
interviews at the lien units, we interviewed other IRS officials
associated with the lien process, such as ALS programmers, lien
compliance policy analysts, and lien unit consolidation coordinators,
to gain an understanding of the lien process. We also reviewed detailed
lien information by analyzing the results of data queries obtained from
IRS systems to identify potential causes of delays in releasing tax
liens. We also reviewed IRC provisions related to IRS's lien authority
and lien release requirements and relevant sections of the Internal
Revenue Manual, which contains IRS's formalized policies and
procedures. Additionally, we obtained and reviewed the various
exception reports used in the lien release process.
We conducted our work in conjunction with our fiscal years 2003 and
2004 financial statement audits, completing our work in October 2004.
We conducted our audit in accordance with generally accepted government
auditing standards. We requested comments on a draft of this report
from the Commissioner of the Internal Revenue Service. We received
written comments from the Commissioner and have reprinted the comments
in enclosure I.
Lien Exception Reports Are Not Being Timely Resolved:
As discussed previously, several exception reports are generated from
IRS's systems to assist IRS in identifying and resolving problems
related to lien processing. A weekly report is generated for liens that
fail to post to the Masterfile due to taxpayer account data in
Masterfile and ALS not matching. Additionally, two other exception
reports are generated when Masterfile downloads to ALS all satisfied
taxpayer accounts with existing liens, one for taxpayer accounts whose
Masterfile information does not match the taxpayer account information
in ALS and another for taxpayer accounts with manually calculated
interest or penalties, which require manual review. If used
effectively, these exception reports provide a critical control to
assist IRS in resolving issues so that tax liens can be timely
resolved.
We found that IRS is not timely resolving problems identified on
certain lien-related exception reports and, in some cases, is not
addressing information in the reports at all. We were unable to
definitively quantify the extent to which IRS's failure to resolve
these exception reports contributed to the overall number of liens IRS
failed to timely release in fiscal year 2004. However, based on the
nature of the delays in releasing liens that we found in our
statistical sample of liens during our fiscal year 2004 financial
audit, we estimate that about 30 percent of the delayed releases likely
resulted from IRS's failure to effectively resolve certain exception
reports.[Footnote 19]
The failure to timely resolve exception reports results in untimely
release of liens, which places undue hardship and burden on taxpayers,
conflicts with IRS's mission of providing top-quality service to U.S.
taxpayers, and leads to noncompliance with the IRC. It also directly
increases lien units' workloads. Because liens that appear on exception
reports are not released until the reports are resolved, affected
taxpayers may be forced to contact the lien units for assistance in
order for their liens to be released. According to IRS personnel,
providing assistance to taxpayers is one of the most time-consuming
lien unit functions. During our review, one of the reasons most
commonly cited by lien unit staff for taxpayer calls was to have IRS
release a lien that should have been previously released. If IRS timely
resolved lien-related exception reports, more liens could be timely
released, resulting in fewer taxpayers contacting the lien units to
resolve their lien problems and thereby lessening lien units'
workloads.
Unpostable Liens Are Not Being Timely Resolved:
When a lien is generated, ALS updates the taxpayer's account in
Masterfile to indicate that a lien has been filed. If a lien cannot
post to the taxpayer's Masterfile account, usually because the taxpayer
identification number or account name in ALS does not match the one in
Masterfile, the lien is included in a weekly exception report that
lists unpostable liens. If a lien is not posted to a taxpayer's
Masterfile account, IRS does not have the information it needs to
identify the taxpayer account for lien release when the tax debt is
fully satisfied. Therefore, timely resolution of this exception report
is an important control to ensure that liens are recorded on taxpayers'
accounts and, consequently, to ensure that liens are timely released.
The Internal Revenue Manual requires that exceptions listed in this
report be resolved within 5 days of the report's generation.[Footnote
20]
As of May 21, 2004, IRS had a total of 8,529 liens that could not post
to taxpayer accounts in Masterfile.[Footnote 21] Despite the
requirement that the exceptions listed in the report be resolved within
5 days, 99 percent of the 8,529 unpostable liens had initially appeared
in exception reports generated more than 5 days earlier, and 74 percent
had initially appeared in exception reports generated prior to calendar
year 2004. Taxpayers who had satisfied their tax debt but whose liens
were unpostable would not have had their liens automatically identified
for release. As a result, if the exception reports listing the liens
were not timely resolved, such liens would not have been released
timely, if at all.
In May 2004, managers at four of the five lien units we reviewed told
us that they were not receiving (and therefore were not resolving) the
exception report that lists unpostable liens, and the manager of the
fifth lien unit told us that she was instructed to stop processing the
exception report because of the upcoming consolidation of the lien
units to a single physical location at IRS's Cincinnati
Campus.[Footnote 22] This is consistent with what we had previously
found. At the time of our initial review of these lien units in 2003,
we determined that the units were not receiving this report because it
had been placed on IRS's Electronic Online/Output Network System
(EONS)[Footnote 23] and was no longer being sent to lien units. The
lien units, however, had not been notified of the change. In subsequent
discussions with IRS officials in June 2004, they told us that the
exception report had been placed on EONS during the IRS reorganization
and that IRS had taken action to address this issue. Specifically, they
informed us that this report had been centralized in the new lien unit
in Cincinnati and that the other lien units were no longer responsible
for reviewing and resolving the exception report.
IRS is now taking steps to address issues associated with this
exception report and is currently reviewing exception reports in a
timely manner. However, these issues were long-standing and therefore
resulted in a significant backlog of unpostable liens. According to
IRS, as of October 2004, about half of the backlog of 8,529 unpostable
liens that existed on May 21, 2004, had been resolved. We were able to
confirm this through a review of more recent exception reports, and we
will continue to follow up on IRS's progress during our fiscal year
2005 financial audit.
Recommendations:
To improve the effectiveness of controls over posting liens to taxpayer
accounts, we recommend that you direct the Cincinnati lien unit
managers to:
* expedite efforts to resolve the backlog of unpostable liens,
releasing liens as appropriate; and:
* keep current on all new unpostable liens.
IRS's Comments and Our Evaluation:
IRS agreed with our recommendations. In its response, IRS stated that
it established a team at the Cincinnati campus's Centralized Lien
Processing Unit to resolve the unpostable lien exception reports. IRS
added that lien transactions that do not post to a taxpayer's account
will now be resolved weekly. IRS also stated that it established a
separate team to resolve the backlog of unpostable liens and that it
expects the backlog to be resolved by September 30, 2005. We will
evaluate the effectiveness of IRS's efforts in future audits.
Unmatched Exceptions from the Automated Lien Release Process Are Not
Being Timely Resolved:
Each week, Masterfile automatically downloads to ALS all taxpayer
accounts with liens that have been fully paid or otherwise satisfied.
ALS uses this information to generate lien releases. Any downloaded
taxpayer accounts whose Masterfile information does not match taxpayer
account information in ALS are listed on an exception report.
Processing of the liens associated with these accounts cannot proceed
until the exceptions are resolved, and the liens cannot be released
until processing is complete. Prompt resolution of this exception
report is therefore a key control to ensure that liens are timely
released. Both the Internal Revenue Manual and the ALS User Guide
require that liens on this exception report be resolved
weekly.[Footnote 24] Prior to the planned consolidation of IRS lien
units in mid-2005, individual units continue to be responsible for
resolving the unmatched exception report.
We found that IRS was not timely resolving weekly unmatched exception
reports. As of June 14, 2004, taxpayer accounts totaling 3,180 that had
previously appeared on the unmatched exception report had not been
resolved.[Footnote 25] More than 1,400 of these unresolved cases were
added during the first 6 months of calendar year 2004. Ninety-eight
percent of the 3,180 accounts had appeared in reports generated more
than 7 days earlier, and 88 percent had appeared in reports generated
more than 30 days earlier. Because these unmatched accounts were not
timely resolved, taxpayer liens were not timely processed and released.
For the five lien units we reviewed, we found that two were not timely
resolving unmatched exception reports as of June 2004.[Footnote 26] One
unit manager informed us that the unit was at least 4 months behind in
resolving these reports, and we found that the other lien unit did not
resolve these reports at all.[Footnote 27] Staff responsible for
resolving the report at these two lien units stated, and the unit
managers confirmed, that the staff had not been trained on how to
resolve the report, which contributed to the units' failure to resolve
the report.[Footnote 28] We identified all the taxpayer accounts from
the February 11, 2004, and May 5, 2004, reports that belonged to these
two lien units and found that of the 32 taxpayer accounts identified,
29 remained unresolved as of June 2, 2004.[Footnote 29]
Recommendations:
To improve the effectiveness of controls over taxpayer accounts
rejected from the automated lien release process, we recommend that you
direct lien unit managers to:
* research and resolve the current backlog of unresolved unmatched
exception reports;
* research and resolve unmatched exception reports weekly; and:
* provide training to designated staff on how to resolve exception
reports.
IRS Comments and Our Evaluation:
IRS agreed with our recommendations. In its response, IRS stated that
accounts on the unmatched exception report will be resolved by matching
information between the Master File and the ALS. IRS also stated that
it is working to resolve the current backlog and that it expects the
backlog to be resolved by September 30, 2005. Additionally, to improve
overall processing of the unmatched exception reports, IRS stated that
it will provide additional training and move the report resolution
process to the Centralized Lien Processing Unit at the Cincinnati
Campus. We will evaluate the effectiveness of IRS's efforts in future
audits.
Liens with Manually Calculated Interest or Penalties Are Not Being
Timely Resolved:
Some taxpayer accounts contain tax debt with interest or penalties that
are manually calculated. Exception reports are generated for such
accounts when there exists a tax lien because procedures contained in
internal IRS guidance call for a review of the calculations before the
liens are released. Because liens on these taxpayers' properties will
not be released until this report is resolved, its prompt resolution is
a key control to help ensure that liens are timely released. Both the
Internal Revenue Manual and the ALS User Guide require that this report
be resolved weekly.[Footnote 30] Prior to the planned consolidation of
IRS lien units in mid-2005, individual units continue to be responsible
for resolving this exception report.
We found that IRS was not reviewing the report and taking actions
necessary to allow the liens on the exception report to be timely
released. As of June 14, 2004, the number of accounts that appeared on
the exception report totaled 1,047.[Footnote 31] Of these, 93 percent
had initially been listed on reports generated more than 7 days
earlier, and 75 percent had initially been listed on reports generated
more than 30 days earlier. Of 854 unresolved taxpayer accounts on the
exception reports containing liens with manually calculated interest or
penalties as of December 31, 2003, 326 (38 percent) were still
unresolved as of June 14, 2004, more than 5 months later.
Four of the five lien units we reviewed were taking actions necessary
to timely release liens appearing on exception reports for liens with
manually calculated interest or penalties.[Footnote 32] The fifth unit,
however, was not taking action to release liens appearing on these
exception reports. The individual at this lien unit who was responsible
for resolving the report had not been trained on how to resolve it,
which contributed to the unit's failure to resolve the report. For this
lien unit, we reviewed the first 10 taxpayer accounts from the March 3,
2004, exception report and found that all 10 remained unresolved as of
June 2, 2004. Of the 10 accounts selected, 6 had appeared on the report
prior to 2004, with the earliest having appeared in August 2003. In 1
of the 10 cases we reviewed, the taxpayer fully satisfied his tax debt
in December 2003 and the account was identified for lien release.
However, because the account had manually calculated penalties, it was
rejected from the automated lien release process and appeared on the
exception report containing liens with manually calculated interest or
penalties. As of June 2004, this account was still unresolved and, as a
consequence, the lien on this taxpayer's property had not been
released.
Recommendations:
To improve the effectiveness of controls over taxpayer accounts
rejected from the automated lien release process, we recommend that you
direct lien unit managers to:
* research and resolve the current backlog of unresolved manual
interest or penalties reports;
* research and resolve exception reports containing liens with manually
calculated interest or penalties weekly, as called for in the Internal
Revenue Manual and the ALS User Guide; and:
* provide training to designated staff on how to resolve exception
reports containing accounts with manually calculated interest or
penalties.
IRS Comments and Our Evaluation:
IRS agreed with our recommendations. In its response, IRS stated that
to improve the overall processing of the exception reports, it will
provide additional training and move the report resolution process to
the Centralized Lien Processing Unit at the Cincinnati Campus.
Additionally, IRS stated that accounts listed on the exception report
containing manually calculated interest or penalties will now be sent
to the Examination Case Processing function for computation and then
returned to the Centralized Lien Processing Unit for either lien
release or other appropriate action. IRS also stated that it is working
to resolve the current backlog and that it expects the backlog to be
resolved by September 30, 2005. We will evaluate the effectiveness of
IRS's efforts in future audits.
Unmatched Exception Reports Are Not Cumulative:
As discussed earlier, unmatched exception reports contain Masterfile
taxpayer accounts for which outstanding tax debt has been satisfied but
that do not match an account in ALS. Further processing of the lien
release cannot continue until exceptions are manually reviewed and
resolved by IRS personnel.
During our review, we identified a significant flaw in the design of
this important control. Specifically, we found that the unmatched
exception reports are not cumulative. They contain only accounts that
have been rejected in the current week and do not include the
unresolved accounts identified in prior weeks' reports. For example,
although at least 3,100 unmatched taxpayer accounts were unresolved as
of June 2, 2004, the weekly unmatched exception report on that day
showed only 109 rejected taxpayer accounts.
Lack of a cumulative report makes it more difficult to ensure that all
taxpayer accounts rejected from the automated lien release process are
resolved in a timely manner, or at all, because rejected accounts are
reported only once, in a single week's exception report, regardless of
whether or when they get resolved. We believe that this flaw in the
design of the exception report contributed significantly to the fact
that at least 99 percent of the unresolved taxpayer accounts at the end
of 2003 remained unresolved as of the end of June 2004. Having a
cumulative report is consistent with GAO's Standards for Internal
Control in the Federal Government, which requires that internal control
activities help ensure that management's directives to mitigate risk
are carried out.[Footnote 33] Without an effective tool to ensure that
all taxpayer accounts rejected from the automated lien release process
are identified and resolved, the backlog of unresolved cases will
likely increase without the knowledge of lien unit management,[Footnote
34] thereby increasing the potential for liens to not be promptly
released.
Recommendation:
To better ensure that taxpayer accounts rejected from the automated
lien release process are timely reviewed and resolved, we recommend
that IRS improve the current unmatched exception report by including a
cumulative list of all unmatched taxpayer accounts that have not been
resolved to date.
IRS Comments and Our Evaluation:
IRS agreed with our recommendation. In its response, IRS stated that it
will modify its system so that rejected items are retained on the
exception report until resolved. We will evaluate the effectiveness of
IRS's efforts in future audits.
This letter contains nine recommendations to you. The head of a federal
agency is required by 31 U.S.C. § 720 to submit a written statement on
actions taken on these recommendations. You should submit your
statement to the Senate Committee on Governmental Affairs and the House
Committee on Government Reform within 60 days of the date of this
letter. A written statement must also be sent to the House and Senate
Committees on Appropriations with the agency's first request for
appropriations made more than 60 days after the date of the letter.
This letter is intended for use by the management of IRS. We are
sending copies to the Chairmen and Ranking Minority Members of the
Senate Committee on Appropriations; Senate Committee on Finance; Senate
Committee on Governmental Affairs; Senate Committee on the Budget;
Subcommittee on Transportation, Treasury, and General Government,
Senate Committee on Appropriations; Subcommittee on Taxation and IRS
Oversight, Senate Committee on Finance; Subcommittee on Oversight of
Government Management, the Federal Workforce, and the District of
Columbia, Senate Committee on Governmental Affairs; House Committee on
Appropriations; House Committee on Ways and Means; House Committee on
Government Reform; House Committee on the Budget; Subcommittee on
Transportation, Treasury, and Independent Agencies, House Committee on
Appropriations; Subcommittee on Government Efficiency and Financial
Management, House Committee on Government Reform; and the Subcommittee
on Oversight, House Committee on Ways and Means. In addition, we are
sending copies of this letter to the Chairman and Vice-Chairman of the
Joint Committee on Taxation, the Secretary of the Treasury, the
Director of the Office of Management and Budget, the Chairman of the
IRS Oversight Board, and other interested parties. Copies will be made
available to others upon request. This report is available at no charge
at GAO's Web site at http://www.gao.gov.
We acknowledge and appreciate the cooperation and assistance provided
by IRS officials and staff during our audit. If you have any questions
or need assistance in addressing these matters, please contact me at
(202) 512-3406 or sebastians@gao.gov. Additional contacts and staff
acknowledgments are provided in enclosure II.
Sincerely yours,
Signed by:
Steven J. Sebastian:
Director:
Financial Management and Assurance:
Enclosures - 2:
Comments of the Internal Revenue Service:
DEPARTMENT OF THE TREASURY:
INTERNAL REVENUE SERVICE:
WASHINGTON, D.C. 20224:
COMMISSIONER:
December 14, 2004:
Mr. Steven J. Sebastian:
Director:
Financial Management and Assurance:
United States Government Accountability Office:
Washington, D.C. 20548:
Dear Mr. Sebastian:
I have reviewed the draft report entitled "Opportunities to Improve
Timeliness of IRS Lien Releases' (GAO-05-26R) and agree with your
recommendations. I agree that one of our main objectives is to provide
timely and efficient service to taxpayers, and that liens should be
released on a timely basis once satisfied.
As a result of earlier reviews of our lien release processes, and
information provided in your report, many corrective actions have
already been implemented. To resolve the unpostable lien transaction
reports, we have established a team in our Centralized Lien Processing
Unit at the Cincinnati campus. Lien transactions that do not post to a
taxpayer's account will now be resolved weekly. We have also
established a separate team to resolve the backlog and expect that all
backlogs will be resolved by September 30, 2005.
New procedures for working the Satisfied Module (SATMOD) Reject Reports
have also been developed. Accounts that are unpostable due to taxpayer
entity mismatches, such as the name or tax period, will be resolved by
matching information between the Master File and the Automated Lien
System. Those accounts that are on the list for manual calculation of
penalties or interest will now be sent to the Examination Case
Processing function for computation and returned to the Centralized
Lien Processing Unit for either a lien release or other appropriate
action. Again, we are working to resolve the backlog of these
unpostables and expect to have all backlogs resolved by September 30,
2005.
To improve overall processing of these reject reports, we will provide
additional training and resolve staffing imbalances by moving the
report resolution process to the Centralized Lien Processing staff.
Timely report resolution is an integral function of the Centralized
Lien Processing Unit, and time frames and managerial oversight are
built into report resolution processes.
Finally, you recommended enhancing the entity mismatch section of the
SATMOD Reject Report to retain rejected items until they are resolved.
We concur with this recommendation and will submit a systems change
request for this enhancement.
We expect that all of these efforts will have a positive effect on our
efficiency and effectiveness and will enable us to provide better
customer service. If you have any questions, please contact me or Brady
R. Bennett, Director, Collection, Small Business/Self-Employed
Division, at (202) 283-2610.
Sincerely,
Signed by:
Mark W. Everson:
[End of section]
GAO Contacts and Staff Acknowledgments:
GAO Contacts:
Paul Foderaro, (202) 512-2535:
William J. Cordrey, (404) 679-1873:
Acknowledgments:
Staff who made key contributions to this report were David Shoemaker,
Mark Yoder, and Esther Tepper.
(196022):
FOOTNOTES
[1] Under section 6321 of the Internal Revenue Code, IRS has the
authority to file a lien upon all property and rights to property,
whether real or personal, of a delinquent taxpayer.
[2] IRS can file multiple liens against a taxpayer to cover property
the taxpayer owns in different geographical locations.
[3] Under section 6325 of the Internal Revenue Code, IRS is required to
release a federal tax lien within 30 days after the tax liability has
been satisfied, has become legally unenforceable, or the Secretary of
the Treasury has accepted a bond for the assessed tax.
[4] GAO, Internal Revenue Service: Recommendations to Improve Financial
and Operational Management, GAO-01-42 (Washington D.C.: Nov. 17, 2000).
[5] GAO, Internal Revenue Service: Status of Recommendations from
Financial Audits and Related Financial Management Reports, GAO-04-523
(Washington D.C.: Apr. 28, 2004).
[6] GAO, Financial Audit: IRS's Fiscal Years 2004 and 2003 Financial
Statements, GAO-05-103 (Washington D.C.: Nov. 10, 2004). We are 95
percent confident that the error rate does not exceed 33 percent.
[7] Some interest and penalties must be manually calculated because the
capability to calculate interest and penalties in accordance with
certain legal requirements has not been programmed into IRS systems.
IRS refers to this as "restricted" interest or penalties.
[8] We are 95 percent confident that the actual figure does not exceed
58 percent of the untimely released liens. This estimate applies only
to the exception reports that are produced by the ALS system, namely,
the unmatched lien exception report and the manual interest or
penalties exception report. We were unable to estimate the effect that
the unposted liens exception report had on the timeliness of lien
releases. Additionally, at this time, we are unable to determine the
cause of the untimely lien releases for the remaining cases in our
fiscal year 2004 sample.
[9] Such criteria include the type of tax (e.g., estate or excise) and
whether the dollar amount owed exceeds a certain amount. See I.R.M. §
5.19.5.3.1 Exh. 5.19.5-10 (Jan. 1, 2000).
[10] ACS is a computerized system that maintains balance-due accounts
and tax return delinquency investigations; it is designed to allow
cases to be worked by priority. (ACS is also a major collection
function at IRS.)
[11] ALS is a comprehensive database that prints federal tax liens and
lien releases, stores taxpayer information, and documents lien
activity.
[12] ICS is the computer system used by revenue officers to track
collection actions taken on taxpayer accounts.
[13] The local courthouse is the courthouse in the county where the
taxpayer's property is located. Liens can also be filed elsewhere as
determined by state law.
[14] Masterfile is the IRS database that stores various types of
taxpayer account information. It includes individual, business,
employee plan, and exempt organization data.
[15] ALS first updates the lien information in taxpayer accounts in the
Integrated Data Retrieval System (IDRS), which is an online data
retrieval and entry system. Once a week, IDRS updates the taxpayer
accounts in Masterfile with this information. For simplicity, we
discuss this as one step--ALS updating Masterfile.
[16] Liens can cover debt arising from one or more tax periods. ALS
does not generate a lien release until all the tax periods covered by a
lien are satisfied.
[17] The lien release activity per lien unit was based on fiscal year
2002 data.
[18] The five lien units we selected for review were responsible for
resolving exception reports for specific IRS "areas," four of which
consisted of more than one lien unit.
[19] We are 95 percent confident that the actual figure does not exceed
58 percent of the untimely released liens. This estimate applies only
to the exception reports that are produced by the ALS system, namely,
the unmatched lien exception report and the manual interest or
penalties exception report. We were unable to estimate the effect that
the unposted liens exception report had on the timeliness of lien
releases.
[20] I.R.M § 5.12.6.9(1)(F) (Oct. 1, 2003).
[21] IRS performed a special query of its system to determine the
number of unpostable liens accounts. However, the listing of unpostable
liens did not go back prior to January 2002.
[22] During our initial review of the lien units, from July through
September 2003, the managers of four of the five same lien units were
unaware of this exception report and were not addressing it.
[23] EONS enables reports that would normally have been available in
printed form only to be viewed on a personal computer.
[24] I.R.M. § 5.12.6.9(1)(A) (Oct. 1, 2003) and the ALS User Guide
(July 2002).
[25] IRS performed a special query of its system to determine the
number of unresolved accounts with manual interest or penalty
calculations. However, the listing did not go back further than August
2002.
[26] During our initial review of the lien units, from July through
September 2003, one of these five lien units was timely resolving this
report.
[27] We were unable to determine how long it has been since this lien
unit has resolved the unmatched exception report, but we know that the
unit has not resolved the report for at least the last 7 years.
[28] Since our review of the lien units in June 2004, the person
responsible for resolving the report at the unit with the 4-month
backlog has received training and, consequently, is now resolving the
report.
[29] Since both lien units have backlogs of at least 4 months, we chose
a report that is part of the older component of the backlog and another
report that is part of the recent component of the backlog.
[30] I.R.M. § 5.12.6.9(1)(A) (Oct. 1, 2003) and the ALS User Guide
(July 2002).
[31] IRS performed a special query of its system to determine the
number of unresolved accounts with manual interest or penalty
calculations. However, the listing did not go back further than January
2003.
[32] During our initial review of the lien units, from July through
September 2003, one of these five lien units was timely resolving this
report.
[33] GAO, Standards for Internal Control in the Federal Government,
GAO/AIMD-00-21.3.1 (Washington, D.C.: November 1999).
[34] ALS programmers had to perform a special query to determine the
backlog of unresolved cases. The backlog of unresolved cases is not
readily available to lien unit management.
