Tax Debt Collection
IRS Has a Complex Process to Attempt to Collect Billions of Dollars in Unpaid Tax Debts Gao ID: GAO-08-728 June 13, 2008The Internal Revenue Service (IRS) estimated that $33 billion in income tax assessments was not paid in 2001. If not collected, annual unpaid taxes keep accumulating each year along with penalty and interest charges to create an inventory of "tax debts," which approached $300 billion at the end of fiscal year 2007. IRS has shelved or delayed collection of billions of dollars of this tax debt. Congress and others have questioned IRS's collection process's effectiveness. As requested, GAO is reporting on (1) the process IRS uses to collect unpaid tax debts; (2) trends in the unpaid tax debt inventory, collections, and other resolutions from fiscal years 2002 through 2007; and (3) the performance measures and goals available to assess how well the collection process works overall. To meet these objectives, GAO interviewed IRS officials and reviewed IRS's unpaid assessments database, documentation on the collection process and factors used in managing it, and IRS's highest-level collection measures.
IRS has a complex process to collect unpaid tax debts by contacting taxpayers through notices, telephone calls, and in person. Because IRS has a very large debt workload and limited resources spread across multiple units, it must make numerous decisions about how best to handle debt cases. The complexity also arises because debt cases can take various routes based on about 70 IRS decision rules used for handling cases. The rules respond to a wide variety of debt characteristics, information known about the taxpayer, and the results of attempts to contact the taxpayer or take enforcement action. From fiscal years 2002 through 2007, increases occurred in the unpaid tax debt inventory, the percentages of debt classified as potentially collectible and in active collection status, and the dollars IRS collected. It is unclear whether dollars collected will continue to grow at rates similar to the growth in debt classified as collectible or active because, for example, those categories do not mean that the debt has a high potential for collection and will be actively pursued or that debt resolution will necessarily result in dollars collected. IRS-wide collection performance measures cover three outcomes of the three-phase process with an emphasis on closing more debt cases in less staff time. IRS did not indicate why more measures for the whole collection process were lacking. For each of the phases, IRS had more performance measures such as on debt resolutions, time spent, satisfaction, and quality, which phase managers said were sufficient for them. GAO has identified material weaknesses in IRS's controls over unpaid tax assessments and collections partly due to the lack of agencywide cost-benefit data and related performance measures. Although IRS has made some progress on these weaknesses, progress has not been sufficient to resolve them. For example, over the past 3 years, IRS has employed various approaches, including sophisticated computer modeling and risk assessment techniques, to assist it in more effectively identifying the tax debt cases with the greatest collection potential, and to facilitate prioritizing of these cases for collection. IRS has also employed these techniques to identify the most effective collection approach to take for the various types of outstanding tax debt. Although IRS has ongoing projects to expand the use of these models and techniques, it does not yet have an agencywide, systematic approach to managing the collection of tax debts across IRS. In response, IRS has created a council of IRS collection officials to coordinate various collection activities across IRS and potential changes across the parts of the collection process. Further, IRS has a number of ongoing projects to improve aspects of the collection process. However, some of these projects will take a few years to be implemented.
GAO-08-728, Tax Debt Collection: IRS Has a Complex Process to Attempt to Collect Billions of Dollars in Unpaid Tax Debts
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Report to the Committee on Finance, U.S. Senate:
United States Government Accountability Office:
GAO:
June 2008:
Tax Debt Collection:
IRS Has a Complex Process to Attempt to Collect Billions of Dollars in
Unpaid Tax Debts:
GAO-08-728:
GAO Highlights:
Highlights of GAO-08-728, a report to the Committee on Finance, U.S.
Senate.
Why GAO Did This Study:
The Internal Revenue Service (IRS) estimated that $33 billion in income
tax assessments was not paid in 2001. If not collected, annual unpaid
taxes keep accumulating each year along with penalty and interest
charges to create an inventory of ’tax debts,“ which approached $300
billion at the end of fiscal year 2007. IRS has shelved or delayed
collection of billions of dollars of this tax debt.
Congress and others have questioned IRS‘s collection process‘s
effectiveness. As requested, GAO is reporting on (1) the process IRS
uses to collect unpaid tax debts; (2) trends in the unpaid tax debt
inventory, collections, and other resolutions from fiscal years 2002
through 2007; and (3) the performance measures and goals available to
assess how well the collection process works overall. To meet these
objectives, GAO interviewed IRS officials and reviewed IRS's unpaid
assessments database, documentation on the collection process and
factors used in managing it, and IRS's highest-level collection
measures.
What GAO Found:
IRS has a complex process to collect unpaid tax debts by contacting
taxpayers through notices, telephone calls, and in person. Because IRS
has a very large debt workload and limited resources spread across
multiple units, it must make numerous decisions about how best to
handle debt cases. The complexity also arises because debt cases can
take various routes based on about 70 IRS decision rules used for
handling cases. The rules respond to a wide variety of debt
characteristics, information known about the taxpayer, and the results
of attempts to contact the taxpayer or take enforcement action.
From fiscal years 2002 through 2007, increases occurred in the unpaid
tax debt inventory, the percentages of debt classified as potentially
collectible and in active collection status, and the dollars IRS
collected. It is unclear whether dollars collected will continue to
grow at rates similar to the growth in debt classified as collectible
or active because, for example, those categories do not mean that the
debt has a high potential for collection and will be actively pursued
or that debt resolution will necessarily result in dollars collected.
IRS-wide collection performance measures cover three outcomes of the
three-phase process with an emphasis on closing more debt cases in less
staff time. IRS did not indicate why more measures for the whole
collection process were lacking. For each of the phases, IRS had more
performance measures such as on debt resolutions, time spent,
satisfaction, and quality, which phase managers said were sufficient
for them.
GAO has identified material weaknesses in IRS‘s controls over unpaid
tax assessments and collections partly due to the lack of agencywide
cost-benefit data and related performance measures. Although IRS has
made some progress on these weaknesses, progress has not been
sufficient to resolve them. For example, over the past 3 years, IRS has
employed various approaches, including sophisticated computer modeling
and risk assessment techniques, to assist it in more effectively
identifying the tax debt cases with the greatest collection potential,
and to facilitate prioritizing of these cases for collection. IRS has
also employed these techniques to identify the most effective
collection approach to take for the various types of outstanding tax
debt. Although IRS has ongoing projects to expand the use of these
models and techniques, it does not yet have an agencywide, systematic
approach to managing the collection of tax debts across IRS. In
response, IRS has created a council of IRS collection officials to
coordinate various collection activities across IRS and potential
changes across the parts of the collection process. Further, IRS has a
number of ongoing projects to improve aspects of the collection
process. However, some of these projects will take a few years to be
implemented.
What GAO Recommends:
GAO makes no recommendations. GAO previously said that the lack of
adequate performance measures hampered IRS in formulating an enterprise-
wide collection strategy. In comments on this report, IRS noted its
collection process highlights. IRS provided technical comments which
were incorporated as appropriate.
To view the full product, including the scope and methodology, click on
[hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-08-728]. For more
information, contact Michael Brostek at (202) 512-9110 or
brostekm@gao.gov.
[End of section]
Contents:
Letter:
Results in Brief:
Background:
IRS Collects or Otherwise Resolves Unpaid Tax Debt through a Complex,
Three-Phase Process:
Tax Debt Collections Have Recently Increased, but Increases in
Potentially Collectible Inventory and Active Cases May Not Portend
Continuing Collection Increases:
IRS-Wide Collection Performance Measures Cover the Collection Process
and Some Outcomes:
Agency Comments and Our Evaluation:
Appendix I: Scope and Methodology:
Appendix II: Challenges in Tracking the Inventory and Collection of Tax
Debts across Fiscal Years:
Appendix III: IRS Efforts to Improve the Collection Process as of May
2008:
Appendix IV: Data on the Inventory of Unpaid Assessments and Collection
Results from Fiscal Years 2002 through 2007:
Appendix V: Comments from the Internal Revenue Service:
Appendix VI: GAO Contact and Staff Acknowledgments:
Tables:
Table 1: Percentage of Unpaid Tax Debt Inventory Resolved by Types of
Removal, Fiscal Years 2002 through 2007:
Table 2: IRS-Wide Collection Process Performance Measure Definitions
and Collection Phases Covered:
Table 3: IRS-Wide Goals and Actuals for Collection Performance
Measures, Fiscal Years 2005-2007:
Table 4: IRS Collection Improvement Projects (as of May 2008):
Table 5: Unpaid Tax Debt Inventory (as of the end of Fiscal Years 2002-
2007):
Table 6: Potentially Collectible Inventory versus Non-Potentially
Collectible Inventory of the Unpaid Assessments:
Table 7: Potentially Collectible Inventory in Active Collection and Non-
Active Collection Status:
Figures:
Figure 1: IRS's Three-Phase Process for Attempting Collection of Unpaid
Tax Debt:
Figure 2: IRS's Three-Phase Process for Attempting Collection of Unpaid
Tax Debt:
Figure 3: Unpaid Tax Debt Inventory: Percentages Categorized as
Potentially Collectible and Not Potentially Collectible at the Ends of
Fiscal Years 2002-2007:
Figure 4: Potentially Collectible Inventory: Percentages in Active and
Not Active Collection Status at the Ends of Fiscal Years 2002-2007:
[End of section]
United States Government Accountability Office:
Washington, DC 20548:
June 13, 2008:
The Honorable Max Baucus:
Chairman:
The Honorable Charles E. Grassley:
Ranking Member:
Committee on Finance:
United States Senate:
The Internal Revenue Service (IRS) must pursue collection of unpaid tax
debt to help ensure compliance and confidence in the tax system and
address the tax gap, which is the estimated difference between tax
amounts that taxpayers voluntarily and timely pay and those they owe.
IRS estimated that $33 billion of the annual gross tax gap (which
totaled $345 billion after including the underreporting and nonfiling
portions) for tax year 2001 was for nonpayment of known tax
assessments. If not collected, these annual unpaid tax assessments
accumulate over time, along with the related penalty and interest
charges, to create an inventory of "tax debts."[Footnote 1] As of the
end of fiscal year 2007, this inventory was approaching $300 billion,
of which IRS considered about $100 billion to be potentially
collectible. Due to resource limitations, IRS has shelved or delayed
collection of billions of dollars of this tax debt. Given the many
challenges that IRS faces, the enforcement of the tax laws, including
collection of unpaid tax debt has been on our list of high-risk areas
since 1990.
Although collecting unpaid tax debt is part of any strategy to help
ensure compliance and confidence in the tax system and reduce both the
annual tax gap and the cumulative unpaid tax debt inventory, Congress
and other stakeholders have raised questions about the effectiveness of
IRS's collection process in helping ensure compliance. Because of your
concerns about unpaid tax debt and to enhance Congress's understanding
of the current collection process, you asked that we describe IRS's
collection process and results for fiscal years 2002 through 2007. This
report addresses the following questions.
* What process does IRS use to attempt to collect or resolve unpaid tax
debts?
* What are the trends in unpaid tax debt, including the size and
composition of the inventory, collections, and other resolutions of
unpaid debt in fiscal years 2002 through 2007?
* What performance measures and related goals are available to assess
how well the collection process works overall?
To answer these questions, we interviewed IRS officials and reviewed
IRS's unpaid assessments database, documentation on the collection
process and factors used in managing it, and IRS's highest-level
collection measures. Appendix I provides more details on our scope and
methodology. In addition, we also attempted to track IRS's tax
assessment and collection results across fiscal years 2002 through
2007, and asked IRS about its efforts to improve its management of the
inventory and collection of debts. Appendix II describes our attempts
to do this tracking from fiscal years 2002 through 2007, focusing on
what happened to fiscal year 2002 assessments, and appendix III
describes IRS's improvement efforts. We conducted our work from July
2007 to May 2008 in accordance with generally accepted government
auditing standards. Those standards require that we plan and perform
the audit to obtain sufficient, appropriate evidence to provide a
reasonable basis for our findings and conclusions based on our audit
objectives. We believe that the evidence obtained provides a reasonable
basis for our findings and conclusions based on our audit objectives.
Results in Brief:
IRS has a three-phase process for collecting unpaid tax debts by
contacting affected taxpayers through (1) a notice in the mail, (2) a
telephone call, and (3) in-person interactions. IRS's very large debt
workload in concert with its limited resources spread across multiple
programs and multiple parts of IRS require many decisions to be made
about how to handle the debt. Beyond the sheer volume of debt cases and
dollars and the multiple IRS units that administer these phases, the
process is complex because debt cases can take various routes through
it, as shown in figure 1.
Figure 1: IRS's Three-Phase Process for Attempting Collection of Unpaid
Tax Debt:
[See PDF for image]
This figure is an illustration of IRS's Three-Phase Process for
Attempting Collection of Unpaid Tax Debt. The following information is
depicted:
[1] Notice phase:
* over 16 million first notices sent in FY2007;
* two divisions in 12 locations handle paper replies; single division
in 25 locations handles telephone call replies.
[2] Telephone contact phase:
* 5.4 million incoming and 1.9 million outgoing phone calls in FY2007;
3.4 million levies issued in FY2007;
* two divisions operating in 12 locations nationwide.
[3] In-person contact phase:
* estimated 400,000 taxpayers contacted in FY2007;
* administered by single division with about 3,800 collection officers
in 435 offices nationwide and in U.S. territories.
Process:
[1] Notice phase:
* Collected or otherwise resolved; or:
* Proceed to phase 2 or 3;
[2] Telephone contact phase:
* Collected or otherwise resolved; or:
* Awaiting next phase assignment;
- if waiting period exceeds 365 days, shelved due to lack of resources;
or:
* Proceed to phase 3;
[3] In-person contact phase:
* Collected or otherwise resolved.
Examples of factors that influence how debt is routed through the
process:
* Debt characteristics:
- individual vs. business;
- amount due;
* Known taxpayer information;
- levy sources?
- good mailing address?
- good phone number?
- financial assets or property?
* Results of contact attempts or enforcement action;
- no taxpayer response;
- full payment;
- partial payment;
- obtain more taxpayer information.
Source: GAO analysis of IRS information.
Note: Figure 1 shows key routes a case can take but not all possible
routes.
[End of figure]
The various routes arise in part from about 70 IRS decision rules for
handling a case in response to the variety of debt characteristics,
information known about the taxpayer, and the results of attempts to
contact the taxpayer or take enforcement action. In general, the
process and decision rules for routing cases are designed to resolve
debt cases as quickly as possible using the least costly resources.
Regarding trends in the unpaid tax debt inventory that went from $280
billion to $290 billion from fiscal years 2002 through 2007, IRS's tax
debt collections increased (about 30 percent) as did its potentially
collectible inventory (which exceeded $100 billion by 2007) and active
cases. However, potentially collectible and active case increases may
not portend continuing collection increases at similar rates annually.
First, potentially collectible means that the debt has not been defined
as uncollectible for a variety of reasons rather than identifying the
debt as having a high potential for collection. Second, active
collection status means that IRS has made the debt available to be
pursued contingent on available resources and other priorities rather
than that IRS is continuously contacting the taxpayer or using its
enforcement tools until the debt is resolved. Third, resolving debt
(i.e., removing it from the debt inventory) does not mean that money
has been collected; for debt amounts resolved during fiscal years 2002
through 2007, IRS removed from 20 percent to 28 percent by abating the
debt, which may have been appropriate, rather than by collecting money.
Furthermore, despite IRS's collection efforts, a sizeable portion of
the unpaid debt inventory--from 31 percent to 46 percent during fiscal
years 2002 through 2007--was written off due to statutory limits on how
long IRS could pursue the debt. Many reasons contribute to writing off
tax debts such as IRS having insufficient resources to pursue the debt
or because businesses go bankrupt or taxpayers die.
The IRS-wide collection performance measures and their related goals
cover three outcomes of which two outcomes--coverage in closing debt
and efficiency in using staff resources to close debt--deal with all
three phases of the collection process. IRS officials who manage the
different phases of the collection process said that measures and goals
are not set for one outcome of the collection process--dollars
collected--in part because the law prohibits IRS from using records of
tax enforcement results to evaluate employees or to impose or suggest
production quotas or goals for employees.[Footnote 2] Although a
limited number of performance measures cover the collection process
across IRS, the officials who manage collection phases within various
IRS offices said that they have measures and data on such things as
debt resolutions, time spent, satisfaction, and quality, which they
viewed as sufficient to manage their operations.
Nevertheless, our previous work has identified material weaknesses in
IRS's controls over unpaid tax assessments and over the collection of
tax revenues due the federal government. The material weaknesses were
partly due to the lack of agencywide cost-benefit data and related
performance measures. Although IRS has made some progress on these
weaknesses, progress has not been sufficient to resolve them. For
example, over the past 3 years, IRS has employed various approaches,
including sophisticated computer modeling and risk assessment
techniques, to assist it in more effectively identifying the tax debt
cases with the greatest collection potential and to facilitate
prioritizing of these cases for collection. IRS has also employed these
techniques to identify the most effective collection approach to take
for the various types of outstanding tax debt. Although IRS has ongoing
projects to expand the use of these models and techniques, it does not
yet have an agencywide, systematic approach to managing the collection
of unpaid taxes across the scope of IRS's responsibilities. In
response, IRS has created a council of IRS collection officials to
coordinate various collection activities across IRS and the impacts of
potential changes across parts of the collection process. Further, IRS
has a number of ongoing projects to improve aspects of the collection
process but some will take a few years to be implemented, as indicated
in appendix III.
In providing written comments on a draft of this report (see app. V),
the Commissioner of Internal Revenue said that he appreciated the
interest of Congress and other stakeholders in tax debt collection,
highlighted certain collection process accomplishments since 2005, and
referred to IRS's ongoing collection improvement efforts. IRS also
separately provided technical comments on a draft of this report which
we incorporated as appropriate.
Background:
IRS has many programs or activities that identify potentially unpaid
taxes and may ultimately result in unpaid taxes being assessed and
collection attempted. Unpaid assessments are generally identified by
either (1) the taxpayer, such as by submitting a tax return with a
balance due but without full payment, or (2) IRS compliance programs
such as IRS's audit program that identifies reporting noncompliance on
filed returns or the Automated Substitute for Return (ASFR) program
that--for taxpayers who failed to file returns--creates a tax due
return on the basis of available data provided to IRS by third parties
on income such as wages and interest.[Footnote 3] Since IRS's filing
and reporting compliance programs identify new tax debt when pursuing
apparent noncompliance, IRS is contributing continually to the unpaid
assessments inventory.
After identifying potential tax assessments, IRS sends a series of
notices to taxpayers about these potential assessments as well as about
any taxes due. For example, IRS is required to send taxpayers certain
statutory notices. IRS first is to send a "30-day letter" that includes
a proposed assessment of tax, penalty, and interest. The letter is to
instruct the taxpayer on possible ways to respond, such as by accepting
the proposed assessment; filing an original return; providing evidence
that there is no filing requirement; or appealing the proposed
assessment to IRS's Office of Appeals. If no response is received to
the 30-day letter within the allotted time, IRS is to send a 90-day
statutory notice. The statutory notice is to contain information
similar to the 30-day letter and information on the taxpayer's right to
petition the Tax Court. If IRS does not receive a response within the
allotted time, the tax, penalty, and interest on the return are to be
assessed. IRS's practice is to send up to four balance-due notices at 5-
week intervals for the amount owed. Six weeks after the fourth balance-
due notice, IRS is to forward any unpaid accounts to IRS staff who are
to try to collect the unpaid amounts through other phases of the
collection process---the telephone or in-person contact phases.
Congress enacted the IRS Restructuring and Reform Act of 1998[Footnote
4] to balance IRS's responsibility to collect taxes with its
responsibility to protect taxpayers' rights. One of the concerns
addressed by the act was the use of collection or enforcement data to
assess performance. The act restricted the use of records of tax
enforcement results for assessing employee performance.[Footnote 5]
We have previously looked at various aspects of IRS collection
programs. For example, in 2002 we reported on the lack of data on the
effects of collection programs on compliance.[Footnote 6] Also,
although we have not assessed the implementation of the private debt
collection program, during our reviews of IRS's planning for the
program in 2006, we reported that IRS had not completed work on a suite
of balanced measures for use in evaluating the results of the program.
[Footnote 7]
IRS Collects or Otherwise Resolves Unpaid Tax Debt through a Complex,
Three-Phase Process:
IRS's process for collecting unpaid debt has three phases. Debt goes
through these phases until it is determined to be not collectible, is
collected, or is otherwise resolved:
* Notice: IRS sends a series of notices of balances due to the taxpayer
to, in part, prompt a reply by the taxpayer and payment.
* Telephone: IRS uses telephone contacts with the taxpayer to secure
payment or to take enforcement action, including a levy of financial
assets and a lien against property.[Footnote 8]
* In-person: IRS attempts in-person contact with the taxpayer to secure
payment or take enforcement action, including levies, liens, and
seizures of property.
During the process, a debt case can also be placed in a "not active"
status. According to an IRS official, this status indicates that
although potentially collectible, the debt case is either in the queue
awaiting assignment to the final collection stage or is "shelved" due
to inadequate IRS resources to pursue it.
As shown in figure 2, the collection process for debt treated as
potentially collectible is a complex set of programs administered by
several IRS units handling a large workload that can take multiple
routes based on about 70 decision rules that IRS has created in
response to a variety of factors, including the characteristics of a
given debt or taxpayer and the results of the process itself.
Figure 2: IRS's Three-Phase Process for Attempting Collection of Unpaid
Tax Debt:
[See PDF for image]
This figure is an illustration of IRS's Three-Phase Process for
Attempting Collection of Unpaid Tax Debt. The following information is
depicted:
[1] Notice phase:
* over 16 million first notices sent in FY2007;
* two divisions in 12 locations handle paper replies; single division
in 25 locations handles telephone call replies.
[2] Telephone contact phase:
* 5.4 million incoming and 1.9 million outgoing phone calls in FY2007;
3.4 million levies issued in FY2007;
* two divisions operating in 12 locations nationwide.
[3] In-person contact phase:
* estimated 400,000 taxpayers contacted in FY2007;
* administered by single division with about 3,800 collection officers
in 435 offices nationwide and in U.S. territories.
Process:
[1] Notice phase:
* Collected or otherwise resolved; or:
* Proceed to phase 2 or 3;
[2] Telephone contact phase:
* Collected or otherwise resolved; or:
* Awaiting next phase assignment;
- if waiting period exceeds 365 days, shelved due to lack of resources;
or:
* Proceed to phase 3;
[3] In-person contact phase:
* Collected or otherwise resolved.
Examples of factors that influence how debt is routed through the
process:
* Debt characteristics:
- individual vs. business;
- amount due;
* Known taxpayer information;
- levy sources?
- good mailing address?
- good phone number?
- financial assets or property?
* Results of contact attempts or enforcement action;
- no taxpayer response;
- full payment;
- partial payment;
- obtain more taxpayer information.
Source: GAO analysis of IRS information.
Note: Figure 2 shows key routes a case can take but not all possible
routes.
[End of figure]
According to IRS officials, the phases and routing of cases result from
IRS's designing the process to effectively and efficiently use
resources to resolve taxpayer debt at the earliest possible time and
using the least costly resources. For example, officials said that low-
and medium-risk cases are routed to the telephone contact
phase[Footnote 9] where they are treated according to case conditions
in a bulk processing environment using lower-cost resources. The
telephone phase handled over 7 million telephone contacts during fiscal
year 2007---of which 5.4 million calls were made by taxpayers
responding to IRS contacts and 1.9 million were made by IRS staff.
However, IRS is to route high-risk cases that require the skills and
tools of a revenue officer[Footnote 10]--including face-to-face
interaction with the taxpayer and use of more complex enforcement
tools--to the in-person contact phase to resolve the debt though at
greater cost in terms of time and money. As a result, the number of
contacts about tax debts in this phase is lower--estimated at about
400,000 in fiscal year 2007.
The Process Is High-Volume and Spread among IRS Subunits:
A part of the complexity of the process stems from having a very large
debt workload and limited resources spread across multiple units, which
contribute to the numerous decisions that IRS makes on how to handle
these debt cases. According to IRS data for fiscal years 2002 through
2007, IRS sent over 83 million first notices to taxpayers involving
about $444 billion in unpaid taxes; the notice phase is the highest
"upstream" part of the collection process. At the end of fiscal year
2007, IRS had $79.3 billion worth of debt in the three phases of the
process.
The IRS units that manage the computer and payment processing systems
send collection notices and process related payments. Written responses
to notices are handled by a Compliance Services unit which is operated,
depending on the type of taxpayer, by the Wage and Investment Division
(W&I) or the Small Business/Self-Employed Division (SB/SE). Taxpayer
telephone calls to IRS in response to collection notices are handled by
IRS's Accounts Management organization. IRS's outgoing calls to
taxpayers to prompt payment or other resolutions as well as taxpayer
calls in response to IRS's telephone contacts are handled by the
Automated Collection System (ACS) operations of W&I and SB/SE. All in-
person contacts are handled by the Collection Field Function in SB/SE.
Cases Take Various Routes through the Process Based on Several Factors:
In routing cases between and within the phases of the process, IRS
considers factors such as the types of debt and taxpayers as well as
the results of contacts with taxpayers.
Debt Characteristics:
The characteristics that IRS considers include individual versus
business tax, the dollar amounts due, and the age of the debt, among
others, to evaluate whether the debt is potentially collectible. For
example:
* Individual taxpayers receive up to four notices while business
taxpayers receive up to two before their cases are routed to the next
phase if IRS receives no taxpayer response or a response inadequate to
resolve the debt.
* Cases not resolved through the notice phase are placed in a system
for modeling to determine the appropriate routing through the telephone
phase or the in-person contact phase.
* Due to the risk of businesses continuing to accumulate tax debt and
the resulting need for faster IRS intervention, trust fund tax
cases[Footnote 11] are more likely to be routed around the telephone
contact phase to the waiting "queue" for in-person contact or routed
around the queue to be assigned for in-person contact if the amount due
exceeds a certain threshold.
* Cases meeting certain criteria in the telephone contact phase--such
as amount due--may be routed to the ACS unit that does outbound calls
to taxpayers. Otherwise, any telephone contact with the taxpayer would
depend on whether the taxpayer calls in response to IRS notices or
letters on enforcement actions proposed or taken in this phase.
Known Taxpayer Information:
The known information about the taxpayer includes whether IRS has
information on potential levy sources (such as bank accounts), a valid
mailing address or telephone number for the taxpayer, the taxpayer's
financial assets or ability to pay, or other tax debts owed by the
taxpayer. Several examples follow.
* After notices are sent, if IRS records (such as those from a
financial statement due to a previous tax debt) indicate that the
taxpayer cannot pay all or part of the debt, the debt may be
categorized as not collectible due to financial hardship.
* Within the telephone contact phase, whether IRS attempts an outbound
call to the taxpayer is determined, in part, by whether IRS has a
telephone number for the taxpayer.
* If IRS records indicate that the taxpayer already has outstanding
unpaid tax debt in a phase of the collection process, IRS is to forward
the new debt information to that phase to facilitate collection of all
the debt. For example, if a taxpayer's debt was already being handled
in the in-person contact phase, the new debt would skip the telephone
phase and the waiting queue to go directly to in-person contact.
Results of Attempts to Contact Taxpayers to Resolve Tax Debts or
Enforce Collection:
The results of attempts to contact taxpayers to resolve tax debts or
enforce collection can vary widely. Taxpayers may respond by providing
more information about their debt or financial situation, making a
partial or a full payment, or asking about alterative ways to resolve
the debt such as by reducing amounts owed or paying through
installments. Taxpayers also may not respond at all. The nature of
taxpayers' responses help determine subsequent IRS action and which IRS
unit takes action. Examples follow.
* Within the notice phase, various IRS units can get involved and
handle a case differently depending on whether the taxpayer has income
from a small business or the taxpayer responds by telephone or through
the mail.
* In the telephone contact phase, IRS may place a lien on a taxpayer's
property if previous attempts to resolve the debt have been
unsuccessful. Unless the lien filing prompts the taxpayer to resolve
the debt, the case can move to the waiting queue for in-person contact.
* If IRS notices to the taxpayer are returned as undeliverable or IRS
records do not provide a levy source, IRS may send the case to be
researched for a good address or a levy source such as bank accounts.
* If taxpayer responds by entering into an installment agreement,
offering to satisfy the debt by paying less than the full amount due
(offer in compromise), or questioning the amount due (such as in an
appeal), IRS is to temporarily suspend routing the case through the
collection process until IRS finishes dealing with these alternative
ways to resolve the debt.
Tax Debt Collections Have Recently Increased, but Increases in
Potentially Collectible Inventory and Active Cases May Not Portend
Continuing Collection Increases:
The revenue collected from pursuing the unpaid tax debt through the
collection process increased about 30 percent--from $33 billion in
fiscal year 2002 to $43 billion in fiscal year 2007.[Footnote 12] At
the same time, the total IRS tax debt inventory went from $280 billion
to $290 billion, as new tax debt was created and old tax debt was
resolved each year. IRS officials attributed the increase in
collections and in debt inventory in part to increased enforcement
actions. Comparing fiscal years 2004 and 2007, IRS's assessments made
from enforcement efforts accounted for a growing portion of the new
potentially collectible debt inventory, increasing from about 30
percent to about 50 percent, respectively. IRS officials said that
assessments made through ASFR were a major factor in this growth.
IRS collection officials said that to some extent IRS cannot control
trends in the total tax debt inventory, which they attribute to trends
in the economy and taxpayer compliance behaviors. They also said that
IRS may make enforcement-related tax assessments even when taxpayers
likely will not be able to pay the debt because IRS needs to signal
taxpayers that IRS will indeed pursue noncompliance.
Over the 2002 through 2007 period, IRS categorized more of the unpaid
debt inventory as worth pursuing with a growing portion of its unpaid
inventory being in potentially collectible and active collection
status. These increases, however, may not result in the total dollars
actually collected growing annually at rates similar to the growth in
the inventory defined as collectible or active.
As shown in figure 3, IRS's potentially collectible inventory increased
from 27 percent of the unpaid tax debt inventory in fiscal year 2002 to
36 percent in fiscal year 2007. Data on the inventory of unpaid
assessments in fiscal years 2002 through 2007, including more details
on how IRS classified the debt, are in appendix IV.
Figure 3: Unpaid Tax Debt Inventory: Percentages Categorized as
Potentially Collectible and Not Potentially Collectible at the Ends of
Fiscal Years 2002-2007:
[See PDF for image]
This figure is a multiple vertical bar graph depicting the following
data:
Fiscal year: 2002;
Percentage of unpaid taxes potentially collectible: 27%;
Percentage of unpaid taxes not potentially collectible: 73%.
Fiscal year: 2003;
Percentage of unpaid taxes potentially collectible: 29%;
Percentage of unpaid taxes not potentially collectible: 72%.
Fiscal year: 2004;
Percentage of unpaid taxes potentially collectible: 29%;
Percentage of unpaid taxes not potentially collectible: 72%.
Fiscal year: 2005;
Percentage of unpaid taxes potentially collectible: 34%;
Percentage of unpaid taxes not potentially collectible: 66%.
Fiscal year: 2006;
Percentage of unpaid taxes potentially collectible: 35%;
Percentage of unpaid taxes not potentially collectible: 65%.
Fiscal year: 2007;
Percentage of unpaid taxes potentially collectible: 36%;
Percentage of unpaid taxes not potentially collectible: 64%.
Source: IRS data.
Note: Percentages may not add to 100 due to rounding.
[End of figure]
According to IRS, the potentially collectible inventory is the focus of
its collection efforts. However, not all potentially collectible debt
has a high potential for collection. Rather, potentially collectible
means that the debt has not been defined as uncollectible for a variety
of reasons, such as the taxpayer being bankrupt or facing a financial
hardship or IRS being unable to find the taxpayer or temporarily
suspending the debt from collection actions.
From fiscal year 2002 to 2007, IRS placed more of the inventory with
collection potential into "active collection status." Comparing fiscal
years 2002 and 2007, debt in active collection increased from 62
percent to 75 percent of the potentially collectible inventory,
respectively, as shown in figure 4.
Figure 4: Potentially Collectible Inventory: Percentages in Active and
Not Active Collection Status at the Ends of Fiscal Years 2002-2007:
[See PDF for image]
This figure is a multiple vertical bar graph depicting the following
data:
Fiscal year: 2002;
Percentage of potentially collectible inventory that is in active
collection status: 62%;
Percentage of potentially collectible inventory that is not in active
collection status: 38%.
Fiscal year: 2003;
Percentage of potentially collectible inventory that is in active
collection status: 64%;
Percentage of potentially collectible inventory that is not in active
collection status: 36%.
Fiscal year: 2004;
Percentage of potentially collectible inventory that is in active
collection status: 66%;
Percentage of potentially collectible inventory that is not in active
collection status: 34%.
Fiscal year: 2005;
Percentage of potentially collectible inventory that is in active
collection status: 77%;
Percentage of potentially collectible inventory that is not in active
collection status: 23%.
Fiscal year: 2006;
Percentage of potentially collectible inventory that is in active
collection status: 75%;
Percentage of potentially collectible inventory that is not in active
collection status: 25%.
Fiscal year: 2007;
Percentage of potentially collectible inventory that is in active
collection status: 75%;
Percentage of potentially collectible inventory that is not in active
collection status: 24%.
Source: IRS data.
Note: Percentages may not add to 100 due to rounding.
[End of figure]
Active collection status means that IRS makes the debt available to be
pursued in a phase of the collection process. This status does not mean
that IRS is actively and continuously contacting the taxpayer or using
its enforcement tools in the telephone or in-person contact phases
until all debt is resolved. Depending on competing priorities and IRS
resources, for example, some of this inventory could remain in this
active status for some time before it is acted upon or resolved. IRS
also could decide to move the debt to an inactive status during which
no further collection action is taken.
For debt that is resolved by removing it from the debt inventory, IRS
often does not collect any revenue. During each of fiscal years 2002
through 2007, over half of the annual resolutions in terms of dollar
amounts were removed from the debt inventory through abatements and
collection statue expirations, as shown in table 1.
Table 1: Percentage of Unpaid Tax Debt Inventory Resolved by Types of
Removal, Fiscal Years 2002 through 2007:
Types of removal from inventory: Collection of dollars;
Fiscal year: 2002: 41%;
Fiscal year: 2003: 34%;
Fiscal year: 2004: 37%;
Fiscal year: 2005: 30%;
Fiscal year: 2006: 39%;
Fiscal year: 2007: 41%.
Types of removal from inventory: Abatement;
Fiscal year: 2002: 23%;
Fiscal year: 2003: 25%;
Fiscal year: 2004: 20%;
Fiscal year: 2005: 24%;
Fiscal year: 2006: 28%;
Fiscal year: 2007: 28%.
Types of removal from inventory: Collection statute expiration;
Fiscal year: 2002: 36%;
Fiscal year: 2003: 41%;
Fiscal year: 2004: 43%;
Fiscal year: 2005: 46%;
Fiscal year: 2006: 33%;
Fiscal year: 2007: 31%.
Types of removal from inventory: Total;
Fiscal year: 2002: 100%;
Fiscal year: 2003: 100%;
Fiscal year: 2004: 100%;
Fiscal year: 2005: 100%;
Fiscal year: 2006: 100%;
Fiscal year: 2007: 100%.
Source: IRS data.
[End of table]
Abatements occur for a number of reasons.[Footnote 13] For example,
section 6404(a) of the Internal Revenue Code, in part, authorizes IRS
to abate the unpaid taxes or any related liability which is:
* excessive in amount;
* assessed after the applicable period of limitation has expired, or;
* assessed erroneously or illegally.
Among reasons for abatements are errors by taxpayers or IRS and changes
to assessments resulting from additional information provided by
taxpayers or obtained by IRS that adjusts the appropriate tax
assessment and related penalty and interest amounts that have accrued
over time. Abatements can occur years after an original tax assessment
was made. In sum, the amount that IRS abates can exceed the amount
collected during a given year.
An example in which additional information leads to abatements involves
ASFR assessments. IRS uses the best information available when it
prepares returns for taxpayers who failed to file returns. When
responding to the IRS-prepared return, taxpayers may provide additional
information, such as on deductions to which they are entitled, which
would produce a lower tax assessment compared to the ASFR-generated
assessment. Accordingly, IRS abates any assessed taxes and any
applicable penalties associated with the ASFR return. Abatements also
can be required when:
* a taxpayer uses a net operating loss carryover amount to offset a tax
liability;
* a taxpayer files an amended tax return that changes the tax
liability;
* a taxpayer provides information as part of a request to abate certain
types of penalty assessments due to reasonable cause;
* a bankruptcy court has discharged a tax assessment;
* a taxpayer has met the terms of the agreement for an offer in
compromise to reduce the amount the taxpayer must pay to satisfy a tax
debt, or;
* a corporate officer has fully paid a trust fund recovery penalty
amount assessed for unpaid payroll taxes, which means that IRS then can
abate any other assessments of this amount against other officers.
Likewise, the law allows IRS a period of time to collect outstanding
tax debts through its collection process or court proceeding. This
period, which IRS refers to as the Collection Statue Expiration Date,
generally is 10 years and usually begins from the date a tax liability
is assessed. In general, if IRS does not collect the full unpaid tax
debt amount before the statute period ends, then any remaining balance
on the debt is removed from the unpaid tax debt inventory because it is
exempt from further IRS collection action.[Footnote 14] Expired debt
can happen, for example, when the taxpayer does not have sufficient
resources to pay the debt before the statutory period elapses, such as
when the taxpayer is a defunct business or dies, or when IRS's limited
resources do not enable it to actively pursue all debts. IRS officials
noted that the increase in the portion of debt removed due to statute
expirations in the 2003 through 2005 period, for instance, was
attributable to the inability of failed financial institutions to pay
large tax assessments associated with Resolution Trust Fund cases
arising during the 1990s.
IRS-Wide Collection Performance Measures Cover the Collection Process
and Some Outcomes:
As shown in table 2, two of the IRS-wide collection performance
measures cover all phases of the collection process and focus on the
extent to which debt cases were closed and the efficiency in using
staff resources for those closures. A third measure covers IRS's
accuracy in the phone contact phase.
Table 2: IRS-Wide Collection Process Performance Measure Definitions
and Collection Phases Covered:
Measure: Collection coverage;
Definition: Percentage of workload that was available and disposed[A];
Collection phases covered: Notice: [Check];
Collection phases covered: Telephone: [Check];
Collection phases covered: In-person: [Check].
Measure: Collection efficiency;
Definition: Number of cases disposed compared to the number of staff
working cases[A];
Collection phases covered: Notice: [Check];
Collection phases covered: Telephone: [Check];
Collection phases covered: In-person: [Check].
Measure: Automated collection system customer accuracy;
Definition: Percentage of time taxpayers received the correct answers
to their inquiries, had their cases resolved correctly, or both;
Collection phases covered: Notice: N/A;
Collection phases covered: Telephone: [Check];
Collection phases covered: In-person: N/A.
Source: GAO analysis of IRS information.
Note: N/A means not applicable.
[A] In addition to debt cases in the collection process, the measure
includes cases where IRS attempts secure tax returns from taxpayers IRS
has identified as not having filed a tax return by the return due date,
which may or may not eventually involve the collection of unpaid tax
debt. For example, IRS could improve collection coverage performance if
more delinquent return cases get closed without the taxpayer owing
unpaid debt. We did not determine whether or how much these cases
affected the performance achieved on the measure shown in table 3
below.
[End of table]
Table 3 shows the goals and actuals for the three IRS-wide performance
measures for IRS's collection process. Fiscal year 2005 is the earliest
available data for the coverage and efficiency measures.
Table 3: IRS-Wide Goals and Actuals for Collection Performance
Measures, Fiscal Years 2005-2007:
Measure: Collection coverage;
Fiscal year 2005: Goal: N/A;
Fiscal year 2005: Actual: 53%;
Fiscal year 2006: Goal: 52%;
Fiscal year 2006: Actual: 54%;
Fiscal year 2007: Goal: 54%;
Fiscal year 2007: Actual: 54%.
Measure: Collection efficiency;
Fiscal year 2005: Goal: N/A;
Fiscal year 2005: Actual: 1,514;
Fiscal year 2006: Goal: 1,650;
Fiscal year 2006: Actual: 1,677;
Fiscal year 2007: Goal: 1,723;
Fiscal year 2007: Actual: 1,828.
Measure: Automated collection system customer accuracy;
Fiscal year 2005: Goal: N/A;
Fiscal year 2005: Actual: N/A;
Fiscal year 2006: Goal: 89.3%;
Fiscal year 2006: Actual: 91.0%;
Fiscal year 2007: Goal: 91.0%;
Fiscal year 2007: Actual: 92.9%.
Source: IRS data.
Note: N/A means not applicable.
[End of table]
The IRS units that manage the phases of the collection process have
more measures and data on their phases. The telephone contact phase
operations of SB/SE and W&I and the in-person contact phase operation
(which is only SB/SE) have measures and goals on customer satisfaction,
employee satisfaction, and quality. For the notice phase, IRS officials
had data on the speed and efficiency of collections. Other measures and
data in some units included the time taken to resolve the debt and the
age of the debt. IRS officials who manage the different phases of the
collection process said that their available data, performance
measures, and goals meet the needs of their operations.
These IRS officials also said that IRS does not have performance
measures and goals for dollars collected in part because of concerns
about legal restrictions on IRS using enforcement records to assess
performance. Under Public Law 105-206, IRS cannot evaluate employees or
suggest production quotas or goals by using "records of tax enforcement
results."[Footnote 15] In addition, these officials said that IRS does
not, in their view, need more IRS-wide measures to indicate how well
the overall collection process is working. They said that to understand
what was driving performance trends, any rolled-up measure would have
to be broken down into its constituent parts. The officials did not
explain why the two IRS-wide measures on coverage and efficiency were
useful while other measures would not be useful even though they all
would be rolled up.
Our previous work has identified material weaknesses in IRS's controls
over unpaid tax assessments and over the collection of tax revenues due
the federal government. Although IRS has made some progress on these
weaknesses, progress has not been sufficient to resolve them. In
November 2007, we reported that IRS's efforts to target cases for
collection have been hampered by an inability to reliably measure how
much it collects compared to the costs, and that these efforts did not
represent an agencywide, systematic approach to managing the collection
of unpaid taxes. The absence of agencywide cost-benefit information and
related performance measures also hampered IRS's ability to form an
effective and efficient collection strategy.[Footnote 16]
Over the last 3 years, IRS has employed various approaches, including
sophisticated computer modeling and risk assessment techniques, to
assist it in more effectively identifying the tax debt cases with the
greatest collection potential and to facilitate prioritizing of these
cases for collection. IRS has also employed these techniques to
identify the most effective collection approach to take for the various
types of outstanding tax debt. Although IRS has ongoing projects to
expand the use of these models and techniques, it does not yet have an
agencywide, systematic approach to managing the collection of unpaid
taxes across the scope of IRS's responsibilities. IRS has acknowledged
the need for the parts of the collection process to work better
together. In response, IRS created a council of IRS collection
officials, for example, to coordinate various collection activities and
review how potential changes in one part of the process could affect
another part of the process. Further, IRS has a number of ongoing
projects to improve aspects of the collection process. However, some of
these projects will take a few years to be implemented, as indicated in
appendix III.
Agency Comments and Our Evaluation:
The Commissioner of Internal Revenue provided written comments on a
draft of this report in a letter dated June 2, 2008 (which is reprinted
in app. V). The Commissioner noted that he appreciated the interest of
Congress and other stakeholders in tax debt collection and outlined
some related collection process highlights and accomplishments.
In addition to citing the two IRS-wide collection measures--coverage
and efficiency--which we discussed in this report, the Commissioner
cited other information as signs of IRS collection improvements since
2005. He pointed to improvements in dollars collected, total
dispositions, productivity, and cycle time without reducing customer
satisfaction, quality, or accuracy. As we discussed in the report,
beyond the two IRS-wide collection performance measures, the IRS units
that manage the phases of the collection process have other measures
and data on their phases of the collection process. We note that
although IRS has only two IRS-wide collection measures--coverage and
efficiency--that are used by agency management to set performance
goals, IRS in effect used measures from the unit level in order to
portray a more complete picture of collection performance in its
comment letter.
The Commissioner further said that progress in collection performance
was recognized when, in October 2006, the material weakness "Collection
of Unpaid Taxes" was downgraded to a reportable condition. This
downgrade was made by IRS. As we noted in this report, although IRS has
made some progress on the material weaknesses we identified in previous
work, we concluded that the progress had not been sufficient to resolve
them as of November 2007. We will review this material weakness again
in our next report on IRS's financial management systems.
The Commissioner also referred to 14 collection process improvement
projects underway, a count that differs from the 18 projects we
identified in our report We did not reconcile the difference.
In addition to its letter, IRS provided technical comments on a draft
of this report which we incorporated as appropriate.
As agreed with your offices, unless you publicly announce its contents
earlier, we plan no further distribution of this report until 30 days
after its date. At that time, we will send copies to the Secretary of
the Treasury, the Commissioner of Internal Revenue, and other
interested parties. This report will also be available at no charge on
GAO's Web site at [hyperlink, http://www.gao.gov].
If you or your staff have any questions about this report, please
contact me at (202) 512-9110 or brostekm@gao.gov. Contact points for
our Offices of Congressional Relations and Public Affairs may be found
on the last page of this report. Key contributors to this report are
listed in appendix VI.
Signed by:
Michael Brostek:
Director, Tax Issues Strategic Issues:
[End of section]
Appendix I: Scope and Methodology:
To determine the process the Internal Revenue Service (IRS) uses to
attempt to collect or resolve unpaid tax debts, we interviewed IRS
officials and reviewed IRS documents. For example, we interviewed the
Small Business/Self-Employed Division (SB/SE) and Wage and Investment
Division (W&I) officials on how debt cases flow through the process and
the various factors that are taken into consideration in deciding how
to route cases. We also reviewed IRS documents on the process,
including written descriptions of the factors considered and flowcharts
of how tax debts are routed through the collection process. In
addition, we obtained information on the IRS units involved in
administering the process and the volume of workload going through the
process from fiscal years 2002 through 2007.
To identify the trends in unpaid tax debt, including the size and
composition of the inventory, collections, and other resolutions of
unpaid debt in fiscal years 2002 through 2007, we obtained and analyzed
data from IRS's unpaid assessments database, including how IRS
categorized the debt. For example, we analyzed debt to identify
increases or decreases over time in the various debt categories, such
as potentially collectible versus not potentially collectible debt. We
also reviewed data IRS provided on the resolution of debt cases,
including the debt amounts collected, abated, or written off due to
collection statute expiration from fiscal years 2002 through 2007.
To determine the performance measures and related goals that are
available to assess how well the collection process works overall, we
requested and reviewed the highest-level available, IRS-wide measures
of collection performance. We reviewed the measures to determine what
results they report about the collection process. We also reviewed the
goals/targets and actual performance achieved for these measures from
fiscal years 2005 through 2007.
In addition, for context on the debt inventory and collection process,
we also asked IRS to provide (1) data and analysis on the inflow and
outflow of debt, and the status of debt identified in fiscal year 2002,
from fiscal years 2002 through 2007 and (2) a list of IRS efforts to
improve the management of the inventory and collection process. The
results of these requests for IRS information are in appendixes II and
III, respectively.
Much of the IRS information we relied on was descriptive. To the extent
possible, we corroborated interview evidence with documentation. Where
not possible, we attributed descriptive information to IRS officials.
The reliability of quantitative data on the tax debt inventory is
assured as part of our annual audit of IRS's financial statements. We
corroborated data on the resolutions of tax debt with other IRS data
and determined that they were reliable for our purposes.
We conducted this performance audit from July 2007 to May 2008 in
accordance with generally accepted government auditing standards. Those
standards require that we plan and perform the audit to obtain
sufficient, appropriate evidence to provide a reasonable basis for our
findings and conclusions based on our audit objectives. We believe that
the evidence obtained provides a reasonable basis for our findings and
conclusions based on our audit objectives.
[End of section]
Appendix II: Challenges in Tracking the Inventory and Collection of Tax
Debts across Fiscal Years:
To help provide context on the magnitude of the Internal Revenue
Service's (IRS) unpaid tax debt inventory and changes in the inventory
over time we requested data from IRS to show the flow of debt into and
out of the inventory during fiscal years 2002 through 2007. For
example, we requested for each fiscal year:
* the amount of new debt that came into the inventory and the amount of
debt resolved during the year, and:
* the balance of the inventory at year's end.
In addition, we requested data from IRS that tracked the dispositions
and status of unpaid tax debts identified in fiscal year 2002 through
the end of fiscal year 2007. For example, for each "new" unpaid tax
debt assessed in fiscal year 2002, we requested data that showed the
amounts collected, abated, or otherwise resolved by fiscal year. For
the balance remaining at the end of each fiscal year, we requested data
on the status of the debt, for example, where the debt was in the
collection phase, such as, in the notice phase or assigned for an in-
person field contact.
Our data requests were a challenge for IRS, in part, because of how IRS
maintains data for the unpaid tax debts inventory and the resulting
complexity in trying to reconcile the data and ensure its reliability.
For example:
* IRS does not have one information system that tracks, in detail, what
happens to unpaid tax debts over time. The unpaid tax debt data come
from several sources including reports from IRS's Master file and
Compliance Data Warehouse (CDW). As such, doing the tracking that we
requested required much of it to be provided in the form of queries
that had to be analyzed and adjusted for things such as duplicate
records, anomalies in the data, or both.[Footnote 17]
* IRS's beginning and ending unpaid tax debt inventory balances for
each fiscal year represents a snapshot of the balances at those points
in time. Yet the inventory is based on what happens during each fiscal
year to accumulated tax debt from multiple tax years; therefore, a
snapshot of the balances at the end of a specific fiscal year will not
reflect the details of what occurred to the debt during the year.
IRS could provide mostly summary-level data. An IRS official
responsible for the data believed that the methodology used to produce
the summary-level data provided enough details to reflect the various
activities that occurred in each fiscal year at the time the reports
were generated. More useful and reliable information that tracked all
activity affecting the unpaid tax debt inventory balances across fiscal
years was difficult for IRS to produce.
According to this IRS official, the difficulty in trying to produce
this level of detailed information is one reason that IRS requested and
eventually received an exemption from the Federal Accounting Standards
Advisory Board. This exemption relieved IRS from a financial reporting
requirement to disclose detailed information on the flow of debt into
and out of the unpaid assessment inventory.
[End of section]
Appendix III: IRS Efforts to Improve the Collection Process as of May
2008:
The Internal Revenue Service (IRS) has numerous projects planned or
underway to improve the collection process. To better understand the
improvements, we asked IRS to provide us with a list of all improvement
projects on the collection process, and details such as their goals,
their objectives, their measures of success, and their status. We
received a list of projects from the Small Business/Self-Employed
Division (SB/SE) and Wage and Investment Division (W&I). We also
identified additional ones from various IRS documents, including the
strategy and program plans of W&I and SB/SE. Also, we did not include a
number of outstanding legislative proposals whose enactment would
affect collection practices because their enactment is uncertain and
beyond the control of IRS. We do not know if this list is complete, and
IRS was not able to provide complete information on some projects as of
May 2008.
We did not attempt to evaluate the information provided; nor did we
attempt to evaluate the process for evaluating and approving collection
improvement projects to ensure that projects had clear goals, measures,
and rationales to support their implementation. Table 4 identifies the
various improvement projects provided by SB/SE and W&I as well as the
projects' goals, measures, and status in terms of key milestone dates.
Table 4: IRS Collection Improvement Projects (as of May 2008):
SB/SE project: Business Master File-Case Creation Nonfiler
Identification Process;
Project goal: Better identify and pursue businesses that fail to file
tax returns and those most likely to have a tax liability;
Measure of success: Reduce by 50 percent the number of business
nonfiler cases worked that do not result in a tax liability. Decrease
staff time needed to work cases;
Key project milestone dates: Implementation by August 2008.
SB/SE project: Integrated Collection System (ICS) Windows --automated
inventory management system;
Project goal: Improve electronic case processing by upgrading ICS
application to a Windows-based system;
Measure of success: Two percent increase in overall user efficiency
(i.e.,the average case cycle time will be reduced from 36 to 35.3
weeks, and 2 percent more cases will be worked;
Key project milestone dates: Implementation by November 2008.
SB/SE project: Consolidated Decision Analytics -system to help score
and route cases;
Project goal: Enhance the collection inventory delivery system (IDS) to
more effectively select cases to work, treatments to use, and staff to
work the case;
Measure of success: Increase both cases worked and dollars collected by
5 percent;
Key project milestone dates: Implementation by January 2009.
SB/SE project: Electronic Lien - to process over a million liens each
year;
Project goal: Streamline and expedite lien filing, reduce lost lien
reports, and ensure prompt payment of lien filing fees by making
process electronic;
Measure of success: Reduce costs for lost lien research and analysis by
15 percent in 2010 and 40 percent in 2011. Similar savings in these 2
years in lien filing fees. Collect additional revenue by raising IRS's
priority against other creditors;
Key project milestone dates: Implementation by December 2011.
SB/SE project: Enhanced Inventory Delivery System (IDS);
Project goal: Enhance IDS by performing its analytics and case-routing
decisions more quickly and accurately after first notice rather than
after final notice;
Measure of success: Reduce cycle time by as much as 15 weeks. Allow
caseworkers to intervene earlier resulting in an estimated 7 percent
reduction in repeat tax delinquencies;
Key project milestone dates: Implementation by January 2011.
SB/SE project: Bulk Electronic Levy;
Project goal: Automate the process for delivering levy notices to and
processing responses and remittances from financial institutions and
large employers, including the posting of levy payments to taxpayer
accounts;
Measure of success: Reduce the cycle time for sending levies. Reduce
mailing costs. Expedite posting of payments to taxpayers' accounts;
Key project milestone dates: Implementation by January 2012.
SB/SE project: Camera cell phones;
Project goal: Improve (1) productivity of revenue officers in
determining asset valuation, (2) communication between IRS and
taxpayers, and (3) employee safety on field visits;
Measure of success: Increased employee and taxpayer satisfaction;
Key project milestone dates: Implementation by September 2008.
SB/SE project: Electronic Processing Initiative;
Project goal: Automate the process for making adjustments to collection
field function accounts;
Measure of success: Reduce time to process audit reconsiderations from
18 plus months to 3 months. Reduce mail costs of over $500,000
annually. Raise employee satisfaction;
Key project milestone dates: Completion by September 2008.
SB/SE project: Employer Identification Number (EIN) Project;
Project goal: Understand the impact of the current EIN application
process on compliance (e.g., businesses misuse EIN's to create
successive entities without resolving tax debts); Determine if EIN
application data can help identify such businesses, and recommend any
changes to help identify them;
Measure of success: To identify and quantify (including tax amounts
involved) the universe of EIN requesters who are likely to create
multiple entities without paying their taxes;
Key project milestone dates: Phase 1 to be completed by August 2008.
SB/SE project: Collection due process (CDP) project;
Project goal: Identify improvements to reduce the time expended by
collection field function staff, reduce nonproductive cases, improve
the quality of the CDP referrals to Appeals, and reduce the amount of
CDP process time;
Measure of success: Improvements in Collection Field Function
productivity, reduction in the time a case is in Appeals, and improved
employee satisfaction;
Key project milestone dates: Completion by October 2008.
SB/SE project: Redesign Installment Agreement (IA) Processing;
Project goal: Identify errors and areas for redesign to increase IA
processing efficiencies;
Measure of success: Reduce errors and allow for the faster
establishment of IA's;
Key project milestone dates: Implementation by June 2008.
SB/SE project: Reasonable Cause Assistant;
Project goal: Automate the process for reasonable cause determinations
to reduce cycle time and improve timeliness;
Measure of success: Reduce cycle time for posting adjustments. Increase
uniformity of abatement decisions;
Key project milestone dates: Implementation by September 2008.
SB/SE project: Case Assignment Grading;
Project goal: Improve revenue officer (RO) case assignments through a
more systemic process and a better automated system;
Measure of success: Reduce number of systemic case reassignments that
require manual case grading changes. Align systemic case assignment
criteria with manual case assignment factors. Reduce managerial burden
and improve case grading accuracy to better match the case grade with
the revenue officer grade and skill level;
Key project milestone dates: Implementation by November 2009.
W&I project: Electronic Automated Collection System Guide --decision
logic guide/support tool;
Project goal: Help ensure that correct and consistent determinations of
case outcomes are made based on information taxpayers provide;
Measure of success: None provided;
Key project milestone dates: None provided.
W&I project: Imaging Delivery for Compliance --Web-accessible, digital
image-based system;
Project goal: Provide online access to images of Form 1040X,
correspondence, and notices to increase number of cases worked
electronically;
Measure of success: No specific numerical measures provided;
Key project milestone dates: Delivery of images expected in fiscal
years 2009 and 2010.
Project: Additional improvement projects identified in IRS documents:
Update IRS risk model;
Project goal: Improve grading of collection potential after notice
phase and provide better assurance that the right kind of work will be
assigned to the right person on a timely basis;
Measure of success: None provided;
Key project milestone dates: Delivery expected in November 2008.
W&I project: Hybrid Automated Collection System Site;
Project goal: Provide staff with more specialized skills and ability to
handle certain types of cases (e.g., employment tax). Hybrid site will
keep control of such cases until they are resolved;
Measure of success: None provided;
Key project milestone dates: Two prototype sites currently in
operation.
W&I project: Universal Case History;
Project goal: Provide a fuller view of the taxpayer across multiple
data sources, databases, and business lines with the ability to
associate electronic imaged correspondence, checks, and related
documents;
Measure of success: No specific measures provided but hope to (1)
decrease cycle time, and (2) increase number of cases that staff can
work in a given period;
Key project milestone dates: Not funded.
Source: IRS information.
[End of table]
[End of section]
Appendix IV: Data on the Inventory of Unpaid Assessments and Collection
Results from Fiscal Years 2002 through 2007:
Table 5: Unpaid Tax Debt Inventory (as of the end of Fiscal Years 2002-
2007) (Dollars in billions):
Total unpaid tax debt inventory:
Fiscal year: 2002: $ 279.8;
Fiscal year: 2003: $ 278.1;
Fiscal year: 2004: $ 284.8;
Fiscal year: 2005: $ 257.9;
Fiscal year: 2006: $ 270.4;
Fiscal year: 2007: $ 290.1.
Assessed amount:
Fiscal year: 2002: $180.9;
Fiscal year: 2003: $182.6;
Fiscal year: 2004: $190.9;
Fiscal year: 2005: $184.5;
Fiscal year: 2006: $198.9;
Fiscal year: 2007: $216.2.
Accrued interest and penalty:
Fiscal year: 2002: $98.8;
Fiscal year: 2003: $95.5;
Fiscal year: 2004: $93.9;
Fiscal year: 2005: $73.4;
Fiscal year: 2006: $71.5;
Fiscal year: 2007: $73.4.
Percentage of assessed amount to total inventory:
Fiscal year: 2002: 64.7%;
Fiscal year: 2003: 65.7%;
Fiscal year: 2004: 67.0%;
Fiscal year: 2005: 71.5%;
Fiscal year: 2006: 73.6%;
Fiscal year: 2007: 74.5%.
Percentage of accrued interest and penalty to total inventory:
Fiscal year: 2002: 35.3%;
Fiscal year: 2003: 34.3%;
Fiscal year: 2004: 33.0%;
Fiscal year: 2005: 28.5%;
Fiscal year: 2006: 26.4%;
Fiscal year: 2007: 25.3%.
Total percentage:
Fiscal year: 2002: 100.0%;
Fiscal year: 2003: 100.0%;
Fiscal year: 2004: 100.0%;
Fiscal year: 2005: 100.0%;
Fiscal year: 2006: 100.0%;
Fiscal year: 2007: 99.8%.
Source: IRS data.
Note: Dollar amounts and percentages may not add to totals due to
rounding and variances in IRS's data.
[End of table]
Table 6: Potentially Collectible Inventory versus Non-Potentially
Collectible Inventory of the Unpaid Assessments (Dollars in billions):
Total unpaid assessment inventory;
Fiscal year: 2002: $279.8;
Fiscal year: 2003: $278.1;
Fiscal year: 2004: $284.8;
Fiscal year: 2005: $257.9;
Fiscal year: 2006: $270.4;
Fiscal year: 2007: $290.1.
Non-potentially collectible inventory:
Fiscal year: 2002: $203.1;
Fiscal year: 2003: $198.9;
Fiscal year: 2004: $203.5;
Fiscal year: 2005: $170.9;
Fiscal year: 2006: $174.8;
Fiscal year: 2007: $184.8.
Potentially collectible inventory:
Fiscal year: 2002: $76.7;
Fiscal year: 2003: $79.2;
Fiscal year: 2004: $81.3;
Fiscal year: 2005: $87.0;
Fiscal year: 2006: $95.6;
Fiscal year: 2007: $105.3.
Percentage of non-potentially collectible inventory to the unpaid
assessment inventory:
Fiscal year: 2002: 72.6%;
Fiscal year: 2003: 71.5%;
Fiscal year: 2004: 71.5%;
Fiscal year: 2005: 66.3%;
Fiscal year: 2006: 64.5%;
Fiscal year: 2007: 63.7%.
Percentage of potentially collectible inventory to the unpaid
assessment inventory:
Fiscal year: 2002: 27.4%;
Fiscal year: 2003: 28.5%;
Fiscal year: 2004: 28.5%;
Fiscal year: 2005: 33.7%%;
Fiscal year: 2006: 35.4%;
Fiscal year: 2007: 36.3%.
Total percentage:
Fiscal year: 2002: 100.0%;
Fiscal year: 2003: 100.0%;
Fiscal year: 2004: 100.0%;
Fiscal year: 2005: 100.0%;
Fiscal year: 2006: 99.9%;
Fiscal year: 2007: 100.0%.
Source: IRS data.
Note: Percentages may not add to totals due to rounding.
[End of table]
Table 7: Potentially Collectible Inventory in Active Collection and Non-
Active Collection Status (Dollars in billions):
Total potentially collectible inventory:
Fiscal year: 2002: $76.7;
Fiscal year: 2003: $79.2;
Fiscal year: 2004: $81.3;
Fiscal year: 2005: $87.0;
Fiscal year: 2006: $95.6;
Fiscal year: 2007: $105.3.
Potentially collectible inventory in active collection status: Notice;
Fiscal year: 2002: $14.3;
Fiscal year: 2003: $13.7;
Fiscal year: 2004: $15.8;
Fiscal year: 2005: $21.1:
Fiscal year: 2006: $21.4:
Fiscal year: 2007: $22.8.
Potentially collectible inventory in active collection status:
Telephone (Automated Collection System);
Fiscal year: 2002: $13.3;
Fiscal year: 2003: $15.4;
Fiscal year: 2004: $14.6;
Fiscal year: 2005: $21.5:
Fiscal year: 2006: $17.9:
Fiscal year: 2007: $19.6.
Potentially collectible inventory in active collection status: In-
person contact (Collection Field Function);
Fiscal years: 2002: $20.1;
Fiscal years: 2003: $21.5;
Fiscal years: 2004: $23.4;
Fiscal years: 2005: $24.5:
Fiscal years: 2006: $32.7:
Fiscal years: 2007: $36.9.
Total: Potentially collectible inventory dollars in active collection
status;
Fiscal year: 2002: $47.7;
Fiscal year: 2003: $50.6;
Fiscal year: 2004: $53.8;
Fiscal year: 2005: $67.1:
Fiscal year: 2006: $72.0:
Fiscal year: 2007: $79.3.
Percentage of potentially collectible inventory in active collection
status:
Fiscal years: 2002: 62.2%;
Fiscal years: 2003: 63.9%;
Fiscal years: 2004: 66.2%;
Fiscal years: 2005: 77.1%:
Fiscal years: 2006: 75.3%:
Fiscal years: 2007: 75.3%.
Potentially collectible inventory in a non-active collection status:
Queue;
Fiscal year: 2002: $21.5;
Fiscal year: 2003: $21.3;
Fiscal year: 2004: $20.8;
Fiscal year: 2005: $15.0:
Fiscal year: 2006: $19.5:
Fiscal year: 2007: $22.0.
Potentially collectible inventory in a non-active collection status:
Shelved due to lack of resources;
Fiscal years: 2002: $7.6;
Fiscal years: 2003: $7.3;
Fiscal years: 2004: $6.7;
Fiscal years: 2005: $4.9:
Fiscal years: 2006: $4.0:
Fiscal years: 2007: $3.5.
Total: Potentially collectible inventory dollars not in active
collection status;
Fiscal year: 2002: $29.1;
Fiscal year: 2003: $28.6;
Fiscal year: 2004: $27.5;
Fiscal year: 2005: $19.9:
Fiscal year: 2006: $23.5:
Fiscal year: 2007: $25.5.
Percentage of potentially collectible inventory in non-active
collection status:
Fiscal year: 2002: 37.9%;
Fiscal year: 2003: 36.1%;
Fiscal year: 2004: 33.8%;
Fiscal year: 2005: 22.9%;
Fiscal year: 2006: 24.6%;
Fiscal year: 2007: 24.2%.
Total percentage:
Fiscal years: 2002: 100.1%;
Fiscal years: 2003: 100%;
Fiscal years: 2004: 100%;
Fiscal years: 2004: 100%:
Fiscal years: 2005: 99.9%:
Fiscal years: 2007: 99.5%.
Source: IRS data.
Note: Dollar amounts and percentages may not add to totals due to
rounding and variances in IRS's data.
[End of table]
[End of section]
Appendix V: Comments from the Internal Revenue Service:
Department Of The Treasury:
Commissioner:
Internal Revenue Service:
Washington, D.C. 20224:
June 2, 2008:
Mr. Michael Brostek:
Director, Tax Issues Strategic Issues Team:
U.S. Government Accountability Office:
441 G Street, N.W.
Washington, D.C. 20548:
Dear Mr. Brostek:
Thank you for the opportunity to review and comment on your draft
report titled: "Tax Debt Collection: IRS Has a Complex Process to
Attempt to Collect Billions of Dollars in Unpaid Tax Debts" (GAO-08-
728). We appreciate the interest Congress and other stakeholders have
in tax debt collection and strive to develop methods that will target
and resolve the underpayment tax gap. Highlights of our Collection
program and its accomplishments are outlined below.
As noted in your report, IRS is responsible for collecting a
significant inventory of tax debt. The IRS Collection program accounts
for over 50 percent of annual enforcement revenue, bringing in $31.8
billion in 2007 - a 30 percent increase from the 2002 level of $24.4
billion. It is designed to move delinquencies through the collection
process while assuring that cases are resolved effectively at the
earliest possible time with the least possible cost to the American
taxpayer. At each major point in the collecting stream - notice,
telephone, and in-person - taxpayers are afforded the opportunity to
self-correct or to come into compliance voluntarily by working with an
IRS employee. The Collection Governance Council, comprised of
executives from IRS' four major operating divisions plus those from all
Collection programs, is an agency-wide body charged with ensuring that
development of strategies and strategic, tactical, and resource
priorities are consistent, address the tax gap, and support IRS'
strategic goals.
Since 2005, IRS Collection coverage has been maintained at
approximately 54 percent despite a concurrent 14 percent increase in
inventory and 4 percent decline in resources. Over the same time
period, IRS Collection efficiency increased 20 percent, total
collections increased nearly 17 percent, total dispositions increased
16 percent, plus productivity and cycle time within operations
improved. These positive results were gained without sacrificing
customer satisfaction, quality or accuracy as measured within various
collecting streams.
IRS progress in this area was recognized when, in October 2006, the
long-standing material weakness "Collection of Unpaid Taxes" was
downgraded to a reportable condition. In order to continue to
strengthen the Collection program, each year we review and pursue the
best suggestions for improvements. There are currently 14 Collection
improvement projects underway. Thirty-six percent of these will be
implemented by the end of FY 2008, with others to be completed in FY
2009 and later .
Thank you for your interest in this area. If you have any questions or
would like to discuss this response in more detail, please contact
Frederick W. Schindler, Director, Collection Policy at 202-283-7650.
Sincerely,
Signed by:
Douglas H. Shulman:
[End of section]
Appendix VI: GAO Contact and Staff Acknowledgments:
GAO Contact:
Michael Brostek, (202) 512-9110 or brostekm@gao.gov:
Acknowledgments:
In addition to the contact named above, Tom Short, Assistant Director;
Ray B. Bush; William J. Cordrey; George Guttman; Ronald W. Jones;
Veronica Mayhand; Donna Miller; John G. Smale; and A.J. Stephens made
key contributions to this report.
[End of section]
Footnotes:
[1] This inventory of unpaid tax debts is not the same concept as the
tax gap because the inventory is cumulative rather than annual and
includes penalty and interest in addition to the unpaid tax. A further
conceptual difference is that the unpaid tax debt inventory starts with
actual tax assessments while most of the tax gap, except for the $33
billion in nonpayment of known tax assessments, represents estimates of
tax losses because of reporting and filing noncompliance.
[2] 26 U.S.C. § 7804 note.
[3] ASFR attempts to enforce filing compliance on taxpayers who have
not filed individual income tax returns by automatically generating a
return that assesses related tax, penalties, and interest. IRS's goal
is to motivate the taxpayer to file an accurate tax return, which
usually reports a lower tax liability than IRS assesses because IRS
does not know all of the taxpayer's circumstances.
[4] Pub. L. No. 105-206, § 1204, 112 Stat. 685, 722 (July 22, 1998).
[5] Prior to 1998, a provision of the Technical and Miscellaneous
Revenue Act of 1988 prohibited IRS from using records of tax
enforcement results to evaluate employees directly involved in
collection activities and their immediate supervisors, or to impose or
suggest production quotas or goals with respect to such individuals.
Pub. L. No. 100-647, § 6231, 102 Stat. 3734 (Nov. 10, 1988). Before
1988, IRS Policy Statement P-1-20 prohibited using records of tax
enforcement results to evaluate enforcement officers or to impose or
suggest production goals or quotas.
[6] GAO, Tax Administration: Impact of Compliance and Collection
Program Declines on Taxpayers, [hyperlink, http://www.gao.gov/cgi-
bin/getrpt?GAO-02-674] (Washington, D.C.: May 22, 2002).
[7] GAO, Tax Debt Collection: IRS Needs to Complete Steps to Help
Ensure Contracting Out Achieves Desired Results and Best Use of Federal
Resources, [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-06-1065]
(Washington, D.C.: Sept. 29, 2006).
[8] Although both are tools to enforce collection of tax debts, a levy
differs from a lien. A levy is a seizure of the taxpayer's property to
satisfy a tax debt. A lien is a legal claim to the property of the
taxpayer as security for a tax debt.
[9] According to an IRS official, the telephone contact phase may also
receive a few high-risk cases for a short period of time before they
are routed to the in-person contact phase.
[10] Revenue officers are the most highly graded and trained IRS
collection staff and have authority to use the full range of IRS
enforcement tools including asset seizure.
[11] These cases involve employers' obligation to remit their share of
employment taxes and each employee's share of federal withholding taxes
such as for individual income tax and Social Security.
[12] These totals, as reported in IRS's annual data book, include the
three phases of the collection process. IRS also reports on enforcement
revenue collected, which is a higher number that includes dollars from
the collection process and other enforcement actions, such as
examinations.
[13] We did not attempt to analyze the appropriateness of these
abatement and expiration resolutions.
[14] The 10-year period can be extended or suspended under a variety of
circumstances, such as agreements by the taxpayer to extend the
collection period in conjunction with an installment agreement,
bankruptcy litigation, offer in compromise, and court appeal.
[15] The statute, however, does not prohibit using quantity measures in
evaluating organization performance. See Pub.L. No. 105-206, § 1204,
112 Stat. 685, 722 (July 22, 1998), codified at 26 U.S.C. § 7804 note.
[16] GAO, Financial Audit: IRS's Fiscal Years 2007 and 2006 Financial
Statements, [hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-08-166]
(Washington, D.C.: Nov. 9, 2007).
[17] For example, an anomaly occurs when a taxpayer's unpaid tax debt
record is created under one Social Security number (SSN) but payments
are recorded to another SSN. A merging of the accounts is done to
resolve the unpaid debt.
[End of section]
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