59

Accounts Receivable

Generally, accounts receivable represent the credit sales of a business. How
to handle accounts receivable is an important question for all businesses. One of the
most effective tools is to investigate the credit-worthiness of customers before
‘extending them credit. Private businesses formalize the precise amount and terms of
debt repayment when the debt accrues, and they manage their receivables by writing
off those accounts that are uncollectible. Businesses do not continue to cary debt on
their books when it becomes apparent, after attempting to collect, that it will not be
paid.

Like businesses, the IRS has accounts receivable. Unlike private businesses,
however, our customers are not purchasing products with their debt, and their credit-
worthiness is not determined prior to a transaction. In short, we do not choose our
customers.

It is important to understand what makes up the total amount of receivables.
When taxpayers either do not file retums or file inaccurate retums, we make
assessments based on the tax laws irrespective of collection potential. We record
these unpaid assessments as accounts receivable and keep them on our books for as
long as they are legally collectible. While we attempt to collect these debts, some
accounts are obviously uncollectible for various reasons, for example: the taxpayer
has died or is insolvent. In other words, we know at the outset that some of these
assessments will not be collected. But our gross accounts receivable do not include
just unpaid taxes, it also includes the ever-increasing interest and penalties related to

those unpaid taxes. In addition, the law prescribes how long we must keep accounts


123

agency or other new entities to go forward and get these funds
back into the Treasury, where they should be.

New expertise and experience is going to be needed simply based
upon past performance and the lack of IRS collections that we’ve
looked at all day long.

The 10 steps are here. I won’t take your time to go through the
lengthy 10 steps. I'll give you a quick summary so that you can re-
view them later at your leisure.

Also, on page 7, I’ve given you a very basic flow chart. For those
of us that learn more easily by visual means, rather than testi-
mony, it gives you a very simplified flow chart as to how it should
work, the step by step plan that has to be followed to bring this
new plan about.

The very first step, of course, is simple on its face. Find the liens.
Research the liens. Right now, again, I don’t believe that they could
tell you what is in New York, California, Nevada.

They could tell you some of the uncollectibles, which would be
from tax returns, but not these liens against real property, and
they certainly could not detail it for you by State, county or by
product type, residential/commercial.

We need to know this so that we can go and dispose of the prop-
erty and collect the revenues.

So we're going to go do research. We're going to find these prop-
erties. We're also going to have to simultaneously commit re-
sources, create, perhaps, new policies and procedures that will then
take this program in the forefront, bring it forward so that all of
the liens are tracked accordingly, which goes hand-in-hand with
step two, and that is what you’ve heard today, create or borrow a
data base.

Create a resource to capture and identify and track and report
to Congress what is in this area of Treasury recoverable dollars.

It’s essential that there be an open line of communication. It’s es-
sential for Congress to do its job. It’s essential that we find out
what’s in there and that this is a retrievable system to tell you at
all times where the liens are, how much the liens are, to date what
has been collected, what is going to expire, all of the questions
we've been asking and also to track the status of these properties.

We can tell you, perhaps, later down the road that we have 10
new liens against the properties. We need to watch every single
property to see if it’s going to go into foreclosure where one of these
institutions does the foreclosure and that equity that belongs to
IRS is not even being looked at.

It’s being passed straight over to another foreclosing entity. IRS
is walking away from all of these funds. We need to track every
one of those and know what status each one of those liens is in.

Also, you heard today that the liens expire after 10 years. Those
liens could be extended. That needs to be watched very carefully
so that never is that ball dropped and never is that lien allowed
to expire on its own means.

We have the tools to do this. We don’t have to make another law
or rule to do any of this. We do need to improve the system for de-
termining equity.


25

them was crucial to mitigate risks and better position IRS to achieve a successful

information systems modernization.

First, IRS! business strategy did not maximize electronic filings because it primarily
targeted taxpayers who use a third party to prepare and/or transmit simple returns,
were willing to pay a fee to file their returns electronically, and were expecting
refunds. Focusing on this limited taxpaying population overlooked most taxpayers,
including those who prepared their own tax returns using personal computers, had
more complicated returns, owed tax balances, and/or were not willing to pay a fee to a
third party to file a return electronically. Without having a strategy that also
targeted these taxpayers, we reported that IRS would not meet its electronic filing
goals or realize its paperless tax processing vision. In addition, if, in the future,
taxpayers file more paper returns than IRS expects, added stress will be placed on

IRS' paper-based systems.

Next, IRS did not have the full range of management and technical foundations in
place to realize TSM objectives. In analyzing IRS' strategic information management
practices, we drew heavily from our research on the best practices of private and
public sector organizations that have been successful in improving their performance
through strategic information management and technology. These fundamental best
practices are discussed in our report, Executive Guide: Improving Mission
Performance Through Strategic Information Management and Technology

a7


149

our faithful clerk, Andrew Richardson, who keeps this place rolling
and is, sitting there saying, “When are these people going to go
me?
And I don’t want to forget the minority staff. There is even some
long contenders there. We’ve had David McMillen, professional
member; Mark Stephenson, professional staff member; and
Lisa Miontes, professional staff member, and we have our official
reporter, Amy Rose. So thank you all. And with that, the hearing
is adjourned.
reupon, at 5:10 p.m., the subcommittee was adjourned.)

ie)


COMMITTEE ON GOVERNMENT REFORM AND OVERSIGHT
WILLIAM F. CLINGER, Jr., Pennsylvania, Chairman

BENJAMIN A. GILMAN, New York CARDISS COLLINS, Illinois
DAN BURTON, Indiana HENRY A. WAXMAN, California
J. DENNIS HASTERT, Ilinois TOM LANTOS, California
CONSTANCE A. MORELLA, Maryland ROBERT E. WISE, Jr., West Virginia
CHRISTOPHER SHAYS, Connecticut MAJOR R. OWENS, New York
STEVEN SCHIFF, New Mexico EDOLPHUS TOWNS, New York
ILEANA ROS-LEHTINEN, Florida JOHN M. SPRATT, JR., South Carolina
WILLIAM H. ZELIFF, Jr, New Hampshire | LOUISE McINTOSH SLAUGHTER, New
JOHN M. McHUGH, New York York
STEPHEN HORN, California PAUL E. KANJORSKI, Pennsylvania
JOHN L. MICA, Florida GARY A. CONDIT, California
PETER BLUTE, Massachusetts COLLIN C. PETERSON, Minnesota
THOMAS M. DAVIS, Virginia KAREN L. THURMAN, Florida
DAVID M. McINTOSH, Indiana CAROLYN B. MALONEY, New York
JON D. FOX, Pennsylvania THOMAS M. BARRETT, Wisconsin
RANDY TATE, Washington GENE TAYLOR, Mississippi
DICK CHRYSLER, Michigan BARBARA-ROSE COLLINS, Michigan
GIL GUTKNECHT, Minnesota ELEANOR HOLMES NORTON, District of
MARK E. SOUDER, Indiana Columbia
WILLIAM J. MARTINI, New Jersey JAMES P. MORAN, Virginia
JOE SCARBOROUGH, Florida GENE GREEN, Texas
JOHN B. SHADEGG, Arizona CARRIE P. MEEK, Florida
MICHAEL PATRICK FLANAGAN, Illinois CHAKA FATTAH, Pennsylvania
CHARLES F. BASS, New Hampshire BILL BREWSTER, Oklahoma
STEVEN C. LATOURETTE, Ohio TIM HOLDEN, Pennsylvania
MARSHALL “MARK” SANFORD, South

Carolina BERNARD SANDERS, Vermont
ROBERT L. EHRLICH, Jr., Maryland (Independent)

James L. CLARKE, Staff Director
KEVIN SABO, General Counsel
JuprrH McCoy, Chief Clerk
Bub Myers, Minority Staff Director

SUBCOMMITTEE ON GOVERNMENT MANAGEMENT, INFORMATION, AND TECHNOLOGY

STEPHEN HORN, California, Chairman
MICHAEL PATRICK FLANAGAN, Illinois CAROLYN B. MALONEY, New York

PETER BLUTE, Massachusetts MAJOR R. OWENS, New York
THOMAS M. DAVIS, Virginia JOHN M. SPRATT, Jr., South Carolina
JON D. FOX, Pennsylvania PAUL E. KANJORSKI, Pennsylvania
RANDY TATE, Washington COLLIN C. PETERSON, Minnesota
JOE SCARBOROUGH, Florida TIM HOLDEN, Pennsylvania

CHARLES F. BASS, New Hampshire
EX OFFICIO

WILLIAM F. CLINGER, JR., Pennsylvania CARDISS COLLINS, Illinois
J. RUSSELL Geonse, Staff Director and Chief Counsel
ANNA MILLER, Professional Staff Member
MARK BRASHER, Professional Staff Member
‘ANDREW G, RICHARDSON, Clerk
Davip McMILLEN, Minority Professional Staff Member
MARK STEPHENSON, Minority Professional Staff Member
Lisa MiENtUs, Minority Professional Staff Member

aD


119

EXHIBIT B

nal Revenue Service “
er Sale)

PANE

ALIA asddal del ALENT

MOTICE OF INTENT To Levy

OUR RECORDS SHO JHAT WE NAVE PREVIOUSLY SENT YOU NOTICES BUT ME HAVE HOT RECEIVED FULL PAYMENT
OF THE FEDERAL TAX LIABILITY SHOMM BECOU, THIS TS YOUR FIMAL WOTTCE,

AWMOTICE OF FEDERAL TAX LIEW. wuTeH 13,4 PUBLIC NOTICE, TWAT INERE 15,4 14% LIEN AOAINST TOUR

CHOPERTY. nay Se FILED AL AMY TIME To eROTECT Tue INTEREMT OF THE a0 Mot
q t

Mab SEIZE YOUR PROPERTY ANG ALGIOE TO ra

DE ALLOWS US 10, SELZE UAGES. ual ACCOUNTS, ConmL 3316)

REALESTATE AMD PERSONAL PROPERTY SUCH AS BUSINESS Asse! auTonanives

Mie eneLOSEO PUBCIEATION CONTAINS AN EXPE ANATION OF THE. IMS HE MAY TAKES

Ye, PREVENT ACTIOM fon vena TAKEN, SenD FULL CATRENE 10DA" By cliEcK O8 MONEY ORDER TavaBLE To

Mie tnvetiat REVENUE SeRVicE. nti Tourn social sec ADENTIFieat

us ER
MURDER ON YOUR PAYMENT. INCLUDE THE HOTfOn PARE OF THIS NOTICE METH YOUR PAYMENT $0 ME CAH
WICK Y eneDty POUR AcoUnT

WE HAVE catcut i
or

IMD OTWER INCOME.
AY ALSO BE SEIZED.

revo ry amp intenes:
ie Le eRrse Fon

CHARGED. AND mai
MichEASES enor ONESHALE 10. one PERCENT
If You RECENTLY PALO INE AMOUNT DUE, OR IF YOU CANNOT FAY THES AMOUNT IN FULLy CONTACT 1
OFFICE SWoum ABOVE TODAY.

grows

we DATE oF

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s NOTICE. 1F FUL rs.
Howae iutenesy An ewal ties wit
THe PATLURE 10 FAY. PENAL



68

‘would have languished in the receivables inventory. This resulted in
additional collections of $281 million in FY 1994 and $295 million in FY
1995.
Effective use of levies resulted in over $2.7 billion for FY 1994 and FY
1995.
Dollars colfected from installment agreements increased from $4.75
billion in FY 1994 to $5.38 billion in FY 1995.
Conclusion
I have tried to demonstrate to you and the members of the Subcommittee the
priority and significance that we attach to both our financial management
responsibilities under the Chief Financial Officers’ Act and to the collection of revenue
through the effective management of the accounts receivable inventory. It is my hope

that the IRS in the near future will be looked upon as an

mple of how the CFO Act
has improved the credibility of goverment in the eyes of the public.
Mr. Chairman, that concludes my remarks, My colleagues and | would be

happy to answer any questions.

7


79

And when we're on the telephone with people explaining to them
what the collection process is and what their rights are, it takes
longer on that phone call than it might if I were a private debt col-
lector and could call and say, “Pay up, or else.”

So there are a number of ways——

Mr. Horn. Well, you certainly can say pay up or else.

Ms. RICHARDSON. We could, but we also——

Mr. Horn. You don’t put it quite that way?

Ms. RICHARDSON. We also are in the position where we're re-
quired to describe to taxpayers what their appeal rights are and
what our obligations are and what our limits are in pursuing the
collection activities.

I think we feel that our efforts, and certainly, as we’ve examined
our practices of late and are working more effectively and more
productively that we feel that it’s going to be interesting to see
whether or not people in the private sector who adhere to the same
rules and practices are more effective and more efficient.

I think we’re all very anxious to see whether that works.

Mr. Horn. Well, how are you framing that pilot project? Do you
have a competitive group of debt that was picked on a random
sample that you can give some to the private collectors and some
to your own people?

I mean, is this really an experiment, or has the fox decided ’'m
going to win this one?

Ms. RICHARDSON. No. I think I'll let Mr. Donelson talk more spe-
cifically about it, and we’re somewhat limited because the request
for proposal is out there as of yesterday and fairly specific.

But no, we've tried to decide a program that would really give
us a fair opportunity to assess what the private sector can do for
us and how they compare to what we do.

We've also taken to heart concerns that you and others have ex-
pressed over the years about being more effective in using private
sector methods, and that’s one of the reasons we shortened up the
notice process.

We've moved more people back to the automated collection sys-
tem sites rather than have them knock on doors. So we know that
we can learn a lot from the private sector, but we also understand
that we have a different relationship with our customers, and we
have concerns about privacy and about taxpayers’ rights.

Jim, would you like to give just a little bit more information, to
the extent you can, about how we designed the program?

Mr. DONELSON. Mr. Chairman, on February 12, 1996, we issued
a CBD announcement, a Commerce Business Daily announcement,
outlining what we would be providing in this sample.

It is, I think, a very level playing field in terms of the type of
cases we're putting to this. They will be currently not collectible
cases. It will be a variety of work that’s offered.

It will be in a region that includes the States of Alaska, Arizona,
California, Colorado, Hawaii, Idaho, Montana, New Mexico, Ne-
vada, Oregon, Utah, Washington and Wyoming. It will be work
coming out of our Ogden and Fresno service centers.

Mr. Horn. And is that work, as I say, is there any way we can
compare by a random sample of just going into that file of getting


15

We found several internal control problems that contributed to our inability to

express an opinion on IRS' financial statements. To illustrate,

IRS was unable to provide adequate documentation for 111 items, or 68
percent, in our random sample of 163 transactions from IRS’ nonmaster file.
‘The nonmaster file is a database of taxpayer transactions that cannot be
processed by the two main master files or are in need of close scrutiny by IRS.
personnel. These transactions relate to tax years dating as far back as the
1960s. During fiseal year 1994, approximately 438,000 transactions valued at
$7.3 billion were processed through the nonmaster file. Because of the age of
many of these cases, the documentation is believed to have been destroyed or

fost.

We sampled 4,374 statistically projectable transactions posted to taxpayer
accounts. However, IRS was unable to provide adequate documentation, such
as a tax return, for 524 transactions, or 12 percent. Because the
documentation was lost, physically destroyed or, by IRS policy, not maintained,
some of the transactions supporting reported financial balances could not be

substantiated, impairing IRS' ability to research any discrepancies that occur.

IRS is authorized to offset taxpayer refunds with certain debts due to IRS and

other government agencies. Before refunds are generated, IRS policy requires


128

BRIEF DISCUSSION ON EXISTING IRS RULES AND CODES FOR REAL PROPERTY LIENS

‘The GOOD NEWS is that the RS 1 les to place liens for non-payment of taxes and to
recover or redeem the real properties are already in place, Present IRS rules, regulations and
codes provide for the procedure: or placing liens, and the rights for IRS to “redeem” a real
property and other tangible and intangible properties to recover treasury revenue. No new
tules, laws or codes will need to be drawn, approved or passed to implement this Plan,
These rules, codes and statutes are listed later in this text. .

‘The Bad News is that the Internal Revenue Service is not logging, tracking or able to report
the number, location, or dollar value of the liens they may have placed, and they are not
tedeeming those properties with IRS liens against them when they are foreclosed on by a
bank, savings and loan or investor. It is estimated that over $100 billion dollars in these li
have been off, M

My experience is that IRS does NOT redeem approximately 99% of these properties and
resell them to recover billions of dollars in treasury tax dollars. Instead, the IRS property tax
liens are simply allowed to "expire" and “disappear”.

The IRS is letting go of a bird in the hand, by allowing these liens to expire; instead IRS.
pursues the debtor's wages over the next several years, with limited success. This
INCREASES collection costs over time, and DECREASES net present value of collection dollars.

‘The OTHER GOOD NEWS is that even though these IRS codes, rules and regulations are
in place, new policies, procedures and guidelines for implementing and improving the real
property lien recavery program are needed, and have been developed herein.

INABILITY TO TRACK OR REPORT ON IRS PROPERTY LIENS

The GAO report states ..."For fiscal year 1994 IRS systems could not provide reliable

information on (1) th it from wre activi revenue realized from
the sale of asset tial that could lized from the sale of
seized assets reported in its ending balance. I an le te st

information because IRS has NO tracking or inventor monitor the pr n of

ized assets from seizure to fit sition” of ‘our

judamental sample of 143 assets, we found that 57 assets should not hav

er lance because inting errors, the assets had
disposed of, or IRS did not have actual or constructive control over the assets..."
Additionally, Note 4 pertaining to Custodial assets states that..." As of September 30, 1994

and 1993, IRS held seized property and collateral valued at $773 million and $761 mitlion
respectively. These amounts are based on estimated values assigned at the time of seizure
and are not reduced for liens and other encumbrances.

In this example, actual EQUITY or RECOVERY potential is not accurately reported, it is
GROSSLY OVERSTATED. For Custodial real estate assets, prior liens such as property taxes,
other lienholders, mortgages, judgements and claims could encumber the majority of equity
value in these custodial properties. 3


134

STRATEGIC PLAN

Reassessment of policies, codes, regulations, practices and procedures to assure their
currency and effectiveness as the economy and circumstances change is needed

The Internal Revenue Service (IRS) must focus on going forward systems to examine
new forms of business operations and to recover those revenues secured by IRS liens which are
rightfully and legally owed the United States Treasury.

New, expanded technology, better techniques, policies and procedures need to be developed
for identifying, monitoring and reporting secured liens to assure the soundness and effectiveness
of an expanded IRS property lien division

Increased efforts to reshape the IRS workforce will be needed to meet these changing needs,
which no longer expects an employee to be an expert in all areas from “cradle to grave", from
taxpayer review analyst to asset disposition and recovery expert.

A system of specialization with a new mix of experience, special skills and technologies will
enable the Internal Revenue Service to expand its efforts and effectiveness in performing its
responsibilities, services and duties, to examine taxpayers and collect treasury revenue.

Improve IRS services, operating and reporting capabilities, within limits of statutory
authority, to develop new efficiencies and revenue recovery programs to create added value and
increased recovery for the treasury

Locate abandoned IRS liens levied against real properties by utilizing county title companies
document recording systems, evaluate equity, track and implement IRS statutory recovery
systems.

1A


74

Mr. DONELSON. And the final large category is Resolution Trust
Corporation accounts where we withhold collection. Nine and a half
percent of the accounts there are currently not collectible because
of the overlapping situation.

r. Horn. OK. So that’s constituency or constituent parts of that
debt, and then do you have the figures as to how that debt is aging
at all? In other words, the $100 billion, how much hits the 10-year
mark?

Well, they won’t hit it until the year 2000 if they started in 1990,
but if they started in 1985 and had 5 years under the old law, did
you grandfather in the time?

Mr. DONELSON. Congressman, I have the cumulative number. I
can get you the—

Mr. Horn. Yeah. Well, why don’t we put it at this point in the
record so we got the total picture. OK? Now, then, you’ve got $60
billion that is deemed to be collectible, and at that point we get
into the IRS collection processes.

{The information referred to follows:]

The chart below ages the Accounts Receivable Inventory of $200 billion at the end
of FY 1995.

Aging of Accounts Receivable Inventory of $200 Billion

1 delve Ae curently Not
ne counts Re calectiie

0-30 days... $7998N $4.7 MN
31-60 days 28BN 148 MN
61-90 days . 258N 696 MN
91-120 days 528N 573 MN
121-180 days 49BN 251 MN
181-360 days BERN = -20BN
361-720 days 438N «6B BN
721-1080 days 1016N 9.9. BN
1081-1440 days 738N 9B BN
1441-1800 days 61BN = 9.18N
1801-2160 days 3958N  -83.8N
2161 days + 1128N  38.0.BN

Total ..... 85.64 BN? 84.3 BN?

‘Age is the time that has elapsed since the date the additonal tax was assessed.

2The difference of $3.16 bn ($88.8 bn in Active Accounts Receivable less $85.64°bn) is assessments that are NonMaster File, NonMaster
File assessments cannot be aged in this manner.

2 The diffeence is again due ta NonMaster File assessments which cannot be aged in this manner.

Mr. DonELSON. Yes, sir.

Mr. Horn. And the degree to which we collect the debt when we
say it’s a debt and you’ve made that determination, within the first
30 days, the next 30 days, in other words, 2 months, and 6 months,
et cetera.

Now, does the IRS keep any figures as to how that debt is col-
lected? My theory being, based on dealing with debt as a university
president and student debt, alumni debt, the sooner you ask, the
more likely you are to get the funds.

And if you just let that sit there, pretty soon everybody forgets
they even have a debt that they owe you. Now, as I understand it,
you then out about four or five letters that first month or so, I
gather, or the first couple of months. How does that work?


32

fundamental problem with collections, which is not so much who is
collecting, but it is how timely we identify that it is owed.

Mr. Horn. Very good.

I now yield to the ranking minority member.

Since you both came in, if you have an opening statement, I
would like to either put it in the record or whatever. We will put
it in as read.

Ms. MALONEY. Very well. If you would put it in as read, I would
appreciate it very much.

Mr. Horn. Yes. As read.

[The prepared statement of Hon. Carolyn B. Maloney follows:]


103

further. The IRS does not publicly disclose its criteria for
determining the cutoff point for such so-called “tolerance cases,"
but I can tell you that the amount is not de minimis and it has
been increasing over the past several years as the number of cases

in delinguent status has risen.

The accounts that fall below the dollar threshold go into
what is called "deferred status." What this means is that no
further action will be taken with respect to these accounts until
some other credit (such as a refund} shows up in the system and the
credit is offset against the deferred amount. If the taxpayer
should file a tax return for a subsequent tax period which reflects
additional taxes due and those additional taxes plus the deferred
amount exceed the dollar threshold, then the account is reactivated

and moved on to ACS.

At the ACS level, the IRS attempts to collect the tax
liability by contacting taxpayers by telephone to demand full
payment of the delinquent tax. It also searches for taxpayers and
their assets by telephoning third parties and other techniques.
During this stage, IRS collection employees attempt to collect the

tax delinquencies through payment arrangements or levies.

If the delinquency is not resolved in ACS, the account moves
to the third stage. At this stage, the account is placed in a

computerized holding file called the "Queue." Accounts in the


39

to go back and retrieve it to reconcile to the overall receipts, and
that is the inherent dilemma.

The problem is, and it goes counter to what Gene says, which is
the fortitude to stick with it. It is an arduous process, but some-
body has got to do it. I think it is important that you do under-
stand how your system works. And what we found is there are a
lot of people in IRS that have a lot of knowledge about that system,
but the problem is putting it all together, to get it down and docu-
ment it so that you know how it works. And when you have experts
on different pieces and you get conflicting information on how it
works, you have to reconcile those things and resolve it. So, I
mean, there are people that understand the system but we just do
not have it documented as to exactly how it works to go back and
get the information.

That is why there is so much trouble trying to reconcile it.

Mr. Doparo. And I think one of the things in our recommenda-
tions directed to put this in place is to put more checks and bal-
ances and reconciliations into the individual aspects of the process.
Many are there, they have many of those, but they need some addi-
tional ones so that you can then find where the differences are to
be able to reconcile and satisfactorily explain that your system has
captured everything.

Mr. Hotioway. I will offer to you, Congressman Spratt, that
while the RACS system, probably when it was initially developed,
was not designed with CFO in mind. The capacity to generate the
information is there because all of the information is there. It is
just mapping out the process and knowing where everything is and
then developing programs to go get the information to identify it.

Mr. SPRATT. rank you, Mr. Chairman.

Thank you.

Mr. Horn. I thank the gentleman.

And I now yield a minute to my ranking colleague. She has to
leave for a meeting.

Ms. MALONEY. Yes. We have a Democratic caucus meeting and
I will be right back, but following up on my colleague’s question,
this is not about missing money, is it? The $1.3 trillion is there,
it is in the Treasury, correct?

Mr. Doparo. Well, yes.

Ms. MALONEY. It is not about missing money, it is just about
bookkeeping.

Mr. Doparo. Well, let me answer that a different way. We have
been able to each year satisfy ourselves that what was in the bank
was what was reported, but in terms of whether or not anything
was missing or misappropriated or whatever, because you cannot
satisfactorily reconcile everything, you really do not know.

You do not have as much confidence as you should. You are hop-
ing nothing is wrong, but you cannot really know for sure until you
can adequately reconcile all these issues that we have brought up.

Mr. Hottoway. Let me amplify on that a little bit. The bottom
line is what he concluded, which is you do not know. You would
like to believe that is the case, but you really do not know and that
is why it is important to reconcile.

The second issue, though, is that what we have been able to say
is that what is in IRS’s records at a summary level essentially


64

Correctly accounting for taxpayers’ payments is an important way to prevent the
creation of a receivable and the expansion of electronic filing and electronic payments
is a significant way to lower our error rate. For example, in FY 1995 taxpayers
deposited $232 billion using the TaxLink/Electronic Funds Transfer Payment System.
This was a substantial increase over the $6.2 billion deposited this way in FY 1994,

Electronic transfer of funds not only means that federal tax deposits are
deposited into the Treasury a day earlier than under the paper deposit system, but the
errors by taxpayers and us are significantly fewer. As more deposits are received
electronically and more retums are filed electronically errors in posting and
assessments will continue to decline.

3. Improving the Currency of the Inventory

‘The earlier a debtor receives a request for payment, the better the likelihood
that it will be paid. Recognizing this, we have been working to make the receivables
inventory as current as possible. Unlike in the private sector, where liability is
established when goods or services are purchased, the IRS often must establish a tax
liability through audit. To protect their rights, taxpayers who do not agree with an
audit finding may use the administrative appeals process and litigation. Thus, several
years may elapse between the time a tax return is due or filed and the time a liability
is finally established.

During FY 1995, for example, more than $17 billion in recommended additional
taxes and penalties were not resolved with taxpayers during the examination process.
The IRS could not take any collection action until the final liability is determined.

Thus, when the FY 1995 recommended assessments finally become eligible for

13


148

Mr. Kors. Again, this is money that’s owed. This is different, in
my view, than the examination process, for example, where they’re
trying to determine if the taxpayer owes money or if there is unre-
ported income or whatever.

Here it could be a situation where somebody filed their 1040
April 15th and didn’t send in a check, and the way the process
works now, with all the notices and all the time, it’s quite some
time before that’s resolved.

Mr. Horn. Let me ask you. Do either one of you want to make
a closing point that we haven’t covered that you think is important,
or have we pretty much covered it?

I think we understand what you’re both advocating. I think
you've both given excellent testimony, and we appreciate it.

Ms. O'TOOLE. I’ve covered it all, thank you.

Mr. Horn. OK.

Mr. Kors. I guess I’d just like to—you asked a question of Mr.
Alexander if he had any problems with the pilot, the RFP, and it’s
quite lengthy.

Mr. Horn. I see. So you’ve had a chance to look at it.

Mr. Kors. Not the whole thing.

Mr. Horn. Has this congressional committee had a chance to
look at it? You have it. Anybody read it?

Mr. Kors. But I do have a couple of points that ['d like to sa:
for the record. No. 1, no employer data is being provided on individ-
yal debtors, and that’s going to be a hinderance. That is not a good

fact.

Second, there is no authority to actually enter into installment
agreements with the debtors. That will have to be turned back to
the IRS. That will result in a delay.

Remember I went through the different categories. The unable to
pay category is not included in the sense that, if a taxpayer, as I
read this, tells the private debt collector that he can’t pay, that’s
the end of it. He has to turn it back over to the IRS.

Well, that shouldn’t be the end of it. That’s what that person is
trained to figure out, whether or not he really can pay.

Maybe they don’t realize it, but they're actually losing some of
the benefit that they could gain from private collection.

In addition, in the items that are being referred out, the deferred
accounts are not. So there is a group that are being left behind,
and the hardships are not.

That’s just a fact. It looks like what they've done is they've fo-
cused on the queue, and they’ve focused on unable to locate in the
CNC. And there is also no authority to do asset location.

If you would like, we could provide you a more complete analysis
at some point, if that would be helpful to you.

Mr. Horn. I'd be glad to include it at this point in the record
without objection. Well, again, we thank you, and let me just ac-
knowledge the staff that has spent a lot of time on this i
headed Y J. Russell George, the staff director and chief counsel;
Anna Miller, who is on my left, the professional staff member, who
is the expert in financial statements; Mark Brasher, who was here,
professional staff member, expert on the Debt Collection Act; Chris-
tine Carpino, who we're delighted to have as a Senior Executive
Service Candidate from the U.S. Department of Agriculture; and


35

are making efforts in all the areas to address the recommenda-
tions, putting in some new processes and procedures, but they have
not progressed far enough in implementing many of those areas for
us to conclude that they are in any more appreciable different posi-
tion today than they were when we issued that report.

Ms. MALONEY. What do they need to do to get into that position?

Mr. Doparo. Let me ask Dr. Stillman to respond to that.

Ms. STILLMAN. What they really need to do is commit to institut-
ing disciplined processes for controlling their systems investments
and for building their systems.

By doing that, they can justify to themselves, and to you why an
investment in a given system is worth making and, having made
that investment, they will have half a chance at delivering the sys-
tem.

What they have to do is implement discipline processes which
exist. There are software development organizations today that im-
plement processes like this and they do substantially better at

uilding big software than organizations like IRS.

It is not a change that requires scientific genius. As they say,
this is not brain surgery. What this is is good management and en-
forced discipline.

Mr. Doparo. And we believe the recommendations we have
made in this latest report provide a good blueprint for IRS if they
can successfully implement them and put them into practice.

Part of the difficulty here, and the same thing exists in the fi-
nancial management area, is ingraining these processes in your
day-to-day management activities. That has not happened yet.
That is what needs to be put in place.

And I might also add here is that we are not the only organiza-
tion that has made this assessment. The IRS has had the National
Research Council employed for the past 5 years tracking their
progress in tax system modernization. They have just recently is-
sued their report and that report mirrors the recommendations
that we have made and also adds some additional areas and rec-
ommends further that IRS set up an independent group to keep
monitoring this as they go forward.

It is just a matter of execution of the different management tech-
niques. We have had a number of discussions, continuing dialog
with IRS on this issue. I think they hear our concerns. I think they
are trying to move forward, but they need to do so more aggres-
sively in all these areas, given the amount of money that they are
spending.

Ms. MALONEY. OK. On page 22, you have a frank on how this
$8 billion is going to be spent and out of roughly, 224 million fil-
ings at the end of 2001 they estimate that only 17 percent is going
to be electronically handled.

Is that correct? Am I reading it correctly?

Mr. Doparo. Yes.

Ms. STILLMAN. You are reading it correctly.

Ms. MALONEY. I am reading it correctly?

Mr. Doparo. Right.

Ms. MALONEY. For $8 billion, just to have 17 percent electroni-
cally handled seems very low to me. I would like a comment on
what is happening. And then further down you talk about how they


67

staffing, it was also the resutt of a deciine in productivity. In FY 1994, IRS’ collection
yield increasad 3% despite a 9.5% decrease in collection staffing. In FY 1995,
collection yield continued to increase by over 7%. While we are making progress, the
loss of the Compliance Initiative funding will make it difficult to sustain our increasing
collection yield.

Our accounting systems will also significantly improve our ability to collect
accounts receivable. We are developing an ARDI expert system. A prototype we'll
begin using this year will allow us to predict collectibility based on case characteristics.

This system will complement the Inventory Delivery System (IDS) which will be
tested in FY 1996. IDS ensures cases are routed to the most effective point in the
collection processing stream. These systems prioritize work so it is assigned to the
point of most likely resolution as early in the process as possible.

‘Some additional changes to improve collection already under way include:
¢ Enhanced cooperation with state taxing authorities. The State Income Tax

Levy Program involves agreements with states whereby they accept our levies

fon state income tax refunds. This resuited in collections of $108 milion from

FY 1992 through FY 1994. Another example involves joint collection of

delinquent employment taxes which includes joint installment agreements,

levies, and seizures.
+ Proper use of certain collection tools, including installment agreements, offers in
compromise, levies and seizures.
In FY 1992, we modified the Offer in Compromise policy and streamlined

procedures to enable field personnel to resolve accounts that previously

16


104

Queue are given priority for assignment to IRS revenue officers
according to each case’s collection potential. The priority is
determined by the Resources and Workload Management System (RWMS),
which enables each IRS District Office's management to concentrate
available revenue officer resources on the most productive cases.
In the third stage, revenue officers attempt personal contact with
taxpayers; search internal and external sources for taxpayers’
assets; initiate levies; file notices of federal tax lien; and
seize taxpayers’ physical property such as automobiles and homes,

to satisfy the tax delinquencies.

Each account in the Queue is assigned a RWMS score based on
its expected collectibility, which in turn depends on such factors
as information from prior returns, information matching program
data, payment history on delinquency modules (i.e., tax periods),
business type, dollar amount of tax liability, whether the taxpayer
is a first time delinquent or has been delinquent in the past, etc.
It also ensures cost-effective use of revenue officers by factoring
into each RWMS score the anticipated cost of collecting the debt in

question.

The RWMS score for an account is computed for each module at
the time the account becomes delinquent. The module scores are
added together for the entity score (the entity is the taxpayer,
either an individual or another taxpaying entity such as a

corporation). The entity score changes as delinguent modules are


126

Testimony

of
‘Shannon O'Toole
before the
House Subcommittee

on
Government Management, Information and Technology

March 6, 1996

Mr. Chairman, members of the Committee, | am honored to have this opportunity to
present my views and findings to the Committee as they pertain to the Hearings on IRS
Financial Management, with a special focus on Internal Revenue Property Tax Lien Recoveries.

My name is Shannon O'Toole: | am not appearing here today in any official capacity, the
views | present here today are my own personal views from my own independent research and
studies and my 15 years experience as an expert in real estate, government and institution
‘owned properties and the IRS lien process. The last 11 years | have overseen over $7 billion
dollars in real estate with the Federal Deposit Insurance Corporation, formerly Division of
Liquidations, and the Resolution Trust Corporation Real Estate Sales Division as Department
Head and Section Chief, in addition to $20 million in private investments. | have also been an
expert consultant for the County of Orange, California bankruptcy in real property disposition.

I have written published real estate training materials and have developed government
programs, policies and procedures for the management, reporting and disposition of
government owned real estate and other assets for the Federal Deposit Insurance Corporation
and the Resolution Trust Corporation.

i in
millions of doll med.

| would first like to commend the Committee in their diligent efforts to examine the
extremely complex financial management of the Internal Revenue Service.

While | concur with the GAO Financial Audit for IRS’ fiscal year 1994 which addressed
significant IRS practices in need of improvement, | intend to focus on an area that was NOT
addressed in the GAO audit, an area that was omitted, and the billions of dollars the Treasury
is loosing. We will be discussing IRS real property tax liens.

1


45

Mr. Doparo. Well, a lot of this gets back to what our first rec-
ommendation was in the report. You need to set clear business
goals in terms of what you want to do, that you are going to go
after that segment of the population. We felt there was too much
emphasis in going through third-party tax preparers. I can under-
stand why originally IRS wanted to go in that direction, you would
have more confidence in the information being submitted and that
was a pilot program that they had for years and we were endorsing
it. It was a good move to go in that direction. But with the pro-
liferation of personal computers and software packages, and things
of that nature, we felt the business strategy had not been modified
to keep pace with the potential opportunities that IRS would have
to receive more types of tax returns, more types of information put
in place.

d they have agreed with us, and they are relooking at that
and trying to put that vision in place. Part of the problem, though,
is that you are building systems that were designed to accomplish
one business strategy and now you have to sort of segue into a dif-
ferent type of strategy. They are struggling to do that and it is
complicated further by the fact that their ability to develop some
of these systems and to provide adequate security and to have the
right type of architecture for taxpayer information is not as reliable
as it needs to be.

Mr. PETERSON. What happens with all of this if we decide next
year to scrap the income tax system and go to a sales tax? Then
we do not have all these problems, right?

1 Mr. HoLioway. But you may have another whole set of prob-
lems.

Mr. PETERSON. No, I know, but we do not have this particular
set any more.

Mr. Doparo. As long as you are in the business of collecting rev-
enue, you are going to have accounting problems and you need
good financial management systems, and depending on what t:
of tax it is and how it is collected and whether it is withheld at
the source or whatever, you are still going to have those problems.

The technology problems would need to be revisited if there are
major changes in the tax code, I think. And probably we would also
have a transition period, I would imagine, and we will have to fig-
ure out what implications there are. But if you have in place a good
managerial and technical foundation, you could make adjustments
like that easier than you can if you do not have that infrastructure
in place. And that is our basic message, to get that in place.

Mr. PETERSON. Thank you.

Thank you, Mr. Chairman.

Mr. Horn. Let me ask about the electronic filing in this way. As
I understand it, they took various tests, they found that high per-
centages of fraud were among the initial electronic filers and last
year the electronic filers were targeted, either before or after that
finding, for extra reviews and more audits. And the question would
be to what degree, if any, did that discourage any further electronic
filing or at least lower the number of people that might otherwise
have filed? Did you run into that problem at all?

Ms. WiLLIs. The number of people who filed electronically was
down last year and we believe it was in part due to the additional


87

So from that standpoint, we feel fairly comfortable on the admin-
istrative side that if we can resolve those two issues we're in pretty
good shape.

One of the things, if I could, I’'d like to just take a minute and
correct something. Folks talk about the 5.1 billion that NFC proc-
esses for us.

Really, all NFC is acting as is as a utility. We have People all
across the country that have to issue though time sheets. They sign
those things. They file them.

It goes to the National Finance Center. They cut the checks.
They bring all that data back and post it into our finance system,
and that’s a large task.

That’s not just passing off information and saying cut checks and.
then walking away from it.

Mr. Horn. Is that electronically filed?

Mr. Musick. Yes, sir. It’s electronically passed. At the time it’s
entered in, it’s electronically passed after the payments are made
back to us.

Mr. Horn. Very good. One last one. In the previous years, the
IRS has had a problem with its employees improperly accessing tax
information of friends, neighbors, even celebrities, and, on occasion,
even changing information in the records.

What actions have you taken to lessen the chance of this happen-
ing, and what penalties were the browsers who were identified sub-
jected to?

Ms. RICHARDSON. Mr. Chairman, I'd be happy to submit for the
record a whole chronology of activities that we have engaged in
since it first—well, since we first discovered it and reported it to
ourselves and then it was picked up by the GAO. I want to under-
score—

Mr. Horn. So you have taken action, No. 1?

Ms. RICHARDSON. Absolutely.

Mr. Horn. No. 2, what was the severest action you took?

Ms. RICHARDSON. There are several people who are under indict-
ment.

Mr. Horn. I couldn’t hear you.

Ms. RICHARDSON. Several people have been indicted.

Mr. Horw. Indicted.

Ms. RICHARDSON. And being prosecuted for violating the statute.
What we have done, though, are a series of things, raise the bar.
You can’t sign onto the system without reading a host of what the
penalties are for not using the system properly, as you’re author-

<A have also supported changes to Title XVIII and to Title XXVI
that would make it very clear that any kind of browsing activity
would be a misdemeanor and automatic dismissal, and we continue
to support those measures.

Because I really do believe, as I’ve said before and said to you
that the confidence that taxpayers have in our system and their
willingness to comply voluntarily, although some may not view it
quite as voluntarily as others, is the confidence that they have that
we keep the information secure for tax administration purposes. So
it’s very important to u:

[The information referred to follows:]


8

found in our evaluation and, indeed, IRS had rated itself at a level
one organization in the computer maturity scale, which is the ini-
tial scale of one to five used by the Software Engineering Institute.

Level one means that IRS's practices were ad hoc, chaotic and
that basically they needed to have much more disciplined processes
to put it on a level where they could on a repeatable basis make
cost estimates, schedule estimates, control the functionality of the
systems requirements to make sure that their processes were going
to produce the right results within costs and within schedule.

we recommended that IRS put a detailed plan together to
move from level one up to level two. We also suggested that any
contractors that IRS hired should be at a level two maturity level
as well.

So under that criteria, there were a number of other rec-
ommendations which are submitted in our statement for the
record.

We think in both of these areas it is clear IRS is facing some for-
midable challenges to produce auditable financial statements
where we can get a clean opinion and also to put their tax system
modernization effort on a good track.

We are pleased that IRS has made a commitment in these areas,
and that they have agreed with all of our recommendations in the
financial audit reports, as well as the recommendations in the tax
system modernization effort.

We believe, however, that successful implementation of these rec-
ommendations, moving beyond agreement to actually implementing
the practices, is the real key to success in both of these areas.

That concludes my summary remarks. I would be glad to answer
any questions.

[The prepared statement of Mr. Dodaro follows:]


OVERSIGHT OF INTERNAL REVENUE SERVICE
FINANCIAL MANAGEMENT

WEDNESDAY, MARCH 6, 1996

House OF REPRESENTATIVES,
SUBCOMMITTEE ON GOVERNMENT MANAGEMENT,
INFORMATION, AND TECHNOLOGY,
COMMITTEE ON GOVERNMENT REFORM AND OVERSIGHT,
Washington, DC.

The subcommittee met, pursuant to notice, at 1:35 p.m., in room
811, Cannon House Office Building, Hon. Stephen Horn (chairman
of the subcommittee) presiding.

Present: Representatives Fox, Peterson, Spratt, and Maloney.

Staff present: J. Russell George, staff director and chief counsel;
Anna Miller, and Mark Brasher, professional staff members; An-
drew Richardson, clerk; David McMillen, Mark Stephenson, and
Lisa Mientus, minority professional staff members.

Mr. Horn. We have some Members that are coming. We just had
a vote, so I apologize for their lateness. We will have a quorum by
the end of this statement, since it is a little long.

The Subcommittee on Government Management, Information,
and Technology is holding this hearing on the oversight of Internal
Revenue Service’s financial management so that we can examine
the Internal Revenue Service’s ability to produce financial state-
ments, have them audited and get a clean opinion, that is, a ver-
ification of the IRS, that it has accurately reported its financial po-
sition and the results of its activities.

In 1990, the Chief Financial Officers Act became law. Pursuant
to the Act, the IRS was required to prepare and have audited agen-
cy wide financial statements for fiscal year 1992 and each year

ereafter. The General Accounting Office was given the respon-
sibility to audit the statements.

The GAO discovered that it could not express an opinion on the
reliability of the IRS’s 1992 Principal Financial Statements and it
gave two reasons for this. First, critical supporting information was
not available and, second, where information was available, it was
found to be generally unreliable. The result was the same with the
1993 statements.

The GAO noted seven areas of weakness: the processing of cash
receipts; the processing of refund payments; the reporting of tax ac-
counts receivable; the protection o! Property and equipment; the
reconciliation of IRS accounts with asury funds amounts; the
adequacy of computer general controls; and the setting of an inven-
tory of seized assets.

aM


42

Ms. STILLMAN. The issue on electronic filing is that for IRS to
succeed at its own vision of processing electronically rather than
processing paper, they have to get most of their returns submitted
electronically rather than on paper. They have to get most of their
returns submitted electronically.

They themselves had a goal of about 35 percent by 2001. By their
own estimates, they were only going to reach 18 percent. The rea-
son for that was that they had not targeted segments of the popu-
lation, large segments of the population that would be willing to
file electronically or they had not planned to give them the incen-
tives to do so.

For example, the only people who would find any advantage to
filing electronically were those who were expecting a refund, those
who were filing relatively simple returns, those who were willing
to pay a fee for the privilege of submitting their tax returns.

For people like me, I use Turbo Tax. My tax return is a little
more complicated. I usually have a balance due. I do not have any
incentive at all for filing electronically. We saw no business plan
for getting people like me on board and that is exactly what we
were asking for, a comprehensive business plan to get the bulk of
the population on board with incentives to do so.

Mr. Horn. Did they use any public service ads, anything like
that?

Ms. STILLMAN. They had targeted a narrow segment of the popu-
lation. They targeted, for example, tele-file, people like students fil-
ing very simple returns who could punch in their returns over the
phone; people who went to third-party providers and wanted a re-
fund and those especially who wanted a loan against that refund
in order to use the money more quickly.

They really had no strategy at all or no incentives for anyone
else.

Mr. Horn. It seems to me one logical place to deal with are the
taxpayers that are in it professionally, have the appropriate equip-
ment, this kind of thing.

Ms. STILLMAN. And that is who they have used primarily, but all
of them charge a fee to do so. And so for that portion of the popu-
lation that does not want to pay more than the cost of the stamp,
that option is not very attractive.

Mr. HouLoway. Which is most of us.

Mr. Horn. Yes. I understand that.

Mr. Doparo. Part of the issue here, too, was in addition to doing
a market research and targeting that population, you need to have
the systems in place in order to receive the information electroni-
cally. And unless you have both in place, and we found neither in
place and they have agreed to move in that direction and we think
that is the right way to go.

The other concern that we have that we brought up in the report
is if you fall short on your goals to have electronic information sub-
mitted by 2001, that means you are going to have much more
paper still coming in than your old systems can handle during that
period of time. We were concerned that you needed a plan to ac-
commodate that as well because that would put additional stress
and strain on the paper systems that they may not be prepared for.


73

Mr. DONELSON. Yes.

Mr. Horn. Have you checked with the Social Security tapes?

Mr. DONELSON. Yes.

Mr. Horn. And you've had cooperation from both groups?

Mr. DonELSON. Absolutely.

Mr. Horn. OK. Is there anything else that should be done, like
a private—

ir. DONELSON. We check credit bureau records, and we use that
data to update our information to get a better telephone number,
better information on an employee.

We also use our own records, because if a taxpayer all of a sud-
den gets a job and we match our records and we find out they're
in a new location with a new employment situation, we will reac-
tivate those cases that were formerly unlocatable.

Mr. Horn. Now, for a small company that we talked about that
went bankrupt, you’ve got an identification number for that entity?

Mr. DONELSON. Yes.

Mr. Horn. OK. But do you have the Social Security number of
the owner of that entity so you can check both of them?

Mr. DONELSON. We have cross-checking ability. We take those
small corporations, and if they have a liability, we institute what
we call a trust fund recovery penalty.

We'll apply that to any officers of that corporation that we be-
lieve are responsible for those trust fund taxes. One of our difficul-
ties in the financial audit is we have the original assessment, and
we have additional assessments for each of the officers we think
are responsible for the trust fund portion of the tax.

Mr. Horn. OK. Do you check the Social Security number for
these people that were officers of the corporation to find out where
they are?

rr. DONELSON. Yes.

Mr. Horn. OK. Because I had understood you didn’t do that.
You’re telling me under oath you do do it?

Mr. DONELSON. Part of our investigation to establish the trust
fund recovery penalty is to identify who the taxpayers are, who the
officers are, and one of our first steps is to get their Social Security
number.

Mr. Horn. Because they have a whole series of phony corpora-
tions, some of them.

Mr. DONELSON. That’s right.

Mr. Horn. And then the question is who is behind all this, and
let’s stick him.

Mr. DONELSON. And that doesn’t happen automatically. It hap-
pens with hard work from our folks to uncover that. There are a
few more categories, and they’re very brief. Pl go through them
quickly.

Deceased taxpayers represent 2.5 percent of our——

Mr. Horn. This is the what tax?

Mr. DONELSON. Deceased.

Mr. Horn. Deceased. OK.

Mr. DONELSON. People passed away.

Mr. Horn. That includes the city of Chicago, I guess, from elec-
tion returns. The vice chairman is not here. I can get away with
saying that.


82

yet Horn. Now, is the Appropriations Committee supportive of
this?

Mr. DoLAN. I think my answer would be yes, in the context that
I think we've all agreed that there are plenty of places where we
need to improve on our ability to deliver that program.

We're working desperately hard to do that. In that context, I
think the appropriators are very conscious of the need and want to
be supportive of the effort.

Mr. Horn. OK. Let me just say on this chart, the Accounts Re-
ceivable Dollar Inventory, which for fiscal year 1995 lists $200 bil-
lion, and it says, “Currently noncollectible 87 4 billion or 43.7 per-
cent of the debt,” and then the next largest here would be the,
“Pending court actions, $19.1 billion, 9.6 percent part of the debt.”

And then we go down to “Available for collection action” which
is the next big one, “18.3 percent.”

Now, I’m told by staff that the chart doesn’t quite add up, that
it really adds up to about $176 billion, and I guess we need to find
out. We're going to put it in the record, but you might want to cor-
rect it before we print it.

What’s missing, since it looks like $24 billion—well, more than
that. It’s $176 billion apparently that is totals, and the chart is ti-
tled “$200 billion.”

And I realize Senator Dirksen had his famous comment, “A bil-
lion here and a billion there, and pretty soon it’s real money.”
You’re dealing with the real money, and I’m just curious if we can
straighten that one out.

[The information referred to follows:]


OVERSIGHT OF THE INTERNAL REVENUE SERVICE
FINANCIAL MANAGEMNT

HEARING

BEFORE THE

SUBCOMMITTEE ON GOVERNMENT MANAGEMENT,
INFORMATION, AND TECHNOLOGY

OF THE

COMMITTEE ON GOVERNMENT
REFORM AND OVERSIGHT
HOUSE OF REPRESENTATIVES

ONE HUNDRED FOURTH CONGRESS
SECOND SESSION

MARCH 6, 1996

Printed for the use of the Committee on Government Reform and Oversight

ce

U.S, GOVERNMENT PRINTING OFFICE
40-850 CC WASHINGTON : 1997

For sale by the U.S. Goversment Printing Office
‘Superintendent of Documents, Congressional Sales Office, Washington, DC 20402
ISBN 0-16-055112-9



108

district to be assigned to a revenue officer in the
third stage. Accounts remain in this status until
(1) the cutoff score is reduced so that the account
now has a high enough RWMS score to be assigned to
a revenue officer, (2) there are additional
delinquencies in later periods which cause the
taxpayer’s RWMS score to rise above the cutoff
score so that the account will be assigned to a
revenue officer, (3) the accounts are ultimately
collected by virtue of refund offsets and/or by
operation of the federal tax lien when the taxpayer
attempts to sell property, or (4) the imminence of
the expiration of the 10-year statute of
limitations causes the account to be assigned to a

revenue officer.

Accounts classified as CNC. These are the accounts
for which the IRS has concluded collection is not
currently possible. Accounts remain in this status
until (1) they are reactivated, (2) they are
ultimately collected by virtue of refund offsets
and/or by the operation of the federal tax lien
when the taxpayer attempts to sell property, or (3)
the expiration of the 10-year statute of

limitations, at which time they are written off.


131

7. Develop new policies and procedures to release files trom IRS audit/tax examination
unit and transfer to marketing disposition unit for tracking, marketing end
“recovery of treanury revenue.

8. Expand and improve marketing/disposition section and program for exposing assets
to the public for sale.

9. Develop training materials for IRS staff and contractors in implementing new
policies and procedures for the implementation of the IRS PROPERTY TAX
LIEN RECOVERY PLAN and CENTRAL DATABASE SYSTEMS.

10. Develop, improve and maintain effective financial and operational internal
controls.

‘The GAO report states....."Because of these problems, in testimony before the House
Subcommittee on Oversight, Committee on Ways and Means, we stated that IRS should seek
another agency or contractor to handle the property management functions that it now carries
out in disposing of seized property......we beliave that the management function should be
handled outside of IRS....".

RECOMMENDATION TO ADOPT THE IRS PROPERTY TAX LIEN RECOVERY PLAN

Honorable members of the Committee, | would like to see the attached IRS Property Tax
Lien Recovery Program strongly recommended by the Committee to the IRS to be adopted.
This Plan should be made a major priority in restructuring IRS programs and efficiency to
‘ensure no further IRS property tax liens are permitted to expire and increase the unnecessary
losses for the National Treasury. | would like to be part of this historical restructuring, and
Participate in guiding and implementing this Plan to provide a new source of funds and billions
of dollars towards the balancing of the national budget.




109

As we all know, the Federal government’s resources are
increasingly limited. Realistically, the Congress cannot authorize
a large enough number of slots at IRS to collect these type of
accounts. As would any private sector business, the IRS must
necessarily deploy its scarce resources to attempt to work the
highest yield cases. Unfortunately, there are a lot more cases
entering into the collection process than resources will allow to

be worked in a timely fashion.

The IRS is experiencing not only growth in delinquent tax
debt, but also the parallel growth of the "tax gap" of unreported
income. The growing demand for resources to combat the underground
economy further reduces the resources available to the IRS for debt
collection--and this comes at a time when the resources of the IRS
are strained by its efforts to accomplish a massive computer
update. One way to address these pressing problems would be to use
private collection agencies to help collect a portion of the

delinquent tax accounts.

Therefore, I am suggesting that the current efforts of the

IRS Collection function be supplemented to enable the federal
government to collect those accounts which the IRS considers a
lower priority and thus reasonably does not use its resources to
work. Private collection firms typically work on a contingent fee
basis. Contracting out these accounts would therefore make sense

from the government’s perspective. There would be no cost to the

10


30

Mr. Horn. Majority members will get 5 minutes a round. The
minority, since they made the quorum and I am an educator and
believe in Skinnerian rewards, get 6 minutes a round.

Welcome, colleagues. Glad you are here.

Let me just say the quorum was established in the last para-
graph of my opening remarks, for the record.

Let me just ask you a few questions and I will yield to the rank-
ing minority member.

One of the things that concerns me, as I mentioned in the open-
ing statement, is the criterion by which we write off tax debt which
is at $100 billion now. And I am interested in the criteria that then
makes the other $60 billion collectible.

Did GAO look at any of this particular situation?

Mr. Doparo. Yes. In fact, one of the other areas we have made
a little bit of progress in, was developing a methodology by which
IRS could sort through its accounts receivable population and de-
cide what is valid and collectible and what is not and also in terms
of a valid receivable and what is not and also from a collectibility
standpoint.

Part of the problem is a lack of detailed subsidiary records by
which you can accumulate that information. In lieu of that for a
financial reporting purpose, we decided to do statistical sampling
to come up with some valid estimates, so we have worked with I
to develop a methodology for doing that. The results showed that
a lot of the accounts receivable that were carried on the books were
actually not valid receivables, but had been put in for enforcement
purposes. And so we are working through that and the detailed cri-
teria, but it is a very difficult area.

I am going to ask Mr. Holloway to comment additionally on that
because he has been working very closely in that area.

Mr. Horn. I am particularly interested in your comment that
they were not valid receivables. Does that mean they had added in-
terest, interest, interest and the real original debt was buried
somewhere down there?

Mr. Hottoway. Let me try to clarify a couple of things because
the $100 billion write-off, I am not familiar with that number. I
would offer to you that IRS technically does not write off anything
until the statute runs, which currently is 10 years. They do not do
the conventional write-off that you would see for financial reporting
purposes.

I think what is at issue is being able to differentiate, of the pur-
ported $160-something billion of outstanding assessments, how
much of that is cases where people legitimately owe money versus
how much of that is the result of a compliance effort, where it is
not so much a question of will we collect it, but rather to provoke
taxpayer compliance by either filing a return or taking some other
action.

And I think that is part of the deception and one of the problems
when you talk about IRS receivables in that larger context is that
what we found is a whole lot of that is not even accounts receiv-
able. A lot of that are the results of compliance initiatives where
they are trying to provoke a taxpayer action and that is part of the
problem, is the inability to differentiate readily on a comprehensive
basis how much of it is really what is owed so that you can evalu-


116/94

12/28/94

3/95

BIL2/95

5/31/95

T3195

8/95

9195

11/98

89

Memorandum on Privacy and Security of Taxpayer Information to all
employees from the Commissioner and President, NTEU

‘Memorandum on Taxpayer Privacy and Browsing to Regional
Commissioners and Chief, Taxpayer Services from Chief, Management
and Administration

Memorandum on IRS Information Security Policy to all employees from
the Commissioner

Privacy Advocate’s Memorandum to Chief, Management and
‘Administration suggesting that use of The Electronic Audit Report Log
(EARL) System for purposes other than detecting browsing be curtailed.

Response from Chief, Management and Administration that EARL will
only be used for IDRS security purposes

IDRS Security Files Systems of Records Notice amended to fully
implement EARL

Managers Toolkit article - IDRS browsing

Initiation of use of Automated Information System User
Registration/Change Request Form - lists IDRS security rules

Manager's Toolkit articles -
Ethics: EARL

Privacy

Computer Security


84

Ms. RICHARDSON. In the statement for the record, we have in-
cluded footnotes which explain the difference, and if I can get to
the right page here, I can tell you exactly.

Not included were the trust fund recovery penalty assessments
of $6.3 billion which were put——

Mr. Horn. What page are you on?

Ms. RICHARDSON. I’m sorry, page 11, I apologize, of my written
statement.

Mr. Horn. And this is in your statement itself or in a footnote?

Ms. RICHARDSON. Yes, Mr. Chairman.

Mr. Horn. At the top of the page? Where are you?

Ms. RICHARDSON. It’s page 11.

Mr. Horn. OK.

Ms. RICHARDSON. At the bottom there is the footnote.

Mr. Horn. OK. “Not included in this balance are trust fund re-
covery penalty assessments of $8.7 billion, and that’s potentially
duplicative in Resolution Trust Corporation assessments of $9.0
billion. They have not yet moved to the currently not collectible.”

It still means we're still off on that chart somewhere. Don’t ask
me where, but I’ll let you worry about it.

OK. Let me now get to a few other things here. So when will this
experiment be over that the Appropriations Committee has funded
as a pilot project?

Ms. RICHARDSON. Well, in the request that’s on the street, we in-
dicated it would be a 1-year pilot that could be renewed for a sec-
ond year.

Mr. Horn. OK. So you take a look at the results the first year,
and you might do another year of it?

Ms. RICHARDSON. Correct. The bidders would be given an oppor-
tunity to participate for a second year.

Mr. Horn. Now, your concern and comments about private col-
lectors, and I realize some private collectors have violated basic ci-
vility, and there are a lot of State laws concerning that, but so have
some IRS violated the rules of civility.

And while the ones I know are all nice people, I don’t know what
they do to customers, and you're dealing with the taxpayers as a
customer.

And I guess what you're saying is right now your position is that
the IRS has greater charisma and joviality than private bill collec-
tors. I hope you're right, but I don’t know if it’s true.

So the question is I just simply want to see $200 billion, $100
billion, whatever figure you're going to land on, I just want to see
some of that collected if we can possibly collect it.

And I must say I think the average taxpayer is outraged when
they say, “What? They’re not collecting those debts which are clear,
and I’m getting beat over the head? I got a problem, too.”

Now, I realize a hearing like this might make more people resist-
ant, and I know that’s your worry, but I think you’ve done a very
good job, on the whole.

But here we have suddenly $100 billion hanging out there, and
this chart says $200 billion and in varying grades of collectibility.

Now, we also talked about $60 billion that is deemed collectible.
Maybe you could explain what the plans are for that. Does this


12

action, to attain the level of financial reporting and controls needed to effectively

manage its massive operations and to reliably measure its performance.

The sections below discuss these issues in greater detail

Issues with Revenue

IRS' financial statement amounts for revenue, in total and by type of tax, were not
derived from its revenue general ledger accounting system (RACS) or its master files
of detailed individual taxpayer records. This is because RACS did not contain
detailed information by type of tax, such as individual income tax or corporate tax,
and the master file cannot summarize the taxpayer information needed to support the
amounts identified in RACS. As a result, IRS relied on alternative sources, such as
Treasury schedules, to obtain the summary total by type of tax needed for its

financial statement presentation.

IRS asserts that the Treasury amounts were derived from IRS records; however,
neither IRS nor Treasury's records maintained any detailed information that we
could test to verify the accuracy of these figures. As a result, to substantiate the
Treasury figures, we attempted to reconcile IRS' master files--the only detailed
records available of tax revenue collected--with the Treasury records. We found that

IRS' reported total of $1.3 trillion for revenue collections, which was taken from


54

collect and spend. My testimony today will focus on the two systems we have
installed that allow us to meet this obligation.
Financial Statement Audits

As the head of the govemment's primary revenue collection agency, | want to
assure taxpayers that the IRS has strong systems and controls to ensure that their
individual accounts are accurate. These systems work. Each year, the GAO has
Certified the more than $1 trilion we collect has been properly deposited in the
Treasury. This is no small accomplishment for an organization that handles over 1
billion information documents per year, processes more than 200 million retums, and
issues more than 90 million refunds. Any complex system will produce some errors,
and ours does, but we make great efforts to detect and correct them promptly.

While | said at the start of my testimony that | was pleased to be here, | am
frankly less than pleased with the results of the GAO financial statement audits in the
past three years. tis disturbing to hear that the IRS ‘has not passed is financial
audit." And, we are quite concemed as well. But it is important that we all understand
What is not meant and what is meant by that remark, It does not mean that the
money the IRS is supposed to be collecting or spending has simply disappeared ~ or
somehow been misappropriated. This has not occurred.

‘The Service has two separate financial processes to track funds: the
administrative system that handles our appropriated funds and our revenue system
that tracks tax collections. It is important to understand these two different systems in
order to understand the GAO's audit findings and what we are doing to improve both

systems to comply with the CFO Act.


96

Estate Disposition, former Resolution Trust Corporation depart-
ment head, section chief of the Real Estate Disposition.

If you don’t mind, both stand, and we’ll swear you in.

[Witnesses sworn.]

Mr. Horn. Why don’t we just take them in alphabetical order.
Mr. Korb, would you like to begin?

STATEMENTS OF DONALD L. KORB, THOMPSON HINE &
FLORY, P.L.L.; AND SHANNON O’TOOLE, EXPERT CONSULT-
ANT FOR COUNTY OF ORANGE, CA, BANKRUPTCY ON REAL
ESTATE DISPOSITION

Mr. Kors. Congressman, I appreciate your reference back to the
tax reform days of 1985 and 1986. You should know that while I
was the assistant to the Commissioner, I was the person who was
responsible for working on that on behalf of the Commissioner and
spent nany a day, evening, weekend, whatever, up here. It was a
very, exciting time. I look forward to going through that again, ac-
tually.

Mr. Horn. Was Gucci Gulch the book written on that?

Mr. Kors. That’s right. Remember, I was working for the IRS at
the time.

Mr. Horn. Yeah, I know. But I was wondering. Is that pretty ac-
curate?

Mr. Kors. That’s right.

Mr. Horn. OK.

Mr. Kors. There was the lobby outside the Ways and Means
Committee room where it was full of lobbyists. You’re exactly right.

I appreciate the opportunity to appear today. A lot of what I was
going to talk about has already been covered, and it is covered in
my written statement, but I would like to summarize some of the
main points for you.

I would like to say at the outset that I’m not here to criticize the
collection function of the IRS. I’m not here to suggest that the IRS
collection function be replaced by private debt collection agencies.

But I am here to talk about the recent experience of the IRS col-
lection function, which demonstrates quite clearly the IRS simply
does not possess the resources to adequately deal with all of the
taxpayers’ accounts that are in delinquent status.

What I’m going to do today is focus on the collection pipeline and
point out those places where accounts, if you will, fall out of the
pipeline and are not being worked by the IRS. It seems to me,
those are the accounts that should be focused on.

I believe the IRS collection function is properly concentrating its
efforts on the highest yield cases and those cases that present the
gravest threat to voluntary compliance.

On the other hand, the IRS does not have sufficient resources,
due to budget constraints, to adequately deal with the relatively
small dollar amount cases and the cases that require a greater ef-
fort to contact the taxpayer or locate the taxpayer assets or sources
of income or otherwise collect the amount owed.

I think the best way to look at this is to describe the process
which has been discussed already; that is the three-stage collection
process.


sy

And only the last one is registered to my understanding. What
is the process to collect?

Mr. DONELSON. Mr. Chairman, after an assessment arises and
we agree with the taxpayer or we assess the tax without the tax-
payer's agreement, we issue to individuals up to three notices.

T say “up to” because we can skip ahead if we see it’s an egre-
gious situation, but these three notices are issued over a 16-week
period.

Mr. Horn. Over what period?

Mr. DONELSON. Sixteen weeks.

Mr. Horn. Sixteen weeks.

Mr. DONELSON. Yes.

Mr. Horn. So one goes out on week one and then another one
on, what, week seven or something, and the third one is on the
16th week? How does it work?

Mr. DoNnELSON. It’s within a 16-week window. My hesitation is
because we get correspondence from a taxpayer, and that may sat-
isfy our first inquiry.

On the other hand, it may require us to cycle that taxpayer
through another cycle of notices. it isn’t a set period for every
taxpayer in order. It’s not a lockstep-type situation.

ir. HorN. How many reply with the first notice? Do you have
any figures on the success of the first notice? I mean, do you get
a 20 percent return where it says, “Yeah. Sure. I'll settle and send
you the check”?

Mr. DONELSON. To be honest, I’d be guessing, in terms of giving
you a percentage off the top of my head. We have a very good suc-
cess rate on reaction to our notices.

Mr. Horn. Well, that’s only three notices. In other words, when
do they start facing up to it? Is it the registered mail one? Do they
turn down the registered mail, refuse to go to the post office?

The first two were not registered, so you don’t even know if they
received them.

Mr. DONELSON. The best response is from the last notices. Those
are the most harshly and aggressively worded notice as well. But
the first notice is a statutory notice that we have to issue to ex-
plain to the taxpayer why the assessment arose.

We generally expect that most taxpayers are going to pay, and
they will respond to a notice that isn’t necessarily harshly worded.

M Horn. Why don’t you send them a registered notice to start
with?

Mr. DONELSON. There is an expense involved.

Mr. Horn. Well, there is an expense on the first two letters, too.

Mr. DONELSON. Yes, but it gets prohibitively expensive when you
use certified mail or registered mail.

Mr. Horn. And you’ve worked out those figures based on how
much you get in on the first notice which is not certified, not reg-
istered?

Mr. DONELSON. Yes. We have all those figures in terms of how
much we get off of the first, second and third notices——

Mr. Horn. Let’s put them at this point in the record, then, if you
don’t mind, without objection. All those exhibits will appear where
we've had the discussion.

[The information referred to follows:] :


36

are not taking advantage of home PCs for electronic filings from in-
dividuals. That would take out a step for IRS and a step for the
individual, saving a lot of money.

So I would like a comment on the 17 percent electronically han-
dled. If the goal which you set is to have your paperwork electroni-
cally handled, why is the percentage so low after $8 billion?

Mr. Doparo. Right. That was the essence of the concern that we
brought to the IRS at that point in time. That if they went forward
with their existing business strategy, we did not think they would
achieve their goal that they had set out in terms of bringing the
vast majority of the taxpaying population into an electronic trans-
mission mode.

And they agreed with us and they have since then started to do
some additional market research. A lot of these figures were kased
upon IRS using third-party tax preparers and other services to
process some of the tax returns. And we felt, as you have pointed
out in the report, the large number of people who develop and use
tax preparation packages on their home PCs. What these people
were doing was developing it using software, printing it out on
paper form, mailing it to IRS and then it was transcribed, and not
all of the information was ever collected off the form, but it would
have to be transcribed again by IRS keypunch operators and put
into electronic format. And it did not make sense to us.

IRS has agreed. They have committed to move toward a broader
strategy, but we have yet to see what that revised strategy is going
to be. But this is where the big payoff is, if we can get most of the
information in electronic format and put in place. But you need to
have your business goals directed toward getting there. This is one
of the areas where we found leading organizations really excelled
by making sure you have a good business plan in place first and
then your information technology supports that business plan and
business goals.

And our recommendations are intended to move IRS in that di-
rection.

Ms. MALONEY. My time is up.

Mr. Horn. I now yield 6 minutes to the gentleman from South
Carolina.

As I recall, my distinguished colleague held a hearing on this
subject in the 103d Congress.

Mr. Spratt. Well, about more than the Internal Revenue Service,
so reconciling all of the departments of the Government to some-
thing like generally accepted accounting principles is a chore and
it has still proved to be one.

I am finding myself a little hard to follow this because I do not
understand the process. When I send a check on April 15th to the
Internal Revenue Service, is it bundled with other checks and im-
mediately deposited in the Treasury of the United States? Or does
the IRS maintain an account and then transfer the funds from it
periodically to the Treasury?

Mr. Houuoway. There are a variety of ways that money comes
in to the IRS. About 60 percent of it, I am going to come back to
the individual, but about 60 percent of it, which is the FTD cou-
pons that most businesses file, come through what is known as the


48

Agency has made important strides to address far-reaching finan-
cial management problems.”

While this kind of praise is nice to hear, especially from the
GAO, we also know for our financial audit that we have more work
to do to get a clean financial opinion.

Shortly after I met with Comptroller Bowsher or shortly after I
became Commissioner I met with him to talk about the 1992 audit
because I was concerned and he assured me that his experience
had been that some of the problems while very correctable would
take several years before we would be able to get a clean financial
opinion and he felt that we should be looking realistically at fiscal
year 1996 as the first year that we could expect to get such an
opinion.

He also, I think, noted that he hoped that the same standards
would someday be applied to the legislative and the judicial
branches as well.

I think it is important to understand that we do have two sepa-
rate financial processes to track funds: the administrative system
that handles our appropriated funds and our revenue system that
tracks the tax collections. And I think it is also important to under-
stand what these two different systems do in order to understand
the GAO’s audit findings and what we are doing to improve both
systems to comply with the CFO Act.

We have taken some significant improvements which I think the
GAO recognized today to our administrative accounting system. In
1992, they were unable to audit that system. In 1993, it was
auditable but we were not able to provide them with all the infor-
mation they wanted. In 1994, the audit report focused on just two
administrative accounting issues: the failure to reconcile the ac-
counts with Treasury and the lack of the receipt and acceptance
documentation for the non-payroll payments such as rent to GSA
and printing payments to the Government Printing Office.

Regarding the two issues, we are reconciling our cash balances
to Treasury’s records in fiscal year 1995 and we are going to ensure
that these balances are reconciled on a monthly basis. On the non-
payroll payments, the concern of the GAO was that we were not
adequately verifying the payments being made for us by the Gen-
eral Services Administration and the Government Printing Office.
We are reviewing those processes and working to improve them,
but the solution requires the assistance of GSA and GPO as well.

One significant example of the effectiveness of our improved ad-
ministrative financial systems has been our ability to track one of
our major programs.

In 1995, you may remember we received funding for a compli-
ance initiative, a 5-year plan with the moneys raised going directly
to deficit reduction. Ironically, it was not refunded because of re-
duced funding for 1996, but the results of that initiative have been
impressive and because of the information produced by our track-
ing system, I can tell you that our compliance initiative did yield
over $800 million in revenue in fiscal year 1995 which far exceeded
the $331 million we promised.

Now, that system is the very kind of thing the GAO was talking
about that enables us to make good management decisions as well
as Congress to evaluate whether its money has been spent wisely.


Ir,

III.

ut

the result of the disposition of higher
scoring accounts. Keep in mind that new
accounts are being constantly added to the
Queue and if a new account has a higher RWMS
score, it will be worked before a lower
scoring account already in the Queue.

At any stage of the collection process, the IRS may
determine that collection is not currently possible.
At that time, the case is closed from the active
inventory and placed in "Currently Not Collectible" or
"CNC" status.

A. IRS can classify accounts as CNC for a variety of
reasons. The most common reasons for individual
taxpayers are that (a) the taxpayer is unable to
pay the delinquent tax (this includes instances
when the delinquent taxpayer does not have the
resources to pay as well as when the taxpayer has
resources but collection of the tax would cause
the taxpayer undue financial hardship); (b) the
IRS is unable to locate the taxpayer or the
taxpayer's assets; or (c) the IRS igs unable to
contact the taxpayer (although it has a current
address) and is unable to locate any of the
taxpayer's assets.

B. Because the situation for which the account was
classified CNC could change -- making the account
potentially collectible -- the IRS has estab-
lished mechanisms to reactivate these accounts.*
If a CNC account is reactivated, the account will
enter the collection process at the first stage.
Note that it may enter the collection process at
different points in first stage depending upon
why it was reactivated. The account then follows
the normal collection process through the next
two stages.

C. Once a year (approximately October) a balance-due
notice is sent to taxpayers whose accounts have
been classified CNC for at least a year.

In summary, tax delinquent accounts not actively being
worked by the IRS fall into three categories.

A. Accounts in deferred status (described in Item
I.B.1. above). These are the accounts that went
through the firet stage (Service Center) but fell
below the dollar threshold for transfer to the

* Note that once an account is classified as a CNC, in

general it will remain a CNC for at least 15 months before it

can be reactivated.


53

‘the Service. | have assured Tony that | am committed to ensuring that he and his
staff have all of the necessary resources to accomplish this and to achieve any
requisite changes within the Service.
Chief Financial Officers’ Act of 1990
| appreciate the opportunity to discuss the Chief Financial Otficers' Act of 1990,

its contribution to improved financial management in IRS, and the actions we are
taking to implement the objectives of the Act. The expectations of the Act include:

the deployment of modem systems to replace outdated ones;

the development of better performance and cost measures; and

the design of results-oriented reports that integrate budget, accounting,
and program information.

‘The passage of the Act, and the designation of IRS as a pilot agency, gave us
‘a unique opportunity over the last four years to improve financial management to meet
these expectations and provide full accountability to all our constituencies. The IRS,
as with virtually all other agencies privileged to be CFO Act pilots, has both made
progress and faced unexpected challenges in meeting financial audit requirements.
We at IRS are using the CFO Act and the financial statement audit as our blueprint for
financial management improvements, The process ot preparing financial statements
and having them audited imposes a critically important discipline on us ~ a discipline
which can only benefit the taxpayers of the United States. it is only appropriate that
we be held to the same standards to which we hold taxpayers.

As the collector of over 90% of the nation’s revenues, we fully understand that

we have a special obligation to taxpayers to be accountable for each tax dollar we


138

Fifth Task: IRS determines tax tien is appropriate action.

If determination is positive that sufficient equity is available to satisty
some or all of the unpaid taxes, and title is acceptable, IRS follows existing rules
to place lien against the real or other property for unpaid taxes.

Sixth Task: Notice is sent to central document control unit/ CENTRAL DATABASE to log
the property fi

including property address, if any
market value of property
brief description of property
amount of tax lien, debtor identification
type of property
responsible IRS staff person, contractor or broker,

Jeventh Task: Develop policies and procedures to release files from IRS tax examinati
unit and transfer to marketing disposition unit for tracking, marketing and
recovery of treasury revenue.

Note: The marketing disposition unit will create an internal control check and balance
for the tax examination unit. If the asset lien is not entered into the
CENTRAL DATABASE by the examination unit, the marketing unit will note the
‘omission and take corrective action.

1. Develop policies and procedures to release the examiner's file to the
expert marketing disposition section.

Note: This will be a change from the current IRS method of using the
same staff from “cradle to grave", wherein the same staff person
performs the accounting examination and marketing functions.

IRS accounting personnel do not have expertise, training or experience

in evaluating real property tax lien equity or skills necessary to efficiently

market and dispose of real property assets as evidenced in the large estimated volume
of over $100 billion dollars in written off IRS lien assets and additional

estimated $69 billion in liens pending future write-off.

2. Policy statement development that it is recognized that these two functions
require separate and different expertise, and that they will be performed
by separate staff, to provide the best experienced staff in each area.

TA


49

But along with improving our administrative accounting systems,
pe are working to improve how we account for the revenue we col-
lect.

Our current system, which was implemented during 1994, was
not designed to provide the detailed information that is required by
the CFO Act for financial statement presentations. While we can
and do reconcile the gross amounts corrected, as discussed earlier,
we have not been able to give the General Accounting Office the
information they would like to have to tie individual transactions
to their sources.

To immediately address this issue for the fiscal year 1995 audit,
the Service is providing detailed revenue receipt information from
the individual taxpayer accounts that we have on our master file.
Also, we are installing a short-term system solution which we call
our interim revenue accounting control system.

In July of this year, it should be implemented nationwide so that
the network will connect our data base located in our Detroit com-
puting center with our 10 service centers.

These improvements hopefully will bring us closer to achieving
our goal of a clean financial audit opinion and we hope, as I said,
by 1996 to be able to do it on both sides.

But I would also like to talk to you for a minute about our ac-
counts receivable inventory. As early as 1988, we determined that
the accounts receivable was a growing concern, an assessment that
OMB and GAO agreed with. Since that time, we have continued to
take steps to improve the management of the receivables inventory.

We have focused on four specific areas: making sure that the
composition of the accounts receivable is correct, ensuring the accu-
racy of the assessments that were included in that inventory, im-
proving the currency of the inventory, and increasing the collection
of the amounts in the inventory.

In 1990, Congress extended the time that IRS would be required
to keep accounts receivable on the books from 6 years to 10. Thus,
unlike accounts receivable in the private sector, what we call our
accounts receivable dollar inventory, also called ARDI by some, is
not a reflection of the annual underpayment of taxes, but it does
include current receivables plus a 10-year carryover of unpaid
taxes along with accrued interest and penalties.

At the end of 1995, our gross accounts receivable inventory
equalled about $200 billion, of which 28.5 percent or $56.9 billion
reflected accrued interest and penalties.

The gross accounts receivable inventory is divided into two com-
ponents: those considered currently not collectible as well as the ac-
tive accounts receivable. Our currently not collectible accounts are
accounts that a collection employee has determined a taxpayer can-
not currently pay. That accounts for about $87.4 billion or nearly
half of the gross receivable inventory. Accounts in this category are
periodically monitored and if a taxpayer is able to pay within that
statutory 10-year period, the account will be collected, so it can
move out of the currently not collectible inventory back into the ac-
tive accounts receivable.

Active accounts receivable are accounts that are potentially col-
lectible and continue to be pursued through activities ranging from
notices and telephone contacts to installment agreements and of-


78

And are we lacking those resources so we could have collected
more of that $100 billion that’s sitting there and might or might
not be collected over the 10-year period? Commissioner, do you
have any thoughts on that?

Ms. RICHARDSON. Well, I think Mr. Donelson can give you some
more specifics, but I think it’s clear that in the proper cases where
we do need the face-to-face contact that we could use more people.

But what we chose to do with the additional compliance money
we got in 1995 was try to put people in places such as our auto-
mated collection system, our telephone site, where we do have a
very high yield and can reach a large number of taxpayers.

But in the proper cases, having some more people to have the
face-to-face contact is also important, And yes, we do think that we
can collect more money if we had more people.

Mr. Horn. Now, some of us here think that there is a problem
of intensity here, I guess, on collection, and that while people
might do a good job in the early months, and those are your people,
what is not collected, if it lags, ple are just going to say, “Hey,
sorry. I don’t owe anything. I forgot about you. You’re not doing
anything.”

Why shouldn’t the uncollectible $100 billion be assigned to pri-
vate debt collectors? I understand the IRS has resisted this. I know
the unions resisted this, but I understand management resisted
this.

What is the rationale for resisting, turning an uncollectible debt
that amounts to $100 billion over to private debt collectors or com-
mercial law league tax attorneys?

There are a whole series of debt collectors out there. They have
success. Corporations turn it over to them. Universities turn it over
to them.

Ms. RICHARDSON. As I mentioned in my earlier testimony, we are
in the process of piloting a private debt collection effort, and I
think we'll have a lot more information as to how effective people
in the private sector can be.

* Mr. Horn. Now, that’s a pilot project of the Appropriations Com-
mittee?

Ms. RICHARDSON. Yes. As a general rule, people in the private
sector are compensated out of the proceeds they collect. It’s, I
think, generally about 30 percent, typically 30 percent, something
we don’t do, as you know.

If we kept 30 percent of what we collected, we could probably
have our modernization in place and a number of other things as
well.

We have an ongoing relationship with taxpayers, or at least we
would like to have, and frequently people in the private sector don’t
have to be concerned about that.

So if you have a bill from a department store or a telephone com-
pany or whatever, they want that debt collected. They really don’t
typically want that customer back. We have an ongoing relation-
ship, as I say. So frequently we can offset a tax debt from 1 year
against a refund for a later year.

We are driven by the concerns about taxpayers’ rights. We do try
to adhere very scrupulously to the Taxpayer Bill of Rights provi-
sions. So we take frequently more time and more care.


88

Protecting IDRS Privacy - Chronology of Actions

Date
10/92

8/93,

9/93,

10/20/93,

11/29/93

12/93

2194
2194
4194

5194

519194

7194

194

8/94

9/30/94

10/94

Action
Intemal Audit Report - Southeast Region

Commissioner's Testimony on browsing before Governmental Affairs
Committee of the Senate

IDRS Privacy & Security Action Plan approved by the Deputy
Commissioner

Memorandum announcing the Taxpayer Privacy Rights Policy to all
employees from the Commissioner

Memorandum on EARL System to All IDRS Users from Chief,
Management and Administration

Leaders Digest Article - Problem Solving: Stopping the Invasion of
Privacy

Guide for Penalty Determinations
Commissioner's Task Force on Privacy, Security and Disclosure Report
Managers Toolkit Article - Privacy, Security and Disclosure

Supplemental Guidance for Penalty Determinations (Computer Security
and Taxpayer Privacy) - Sent to Heads of Office

Memorandum announcing the Declaration of Privacy Principles tall
employees from the Commissioner

‘Commissioner testifies before Senate Committee on Governmental
Affairs - update on browsing - actions taken

Privacy Advocate Hired by IRS

IDRS Security Training Modules for Employees and Managers: “IDRS
Security: A Public Trust”

AILIRS employees complete privacy awareness training, including
viewing the videotape on privacy and browsing, “Protecting Privacy.”

Managers Toolkit Article - Ethics: IDRS Security


43

Mr. Horn. One last question just to round this thing out. What
do you think of the status of the electronic equipment that the IRS
is using? Are they lagging behind in this?

Ms. STILLMAN. I do not think the primary problem with IRS is
equipment. The primary problem is business planning and manage-
ment.

Mr. Horn. And that would solve most of the missing rec-
ommendations in terms of implementation? Or are you just talking
electronic filing?

Ms. STILLMAN. In terms of the recommendations on the computer
systems, they need a good business plan, they need a good invest-
ment strategy and they need good technical procedures in place to
build systems. They need a way to determine what to build from
an investment point of view and from a business point of view and
then they need the infrastructure in place to enable them to build
it. They had neither of those things when we looked at those re-

ports.
Mr. Horn. I see.
The gentleman from South Carolina?
Mr. SPRATT. No questions.
Mr. Horn. The gentleman from Minnesota, Mr. Peterson?
Mr. PETERSON. Thank you, Mr. Chairman. I apologize. I got tied

up.

I think it was a discussion I had with you about some of these
similar issues a couple of years ago and at that time, I think it was
you, maybe it was somebody I was talking with, you said that these
returns were coming in to some of these centers and they were lit-
erally putting them in carts and trucking them over to the other
side of the thing and that the big problem was that there was no
plan to get them into the computers.

Mr. Doparo. Right. We had a discussion at a hearing on revi-
sions to the Paperwork Reduction Act.

Mr. PETERSON. Right. Right. And apparently they have not made
a whole lot of progress in getting a system in place to deal with
all the paper and get the input without errors and so forth. Is that
what you are saying?

Mr. Doparo. Yes. We basically concluded that the plan to mod-
ernize and move in that direction and have more things submitted
electronically was not good. The business plan needed revamping
to move more in that direction and IRS’ ability to actually develop
the software and put the systems in place within costs and within
schedule needed major enhancement.

We had mentioned earlier that their software development capa-
bility was at the lowest level in the ranking by the Sokware Engi-
neering Institute and unless they could move up their level of so!
ware development capability, they were not going to be able to
produce the systems in order to receive the information electroni-
cally.

Mr. PETERSON. This is just for the receiving of the electronic in-
formation?

Ms. STILLMAN. It is for all of their processing of data electroni-
cally: when they receive paper, they convert that paper or some of
the data on that paper to electronic format and then from there on
it is electronic.



129

PROJECTED NATIONAL VOLUME OF UNCOLLECTED LIENS.

My experience has been in reviewing the title of foreclosed properties from failed banks and
savings and loans in over 19 states, primarily within Arizona, California, Colorado, Florida,
Kansas and Texas. The number of FDIC insured banks throughout the United Statesis 10,054
and the number of insured Savings Banks and Savings and Loans throughout the nation is
2,058, for a total of 12,112 institutions, of which the Office of Thrift Supervision (OTS) is
monitoring 1,459, The assets from these institutions total over five trillion two hundred fifty-
four billion dollars.

The Quarterly Banking Profile states that over one trillion, six hundred and three billion of

these assets are loans secured by real estate.
ity of thriving and OTS monitored institutions will al lost
f which will have IRS liens agai sm. Additionally, uninsur
edit uni investor hol losed re:

fiens that total m fs

IRS REVOLVING FUND

The IRS has a revolving fund from which money can be taken to redeem a very small
number of IRS liens. Page 110 under Note 5 of the GAO report notes that the ending balance
in this revolving fund was $ 10 million in 1993 and $ 12 million in 1994 of Unexpended
Appropriations for the redemption of IRS liens.

‘The appropriated money should have been used to redeem IRS liened assets and then to
resell the properties to recover treasury revenue, paying back the revolving fund, paying for
expenses to run the lien recovery program, and providing going forward funds to redeem more
properties.

CHECKS AND BALANCES, INTERNAL CONTROLS

The GAO audit sorely points out the lack of internal controls and checks and balances
‘throughout the IRS......"because key staff knowingly and consistently did not follow
‘established procedures....”.(p.49). The attached Ten Step plan sets forth new checks and
balances between IRS sections and extensive internal controls to ensure all future liens will
be recorded, tracked, and reported in an accurate and timely manner.

It is not reasonable to expect an IRS tax auditor to also be an expert in real property
appraisal, equity determination, title examination and re-sale marketing. The IRS has expected
its’ staff to handle a tax debt “from cradle to grave”, from the tax audit through tax lien
collection. This is not customary in today's environment of specialty work, to provide the
most experienced and highest quality performance in each specialty area.

The attached Ten Step IRs Property Tox Lien Recovery Plan separates the duties of

nm re h

blance/ internal control for the eudit department, in the event the audit department does not

log the new lien into the Central Database system, the resale section will loa it in and include
lien, i , r 7



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122

United States after all the banking problems, the savings and loan
problems that have been going on.

And, of course, they sometimes have hundreds and hundreds of
branches or sometimes none at all. Of these 112,000 branches that
are FDIC insured—and, of course, we know there are other credit
unions, other mortgage houses that are not insured at all, so we
are focusing now just on the insured institutions—there are over
$5,254 trillion in assets in those institutions of which more than
a third is secured by real estate.

That’s a lot of real estate that’s out there with mortgages against
it. Now, we don’t know how many of those loans are going to per-
form and how many are not.

Historically, it’s public record, that for the institutions that the
Resolution Trust Corporation managed 13 percent, perhaps, some-
times 15 percent of the assets from the failed institutions were real
estate. That’s a very large portion.

I don’t believe that portion is going to be in effect in these thriv-
ing institutions, but I do understand from the quarterly banker
profile that perhaps up to 6 percent of the real estate loans are in
trouble.

They’re overdue, up to 89, 90 days overdue and/or it already in-
cludes real estate that has been foreclosed on.

What we don’t know, ladies and gentlemen, is how many liens
there are against these properties. We do not know if there are IRS
liens out against any of these assets that could immediately be-
come assessable and be collected upon.

I have attached a 10-step plan to this program, and it is a step-
by-step mini manual, if you will, as to how you go about collecting
on these liens.

For one, it is separating the duties and responsibilities from the
auditor agent at the IRS and no longer having what is known in
the industry as cradle-to-grave responsibilities whereby the auditor
not only examines the tax return but pursues the taxpayer debtor
and also is responsible for trying to place a lien on his property and
follow it and collect on it.

In this day and age of specialization, that simply does not make
good business sense. So a check and balance is to separate the du-
ties of the auditor, let them do their job, but once it is determined
that a lien needs to be placed, let’s put that into another set of
hands, whether that’s another section, another department or any
other entity, but let’s make that a separate entity so that they can
check and balance.

If the auditor did not record the lien as he should have done so
that it’s reportable, now we have a check and balance immediately
to go back and put the correct records into place so that we can
always go back and track those liens.

I’ve given you a strategic plan. It’s to implement this lien recov-
ery plan, and it’s really so simple, because not another rule or law
has to be passed. It’s all there.

We simply have to prioritize this area. We have to bring it for-
ward, and we have to implement it, commit resources and dedicate
ourselves to going after these recoverable liens.

I’ve issued a vision-mission statement included in this proposal,
again to take all the lawful steps available to this agency, the IRS


127

‘THE GAO REPORT: EXAMINATION OF IRS’ FISCAL YEAR 1994

The recently released Government Accounting Office (GAO) IRS Financial Audit report for
1994 dated August 4, 1995 tly sets forth ineffi , . errors and
‘omissions in present IRS accounting practices and procedures, as well as in the actual

efforts of the IRS to account for IRS recovery dollars and assets.

GAO's introductory letter to the President of the Senate and the Speaker of the House of
Representatives states that "! able res it 12 reliability of IRS’,
fiscal veer 1994 Principal Financial Si Our 5

While the entire IRS GAO report outlines and details extensive errors and omi
is ONE AREA THAT IS COMPLETELY OVERLOOKED.

THAT AREA IS IN THE IRS PROPERTY TAX LIENS THAT ARE ALLOWABLE UNDER
CURRENT IRS RULES AND REGULATIONS THAT ARE NOT BEING EXERCISED. PROPERTY
LIENS ARE NOT BEING REDEEMED OR ARE BEING ALLOWED TO EXPIRE, THAT COULD
PROVIDE HUNDREDS OF BILLIONS OF ADDITIONAL TREASURY RECOVERY REVENUES.

IRS REAL PROPERTY TAX LIENS

The GAO report discusses seized property and uncollectible receivables, however, it does
NOT discuss those IRS property tax liens that were allowed to “expire” or to be “abandoned”.

ose lier 20 s¢ not report
int tievable or nd unt to: billion:
treasury revenu

In order to collect taxes from non-paying debtors, the IRS is empowered to place liens
against the debtor's real property. If the debtor sells his property, the IRS is paid the amount
of the lien or a negotiated amount. If the debtor's property is foreclosed upon by a bank,
savings and loan, mortgage holder or investor, the IRS lien transfers with the property and
remains alien against the real property for 120 days from the date of the foreclosure. IRS has
120 days to "redeem" or buy back the property for the amount the foreclosing entity paid at
the foreclosure sale, plus certain expenses. IRS then can re-sell the real property and retain
the equity to credit towards the debtors tax debt, pay IRS operating expenses for the property
tax lien recovery program, and to provide additional funds to "redeem" more property liens.

If the IRS does not “redeem” the foreclosed property within 120 days, the lien expires, or
“drops off", is considered “abandoned” and the IRS looses the tax lien forever.

or ler or and loans, have been WINDFALL PR
when they foreclose on real properties that have IRS liens levied against them. The IRS has
not been redeeming properties with IRS tax liens against them, the IRS tax lien expires after
approximately 120 days are th other fon boktas re-sale properties and retain all ofthe
equity, including the IRS, off

2



CONTENTS

Hearing held on March 6, 1996 ..
Statement of:
Alexander, Donald C., former Commissioner, Internal Revenue Service .....
Dodaro, Gene L., Assistant Comptroller General, Accounting and Infor-
mation Management Division, General Accounting Office, accompanied
by Gregory M. Holloway, Director, Governmentwide Audits, Accounting
and Information Management Division, General Accounting Office;
Rona B. Stillman, Chief Scientist for Computers, and Communications,
Accounting and Information Management Division, General Accounting
Office; and Lynda D. Willis, Director, Tax Policy and Administration
Issues, General Accounting ice
Korb, Donald L., Thompson Hine & Flory, P.L.L.; and Shannon O'Toole,
Sepert consultant for county of Orange, CA, Bankruptcy on Real Estate
isposition ...
Richardson, Margaret Milner, Commissioner, Internal Revenue Service,
accompanied by Michael P, Dolan, Depuly, Commission of Internal
Revenue Service, Anthony Musick, Chief Financial Officer, Internal
Revenue Service; and James E. Donelson, Chief, Taxpayer Service,
Internal Revenue Service ..... 46
Letters, statements, etc., submitted for the record by
Alexander, Donald C., former Commissioner, Internal Revenue Service,

|

prepared statement of .. 93
Dodaro, Gene L., Assistant Comptroller General, Accounting and Infor-
mation Management Division, General Accounting Office, prepared
statement of ..... 9
Donelson, James E., Chief, Taxpayer Service, Intern:
Chart on Accounts Receivable Inventory of $200 billion .. 74
Chart on protecting IDRS privacy 88
Gross ARDI chart ... 83
Information concerning collections igh the 7
Information concerning definition of hardship 72

collection Feld os
Korb, Donald L., mpson Hine
Maloney, Hon. Carolyn B., a Rep!
of New York, prepared statement of ....
O'Toole, Shannon, expert consultant for county of ge,
ruptcy on Real Estate Disposition, prepared statement of ..
Richardson, Margaret Milner, Commissioner, Internal Reve:
prepared statement of ...



145

enced person. I could do it. I could teach you to do it. You look at
comparable sales in the neighborhood.
r. Horn. After the November election comes. You never know.

Ms. O'TOOLE. You look at comparable data, square footage, simi-
lar type of house, recorded sales. It’s right there. It’s not a difficult
maneuver at all. You don’t need a formal appraisal. You could do
that, perhaps, on 20 percent as a check and balance, though.

Mr. Horn. Mr. Korb, back to you. As I understand it, if the pri-
vate collection agencies were authorized to work only the three
types of accounts that you're discussing, the collection agencies
would merely supplement the collection work of the IRS.

In other words, the private collection agencies would merely per-
form collection activities with regard to accounts lying dormant at
the IRS, and thus there would be no displacement of IRS collection
staff. Do you think that’s correct?

Mr. Kors. Yes. That’s clearly my suggestion. Let the IRS focus
its efforts on the higher-yielding accounts.

Mr. Horn. Right, and get them early.

Mr. Kors. That's right.

Mr. Horn. The first month or two.

Mr. Kors. That’s right. And let the contractor supplement these
efforts on the accounts that aren’t going to be worked

What I think it does, Congressman, it provides more flexibility.
It helps smooth out the peaks and valleys of resource allocations.
It’s also going to provide for uniform treatment nationwide, too,
when you think of it.

As I mentioned, in the collection business, time is important. The
sooner an account is referred, the more likely it will collected.

And by its nature, as we’ve learned today, the IRS pipeline takes
a long time, and therefore, by the time these accounts reach this
dormant status, quite a bit of time has gone by.

So think about it for a moment. The deferred accounts there is
no.further contact. A telephone call might turn up some of that
money right there.

On the CNCs, one thing that’s forgotten, I think, although was
mentioned by Mr. Donelson, as time passes, a debtor’s ability to
pay could improve.

An unemployed person can find a job. A failed business owner
can recover. A telephone call at the right time could make the dif-
ference instead of having the accounts sit there unworked.

So I really do view it as really a supplement that can fit in with
what the IRS is already doing.

Mr. Horn. With your experience, is there a minimal level of
funding that is necessary to launch a successful private collection
program?

It seems to me it would take an individual, a telephone, a good
pair of shoe leathers and maybe a car. Then, you could have an in-
dividual out there, if they have State licensure or whatever.

Mr. Kors. Right. You don’t even have to launch it. There is a
whole business out there. Thirty-two States out there now use this.
So, there is a whole industry that does this kind of thing. A good
portion of the Federal Government uses these people.

Mr. Horn. Yeah, certainly the Department of Education.

Mr. Kors. That’s a very good example.


106

cutoff score in that particular district is lower.

Accounts that do not score high enough to be assigned to a
revenue officer remain in the Queue until they move "up" in line as
a result of the disposition of higher scoring accounts. Keep in
mind that new accounts are being constantly added to the Queue and,
if a new account has a higher RWMS score, it will be worked before
a lower scoring account that is already in the Queue. Also the
Chief of Collection can adjust the cutoff score as resources

available to him or her decline.

At any stage of the collection process, the IRS may determine
fhat collection of a particular account is not currently possible.
At that time, the case is closed from the active inventory and
placed in "Currently Not Collectible" or "CNC" status. The IRS
classifies accounts as CNC for a variety of reasons. The most
common reasons for individual taxpayers are that (1) based on
information available to the IRS, the taxpayer is unable to pay the
delinquent tax without undue financial hardship; (2) the IRS is
unable to locate the taxpayer or the taxpayer's assets; or (3) the
IRS is unable to contact the taxpayer (although it has a current
address) and is unable to locate any of the taxpayer’s assets.
Once a year (approximately October) a balance-due notice is sent to
taxpayers whose accounts have been classified CNC for at least a

year.


66

* Expediting field enforcement action on taxpayers who have repeatedly been
delinquent, with emphasis on those who are delinquent in their payroll tax
payments. A test in one site in 1994 resulted in a reduction to the receivables
inventory by almost $15 million. Nationwide implementation began in FY 1995.

+ Expansion of the Integrated Collection System (ICS) (the full automation of the
IRS field collection activity) to 2 districts in 1995 and to 7 additional districts in
FY 1996. In the two districts with ICS, productivity increased by more than
30% last year.

A longer-term initiative that will continue the efforts to improve currency is the
integration of our telephone resources by combining the ACS and the Toll-Free
Service Center telephone operations. (In FY 1993 we had 70 sites, we currently have
34 sites and our goal is to reduce to 23 sites.) Combining the ACS and Toll-Free
sites will give taxpayers “one stop" resolution of their accounts. It will also provide
uniform handling of account issues and allow the IRS to balance outgoing and
incoming calls in a way that maximizes the collection of delinquent accounts.

4. Increasing the Collection of Accounts in the Inventory

‘The initiatives | have just described are designed to ensure the correctness of
assessments and accelerate contact with taxpayers so that we can avoid the use of
‘enforcement actions such as liens, levies, and seizures. | also want to describe our
efforts to improve our effectiveness in collection enforcement.

We are changing our business practices, our technology, and our organizational
structure. Our actions have focused on improving the use of existing collection tools
coupled with increased productivity of our field operation. The results are quite
promising. For the three years prior to FY 1994, collection yield had declined between

4% and 6%. Although some of this decline was attributable to a decrease in collection


52

‘STATEMENT OF
MARGARET MILNER RICHARDSON
COMMISSIONER OF INTERNAL REVENUE
BEFORE THE
SUBCOMMITTEE ON GOVERNMENT MANAGEMENT,
INFORMATION AND TECHNOLOGY

MARCH 6, 1996

Mr. Chairman and Distinguished Members of the Subcommittee:

Good aftemoon. | am pleased to be here today to discuss two of the IRS's
critical responsibilities ~ implementation of the Chief Financial Officers’ Act (CFO) of
1990 and the collection of tax receivables. With me are Mike Dolan, Deputy
‘Commissioner, Jim Donelson, Chief Taxpayer Service and Acting Chief Compliance
Officer, and Tony Musick, our new Chief Financial Officer, who is my principal advisor
on financial management issues.

Tony is a certified public accountant with a master’s degree in business
administration from George Washington University with a concentration in Finance.
From 1972 to 1983, Tony was an auditor with the public accounting firm of Emst and
Emst, the General Accounting Office (GAO) and the Environmental Protection Agency.
Tony also served as budget director for Virginia Commonweatth University in
Richmond. Tony began working for the intemal Revenue Service in 1991 as our
National Director for Systems and Accounting Standards and served on Vice President
Gore's National Performance Review participating in the “Improving Financial
Management Team.” He served as Acting CFO for six months betore his selection.

(One of Tony's priorities -- as well as mine -- is to continue our progress toward

a clean financial statement opinion from GAO by improving financial management in


101

Let me say at the outset that I am not here to criticize the
Collection function of the IRS. I am also not here to suggest that
the IRS Collection function be replaced by private debt collection
agencies. However, I am here to talk about the experience of the
past 10 years of the IRS Collection function which demonstrates
quite clearly that the IRS simply does not possess the systems and
resources to adequately deal with all of the taxpayers’ accounts

that are in delinquent status.

In my view, the IRS Collection function is properly
concentrating its efforts on the highest yield cases and those
cases that present the gravest threat to voluntary compliance. On
the other hand, the IRS does not have sufficient resources due to
budget constraints to adequately deal with (1) the relatively small
dollar amount cases and (2) the cases that require a greater effort
to contact the taxpayer, locate the taxpayer’s assets or sources of
income, or otherwise collect the amount owed. Today, I am going to
suggest that serious consideration be given to the concept of
contracting with private collection agencies to collect these types
of accounts. Contracting out the collection of these types of
accounts would merely supplement the existing IRS collection

efforts.

Attached to my statement as Exhibit A is an outline which

explains how the IRS processe

it delinquent tax inventory.

Although there are always unusual cases that receive unique


26

(GAO/AIMD-94-115, May 1994), and our Strategic Information Management (SIM)
Self-Assessment Toolkit (GAO/Version 1.0, October 28, 1994, exposure draft.) To
evaluate IRS' software development capability, we validated IRS’ August 1993
assessment of its software development maturity based on the Capability Maturity
Model (CMM) developed in 1984 by the Software Engineering Institute at Carnegie
Mellon University. CMM establishes standards in key software development
processing areas and provides a framework to evaluate a software organization's

capability to consistently and predictably produce high-quality products.

To its credit, IRS had (1) developed several types of plans to carry out its current and
future operations, (2) drafted criteria to review TSM projects, (3) assessed its software
development capability and initiated projects to improve its ability to effectively
develop software, and (4) started to develop an integrated systems architecture? and
made progress in defining its security requirements and identifying current systems
data weaknesses. However, despite activities such as these, pervasive weaknesses

remained to be addressed:

-- IRS’ strategic information management practices were not fully in place to guide

systems modernization. For example, (1) strategic planning was neither complete

°A system architecture is an evolving description of an approach to achieving a
desired mission. It describes (1) all functional activities to be performed to achieve
the desired mission, (2) the system elements needed to perform the functions, (3) the
designation of performance levels of those system elements, and (4) the technologic
interfaces and location of functions

18


22

committed to resolving them. These actions represent a good start in IRS’ efforts to

more fully account for its operating expenses. For example, IRS has

-- successfully implemented a financial management system for its appropriated
funds to account for its day-to-day operations, which should help IRS to correct
some of its past transaction processing problems that diminished the accuracy

and reliability of its cost information; and

-- successfully transferred its payroll processing to the Department of
Agriculture's National Finance Center and, as a result, properly accounted for

and reported its $5.1 billion of payroll expenses for fiscal year 1994

IRS is working on improving the process of reconciling and monitoring its funds. In
this regard, it has created a unit whose sole responsibility is to resolve all cash
reconciliation issues and retained a contractor to help with this process. In the area
of receipt and acceptance, IRS stated that it is more fully integrating its budgetary
and management control systems. Also, IRS has developed a methodology to
differentiate between financial receivables and compliance assessments and has
modified current systems to provide financial management information. Finally, IRS
is in the process of identifying methods to ensure the accuracy of balances reported

in its custodial receipt accounts. We are currently reviewing these actions.

14


105

satisfied or additional modules become delinquent for the

particular taxpayer.

Once the account is transferred to the Queue of the
appropriate IRS district, if the RWMS score for the case equals or
exceeds the cutoff score established for that district by the Chief
of its Collection function, the account is assigned to a revenue
officer for pursuit. Those cases which fall below the cutoff score
for the district, however, remain in the Queue until the cutoff
score is revised (i.e., adjusted to satisfy current inventory
requirements) or the account is specifically called out of the
Queue. Therefore, at the third or revenue officer stage, accounts
are basically worked in order of RWMS score. This means that the
higher scored accounts are worked before the lover scored accounts,
even if the lower scored accounts have been in the Queue for

months, or even years.

The number of accounts in the Queue that is worked in any
particular IRS district is dependent upon the resources available
to the Collection function in that district. In a district such as
Manhattan where there are a significant number of accounts with
high RWMS scores but limited collection resources, an account would
have to score a high RWMS score before it leaves the Queue and is
assigned to a revenue officer, while in other parts of the country
with greater collection resources, accounts with lower RWMS scores

would be assigned immediately to a revenue officer because the


34

Mr. Horn. Did the gentleman from South Carolina have an
ing statement?

Six minutes to the ranking minority member.

Ms. MALONEY. First, I would like to thank the chairman for call-
ing this hearing and really for his hard work on the debt collection
bill. In probably the most partisan Congress in history, certainly
the most partisan one I can remember, we have found one area in
which we could agree and we have worked very strongly and hard
to enact it. I think it will be very positive to improve management
in Government and ensure more revenues coming in to pay for
more teachers, police officers, and other things that we need.

This report is extremely troubling and I would like to refer first
to page 3 where you talk about your results in brief and say that
the Government’s investment of what could be more than $8 billion
and IRS's effort to modernize tax processing are at serious risk due
to remaining pervasive management and technical weaknesses that
impede modernization efforts.

And it goes on. In this regard, IRS does not have a comprehen-
sive business strategy to cost-effectively reduce paper submissions
and it has not yet fully developed an put in place the requisite
management, software development and technical infrastructure
necessary to successfully implement an ambitious world-class mod-
ernization effort like TSM.

That is probably one of the most damning results I have ever
read in a GAO report. It goes on and says in so many words that
the success rate or modernization or improvement is not movin,
forward and, in fact, the problems that you identified in the 1994
report are not substantially different from those in previous audits.
I would just like to ask you why has so little progress been made
and based on what you say here, you say the Government is wast-
ing $8 billion because they do not have the management in place
to make this happen.

Am I reading it correctly? I mean, it is a very strong statement
and is it a fair statement that not much progress has been made
since the 1994 report to this report?

Mr. Doparo. We think that the statement that we said, that you
just read, is very accurate and at the time IRS agreed with that
assessment. We met with them very frequently during the course
of that evaluation.

We think that the Government as a whole has had a lot of dif-
ficulty implementing successful information technology instances.
The case of IRS, however, is that we are spending large amounts
of money without having the necessary management and technical
infrastructure in place.

Ms. MALONEY. Well, do they now have it in place?

Mr. Doparo. We are in the process of responding to the commit-
tee report on IRS’s appropriation, the Treasury appropriation last
year, which asked us to evaluate IRS’s response to those rec-
ommendations and report back to the committee.

The Secretary of Treasury was due to issue a report responding
to the recommendations. That report has not yet been issued. We
have been reviewing IRS’s plans and activities. We find that they


115

taxpayer files a return for a subsequent tax
period reflecting additional taxes due and
those additional taxes plus the deferred
amount exceed the dollar threshold, the
account is reactivated and moved to ACS.

3. At the ACS level, the IRS attempts to
collect the tax liability (a) by contacting
taxpayers by telephone to demand full
payment of the delinquent tax and (b) among
other means, by searching for taxpayers and
their assets by telephoning third parties.
During this stage, IRS collection employees
attempt to collect the delinquencies through
payment arrangements or levies.

If delinguencies are not resolved in ACS,
collection efforts move to the third stage. At
this stage, the accounts are placed in a
computerized holding file called the "Queue."
Accounts in the Queue are assigned to IRS Revenue
Officers according to the cases’ collection
potential. The priority is determined by the
Resources and Workload Management System (RWMS)
which is supposed to enable IRS district
management to limit Revenue Officer assignments
to the most productive cases based upon current
collection staffing in the district. In the
third stage, Revenue Officers attempt personal
contact with taxpayers; search internal and
external sources for taxpayers’ assets; initiate
levies; file Notices of Federal Tax Lien; and
seize taxpayers physical property such as
automobiles and homes, to satisfy the tax
delinguencies.?

1 Each account in the Queue is assigned a RWMS
score which is based on such factors as
information from prior returns, infomration
matching program data, payment history on
delinquent modules,’ business type, dollar

Note that there are certain cases that are not placed
in the Queue, but instead are assigned directly to Revenue
Officers.

* A “module" is a tax period. For example for
individual taxpayers, each calendar year is a module. This is
to be distinguished from an "entity" which is the taxpayer,
either an individual or another taxpaying entity such as a
corporation. Thus, for example, one entity is delinquent for
more than one module if the taxpayer (the entity) is
delinquent for two or more tax years (each tax year being a
module).



136

Commit resources to cr

ing new computer database to:

collect
eta
inventory

sort

track

report

and account for all IRS lien data

2. Develop polices and procedures for reporting each IRS liened, written off
or redeemed assets, and their re-sale/revenue recovery into the DATABASE by
IRS staff for asset contro! and management review.

a. Develop policy and procedures with internal controls for fogging lien
information into a timely and accurate system.

b. Identify organizational point person(s} at both the local office and national
IRS level through whom all lien information must be reported for fogging into
CENTRAL DATABASE as a check and balance for total data control.

c. Develop policy and procedures for accounting systems for revenue recovery.

4d. Develop policy and procedures for detailing physical and geographical
description into DATABASE for use in re-sale marketing.

e. Develop policy and procedures for tracking all lined, redeemed or re-sold
assets to provide accurate information to interested purchasers, management
and Congress.

4, Develop policy and procedure for entering redemption period into Central
Database for real estate properties and other assets to ensure IRS liens
are not "wiped out, or expire".

g. Develop relationships with national Title Companies to be required to send
notice to lien point person/section in each local IRS office with confirmation
when an IRS lien has been recorded at county recorder’s office.

h. Develop "failsate” disaster recovery plan to determine system sensitivity and
vulnerability and to insure risk management is complete.

5A


58

CFO Act for financial statement presentations. Most of the problems with the revenue
accounting procedures that have been raised by GAO concem summary data
produced by RACS that is difficult to reconcile on a transaction by transaction basis
with our Masterfile.

While we can and do reconcile gross amounts collected, we have been unable
to give GAO auditors the information that they would like to have to tie individual
transactions to their sources. Because the revenue systems were not designed to
meet the CFO Act audit requirements, our real challenge is to alter our revenue
accounting system to provide the necessary data to meet the new standards, so that
our revenue accounting systems can also get a clean audit opinion.

To immediately address this issue, for the FY 1995 audit, the Service is
Providing detailed revenue receipt information from the individual taxpayer accounts
contained in the Masterfile. Also, we are installing a short-term system solution, the
Interim Revenue Accounting Control System or IRACS. By July, IRACS should be
implemented nationwide so that the network will connect the database located at our
Detroit Computing Center with our 10 service centers. The system will:
improve balancing routines and validity checks,
¢ provide additional information on-line,

. retain three years worth of data instead of the one month that we currently
retain, and

interact electronically with and extract data from other tax processing systems.


112

With over one million private businesses, 32 state tax collection
agencies, and numerous Federal agencies availing themselves of
these private collectors, why not the IRS? Those of us who pay our
taxes should not have to carry the additional burden for those who

do not

That concludes my prepared remarks. If you have any questions

about my statement, I would be pleased to answer them.

13


76

In FY 1995, the IRS’ collection yield was $25.2 billion. Almost 47 percent ($11.8
billion) of this yield was collected through the notice process. Dollars collected by
the various notices are as follows: A) First notice—$7.7 billion, B) Second Notice
thru Final Notice—$4.1 billion.

Mr. Horn. So go ahead. Tell me, then, your first notice, is it only
certified at the end, or is it registered?

Mr. DONELSON. It’s certified.

Mr. Horn. It’s certified. You don’t register it. OK. It’s certified,
but you do get a slip back?

Mr. DONELSON. It requires the taxpayer’s signature, yes, sir.

Mr. Horn. OK.

Mr. DONELSON. That series of notices is to individuals.

Mr. Horn. Yes.

Mr. DONELSON. There is another situation for businesses, and we
send two notices to businesses in an 11-week period. So we have
fewer notices, and we limit the time to 11 weeks.

Mr. Horn. Now, as I understand it, it varies by the IRS district,
and maybe “district” is the wrong word. Maybe it’s even a smaller
subdivision, but let’s take California.

I’m familiar with the Fresno processing center. I’m familiar with
Los Angeles, and I’m familiar with Laguna Niguel.

My understanding is that management in all three districts have
different policies as to when enforcement action is triggered against
a taxpayer, after the letters are sent out, in terms of the revenue
agent actually going out, knocking on the door, and trying to track
the person down.

What’s the experience on that policy, and maybe others, maybe
the Commissioner can answer. I assume she knows. Nationwide do
we have a tremendous variety of what triggers enforcement human
response, as opposed to mail and certified mail? How do we do
that?

Mr. DONELSON. Well, when a case reaches the point where it
reaches the revenue officer in Laguna Niguel or Los Angeles, the
case is examined and analyzed on a case-by-case basis.

Depending on the circumstances, depending on the taxpayer’s
history, depending on the amount of money owed and the type of
tax that is owed, the analysis will result in a decision as to what
type of enforcement action to take.

It could be as simple as a visit to the taxpayer’s business or resi-
dence to ask for the money because telephone calls haven’t worked,
or it could be that because of the history of the taxpayer a seizure
may be warranted.

And depending on the circumstance of a business, where it looks
like it’s a precarious situation, we might move in and make a sei-
zure on an original assessment of the situation.

But seizures account for only about 10,000 of our cases over the
course of a year. There are only 10,000 seizures made. So it’s a
very small percentage of our activity.

We have millions of levies that we use, which are, basically, at-
taching bank accounts or salaries or other assets. That’s one of our
most productive tools, in terms of bringing in revenue.

Mr. Horn. I forgot. You reminded me with your word “telephone”
there. You go from the paper notice, a couple of notices not cer-


28

Finally, IRS had not established an effective organizational structure to consistently
manage and control system modernization organizationwide. The accountability and
responsibility for IRS’ systems development was spread among IRS' Modernization
Executive, Chief Information Officer, and research and development division. To help
address this concern, in May 1995, the Modernization Executive was named Associate
Commissioner. The Associate Commissioner was assigned responsibility to manage
and control modernization efforts previously conducted by the Modernization
Executive and the Chief Information Officer, but not those of the research and
development division. However, the research and development division still did not

report to the Associate Commissioner.

We made over a dozen specific recommendations to the IRS Commissioner in our
report to enable IRS to overcome its management and technical weaknesses by
December 1995. Our recommendations were intended to improve IRS' ability to
successfully develop and implement TSM efforts in fiscal year 1996. The House
Conference Report on IRS' fiscal year 1996 appropriation notes that legislative
language "fences" $100 million in TSM funding and requires that the Secretary of the
Treasury report to the Senate and House Appropriations Committees on the progress
IRS has made in responding to our recommendations with a schedule for successfully

mitigating deficiencies we reported." As of March 4, 1996, the Secretary of the

‘House of Representatives Report 104-291, October 25, 1995.
20


94

Mr. Horn. Well, I think your perspective has greatly helped the
committee. Have you had any chance to look at the RFP they’re
putting on the street on their experiment under the Appropriation’s
Committees auspices? Have you seen that at all?

Mr. ALEXANDER. I’m aware of the RFPs and the write-ups about
the RFPs.

Mr. Horn. Do you have any feeling on that as the right way to
go about it?

Mr. ALEXANDER. I think they’ve done a good job in complying
with the Appropriations Committee’s mandate, in complying with
it in a way that should come close in meeting the concerns that
some of us have.

And by the way, I think our concerns are shared by taxpayers
around the country who seem to be more concerned than we are
about privatizing tax collection, not without some cause, I suppose.

Mr. Horn. What, in your judgment, does an IRS collector or a
private collector need to know? Do they need any information other
than the name, the address, the telephone number and the obliga-
tion?

Mr. ALEXANDER. Oh, certainly. It varies, of course, depending on
the particular case, because some matters are very simple.

Mention was made of the 7 million dependents that disappeared
when their Social Security numbers were required. That’s an easy
situation. Some are quite difficult.

In many cases, the taxpayer doesn’t agree that he, she or it owes
anything at all. In many cases, the taxpayer could demonstrate
that by the time Internal Revenue seeks to collect a tax the tax-
payer had an operating loss carry-back that wiped out the tax. So
no tax is owing.

If you simply give the name, the address, the telephone number
and the amount of a tax and, perhaps, the type of tax purportedly
due, you may be able to collect some taxes, but some of that $100
billion is not going to wind its way into the Nation’s coffers without
a fight and without the tax collector, whether a revenue officer or
a private collector, having to obtain much more information.

And one of the risks in giving information to private collectors
is that information is very valuable and can be misused.

That’s not to say that private collectors are all going to misuse
information. ’'m not saying that at all. But I’m saying that private
collectors, like Internal Revenue officers, are human beings, and
human beings are sometimes fallible and sometimes possessed by
self-interest.

Mr. Horn. Under the existing law, what are the problems?
Would they have to secure an amendment to the law if they went
to private collectors? What are the problems of getting more than
the obligation that’s owed?

Mr. ALEXANDER. Well, what they’ve done in the RFP is subject
private collectors to the same rules under Section 6103 and 7213
of the Internal Revenue Code as Internal Revenue employees are
subjected to as to the misuse of taxpayer information.

Exactly how they did it I don’t know, because I haven’t had a
chance to go back and read 6103 to find out under what subsection
of that provision they can subject private citizens to the rather


Statement of Gene L. Dodaro
Assistant Comptroller General
Accounting and Information Management Division

Mr. Chairman and Members of the Subcommittee, I am pleased to be here today to
discuss the results of our fiscal year 1994 financial audit of the Internal Revenue
Service (IRS)--our most recently completed audit--and our reports 2valuating IRS' Tax
‘System Modernization (TSM) effort. Last year, we issued two soajor assessments
concerning IRS' guardianship of federal revenues and its ability to function efficiently
in an increasingly high technology environment. I am submitting these reports for
the record: Financial Audit: Examination of IRS’ Fiscal Year 1994 Financial
‘Statements (GAO/AIMD-95-141, August 4, 1995) and Tax Systems Modernization:

Succeed (AIMD-95-156, July 26, 1995).

‘These reports

(1) _ highlighted a number of serious technical and managerial problems that IRS
must directly address to make greater progress in both of these areas,

(2) discussed actions being taken by IRS to strengthen its operations, and

(3) presented numerous specific GAO recommendations for needed additional

improvements.

IRS agreed with all our recommendations and committed itself to taking the
corrective measures necessary to improve its financial management and information
technology capability and operations. We currently are in the process of auditing

IRS’ fiscal year i995 financial statements and evaluating IRS' response to the


77

tified, the certified notice. Then, you go to, what, an automated
telephone system? And what do you mean by “automated?”

Is there a human being there, or is it like campaigns where they
drive you nuts and get their message over, and you can’t use your
phone until they’re done?

Mr. DONELSON. We have human beings there, let me assure you,
and we have two basic activities that occur. We call out, and we
receive calls.

Most of the calls that we receive are driven by either the notices
that were sent out and they call us at the telephone site, or we
have used a levy authority and levied a source to attach wages or
a bank account.

That will usually generate a telephone call to our call sites. After
we talk to the taxpayer on the telephone, we make a determination
whether to levy again, keep the levy in place, release the levy, give
the taxpayer an installment agreement, or even transfer the case
immediately to the field because it looks like a really difficult situa-
tion that requires face-to-face handling.

Mr. Horn. So going from the paper notice to the telephone call
to the field agent actually knocking on the door, how much time
does that usually take?

Mr. DONELSON. Well, every case isn’t handled the same way.
There are some cases that bypass the entire telephone—

Mr. Horn. And go immediately to the agent.

Mr. DONELSON. That’s exactly ——

Mr. Horn. I understand that, if you think the guy is going to flee
to Panama or someplace.

Mr. DONELSON. Well, even if the case is the second or a third
case in a taxpayer's situation, if the first case is in the hands of
a revenue officer in, your example, Los Angeles or Laguna, we will
have all subsequent cases sent directly to that revenue officer, too,
so they don’t have to stop off and get all of the series of notices and
the telephone calls. We expedite the cases to the person who has
the original case.

Mr. Horn. Do you have a ballpark figure about what percent re-
turn you get with the paper effort, the telephone effort and the rev-
enue agent effort?

Mr. DONELSON. We have those numbers. We can give those to
you for the record, as well.

(The information referred to follows:]

The precise information requested in not available. In FY 1995, $11.8 billion was
collected through the notice process. The notice process does not. require any re-
sources; only printing and postage costs. In FY 1995, employees in the telephone
‘Automated Collection Process collected $1,124 million per ‘taltyear and revenue of-
fices in the field collection process collected $413,000 per staffyear.

Mr. Horn. Well, off the top of your head do you have one? I’m
just trying to get a feel for success here at this point.

If you have the chart with you, maybe we can go to another ques-
tion. Let’s get it out, though, before we leave today, because I'd like
to understand the process.

Part of my concern is the next one goes to human resources ap-
plied to the job. What is your feeling based on the number of
agents you have knocking on people’s doors?


83

Corrected chart for the Gross Accounts Receivable Delinquent Inventory (ARDI) is attached

SK

oe BOND:

UOIIG OOZ$ -- S6 AS

—1adyv ssoig


5

the Members to ask questions. And we will limit ourselves to 5
minutes per round, but we might have a number of rounds. It is
not meant to shut off a Member, it is just meant to give other
Members a chance to ask questions.

So we are delighted to hear from you, Mr. Dodaro, and it is al-
ways a pleasure to see you. You are the principal witness from
GAO, so proceed as you wish.

STATEMENTS OF GENE L. DODARO, ASSISTANT COMPTROL-
LER GENERAL, ACCOUNTING AND INFORMATION MANAGE-
MENT DIVISION, GENERAL ACCOUNTING OFFICE, ACCOM-
PANIED BY GREGORY M. HOLLOWAY, DIRECTOR, GOVERN-
MENTWIDE AUDITS, ACCOUNTING AND INFORMATION MAN-
AGEMENT DIVISION, GENERAL ACCOUNTING OFFICE; RONA
B. STILLMAN, CHIEF SCIENTIST FOR COMPUTERS, AND COM-
MUNICATIONS, ACCOUNTING AND INFORMATION MANAGE-
MENT DIVISION, GENERAL ACCOUNTING OFFICE; AND
LYNDA D. WILLIS, DIRECTOR, TAX POLICY AND ADMINISTRA-
TION ISSUES, GENERAL ACCOUNTING OFFICE

Mr. Doparo. Good afternoon, Mr. Chairman, Congresswoman
Maloney, Congressman Spratt. I would like to introduce my col-
leagues first.

mn my far left is Lynda Willis. Linda is in charge of tax adminis-
tration work and monitors IRS activities as it relates to collection
programs and enforcement activities.

On my immediate left is Dr. Rona Stillman, our chief scientist
for computers and telecommunications. Rona has been in charge of
our efforts to evaluate IRS’s tax system modernization effort. On
my right is Mr. Greg Holloway. Greg has been in charge of the fi-
nancial audits that we have done of IRS from fiscal years 1992
through 1994.

We are pleased to be here today to talk about the significant
challenges facing IRS in improving its financial management and
carrying out its tax system modernization activities. Both of these
areas are ones that we have closely examined. They are both on
GAO’s high-risk list and, as a consequence, we have continuing ac-
tivities underway to monitor IRS’s progress.

As you noted in your opening statement, the IRS was one of the
original pilot agencies under the CFO Act and, as a result, we have
been auditing their financial statements since fiscal year 1992.
Those statements cover both IRS’s responsibility as a custodian of
collecting tax revenues which, as you pointed out, exceed $1 trillion
a year and also financial statements that account for their $7 bil-
lion in appropriated funds which are used to carry out their activi-
ties.

As you have noted, we have been unable so far to render an opin-
ion on IRS’s financial statements due to some longstanding and
pervasive financial management problems. In the revenue area,
this includes, as you mentioned in your opening statement, the in-
ability to reconcile or verify the total amount of tax collections on
the financial statements. In 1994, it was $1.3 trillion with the ac-
counting records of individual taxpayers in the aggregate.

We have also been unable to substantiate the balances for indi-
vidual taxes such as income, Social Security and excise taxes; and


poet

does absolutely nothing to follow up. Taxpayers quickly learn that
if their delinquent amount is below a certain dollar threshold, the
IRS will do nothing more than send out a notice once year. The
long term cost to the integrity of the voluntary compliance system
when the IRS sends out notices and then does not follow up should

not be underestimated.

In conclusion, I am proud of my past service with the IRS and
I believe that the Service does a good job overall. In recent
years, the IRS has made some progress in accelerating the
collection process. But the reality is that the IRS cannot work
all of the cases in the way they need to be worked in order to
collect taxes that should be collected--and remember here that we
are talking about collecting tax dollars that taxpayers by and

large will admit they owe.

‘The IRS is beleaguered, its funds are being cut, and it just
does not have the resources to do the job it needs to do to collect
the deferred accounts, the accounts that sit -nworked in the Queue,
and the CNCs. Given the current efforts to cut government
spending, it is unrealistic to think that this will change in the
near term. Consequently, it makes sense to supplement the IRS's
collection efforts by contracting out certain activities on the tax
debts I have described to private collection agencies to get the
job done. If the IRS cannot collect these accounts, let the

private collection agencies supplement the government's efforts

12


81

up? If that’s part of the batch as one way and part of the other,
Ican understand that.

You can try to see if it makes any difference, and I’m not quar-
reling over that. I guess what I’m quarreling over is the revenue
agent would go—it wouldn’t matter if they said they couldn’t pay,
I assume, on the telephone. They would followup, I would think.
Everybody would be saying you can’t pay.

Mr. DoLaNn. One of the things that’s presumed in your question,
I want to make sure we don’t mislead you, because the nature of
the commitment, the nature of the request made of us by the Ap-
propriations Committee and therefore the nature of the design of
this test that’s on the street is to take work that we don’t otherwise

t to.

So by definition, there is a difference right there in terms of what
we're working and——

Mr. Horn. You can be creaming off the easy ones.

Mr. Do.aN. Or said differently, we could. be dealing with the
most egregious, the most in need of our immediate attention.

And indeed, what we were asked to do was see if contractors
could help in those cases where we had declared them currently
noncollectible or if they were below the threshold of the prudent
application on a resource.

So that really is the way this test is conceived and put to the
market, and it’s because that’s the way the appropriators asked us
to attack the problem.

Mr. Horn. See, I don’t have a problem with the IRS doing the
initial debt collection. I'd say spend a couple of months on that.

But after that, it seems to me, given a world of limited resources,
I think it ought to go out to the private sector and let them take
their crack at it.

And as you know, in our bill, I think, we give a percent back to
agencies who participate which the Appropriations Committee
might not like, but then we’d have to work that out up here.

T mean, it’s a a pretty good investment. It’s the first time anybody
has got a reward in this Government for doing good deeds. So the
agency, as you say, Commissioner, might well have paid for the
computing situation that you face.

And by the way, on that point, I understand you’re pretty much
still mainframe oriented, are you?

Ms. RICHARDSON. Yes.

Mr. Horn. On the computing?

Ms. RICHARDSON. Yes.

Mr. Horn. Has anybody ever looked at the fact that most people
don’t really care much about mainframes anymore? Is that an octo-
pus youre carrying?

Mr. Douan. Congressman, all the dialog that has gone on about
TSM ‘today may have missed the point you’re making now.

We are coming out of a 1960’s design infrastructure. We got
newer boxes, but that infrastructure is around mainframes. We are
desperately trying to abandon that structure and get to the distrib-
uted computing power, get to the on-line data bases as opposed to
the batch updated weekly like we do today. That is the heart and
soul of what we're trying to do in our modernization effort.


107

Because the situation for which the account was classified as
CNC could change--making the account potentially collectible--the
IRS has established mechanisms to reactivate these accounts. If a
CNC account is reactivated, the account enters the collection
process at the first (i.e., notice) stage. The account then

follows the normal collection process through the next two stages.

As you can see, tax delinquent accounts not actively being

worked by the IRS fall into three categories.

© Accounts in deferred statue. These are the
accounts that went through the first stage (Service
Center notices) but fell below the dollar threshold
for transfer to the second stage (ACS). Accounts
remain in this status until (1) there are
additional delinquencies for the same taxpayer in
later tax periods which result in the total tax
liability exceeding the dollar threshold or (2) the
accounts are ultimately collected by virtue of
refund offsets and/or by operation of the federal
tax lien when the taxpayer attempts to sell

property.

© Accounts in the Queue. These are the accounts that
went through the second stage (ACS) but did not

have a high enough RWMS score in the particular IRS


92

If you tell people they have to bill 2,100 hours, they'll bill 2,100
hours if they possibly can. Sure, you need to motivate Internal Rev-
enue people.

You need to learn from the private sector, but if you’re going to
move into private tax collection, Mr. Chairman, I hope you move
very carefully and take a look at what happened this year to see
if next year can be an improvement both for the taxpayers of this
country and for the revenues. Thank you, Mr. Chairman.

[The prepared statement of Mr. Alexander follows:]


60

receivable on the books ~ 10 years. Thus. unlike private sector businesses, the IRS’
accounts receivable cannot be written off even when we know that they are not
collectible.

As early as 1988, the IRS determined that accounts receivable was a growing
concem, an assessment both OMB and GAO agreed with. Since 1988, we have
continued to take steps to improve the management of the receivables inventory, but
key to that has been our efforts to develop a systemic approach to provide timely,
accurate information about the accounts receivable. Having a reliable estimate of
delinquent taxes that are truly collectible is essential in enabling us to better manage
our collection efforts."

Today, | would like to discuss with you our efforts to:

1, Determine the correct composition of the accounts receivable inventory;

2. Ensure the accuracy of assessments that are included in the inventory;

3. Improve the currency of the inventory; and

4. Increase the collection of accounts in the inventory.

' The GAO has reported and we agree that financial recelvables are those that
the taxpayer has agreed to or the courts have set, and that from this amount we
should estimate a net realizable value of accounts that are potentially collectible, To
accomplish this, we have been working with GAO on a better way to represent these
amounts on our financial statements. Starting with the FY 1995 statements, we will
classify amounts as financial receivables (the amounts that taxpayers have agreed to
pay or courts have set), financial write-offs (financial receivables that have
subsequently been determined to have no further collection potential), and compliance
assessments (those amounts that taxpayers have not agreed to or on which the courts
have not acted). These amounts will be audited by GAO.

9


56

appropriated funds. In addition, in the last two years we have made measurable

improvements. For instance,

¢ We implemented our integrated financial system, transferred payroll to the
National Finance Center, and integrated other administrative systems to capture
data at the source and transmit this data electronically to our corporate financial
database.

Our travel vouchers and payments to contractors have been automated
nationwide. The traveler keys the travel information into the system, certifies
the electronic voucher, and sends it to the supervisor. Once the supervisor
approves, the traveler will receive payment in 5 to 7 days. Over 80% of our
travel vouchers were processed this way in FY 1995.

¢ We implemented commitment accounting procedures, so that we will have
timely information about how money is being spent and so that we can manage
our expenditures more carefully.

+ We linked the procurement system with the administrative accounting system to
enable obligations to be transferred electronically.

To show the progress we have made in improving our administrative finance
operations, the GAO was unable to audit our administrative accounting systems for FY
1992, In FY 1993, our system was auditable, but we were unable to provide
supporting information for among other things the reconciliation of budgeted amounts
to actual expenditures. For FY 1994, the GAO audit report focused on just two
administrative accounting issues in this area -- failure to reconcile our accounts with
‘Treasury and the lack of receipt and acceptance documentation for non-payroll
payments, such as rent payments to GSA and printing payments to GPO.

Regarding these two issues, we are réconciling our cash balances to Treasury's
records through FY 1995 and will ensure these balances are reconciled on a monthly
basis. On the non-payroll payments, the concem of GAO was that we were not

adequately verifying the payments being made for us by GSA and GPO. We are


18

Issues with Administrative Operations

IRS has made progress in accounting for its appropriated funds, but there were
factors in this area that prevented us from being able to render an opinion
Specifically, IRS was unable to fully reconcile its Fund Balance with Treasury
accounts, nor could it substantiate a significant portion of its $2.1 billion in
nonpayroll expenses--included in its $7.2 billion of operating expenses--primarily

because of lack of documentation.

With regard to its Fund Balance With Treasury, we found that, at the end of fiscal
year 1994, unreconciled cash differences netted to $76 million. After we brought this
difference to the CFO's attention, an additional $89 million in adjustments were
made. These adjustments were attributed to accounting errors dating back as far as
1987 on which no significant action had been taken until our inquiry. IRS was
researching the remaining $13 million in net differences to determine the reasons for
them. These net differences, which span an 8-year period, although a large portion
date from 1994, consisted of $661 million of increases and $674 million of decreases.
IRS did not know and we could not determine the financial statement impact or what

other problems may become evident if these accounts were properly reconciled.

To deal with its long-standing problems in reconciling its Fund Balance with

Treasury accounts, during fiscal year 1994, IRS made over $1.5 billion in unsupported


47

ables. There were several other issues that came up in the course
of the GAO testimony which we would like to touch on as well.

As you noted, Mike Dolan, the Deputy Commissioner is with me,
as well as Jim Donelson, who is the Chief of Taxpayer Service and
the Acting Chief Compliance Officer. The collection activities are in
his bailiwick. And then Tony Musick, who is our new Chief Finan-
cial Officer and our principal advisor on financial management is-
sues.

I do appreciate the opportunity to talk about the CFO Act of
1990 and the contribution that we think it has made to financial
management at the IRS. We also wanted to talk to you a little bit
about the actions we are taking to implement the objectives of the
act.

As the collector of over 90 percent of the Nation’s revenues, we
do fully understand that we have a special obligation to taxpayers
to be accountable for each tax dollar we collect and spend and I
wanted to talk to you today about what we are doing to meet this
obligation.

As the head of the Government’s primary revenue collection
agency, I do want to assure you, Mr. Chairman, as well as the
other members of the subcommittee and the taxpayers that the IRS
does have strong systems and controls to ensure that their individ-
ual accounts are accurate and I think we can tell you that these
systems work.

Each year, and again today, the GAO has certified that the more
than $1 trillion that we collect has been properly deposited in the
Treasury. It is no small accomplishment for an organization that
handles over a billion information documents a year, processes
more than 200 million returns and issues more than 90 million re-
funds. Any complex system will produce some errors and ours does,
but I want to assure you we make and will continue to make great
efforts to detect and correct errors promptly.

While I said at the start of my testimony that I was pleased to
be here, I am frankly less than pleased with the results of the GAO
financial statement audits for the past 3 years. It is disturbing to
hear that the IRS has not passed its financial audit and all of us
are quite concerned as well.

But it is important for us, I think, to understand what is meant
and what is not meant by that statement. It certainly does not
mean, as I said before, that the money we are supposed to be col-
lecting or spending has simply disappeared or somehow been mis-
appropriated.

When we had our first financial statement audit in 1992, I had
just become Commissioner. The 1994 statement which was issued
just last August reported that we had made considerable progress
since 1992 in implementing a new administrative accounting sys-
tem and transferring our payroll processing to the Department of
Agriculture’s National Finance Center and improving the account-
ing for Federal revenues.

in fact, in testimony before the Senate Committee on Govern-
mental Affairs in November 1995, Comptroller General Bauzer
stated, “To its credit, IRS has made a commitment to institute
changes. Through the strong support of the Commissioner, the


51

stood, but I had the sense that someone felt we were spending $8
billion just to have an electronic filing program. That is not at all
true.

We are in the process of trying to modernize the administration
of the tax system and we are doing it in three ways: one, by looking
at our business processes and really trying to re-engineer how we
do our tax processes and that would include perhaps getting rid of
returns all together, looking at trying to increase the number that
are filed electronically and looking at a range of alternatives for
trying to re-engineer exactly how we do our business today.

‘We have also looked at our organizational structure. This past
year, last May, we announced that in October we would reduce the
number of regions from seven to four and that was completed in
October 1995 and we have moved from 68 districts to 33 and that
should be completed within the next couple of months.

Mr. Horn. Commissioner, I will let you give us your last formal
paragraph. Right now, we have to break for a vote and we will be
in recess for 15 minutes.

Ms. RICHARDSON. Great.

[Recess.]

Mr. Horn. Commissioner Richardson, if you’d like to get to your
final paragraph, we'll begin the questioning.

Ms. RICHARDSON. Thank you, Mr. Chairman. I really wanted to
just close the loop on the electronic filing for one moment.

We, as you may recall, last year did make a concerted effort to
assure that the fraud that had been reported in prior years was ad-
dressed, and we did slow down the process of electronic filing.

And we are developing and have developed a very different kind
of electronic filing strategy, and it really does relate to looking at
the various markets that are out there and trying to address those
needs, as opposed to relying on the rapid refund.

I think the fact that we lost about a million and a half depend-
ents last year indicates that it was well worth the effort, and if it
caused a temporary setback, frankly, we thought that it was impor-
tant enough to protect the integrity of the tax system to do it.

I have tried to demonstrate today to gon and members of the
subcommittee the priority and the significance we attach to both
our financial management responsibilities under the CFO Act and
the importance of collecting revenue through the effective manage-
ment of our accounts receivable inventory.

It is my hope that the IRS, in the near future, will be looked
upon as an example of how the CFO Act has improved the credibil-
ity of Government in the eyes of the public.

That, Mr. Chairman, concludes my remarks, and my colleagues
and I would be delighted to answer any questions you have.

(The prepared statement of Ms. Richardson follows:]


80

this batch, which would be comparable to the batch the IRS does,
so you have some basis of comparison?

Mr. DONELSON. There will be 125,000 cases, 25,000 to 40,000 in
each batch given up to five successful bidders, and we will have the
cases categorized, and we'll transfer the cases from ourselves to the
private contractor.

And we'll be able to make a comparison on the t of case we
transfer, but obviously, they'll have one case, and we'll have a dif-
ferent case. They will be of the same type, but it would be difficult
to—

Mr. Horn. Well, I can understand that you can compare among
jypes of cases and you can compare among competitive private col-

lectors.

My interest is the timing of when they get it compared to when
the IRS handles it. Does the IRS stop after—well, let me put it this

way.

A lot of people you go through the paper and the telephone call.
It’s my understanding that you simply don’t have the agents to fol-
low through on everything because either it’s too small an
amount—and that’s what concerns me—is there a national policy
on when you do or you don’t follow through?

My understanding is this is a decision of management at the
local level, and there is not a national policy. Are we wrong on
that?

Mr. DONELSON. Well, actually, it’s a national decision. It’s cov-
ered in our law enforcement manual, and we make a determination
based on a combination of inventory and the staffing available to
work that inventory.

One of the things the Commissioner mentioned in her remarks
was concern about the compliance initiative that ended after 1
year, and that does impact us in terms of how we assign work.

We've had to look at our tolerance levels in terms of what we are
able to put into the case creation stream because of the size of our
work force, yes.

Mr. Horn. OK. Now, I understand that the IRS pilot does not
allow collectors to interview debtors if the debtor says that they
can’t pay. Is that true?

Mr. DONELSON. That they can pay?

Mr. Horn. If they cannot pay. I mean, in other words, let’s say
the private collector has used the letters and the phone, more likely
the phone, I would think, and then they say, “Sorry. I can’t pay.”

Is it true that the pilot does not allow the collectors to interview
debtors if the debtor says they cannot pay?

Mr. DOLAN. Congressman, we're just a little antsy about pursu-
ing in the open session an explanation of the request for proposals
that went to the street yesterday, because what the procurement
process requires us to do is be sure that any kind of public utter-
ances we have on what’s in that proposal or what’s not get docu-
mented in a way that all prospective bidders hear all the answers.

I guess if it would meet your needs, we'd be happy to brief you
maybe in a concentrated way——

Mr. Horn. Well, it seems to me if it was on the street it’s public,
or some have the requirement that you don’t followup if they say
they can’t pay, and others have the requirement that you do follow-


142

Mr. Horn. Well, thank you. Let me ask you on the lien question,
you’re including all property the taxpayer might have that is both
industrial, business, home, et cetera. Is that correct?

Ms. O'TOOLE. Those are available assets. That’s correct.

Mr. Horn. Right. OK. The one problem I saw in a lien case re-
cently that, as you know, congressional offices have hundreds of
cases involving the IRS that come in in the course of a year, in this
one case, one part of the IRS was negotiating, and the other part
of the IRS was issuing a lien.

And the person couldn’t make the payment if his business had
a complete lien on it, because he needed the cash-flow that was
coming in, if his bank accounts were frozen and everything else.

And all that would do is put him out of business and being un-
able to pay the tax bill, which he was quite willing to pay, but it
was a mistake when they put a lien on it.

Now, part of that is just organization, that the left and the right
hand know what each other is doing in any human agency, but do
you have any reaction to that, or have you ever seen those situa-
tions?

Ms. O'TOOLE. Certainly, I have a reaction. It’s very simple. If
they had a data base to capture these liens and track them, they
could look into the system and see credit notation notes that simply
said the lien has been attached or we have come to an agreement
with the taxpayer to pay X-amount of dollars by this date. Do not
take lien action.

It could be there by a push of a button, total communication, full
reporting.

Mr. Horn. OK. Let me ask you another question on this. By the
way, what I’m going to do on this is take your proposal, send it to
Commissioner Richardson, ask her for the response of the Internal
Revenue Service to that.

So staff and you can work out the transmittal letter of what par-
ticular questions, but I just want their reaction on the record to
that proposal.

Now, in your testimony, you suggested that the IRS should be
more aggressive in the property redemption marketing activities,
and I guess my query is on the staffing.

What is your assessment of the staffing level needed to carry out
your proposal, and could this activity be contracted out? And if it
were to remain an in-house activity, what additional training
would current staff need?

Those are three questions. We can take them one at a time.
What is your assessment of the staffing level needed to carry out

your proposal?

Ms. O'TOOLE. All right. First portion, of course, I do not have
that information as to what IRS staffing has at this time or how
they consider this a priority.

My experience tells me it is not a priority, since, in 11 years and
working in 19 States, I haven’t seen one IRS tax lien redeemed. So
that should tell you that.

As far as what staffing would be needed, you could have in-house
staff, and certainly it could be contracted out, since that has been
a topic today.


185

TASKS, POLICIES & PROCEDURES OUTLINE

First Task: Prioritize, Strengthen and Develop IRS Policy to exercise lien authority

for all unpaid taxes, when equity is sufficient to recover all or a portion of
debtor's unpaid tax.

1. Exercise IRS authority to place liens and to redeem property for unpaid taxes.

2. Review existing IRS policies and procedures for determination/approval process
for lien attachment/redemption action, and make recommendations for
improvement as needed.

3. Develop strong policy for directing IRS staff to use lien codes when making
demand for payment of IRS unpaid taxes.

4, Prepare Scope of Work and Commit resources to RESEARCH COUNTY TAX
RECORDS TO LOCATE IRS LIENS.

5. Develop improved policies and procedures for reporting lien activity.

6. Reduce amount of IRS uncollected and written-off liens and claims.

Second Task: Develop policies, procedures and CENTRAL DATABASE for
reporting and collecting data for all IRS tax liens.

At the present time, IRS cannot accurately report the number, value,
location, property type or amount of liens that are outstanding today,
‘and they can only estimate the amount IRS has written off or
abandoned.

At all times, the proposed CENTRAL DATABASE will provide accurate
and up to data information to IRS mangers, directors and congress on the
status amount of liens redeemed and funds brought back into the treasury.

This CENTRAL DATABASE will log in all liens placed against real,

personal, tangible or intangible property placed by the IRS, and will provide
the pri is i ackit wunting for IRS liens and
inventory.

1, Develop CENTRAL DATABASE for reporting all IRS liened, redeemed or sold
assets.

an


13

Treasury schedules, was $10.4 billion more than what was recorded in IRS’ master
files. Because IRS was unable to satisfactorily explain, and we could not determine
the reasons for this difference, the full magnitude of the discrepancy remains

uncertain.

In addition to the difference in total revenues collected, we also found large
discrepancies between information in IRS' master files and the Treasury data used
for the various types of taxes reported in IRS’ financial statements. Some of the
larger reported amounts for which IRS had insufficient support were $615 billion in
individual taxes collected--this amount was $10.8 billion more than what was
recorded in IRS' master files; $433 billion in social insurance taxes (FICA) collected--
this amount was $5 billion less than what was recorded in IRS’ master files; and
$148 billion in corporate income taxes--this amount was $6.6 billion more than what
was recorded in IRS' master files. Thus, IRS did not know and we could not
determine if the reported amounts were correct. These discrepancies also further

reduce our confidence in the accuracy of the amount of total revenues collected.

Despite these problems, we were able to verify that IRS' reported total revenue
collections of $1.3 trillion agreed with tax collection amounts deposited at the
Department of the Treasury. However, we did find $239 million of tax collections
recorded in IRS' RACS general ledger that were not included in reported tax

collections derived from Treasury data.


137

Third Task: Improve and expand existing IRS policies, procedures and guidelines for
determination of asset equity.

|. Develop new, expanded policy and procedures for evaluation of equity, prior
to lien attachment including the following:

‘a. Resources for in-house and contracting appraisal determination.
b. On-line/subscription resources for determining comparable sales data.

©. Create policies and procedures for obtaining brokers opinions for re-sale.
value in addition to appraisals.

4d. Develop policies and procedures for equity tracking.
2. Develop policy and procedures for Examination of title, prior liens, mortgages
or other attachments as follows:

a. Review and improve policy and procedures for ordering preliminary title
reports,

b. Correct poli
clearance.

and procedures for title exception expirations, work-outs and

©. Create policy and procedures for clearing title.
4. Create policy and procedures for UCC filings.
Fourth Task: Develop policies and procedures as follows for determination/approval
process for lien attachment/foreclosure/redemption action
1. Expand policies and procedures for determination of acceptable equity.
2. Improve policies and procedures for determination title is acceptable.

3. Correct policies and procedures for IRS staff recommendation process to
management to proceed with lien/foreclosure/redemption action,

4, Develop policies and procedures for appropriate management approval level
for authority to proceed with recommended action.

6A


Results of FY 1994 Audit

The IRS first financial statement audit by the GAO was for FY 1992. In the
1994 financial statement audit, GAO recognized the progress we had made since
1992 in implementing a new administrative accounting system, in transferring our
payroll processing to the Department of Agriculture's National Finance Center, and in
improving the accounting for federal revenues, But GAO also listed five primary
reasons why they were unable to express an opinion on the financial statements:
1 They could not reconcile the amount of total revenue of $1.3 trillion reported in

the financial statements to accounting records maintained for individual

taxpayers.

2. They could not substantiate amounts reported for various types of taxes
collected, for example, social security, income and excise taxes,

3. ‘They could not determine the reliability of our estimates of accounts receivable.

4. They could not substantiate a significant portion of our $2.1 billion in non-payroll
expenses, primarily due to lack of documentation, and

5. _ IRS could not reconcile its fund balances with Treasury accounts.

While our goal is a clean financial statement audit opinion at the earliest
Possible time, and | reaffirm that commitment today, | would also like to highlight some
of the progress we have made since FY 1994 in addressing some of the GAO's
concems. The FY 1995 financial statement audit is currently underway but GAO has
not given us any indication when it will be completed.

‘Accounting for the Appropriated Funds that the IRS Spends

We are very proud of the significant improvements we have made in our
Administrative Accounting System. Just five years ago, we had eight separate

systems. Now we have a single corporate data base for our over $7 billion in

4


2

In August 1995, the GAO issued its report on the IRS’s fiscal
ear 1994 audit. Once again, it was unable to express an opinion.
The reasons for this were: that $1.3 trillion of total revenues could
not be verified or reconciled to the accounting records; amounts re-
ported for various types of tax collections could not be substan-
tiated; and the amounts of gross and net accounts receivable re-
Rorted on the financial statements and estimates were a problem.
e GAO could not determine from the IRS records whether the es-
timates were accurate. In addition, the IRS fund balance could not
be reconciled with the accounts at the Department of the Treasury,
and supporting documentation was lacking for total operating ex-
penses. As a result, nearly 30 percent of the expenses in this cat-
egory were questioned.

The only category of expense that the GAO could verify that the
IRS properly accounted for and reported was the $5.1 billion in
payroll expenses. It is noteworthy, however, that the Department
of Agriculture's National Finance Center administers the IRS pay-
roll.

Between May 1993 and August 1995, the GAO issued a series of
reports on the IRS, the titles of which speak volumes.

And, as I say, some of this goes back to 1992, so this is not a
partisan thing. All administrations have had some of this problem:

“IRS Significantly Overstated Its Accounts Receivable Balance”
(May 1993);

“IRS Lacks Accountability Over Its Automated Data Processing
Resources” (August 1993);

“IRS Information Systems: Weaknesses Increase Risk of Fraud
and, Impair Reliability of Management Information” (September

“IRS Self-Assessment of Its Internal Control Accounting System
is Inadequate” (October 1993);

“Important IRS Revenue Information is Unavailable or Unreli-
able” (December 1993);

“IRS Does Not Adequately Manage Its Operating Funds” (Feb-
ruary 1994); and

“Tax System Modernization: Management and Technical Weak-
nesses Must Be Corrected if Modernization is to Succeed” (July

This is, of course, on top of the financial statement audit. These
are reports for fiscal years 1992, 1993 and 1994.

Each of these reports resulted in recommendations for changes to
the IRS financial management system, a total of 59 recommenda-
tions. The IRS has completed corrective action on only 13 of the 59.

The GAO report on the IRS self-assessment of its internal con-
trols causes grave concern. It found that the IRS misrepresented
the state of its internal control system, the system that controls er-
rors, including fraud, by preventing or detecting them. The IRS
concluded that it had reasonable assurance that the objectives of
internal control had been achieved, a requirement of the Federal
Financial Managers Integrity Act. The General Accounting Office,
however, disagreed with that.

According to the GAO, it appears Congress could be getting inac-
curate information from these IRS reports, unreliable information,
information that cannot be independently verified. The amounts re-


72

Taxpayers’ circumstances change, and then theyre able to pa)
their taxes. Taxpayers who have liens on their property have to sell
a home, and the money that’s there, their equity, is applied to a
formerly currently not collectible account.

Mr, Horn. OK. So you're telling me if suddenly the taxpayer who
you thought was uncollectible as a period 1990 through 1996 now
that we’re into suddenly wins the Maryland State Lottery or some-
thing and declares that, that your equipment, are you telling me
will cross-check that?

Mr. DONELSON. Yes.

Mr. Horn. So you have everybody that’s in the $100 billion list,
you can check them against what’s coming in?

Mr. DONELSON. Yes.

Mr. Horn. OK. Well, that’s good news, first good news I’ve heard
on that subject.

Mr DONELSON. Well, let give you some categories and maybe ex-
ain.
P Mr. Horn. OK.

Mr. DONELSON. About 28 percent of our accounts are in what we
call hardship categories. We’ve gone out, taken a financial state-
ment, analyzed the taxpayers’ situation and come to the decision
that further enforcement action, taking the taxpayers’ assets and
so forth to collect the tax would be a hardship on the taxpayer.

We can go into all kinds of definitions of that for you for the
record.

Mr. Horn. We'll put them in the record at this point without ob-
jection.

[The information referred to follows:]

Definition of Hardship—A hardship is where a taxpayer's necessary expenses ex-
ceed expected annual income. Thus, er enforcement action would be a hardship
on the taxpayer.

Mr. DONELSON. About 10 percent of the accounts are results of
bankruptcies, but 36 percent are as a result of defunct corpora-
tions, no assets corporations.

Mr. Horn. Now, what do you mean by that?

Mr. DONELSON. Corporations go out of business after accruing
tax liabilities.

Mr. Horn. Are these, essentially, Americans that have done a,
say, Bahama-type operation?

Mr. DONELSON. No. These are——

Mr. Horn. These are U.S.—

Mr. DONELSON. Start-up businesses that didn’t make it.

Mr. Horn. OK. This is the person that’s running the small sand-
wich shop, and he’s had it.

Mr. DONELSON. That’s a good example.

Mr. Horn. And he’s not paid the last year of payroll taxes.

Mr. DONELSON. That’s a good example.

Mr. Horn. Right. OK.

Mr. DONELSON. Unable to locate taxpayers, approximately 5.6
percent of the currently noncollectible are unlocatable. We’ve done
everything we can within our jurisdiction and with the information
that we have available to us to find the taxpayer.

Mr. Horn. OK. Let me ask you about that. Have you checked
with the post office tapes?


27

nor consistent, (2) information systems were not managed as investments, (3) cost
and benefit analyses were inadequate, and (4) reengineering efforts were not tied

to systems development projects.

-- IRS’ software development capability was immature and weak in key process
areas. For instance, (1) a disciplined process to manage system requirements was
not applied to TSM systems, (2) a software tool for planning and tracking
develo} nent projects was inconsistently used, (3) software quality assurance
functions were not well-defined or consistently implemented, (4) systems and
acceptance testing were neither well-defined nor required, and (5) software

configuration management" was incomplete.

-- IRS’ systems architecture (including its security architecture and data
architecture), integration planning, and system testing and test planning were
incomplete. For example, (1) effective systems configuration management
practices were not established, (2) integration plans were not developed and
systems ‘testing was uncoordinated, and (3) standard software interfaces were not

defined.

*°Configuration management involves selecting project baseline items (for example,
specifivations), systematically controlling these items and changes to them, and
recording their status and changes.

19


70

Mr. Horn. OK.

Ms. RICHARDSON. I did provide at the recess a pie chart.

Mr. Horn. We have that pie chart, and I will be asking you a
question about it, but let me first pursue the problem of collectible
and uncollectible.

Can you give the committee an idea as to by what criteria do we
decide that $100 billion since 1990—I realize this predates you—
is uncollectible? What are our standards, our criteria?

Ms. RICHARDSON. May I ask Mr. Musick, our CFO, to address
that?

Mr. Musick. First of all, Mr. Chairman, the $100 billion is not
a write-off, and contrary to what GAO said, this is a bookkeeping
exercise.

What we have to do on the financial statements to get them in
compliance with generally accepted accounting principles is to re-
port as receivables a number called net realizable value.

The offset to that is an amount that’s called due to the Treasury.
We do not have a profit and loss or an income statement.

The write-offs take place only after 10 years, which is a statutory
requirement, but to get down to that number and to put a number
on the statements that would be in accordance with generally ac-
cepted accounting principles, we go through this exercise of identi-
fying this.

The other problem is that we’re not talking about just accounts
receivable. The last two parts of the ARDI name is left off. It’s
called a dollar inventory.

So our approach is to take that inventory and to try to break it
down, as the GAO said, working with them in the two pieces, what
we call financial receivables and compliance assessments, but there
is not $100 billion written off.

The difference that is noticed there is between net realizable
value on the statements and the gross ARDI.

Mr. Horn. Well, as I understand it, there is $100 billion that the
IRS has decided is not collectible. Is that correct?

Mr. DONELSON. Congressman, if I could answer that?

Mr. Horn. Sure. Please.

Mr. DONELSON. There are various categories of situations that
result in the taxpayer’s account becoming currently not collectible.
I think that’s what Mr. Musick was trying to explain.

The cases that are processed in our collections systems, be it on
the telephone or in person by revenue officers interviewing tax-
payers are classified as they’re closed currently not collectible. And
currently, there are nearly $100 billion worth of those kind of ac-
counts.

Mr. Horn. OK. There are $100 billion of the accounts that some-
body in the IRS has said are not collectible?

Mr. DONELSON. Yes, sir.

Ms. RICHARDSON. I think what we need to underscore is the term
“currently,” not “collectible.” That does not mean that at some later
point in time they may not become collectible.

Mr. Horn. Unless the 10-year period is elapsed?

Mr. DONELSON. Yes. And during that 10-year period ——


146

Mr. Horn. Which has $15 billion in uncollected debt.

Mr. Kors. But-they had 15 years of experience with outside col-
lectors to try to help on that. Again, that’s a point that should be
kept in mind.

There is no training. There is no cost of equipment. I’m talking
about the Government. It’s a matter of contracting with somebody
who already has that already at their disposal.

Mr. Horn. Is there a direct correlation between the amount of
the debt collected and the amount of funding provided to support
increased efforts to collect, or would a point be reached at which
the additional funding wouldn’t really produce any more bang for
the buck?

Mr. Kors. That’s a very interesting question, because based on
some numbers that I’ve just had a chance to look at, I really ques-
tion whether additional funding will do much.

What I’m referring to is in fiscal year 1990 the collection yield
was $25 billion, roughly, $25.4 billion. In 1995, fiscal year 1995, it
was $25.15 billion. So it has been stagnant for 6 years.

When you look at the number of employees the Service had in
their revenue officers, ACS staffing and service center collection
branch functions, there was an increase of 1,000 employees over
that period.

At Horn. Now, do we know that they went into the enforcement
side?

Mr. Kors. Into these three functions.

Mr. Horn. OK.

Mr. Kors. I’m just looking at these three functions, and these
are the functions—not enforcement. This is collection.

Mr. Horn. Yes. OK. Collection.

Mr. Kors. These are the people doing the kind of things we're
talking about. So what you had was a 1,000 employee increase. The
collection yield was stagnant, but the departments in CNC, notice
status, deferred status and in that Acs queue revenue officer
group went from $64.8 billion to $137.2 billion. So you really have
to wonder.

Mr. Horn. Now, you heard a discussion we had a little earlier
on the Privacy Act implications. What’s your feeling on that with
the private bill collectors?

That was one argument the IRS, apparently, gave a year or so
ago as to why they weren't keen on private collection.

Mr. Kors. Well, as I understand your bill, it limits the informa-
tion provided. It gives just enough information to the private collec-
tion agencies—and I want to disagree a little bit with Mr. Alexan-
der on that point—to do their job.

But it also provides severe legal sanctions against the private
collection agencies who violate the taxpayers’ rights or violate the
disclosure.

So we have Section 6103, which Mr. Alexander mentioned. There
is a provision 6103(M) is the legal authority. He was wondering
what the legal authority was.

If you look at 6103(M), that is the legal authority for providing
taxpayer information to the contractors so they can lo their job.

But you have those rules that will restrict. You have the Privacy
Act, of course, of 1974. In addition, you have something which the


63

2% ($1.6 billion) is lower value cases that will be collected through
systemic monitoring, such as refund offsets and yearly notices to
taxpayers.
Included in these numbers is $18.5 billion of accrued penalties and interest.
2. Ensuring the Accuracy of Assessments Included in Accounts
Receivable
There are several ways an account can be put in the accounts receivable
inventory. For example, a taxpayer may file a tax retum but not pay what is due, and
the unpaid tax will be included in accounts receivable inventory. In addition, accounts
receivable are created as a result of any number of compliance initiatives.
Examinations and secured delinquent retums frequently result in an assessment which
is not fully paid, and therefore becomes part of accounts receivable inventory. Tax

payments that are erroneously posted may increase the accounts receivable, and we

are actively seeking to mit the erroneous assessments. Finally, the accounts

receivable inventory is increased by accrued interest and penalties.
Between FY 1992 and FY 1995, the IRS has —

° Through rigorous pre- and post-assessment reviews eliminated $276 billion of
erroneous assessments, preventing these assessments from becoming part of
the accounts receivable inventory.

. Created a new computer match that detects discrepancies between the amount
taxpayers claimed were deposited and the amount in their accounts, an action
which has prevented $22 billion from becoming part of accounts receivable

inventory.


20

Services Administration; and photocopying and records storage from the National

Archives and Records Administration.

Not having proper support for if and when goods and services are received made IRS
vulnerable to receiving inappropriate interagency charges and other misstatements of
its reported operating expenses, without detection. Not knowing if and/or when these
items were purchased seriously undermines any effort to provide reliable, consistent
cost or performance information on IRS' operations. As a result of these
unsubstantiated amounts, IRS has no idea and we could not determine, when and, in
some instances, if the goods or services included in its reported operating expenses

were correct or received.

Some Improvements Made but Overall
Computer Systems Security Remained Weak

In our prior year reports, we stated that IRS’ computer security environment was
inadequate. Our fiscal year 1994 audit found that IRS had made some progress in
addressing and initiating actions to resolve prior years’ computer security issues;
however, some of the fundamental security weaknesses we previously identified

continued to exist in fiscal year 1994.

12


37

TT&L process which is usually electronically transmitted through
the Federal Reserve and so on and so forth.

There are lock box arrangements where it is sent to commercial
banks and packaged and sent to the Federal Reserve and there are
instances like you describe where it comes directly to a service cen-
ter at IRS and they deposit it. I believe their policy is to deposit
it every day and send it to the Federal Reserve.

Mr. SPRATT. To the Treasury account at the Federal Reserve?

Mr. Hotioway. Right. They send it to the Federal Reserve. That
is correct.

Mr. Spratt. Now, when you say that—and at the same time,
then, what is the data entry made for accounting purposes? Is
there a ledger, John M. Spratt, there that——

Mr. HoLLoway. Basically, what they do, is a process. I will call
it pre-journalization. I believe that is the correct phrase. But essen-
tially when those deposits are made, and I am going to cut through
some corners just to simplify the basic way it works, they identify
all the cash that was purportedly deposited and sent to the bank,
they pre-journalize that, and then the processing of your receipt
through their system begins through the RACS system ultimately
going to master file, which is the detailed record of your tax ac-
count.

Mr. Spratt. Now, they journalize it? There is an entry there?

Mr. Houtoway. There is an actual journal entry made to their
accounting system for the receipts that came in for the most on a
daily basis.

Mr. Spratr. Now, is there then a transfer from the journal to
ledger, cards, to a ledger account or a ledger for each individual tax-
payer?

Mr. Hotioway. Say that one more time.

Mr. Spratt. All right. You have got a journal entry. Then does
somebody post the journal to a ledger?

Mr. Hotioway. Not to your independent account. No. The receipt
processing goes through the entire process of the keypunching and
the other things that happen to move it to master file.

There is an overall journal entry that takes the aggregate re-
ceipts that came in that day on Fed Wire or whatever and they say
this is how much we got, write a journal entry to book all of cash,
essentially putting in cash and putting it in quote-unquote a sus-
pense account, to say that this is how much we got in.

The challenge then becomes to verify to your individual record
that the thing ultimately posts and there is a period of time that
it takes for it to move through the IRS’s processing stream before
it hits what is known as the master file which is where your indi-
vidual account is and it is posted.

Mr. Spratt. Well, that is where I was trying to get, from the re-
ceipt of the check where it is a check transaction, the individual
taxpayer to the Internal Revenue Service Service Center. Once it
is journalized upon receipt, is a data entry made in a journal?

Mr. HoLioway. Yes, but not to your account at that point.

Mr. Spratt. Not to my account. But it is cash received and then
something, something is debited and something is credited.

Mr. Hotoway. That is right. A suspense account.


57

reviewing the processes involved and working to improve them, but the solution
requires the assistance of GSA and GPO.

Improving Financial Information Systems

A significant example of the effectiveness of our improved administrative
financial systems was our ability to track one of our major programs. In FY 1995, we
received funding for a Compliance Initiative, a five-year plan with the monies raised
going directly to deficit reduction. (Ironically, because of budget cuts, it was not
funded for FY 1996.

In order to meet our commitment to Congress to account for the Initiative so
that we could verity the money raised by the FTEs hired under the Initiative, we
developed comprehensive tracking procedures that enabled us to provide a clear and
verifiable picture of the results. Using our Enforcement Revenue Information System
(ERIS), we were able to produce reports showing resource and revenue plans and
results in far greater detail than ever before.

The results have been impressive. Because of the information produced by our
tracking system, | can tell you that our Compliance Initiative yielded over $800 million
in revenue in FY 1995, far exceeding the $331 million we promised. Regrettably,
much of the progress we have made in improving our collection efforts that | will be
discussing with you today, is because of the Compliance Initiative and may be
jeopardized by its abandonment.

Accounting for the Revenue that the IRS Collects

The Revenue Accounting and Control System (RACS), which was implemented

during 1984, was not designed to provide the detailed information required by the

6


WEAKNESSES MUST BE CORRECTED IF
MODERNIZATION IS TO SUCCEED

‘Over the past decade, GAO has issued several reports and testified before
congressional committees on IRS' costs and difficulties in modernizing its information
systems. As a critical information systems project that is vulnerable to schedule
delays, cost over-runs, and potential failure to meet mission goals, in February 1995,

tax systems modernization (TSM) was added to our list of high-risk areas.”

In July 1995,* we reported that one of IRS' most pressing problems is efficiently and
effectively processing the over 200 million tax returns it receives annually; handling
about 1 billion information documents, such as W2s and 1099s; and, when needed,
retrieving tax returns from the over 1.2 billion tax returns in storage. IRS' labor-
intensive tax return processing, which uses concepts instituted in the late 1950s,
intensifies the need to meet this enormous information processing demand by

reengineering processes and using modern technology effectively.

Since 1986, IRS has invested over $2.5 billion in TSM. It plans to spend an
additional $695 million in fiscal year 1996 for this effort, and through 2001, it is
"High-Risk Series: An Overview (GAO/HR-95-1, February 1995).

“Tax Systems Modernization: Management and Technical Weaknesses Must Be
Corrected if Modernization Is To Succeed (GAO/AIMD-95-156, July 26, 1995).
15


144

With respect to the second group, it’s the accounts that are in the
queue. These are the ones—and these are going to become very sig-
nificant, I think, as IRS staffing would, for example, go down.

It’s my understanding that the collection staffing—I’m talking
about revenue officers, ACS and service center collection branch
employer—are going to decrease by about 1,000 positions in the
next fiscal year.

What that means, of course, is that the chiefs of collection in the
various districts will have less resources at their disposal, and they
will set the cutoff scores higher. That’s how that works. It’s a flexi-
ble system.

So there could be an increase in the accounts in the queue as a
result of that. Keep in mind that time is here in the collection busi-
ness.

Mr. Horn. Sure.

Mr. Kors. Time value of money is very important, as you indi-
cated earlier. The longer these accounts sit out there, the less like-
ly they are going to be collected.

The third group are the currently noncollectible accounts. The
two groups in there that seem susceptible to be worked by outside
collectors would be the inability to locate taxpayers.

The IRS is trying to emulate—as I read the Commissioner’s testi-
mony—a number of the procedures and practices the private collec-
tion industry has used for many years and using some of the new
technology.

The problem with that, once they go through the requisition
process and once they get all that in place, the technology will
move that much further ahead.

So it will probably be never-ending—they’ll never be able to catch
up. But that would be one group.

Another would be the hardship cases, to try to determine what
assets are really out there that some individuals might have, if the
time were spent to try to locate the assets. So those are the three
areas.

Mr. Horn. Mr. Korb, you’ve heard Ms. O’Toole’s suggestion.
What do you think of it?

Mr. Kors. This is the first time I’ve heard of it, and I find it very
interesting, but it seems to me that it makes sense. It’s something
that should be pursued, no question about it. I was intrigued by

it.
Mr. Horn. Do you recall much use of the lien when you were

serving with the IRS?
Mr. Kors. Oh, absolutely. Sure. It’s used all the time.

Mr. Horn. Right.

li Mr. Kors. Federal tax lien is used quite a bit. It’s a statutory
en.

Mr. Horn. Conceivably, you’d need an appraisal very rapidly on
some of these properties if they're going to put them up for auction
or sale or whatever, wouldn’t you?

Mr. Kors. Sure.

Ms. O’TOOLE. You can do the appraisal through Dataquick, an
automated on-line service. It would probably take less than a half
an hour to write one up on residential property with an experi-


90

Mr. Horn. We thank you, Commissioner. If you don’t mind, there
might be a few followup questions. We’d appreciate answers in
writing we can put at this place in the record. We thank you for
taking the time.

Ms. RICHARDSON. I will be happy to. There were two things,
though, I did want to touch on real quickly, if I could.

Mr. Horn. OK.

Ms. RICHARDSON. And that was that I think there was an occa-
sion from the GAO they had made 59 recommendations and only
18 of which had been fully satisfied.

Mr. Horn. Right.

Ms. RICHARDSON. We're in the process of realiy trying to ascer-
tain—because we felt we had complied with many more, I think
maybe 43. .

Mr. Musick. Something over 40.

Ms. RICHARDSON. Something over 40. So we are actually working
with them to try to ascertain where that list is, because clearly, we
want to make sure that we are following their recommendations
and meeting their expectations.

And the other is the detailed plan that they requested I’ve been
assured will be available next week, and we will make a copy of
that available to you for the record as well.

Mr. Horn. Well, we thank you very much and appreciate all of
you coming. We now have one of your predecessors who also knows
what it is to be in a tough job.

Ms. RICHARDSON. That’s right. He was also my boss.

Mr. Horn. Will Donald C. Alexander, now attorney, former Com-
missioner, come forward? Mr. Alexander, if you’d raise your hand.

[Witness sworn.]

Mr. Horn. The ex-Commissioner affirmed, and we welcome you
here. We know you have a time problem, too, and we'll try to get
you out of here on time.

STATEMENT OF DONALD C. ALEXANDER, FORMER
COMMISSIONER, INTERNAL REVENUE SERVICE

Mr. ALEXANDER. Thank you, Mr. Chairman. I'll try to speed it
up. Mr. Chairman, listening to GAO brought back some memories,
a few of them happy.

If you think things are bad now, you should have seen them
then, Mr. Chairman. They were much worse. We were fighting
GAO. We wouldn't let them in the house.

As I recall, it was at the request of Treasury that we were fight-
ing. So finally, we concluded, why fight them? Let’s call them in
and see if they can do something constructive.

And they do, and they have, and they're a very fine agency. How-
ever, one tiny little point. If they found that everything was per-
fect, they would be out of business.

Mr. Horn. Right. That’s the nature of auditors.

Mr. ALEXANDER. Yes, sir.

Mr. Horn. And every other human being I know.

Mr. ALEXANDER. That is correct. And Internal Revenue people
are, unfortunately, human beings. Back in those days when I was
around the shop, we had a worse problem of unevenness than In-
ternal Revenue has now and that was discussed this afternoon.


44

Mr. PETERSON. And how do they convert it?

Ms. STILLMAN. Manually. Some manually. They have some opti-
cal character reading equipment.

Mr. PETERSON. That was my question.

Ms. STILLMAN, It is mix and match.

Mr. PETERSON. Are they using optical scanning?

Ms. STILLMAN. They do do some of that, yes.

Mr. Ho.Lioway. Certain parts of the operation are done that way,
yes. But certain parts of it are not.

Mr. PETERSON. Well, when a tax return comes in, I mean, I agree
with Ms. Stillman here. I just did my tax return on Turbo Tax and
I am not going to send it in electronically because it costs me
money and I think most people are going to take that position.

So the question becomes it is going to be, I think, hard to change
that so you need to have some kind of a system there to deal with
this paper that comes in and not have the errors and not have the
inefficiencies that are going on, but that is what we are talking
about, right?

Mr. PETERSON. Right.

Mr. Doparo. That is exactly correct.

Ms. STILLMAN. Actually, there are some alternatives. It ought not
to be that hard to take it via a modem from your PC.

Mr. PETERSON. It should be easy to do.

Ms. STILLMAN. It ought to be not too bad. It is already in the for-
mat they want it. You have it electronically and complete in your
machine. If you have a modem, all you have to do is send it out
on the phone.

Mr. PETERSON. They have no way to accept it. In an easy way.

Ms. STILLMAN. At the moment they do not do that. That is cor-
rect.

Mr. PETERSON. It would not be that hard to do.

Ms. STILLMAN. It does not seem to be, does it?

en PETERSON. They could do it with off-the-shelf software, prob-
ably.

Ms. STILLMAN. It ain’t rocket science.

Mr. PETERSON. Right. And have they not been moving toward the
paper that comes in just trying to do all of that just by optical scan-
ning rather than have people manually inputting it?

Mr. HoLioway. I think it is a mixture. I mean, certain parts of
their operation, like when the returns come in, for the most part,
a lot of that is still being keypunched in but I would defer to—

Mr. PETERSON. But my question, why are they doing that? It just
seems to me it would be a lot more accurate and inexpensive if—

Ms. STILLMAN. Congressman, if I could interrupt you here, it de-
pends on the type of return that is coming in. If it is a fairly simple
return, they have optical character reading capability to scan those
returns and to process them and a more complex return similar to
what you and I would probably file they do manual data entry.

Mr. PETERSON. But my question is why.

Ms. STILLMAN. Because they do not have the capability with the
scanners right now.

Mr. PETERSON. Why? The scanner is there, the software is there.
I mean, they could do this if they wanted to, right?


85

seem to be a growing situation, or is it declining based on the effi-
ciency of collecting?

Do you have more problems where people can’t pay? Is it just due
to & recession in some areas? What is it? What’s your theory on
that?

Ms. RICHARDSON. Our collection yield in 1995 was $25.15, which
was up from $23.5 billion the preceding year. I mentioned in my
opening statement I think we are working more productively, more
efficiently, and I think the results are starting to pay off.

We are in the process, as described in more detail in my written
testimony, of implementing technology in more and more districts
so that we can have our revenue officers working for productively.

I guess we feel that it’s a combination of factors that is causing
the collection yield to go up, including the ability to have the right
funding for the people who can be out there engaging in the collec-
tion activities.

Our plans, and I'll let Jim talk about more specific plans, and I
think we’re probably more concerned than almost anyone around
about making sure that each and every taxpayer pays his or her
proper share of taxes.

e thing I probably hear most about from taxpayers is, “I pay
my proper share. I want to make sure my neighbors and my in-
laws and everybody else are doing the same thing.”

Mr. Horn. Absolutely.

Ms. RICHARDSON. When I visit with our people, collection people,
particularly in the field, many of them are frustrated because they
can see situations where taxpayers are, perhaps, not paying what
they owe.

One of the things we have done and technology has allowed us
to do and one of the very impressive gains we’ve made through our
modernization efforts are in what we call our integrated collection
system.

They were fully operational in two districts in 1995. It’s being
rolled out to nine more this year, I believe, and the productivity in-
crease just from automating many of the processes that our field
agents or field officers, revenue officers do has resulted in about a
30 percent productivity increase. That’s a good investment. That in-
vestment in technology is paying off very, very well.

Mr. Horn. Let me just ask a couple of more questions, and then
I know you have to leave. We might continue on with your staff.

On page 3 of your testimony, you said that the General Account-
ing Office has certified that more than $1 trillion collected by the
IRS has been properly deposited in the Treasury.

My question, is this an estimated amount or an actual amount
that can be verified by recalculating from the records? What type
of estimate is that?

Ms. RICHARDSON. Well, I would guote from Mr. Dodaro’s written
testimony which was on page 5 of his statement, and he said, de-
spite the problems, the ones he described, “We were able to verify

tt IRS’s reported total revenue collections, the $1.3 trillion,
agreed with tax collection amounts deposited at the Department of
the Treasury.”

Mr. Horn. My understanding is, and we will ask Mr. Dodaro to
file something for the record on this comment, that it’s an esti-


62

¢ Currently Not Collectible (CNC) are accounts that a collection employee has
determined a taxpayer cannot currently pay. Accounts in this category are
periodically monitored, and if a taxpayer is able to pay within the statutory 10-
year period, the account will be collected. At the end of FY 1995, $87.4 billion?
~- or nearly half the gross receivable total -- is classified CNC. Of this amount:

37.6% ($32.8 billion) is accrued penalties and interest.

Over 85% ($75 billion) is not collectible because it is owed by defunct
corporations; taxpayers adjudicated bankrupt; hardships; or our inability
to locate taxpayers.

+ Active Accounts Receivable -- are accounts that are potentially collectible and
that continue to be pursued through activities ranging from notices and
telephone contacts, to installment agreements and offers-in-compromise, and,
ultimately, liens, levies and seizures. At the end of FY 1995, $88.8 billion‘ is
classified in the Active Accounts Receivable category. Of this amount:

41% ($36.6 billion) the largest portion of the active account, has been
assigned for enforcement action;

22% ($19.1 billion) of the inventory is either awaiting adjudication by a
court or acceptance of an offer-in-compromise;

13% ($11.7 billion) is currently being collected by sending notices to
taxpayers;

13% ($11.2 billion) is being collected through installment agreements;

* Not included in this balance are Trust Fund Recovery Penalty assessments of
$6.3 billion that are potentially duplicative.

* Not included in this balance are Trust Fund Recovery Penalty assessments of
$8.7 billion that are potentially duplicative and Resolution Trust Corporation
assessments of $9.0 billion that have not yet moved to Currently Not Collectible.

”


86

mated amount, and of course, I’m wondering how GAO can say it’s
accurate,

Mr. Horn. Tony.

Mr. Musick. No. I don’t believe it’s an estimated amount, sir. I
think the difficulty that GAO has is that they can’t take that total
amount and tie it back to individual transactions in the master file,
and that has been their problem, and to our revenue accounting
and control system.

Mr. Horn. You also state in your written testimony, “The money
the IRS is supposed to be collecting or spending has not simply dis-
appeared or has not been misappropriated.”

‘And I guess the query there, I’m going to ask for the record is
can you be 100 percent sure of this, given that there are pervasive
weaknesses in the IRS internal control system, which is the system
that detects or prevents such misappropriations?

I mean, how sure and confident are we of this?

Ms. RICHARDSON. Well, not having seen every dollar go in myself,
I guess I have to rely on others, but I think the GAO has also re-
ported each year that despite their inability to audit the revenue
system the way they would like to and to track every transaction
from an individual taxpayer who pays the check all the way to the
master file and then back, I guess, to the Federal Reserve Bank ul-
timately.

Mr. Horn. So the totals add up?

Ms. RICHARDSON. The totals add up.

Mr. Horn. OK. Very good. Now, I guess my last query is this,
since we have the Chief Financial Officer here—do we not?

Ms. RICHARDSON. We do. And I might add he is the Chief Finan-
cial Officer as of just 2 months ago, sir.

Mr. Horn. Well, congratulations. You always wanted to attend
a congressional hearing, I’m sure. You're doing a lot of good folks.
I appreciate all the hard work the CFOs have done.

The Chief Financial Officer Act requires agencies to prepare
auditable financial statements. If an auditor cannot give an opinion
on the financial statements, they are not auditable.

The GAO has been unable to give an opinion on the IRS financial
statements for the last 3 years. It would seem that the IRS is not
in compliance with the law.

Do you agree with this interpretation, and what does the IRS in-
tend to do to remedy this situation, and can you remedy it in time
for the balance sheet required under the law, which is, what, the
end of this fiscal year, essentially?

Mr. Musick. 1996, I believe it is.

Mr. Horn. What’s your feeling on that?

Mr. Musick. Let me answer that in a couple of ways. We have
several things going on. No. 1, we’ve already taken significant ac-
tion in the administrative side of the House to put in a new finance
system that is compliant with the Government standards.

As in previous audits, GAO could not be provided accounts pay-
able transactions or other transactions in order to do the audit.

Last year they found two items, really, the cash reconciliations,
which is inexcusable, and we're trying to correct that right now,
and the issue with lack of receipt and acceptance on some of the
intergovernmental payments, namely, to GSA and to GPO.


121

Now, these liens, as you’ve heard today, are placed against the
property, and they are generally valid for 10 years—you've heard
that—and they are renewable as well.

In my last 4 years, I have tried to find out exactly how many IRS
liens there are, where they're located, and I have not been able to
find out how many liens there are in, say, New York or in any
county of California, say Los Angeles County or Orange County.

I am not able to and I don’t believe the information is available
to tell you what kinds of properties those liens are against. I don’t
believe they can tell you there is X-amount of dollars against com-
mercial or X-amount of dollars against residential or land.

We need to know this. We need to know where those liens are.
We need to do the research to go out and find out and identify
those IRS liens.

And capture them. Capture them in a data base. We’ve heard a
lot of testimony about the IRS data base not being adequate at this
time. We have to commit resources, whatever they may be, to cap-
ture these liens.

Congress deserves to know. Congress deserves to know how
many liens there are in this category and where they are. Then,
we can go about taking the appropriate action to redeem them.

Now, there are several ways that these liens can be redeemed.
We know it’s a 10-year lien that’s placed against property. We can
sit back and we can wait for the taxpayer to come forward and pay.
We can also wait until he attempts to sell his property, and at that
point he would be compelled to pay the amount of his lien or a ne-
gotiated amount.

There is a third action that can be taken, and that’s where the
IRS actually seizes his property. They actually take the property
themselves so that they can get the equity from the property.

But what is most interesting is that the liens are against the
property and at a time a senior lien holder, say a mortgager, an
investor, a bank or a savings and loan, forecloses against a prop-
erty, that IRS lien is going to go away. It’s going to evaporate, dis-
solve, expire, go away, be wiped off the books in 120 days.

This is called the redemption period, and this is something that
has not been discussed. This has not been specifically identified as
another very significant area that we need to examine.

When a piece of property is foreclosed on, my experience has
shown in about 19 States that the property will simply go to the
lienholder, the mortgagor, the bank, the savings and loan, and they
will take the property back.

They will see the IRS lien against the title to the property, and
they know that that lien is going to go away in 120 days.

We are creating a windfall profit for these institutions because
they not only keep their money, but they keep all of the equity in
the property that should have been going to the IRS to satisfy
these liens.

The rules are there to do this. They’re simply not being imple-
mented. They're simply not being paid attention to, and that needs
to happen right away.

In doing additional research, let’s see if I can get my numbers
to you clearly, there are over 12,112 institutions still today in the


124

So now we have the liens. We have 10-year liens against the
propert . We know they're going into foreclosure, but we have to

ow if there is equity.

If there is no equity, then it makes a good business sense, in
most instances, to pass. Why spend more resources on something
that’s not going to bring in Treasury recovery?

But when it is determined that there is equity, then we should
take action, appropriate action to go and recover our lien moneys.

This would require some in-house or some special circumstance
for appraising equity. There are on-line systems right now, there
is Data base, Dataquick. All of these systems are already there.

They don’t need to be developed. They just need to be brought
forward and implemented to determine that the equity is in the as-
sets and to go and take appropriate steps.

Fourth task you'll see is to develop policies and procedures for
lien attachment. “Redemption” is your key word here. That has not.
been discussed until just now.

Redemption is that very, very small 120-day window that is open
after a property is foreclosed on. IRS has 120 days to act, and
that’s short.

And if IRS has not reported the lien, if they have not tracked the
lien, if they do not know the status of the lien, if they don’t know
that it’s in foreclosure, then 120 days is a very short window.

But if they have tracked that lien and they do know that it’s
about to go into foreclosure and they have ascertained equity, then
120 days is a very easy amount of time to move in and redeem, if
it’s determined that equity is there, and get the money back for the
Treasury.

Again, in my 11 years with the Government and 15 years overall
looking at Government-owned real estate, I have never once had an
IRS lien redeemed in my entire career.

IRS will redeem occassionally. I have seen, on highly visible as-
sets but not on the every day property liens that rank up to be bil-
lions and billions of dollars.

We need to, again, get a logging and tracking data-system. We've
discussed that. By identifying the properties, we’re able to release
liens as necessary, when the debtor sells his property. By having
a strong marketing arm come into effect, if these properties are re-
deemed, if they are going to be redeemed by the IRS, then there
should immediately be a marketing vehicle ready for these prop-
erties.

It’s my experience that the public is ready, willing and able to
step in and repurchase these properties. It has been done many
times by many other agencies.

‘You announce that there is a quarterly sales initiative to put
forth these properties, and you have a built-in buying base ready
to step in, pick up these properties, and every dollar goes back into
the Treasury.

It is not an expensive system. My experience has been to bring
in the liquidation and disposition of real estate owned by the Gov-
ernment, at one of the lowest cost of sales in the Nation.

It is not difficult, but it takes organization, and it takes plan-
ning, and it takes commitment. We need to get the resources in
here, both financial and operational, and we need to get internal


31

ate collection efforts against it versus how much of it is in there
for the purposes of trying to provoke a taxpayer action.

So I guess I would just leave you with that I do not believe that
there has been $100 billion written off. I think there is possibly
that portion that may have been identified by some sources as be-
lieved to be not collectible, but I think there is a mistake in looking
at $160-some billion because that is not a real number.

Mr. Doparo. The other point, Mr. Chairman, on your question
is the basic problem we have had, and we have had this for years,
the IRS accounts receivable area is a discrete area also on our
high-risk list and part of the problem is just the underlying data
is not accurate and until we can get the underlying data accurate
and we have a good methodology on a routine basis that sorts
through all the enforcement activities that IRS levies, to get down
to have that account receivable information so we know what the
number is, what is collectible and what is the most effective way
to go about it. And that is really at the heart of the issue and that
is one of the reasons we have been focusing a lot on this activity
as part of the financial statement audit.

It is a classic case of where good accounting can enhance your
program activities and your program efforts, and that is really the

eart of what we are trying to work with IRS on.

Mr. Horn. In your written testimony, you mentioned one situa-
tion where the IRS was getting ready to pay 10 refunds totaling
$173 million. The recipients of those refunds owed the Federal Gov-
ernment $10 million, but the IRS went ahead and sent the refunds
anyway. I am curious how common that occurrence is, because that
is what our debt collection bill is all about. Let the left and the
right hand know where the benefits are going and when the obliga-
tions are there and either deduct one from the other or do not
grant the benefits until the Government gets its money.

What is your view on that? Is that a common occurrence and
could you estimate how much is unnecessarily lost each year by
that processing or lack of processing?

Mr. Hotioway. I think the concern there, and it is one that we
certainly are concerned about, is that a minimum a threshold
needs to be established. What is occurring for the most part or
what provokes that is, I believe it is 45 days, that if it is not re-
funded in that time period interest begins to accrue. And what hap-

ens, and this is one of our overriding concerns about receivables
is the timelineness with which we determine who owes us what
and what is happening these refunds go out in an effort not to hit
the penalty period as a result they would not have been subjected
necessarily to review in the fullness of an exam or whatever step
IRS might take and then it is out there. And then what happens
is 1 year or 2, 3 years later an examination occurs and they deter-
mine that it should have been disallowed, but it is already gone
and by the time we get back to them, it is often found that they
are bankrupt, unfindable or whatever the issue may be.

So what is occurring in those cases, I think, is a definite need
to establish thresholds of when you allow that to happen because
sometimes I believe we may find that it is cost beneficial to absorb
the interest, if we have to, rather than letting the moneys go and
then have to try to recoup them. But I think it really goes to the


7

to review IRS’s efforts to implement its tax system modernization
effort. That effort is a laudable undertaking to move toward elec-
tronic filing. IRS is drowning in paper and really needs to move
into the new information age and toward electronic filing. They
have spent about $2.5 billion on this activity so far and plan to
spend another $5 to $6 billion between now and the year 2001.

While IRS has made progress in implementing the tax system
modernization program over the past few years, we believe there
are still fundamental managerial and technical problems with the
program that they have underway. Last year, what we did was to
perform a comprehensive evaluation of IRS against several dif-
ferent criteria. One of which are best practices that we have done
research on regarding what type of management actions are taken
by successful organizations to implement successful information
technology initiatives.

We have testified before this committee, myself and Chris
Hoenig, on our research in this best practices area, but what we
did was compare IRS’s tax system modernization management to
these best practice criteria.

We also compared IRS to industry standards. For example, we
looked at the maturity of their ability to develop software to imple-
ment the tax system modernization effort. In doing that, we used
the computer maturity model criteria developed by the Software
Engineering Institute at Carnegie-Mellon and this is recognized
throughout the world as the best criteria.

What we found as we compared IRS against all these criteria is
that they had made efforts in many of the areas to make improve-
ments, but there were still pervasive, serious problems in each of
the major categories that we compared them to using this criteria.
Again, as in the financial area, we made a number of recommenda-
tions, over a dozen recommendations, to help IRS strengthen its
tax system modernization effort. It covered a wide range of activi-
ties. For example, we suggested they revamp their business strat-
egy for tax system modernization.

In this area, we suggested they look to a broader range of the
taxpaying population to move toward electronic filing, that their
current plan at that time by the year 2001 under the current esti-
mates would only reach about 18 percent of the taxpaying popu-
lation. They had set a goal for about 36 percent but they were fall-
ing short of that goal.

fe thought through redoing and relooking at their business
strategy they could reach a larger segment of the estimated 224
million returns that are filed each year. They agree.

We also suggested that IRS put in place a more disciplined proc-
ess to look at the investments that they were making, the multi-
billion dollar investments in the tax system modernization. This is
really the heart of many successful organizations. They put in dis-
cipline process to select, control and evaluate their investments in
technology. They do it in modular, incremental pieces, not long-
term, multi-year activities, and we find criteria for making invest-
ment decisions and doing cost benefit analysis in the tax system
modernization effort needed to be greatly strengthened.

Third, we recommended that the TRS put in place an intensive
program to increase its software development capability. What we



139

Eighth Task: Develop » merketing/disposition section and program for exposing
assets to public for sale.

1. Develop policies and procedures for marketing IRS liened/foreclosed/seized
or redeemed assets. .

2. Develop appropriate levels of delegated authority and Power of Attorney
to approve re-sale offers and to execute transfer and sale documents.

3. Expand policies and procedures to market and accelerate the resale of these
redoemed assets.

4. Create a list of available properties and/or assets is generated from
the CENTRAL DATABASE to send to buyers, investors and brokers to
promote the sale of the assets.

5. A quarterly list of properties can be promoted, auctioned, or put out for bid
10 create public interest in quarterly sales events and participation in the sale of
IRS assets.

6. Develop a system to retain buyers names for future sales.

7. Develop Marketing Programs for the orderly, timely and efficient
disposition and sale of IRS owned assets.

Develop disposal strategies including:

- pre-sale of real properties with IRS liens

+ promotional listing of all IRS liened or owned properties
and other assets

. listing broker strategy

+ auctions

. sealed bids

. portfolio sales

. Structured transactions:

quarterly disposition sales initiatives

InterNet listings of IRS available assets

2, Solicit and have ready “bucket initiatives”, such es auctions or brokerage houses
ready to place newly acquired assets into to expedite their marketing and sale.

BA


147
TRS isn’t subject to, and that’s the Fair Debt Collection Practices

There is a code provision that permits civil lawsuits against the
IRS for unauthorized collection activities. There is a $100,000 ceil-

ing on that.

ihe Fair Debt Collection Practices Act has no ceiling, none what-
soever. So the liability exposure to private collection agencies is
much, much higher than it would be to the IRS.

So I think there is clearly within the law and in the RFP they
clearly recognize that and put the private collection agencies under
or will put them under these requirements.

With respect to the information that needs to be provided, the
name, Social Security number, address, phone number, employer
address and phone number, amount of debt, that’s really about it
for the types of accounts that I envision.

Mr. Alexander was talking, I think, about turning over accounts,
for example, where the amount of the debt would be in dispute.
That’s not what I’m talking about here. You would not have to pro-
vide any additional information to collect these kind of accounts.

Mr. Horn. Some people have expressed concern about private
bill collectors just as they have expressed concern about IRS bill
collectors.

What do you think is the best way to handle that, in terms of
the average American citizen? Do you think they would have a
more negative attitude against the private groups or the IRS, or
would they just be, sort of, generally negative with anybody that’s
trying to get some money out of them? And is that a problem in
public relations for the Government?

There seems to be that implication in the IRS group that they’ve
trained their people so forth, so on. If they trained all of them, I
wouldn’t be hearing my colleague, Mr. Traficant, on the floor citing
the latest horror of IRS collection or enforcement, as the case may
be. Do pa have any feeling on that?

Mr. Kors. Yes, I think the best answer to that is that a profes-
sional, skilled contingency fee collector is not going to waste their
time or money going after an account that’s going to end up being
a dry hole.

These people are trained to know, to sense who has the money
and who doesn’t. So I don’t think they’re going to be wasting their
time and be hard on somebody who just doesn’t have the money.
I think that’s probably the best answer to this.

Also, I guess this is a little off the question, but when you look
at the CNCs, just because the IRS doesn’t know that there are as-
sets there doesn’t mean that the debtor still doesn’t have them.

The decision to classify something as a CNC may have come
without full knowledge of what assets the taxpayer actually had or,
as I said, the taxpayer may have come into some assets subsequent
to that time.

Again, I think professional collectors have a way, of experience
of finding that money.

Back to the broader question, I have a feeling that no matter
who does this the individuals being called is not going to be terribly
excited about receiving the call.

Mr. Horn. Right.


46

controls that were in that did not allow people to file returns elec-
tronically that they would have been able to file in previous years.
pet. Horn. Now, was electronic filing going the preceding year to
that?

Ms. WILLIS. Yes.

Mr. Horn. When did they start with the electronic filing, rough-

Ms. WILLIS. I do not know the answer.

Mr. Horn. Well, we obviously can ask the IRS that, but I was
just curious if you had run into that problem?

Mr. Doparo. Well, one of the issues, that is an interesting exam-
ple, Mr. Chairman, of what we are talking about, about having the
right infrastructure in place because some of the security controls
to prevent the filing fraud had to be retrofitted after the system
was in place and that is why we have been harking on the fact that
as you move toward new systems and new systems being put in
place that security features be built in up front. In the private sec-
tor, it has proven to be much more cheaper to build them in up
front rather than retrofit them at the end.

Mr. Hottoway. I think the mystery, too, when you look at any
kind of performance measure is I do not know that the fact that
it went down was necessarily a bad thing. You might recall that
when they started asking for Social Security numbers, the number
of dependents went down quite a bit, too. So it may not always be
a bad thing.

Mr. Horn. OK. Any further questions over here?

[No response.]

Mr. Horn. If not, we thank you very much for coming. We appre-
ciated all of your comments.

Mr. Doparo. Thank you very much, Mr. Chairman.

Mr. Horn. The next panel is Commissioner Margaret Richardson
of the Internal Revenue Service; accompanied by Mr. Michael
Dolan, the Deputy Commissioner; Mr. Anthony Musick, the Chief
Financial Officer; and Mr. James Donelson, the Chief of the Tax-
payer Service.

[Witnesses sworn.]

Mr. Horn. The clerk will note all four witnesses have affirmed.
And we will ask Commissioner Richardson to begin and we are
conscious that you have to leave at 4. We might have you stay over
a little bit, but anyhow, please proceed.

STATEMENTS OF MARGARET MILNER RICHARDSON, COMMIS-
SIONER, INTERNAL REVENUE SERVICE, ACCOMPANIED BY
MICHAEL P. DOLAN, DEPUTY, COMMISSION OF INTERNAL
REVENUE SERVICE; ANTHONY MUSICK, CHIEF FINANCIAL
OFFICER, INTERNAL REVENUE SERVICE; AND JAMES E.
DONELSON, CHIEF, TAXPAYER SERVICE, INTERNAL REVE-
NUE SERVICE

Ms. RICHARDSON. Thank you, Mr. Chairman, and distinguished
members of the subcommittee.

I am pleased to be able to be here today to talk about two of
IRS’s critical responsibilities: the implementation of the Chief Fi-
nancial Officers’ Act of 1990 as well as the collection of tax receiv-


6

we have had difficulty attesting to the reliability of the accounts re-
ceivable information both in terms of the valid accounts receivable
and those that are deemed to be collectible due to data integrity
problems.

In the administrative side, we have had difficulties in a number
of areas. In 1992, we were unable to perform an audit of the ad-
ministrative financial statements. Since then, some improvements
have been made, and last year we had two outstanding issues, rec-
onciling IRS’s cash balances with Treasury and providing docu-
mentation for about $2.1 billion in non-payroll expenditures on the
part of the IRS.

Now, I want to stress to the committee that these are not just
bookkeeping problems. First, this provides, in my opinion and those
of others, an adequate public scorecard on IRS’s stewardship over
taxpayer revenues.

Second, it goes to the very heart of the Congress’ ability to assess
IRS’s performance and to have a good basis for judging their re-
quests for budgetary resources. Without adequate underlying data,
efforts to look at the performance measures and the cost effective-
ness of IRS’s programs and activities is very limited. So improve-
ments in this area are important to not only achieve the objectives
of the Chief Financial Officers Act, but are also really very much
intertwined with the ability of IRS to successfully implement the
Government Performance and Results Act, which I understand this
committee sponsored a joint hearing this morning on. So these
problems are serious and ones that impede Congress’ ability to
make informed decisions about IRS.

Now, there have been a number of areas where there has been
progress on the part of IRS since we have done the audits and I
want to highlight those.

Regarding their payroll expenses, which are $5 billion back in
fiscal year 1994, we were able to say that those had been ade-
quately accounted for. This was due to the IRS, as you mentioned
in your opening statement, transferring its payroll operations to
the National Finance Center run by the Department of Agriculture
in New Orleans. So we are pretty satisfied with that effort.

We are also satisfied that IRS has put in a new financial man-
agement system to keep better track of its appropriated funds for
running its operations. That has enhanced its ability to track its
expenditures and was also a good move.

Additionally, we believe that IRS has been learning more about
the depth and nature and scope of its financial management prob-
lems through the audit process. This has helped them both to de-
velop more insights into what is needed to fix these problems, but
it is really Proven to be a good learning process about how perva-
sive some of these problems are and how serious they are.

To help IRS in this area, we have made over 59 recommenda-
tions as a result of our audits. As you pointed out in your opening
statement, only 13 of those were implemented as of our last finan-
cial audit. We are currently in the process of monitoring IRS’s
progress in implementing the other 46 recommendations and will

e reporting on that soon.

Now, in addition to our work in auditing the financial manage-

ment statements, we have also had an extensive effort underway


40

equals what they told Treasury was collected. That does not nec-
essarily mean that it equals what was at the Federal Reserve,
which is where the actual money is, which is what we are trying
to do in this year’s audit, is to try to ascertain whether or not we
can agree the transactions that they have in their master file.

They are making an effort to try to develop all of the trans-
actions in the master file that I talked about that should have got-
ten through the process during the fiscal year. We are in the proc-
ess of trying to secure directly from the Federal Reserve how much
came in through those accounts in an effort to see if they do agree
and that will at least in part go to your question in trying to do
that.

But that is the problem when you do not reconcile something. It
is just like your own personal bank account. You do not know if
something is missing. You would like to believe it is not, it could
not be, but then again it could be.

Mr. Doparo. But that lack of assurance and our comfort level
with that process is really at the heart of the reason we have not
been able to render an opinion on the statements.

Mr. Horn. Now, remind me, Mr. Dodaro. Were you involved in
our hearing with the Pentagon as to whatever happened to $15
plus billion and they said, “Gee, we do not think anybody stole it
and we think we have the equipment, but we cannot reconcile any-
thing because we have 49 different accounting systems.” Were you
involved with that?

Mr. Doparo. Yes, I was.

Mr. Horw. Is this worse?

Mr. Doparo. I have also the honor of auditing the Defense De-
partment as well.

Mr. Horn. Right. I thought you were one of the more popular
people in the executive branch as you go round to round.

I am curious, how would you compare these two situations?

Mr. Dopakro. I think there are some similarities in terms of the
need for discipline into the process and procedures, but the prob-
lems are very different. They are more easily solvable at the IRS
because of the reasons that Greg mentioned in terms of the reve-
nue accounting system actually being—in comparison to DOD’s sys-
tems, it is in relatively better shape. With some effort we can get
there quicker on the IRS than we are going to do at the Defense
Department.

Additionally, in the Defense Department, when we tracked down
some of the control problems, we actually found some fraudulent
activities. I think you have a different problem. There you have a
bigger problem controlling your disbursements in the process and
you are spending a lot of money on a lot of different things and a
lot of different people are spending the money and you do not know
whether you have spent more than you are supposed to have spent,
there is no assurance of that at Defense. Making sure you do not
overpay contractors. We know they overpay contractors routinely.
So you have different problems there with their systems.

At IRS, it is more collecting the money and there are various
checks and balances in the system but we cannot get them all to
reconcile yet. And I think we can get there. I think they are both


120

Mr. Horn. Well, those are very well done. If you don’t mind, we
will also take Ms. O’Toole’s testimony, and then we'll question both
of you.

Ms. O'Toole, we’re glad you could make it here. You’ve done, I
know, a terrific amount of work in developing your tax lien recov-
ery plan, and we deeply appreciate those efforts and your willing-
ness, frankly, to take the time to come here and testify. So thank
you very much.

Ms. O’TOOLE. Thank you kindly for having me here today. I sin-
cerely appreciate it, and I’m also honored to be here and for the
committee setting aside the time to hear this issue. It’s very impor-
tant that we address it now while there is still time to correct it.

My name is Shannon O’Toole, and I am not appearing here today
in my official capacity. I am here as an individual. I am going to
express some points of view that come from my own experience, my
own professional background.

I’ve done independent research for this, and I’ve prepared studies
that I’m going to be presenting to you today.

I have over 15 years’ experience as a Government real estate ex-
pert. I have been managing assets from institution- and Govern-
ment-owned properties as well as private investments prior to my
joining other agencies.

For the last 11 years, I have overseen over $7 billion worth of
Government-owned properties. I am formerly from the Federal De-
posit Insurance Corporation, from the Division of Liquidations and
most presently from the Resolution Trust Corporation as depart-
ment head and section chief for the Real Estate Disposition Divi-
sion.

But again, I’m here today as an individual not representing my
agencies.

T’ve also been an expert consultant to the county of Orange dur-
ing their bankruptcy sessions to give them advice on disposing of
real estate to bring in revenue for the county as well.

I have written and published Government manuals, policies and
procedures for the disposition of real estate. I’ve been deeply in-
volved in trying to find the best practices from other agencies and
trying to make disposition efforts bring in the most recovery at the
least amount of expense.

I’m going to talk about something we have not addressed yet
today. I’m going to focus on another portion of IRS recoveries. It
was not addressed specifically on the floor today or in any of the
reports that I have read previously to appearing here today.

That area is the property tax lien recovery plan that I’m putting
before you, because all the laws and all the statutes and all the
rules are in place. They’re already in place to be activated.

Unfortunately, they’re not being activated or used to bring in the
Treasury recoveries that we're here to discuss today.

The IRS has the rules, the statutes, the codes to place liens
against property, both real tangible and intangible property when
a debtor does not pay his taxes that are due.

From our earlier testimony today, you can see that that’s gen-
erally happening in the IRS’ third stage of collection, after the let-
ters, after the phone calls. This is where they take more direct ac-
tion.


19

adjustments (it wrote off these amounts) that increased cash by $784 million and
decreased cash by $754 million, netting to $30 million. In addition, $44 million of
unidentified cash transactions were cleared from cash suspense accounts® and
included in current year expense accounts because IRS could not determine the cause
of the cash differences. These differences suggest that IRS did not have proper

controls over cash disbursements as well as cash receipts.

In addition to its reconciliation problems, we found numerous unsubstantiated
amounts. These unsubstantiated amounts occurred because IRS did not have support
for when and if certain goods or services were received and, in other instances, IRS
had no support at all for the reported expense amount. These unsubstantiated
amounts represented about 18 percent of IRS' $2.1 billion in total nonpayroll

expenses and about 5 percent of IRS' $7.2 billion in total operating expenses.

Most of IRS’ $2.1 billion in nonpayroll related expenses are derived from interagency
agreements with other federal agencies to provide goods and services in support of
IRS' operations. For example, IRS purchases printing services from the Goverament

Printing Office; phone services, rental space, and motor vehicles from the General

‘Suspense accounts include those transactions awaiting posting to the appropriate
account or those transactions awaiting resolution of unresolved questions.

ql


4

In addition to these problems, we could not determine from our testing the reliability
of IRS' projected estimate for accounts receivable. As of September 30, 1994, IRS
reported an estimate of valid receivables of $69.2 billion,” of which $35 billion’ was
deemed collectible. However, in our random statistical sample of accounts receivable
items IRS tested, we disagreed with IRS on the validity of 19 percent! of the accounts
receivable and the collectibility of 17 percent® of them. Accordingly, we cannot verify

the reasonableness of the accuracy of the reported accounts receivable.

Inadequate internal controls, especially the lack of proper documentation of
transactions, resulted in IRS continuing to report unsupported revenue information.
In some cases, IRS did not maintain documentation to support reported balances. In
other cases, it did not perform adequate analysis, such as reconciling taxpayer

transactions to the general ledger, to ensure that reported information was reliable.

*The range of IRS’ confidence interval, at a 95 percent confidence level, is that the
actual amount of valid accounts receivable as of September 30, 1994, was between
$66.1 billion and $72.3 billion.

*The range of IRS' confidence interval, at a 95 percent confidence level, is that the
actual amount of collectible accounts receivable as of September 30, 1994, was
between $34 billion and $36 billion.

“The range for our confidence interval, at a 95 percent confidence level, is that the
actual amount of the validity exceptions as of September 30, 1994, was between 14.5
percent and 24.2 percent.

*The range for our confidence interval, at a 95 percent confidence level, is that the
actual amount of the collectibility exceptions as of September 30, 1994, was between
18.1 percent and 22.5 percent.

6


3

ported in the financial statements may not be representative of the
IRS's actual operations.

One of the primary missions of the Internal Revenue Service is
to know how much revenue should be coming in and to make deter-
mined efforts to collect all the revenue that is due the Federal Gov-
ernment. With a voluntary compliance system, and I know the IRS
is correctly very proud of their work on the voluntary compliance
system, but with that system such as ours, it is extremely impor-
tant that the American taxpayer has confidence in the IRS’s ability
to be aware of the revenue owed, how do they contact delinquent
taxpayers and to followup on the delinquent taxpayers once it has
identified them.

If taxpayers were to think that “the other guy” is getting out of
paying his or her taxes, it would seriously reduce compliance levels
and the revenue generated.

The Chief Financial Officers Act audits first brought to light the
fact that the IRS cannot reconcile its fund balance with Treasury
accounts. It was reported by the GAO that in the 3 years before
August 1995, hundreds of millions of dollars had been written off
when the causes of the unreconciled amounts cannot be identified.

As of May 1995, amounts continue to be unreconciled and are not
being identified and resolved promptly.

The GAO has requested the IRS give it a detailed plan for im-
provement, with clear accountability for failure to meet deadlines.
We hope to learn today whether the IRS has done so.

In the August 1995 GAO report, the IRS claimed that its revenue
general ledger system would be operational by fiscal year 1996.
That is the year we are in. However, the IRS is currently redesign-
ing it. The system will not be fully operational until the new soft-
ware program developed as a part of the Tax System Moderniza-
tion is completed and that will be some time in 1997.

What are we to expect until then? No improvement in the IRS’s
ability to effectively manage its operations and to reliably measure
its performance?

thermore, there are questions on the reliability of the infor-
mation the IRS supplies to Congress on taxes collected and uncol-
lected, and on the cost of the IRS operations. I am concerned that
the IRS has decided, and this is not something recent, this is since
1990, that $100 billion of tax debt is not collectible. I understand
that another $60 billion is considered to be collectible.

The subcommittee needs to know the process and the criteria
that were used in each case as to what is uncollectible and what
is collectible. A total of $160 billion involved in the two categories.
It will not solve the deficit, but it might help for 1 year if we ever
got it.

Congress must have accurate information to properly oversee
and evaluate the IRS’s performance. The GAO cannot ensure that
the Congress is getting such information now from the IRS.

In H.R. 2234, I have offered a bill which is bipartisan in sponsor:
ship and designed to improve debt collection efforts in the Federal
Government. Included in this legislation are provisions related to
the IRS use of private debt collection agencies.

We will hear today from several witnesses whether the IRS is
doing enough to collect its delinquent debt, whether it can do more


IRS does not track liens

IRS not notifed

IRS does not act

IRS does not act

IRS WRITES OFF LOSS.

‘After 120 days
the lien expires
off
not act

or drops
if IRS dows

New Procedures to report fiens
and new Database to record and
track liens needed

Notice to IRS is made a
requirement IRS determines equity,
pass or take action

IRS still has 120 days to act, pass or
redeem

IRS redeems property, begins
remarketing

IRS resells property, applies
recovery to treasury collections, repays
revalving fund

IRS uses portion of recovery to redeem
‘additional property tax liens


0

government since nothing would be paid to the private collection

agency unless the debtor pays. It is truly a win-win situation.

In a 1993 study assessing the use of private collection
companies, the GAO declared, "[f]or IRS to be a successful
competitor, it will have to adopt collection strategies that are
more effective than its current approaches . . . . The use of
private collection companies could prove to be an effective
strategy... ." The GAO continued, "[s]ince IRS does not work
all its delinguency cases and many of the cases that are eventually
worked are delayed because collection staff work higher priority
cases first, we believe that private collection companies should be

allowed to supplement IRS’s collection. . ."

There is another plus for the government in contracting out
certain collection activities on dormant accounts. That plus would
come from the expectation that voluntary compliance would also

increa: At the present time, the IRS sends at least three

notices, the last one of which threatens as follows:

If you do not take the requested action within 30 days
from the date of this notice, we may, without further
notice to you, levy upon and seize your property and
rights to property. Section 6331 of the Internal Revenue
Code allows us to seize wages, bank accounts,
commissions, and other income. Real estate and personal
property such as business assets and automobiles may also
be seized. (A copy of IRS Notice of Intent to Levy--Form
$04 is attached as Exhibit B.)

The IRS cannot possibly be helping voluntary compliance when it

sends a notice with this language and then--on a deferred account--

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69

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24

expected to spend up to $8 billion on TSM. By any measure, this is a world-class
information systems development effort, much larger than most other organizations
will ever undertake. TSM is key to IRS’ vision of a virtually paper-free work
environment where taxpayer account updates are rapid, and taxpayer information is

readily available to IRS employees to respond to taxpayer inquiries.

IRS recognizes the criticality to future efficient and effective operations of attaining
its vision of modernized tax processing, and has worked for almost a decade, with

substantial investment, to reach this goal. In doing so, IRS has progressed in many
actions that were initiated to improve management of information systems; enhance
its software development capability; and better define, perform, and manage TSM's

technical activities.

However, our July report noted that the government's investment and IRS' efforts to
modernize tax processing were at serious risk due to pervasive management and
technical weaknesses that were impeding modernization efforts. In this regard, IRS
did not have a comprehensive business strategy to cost-effectively reduce paper
submissions, and it had not yet fully developed and put in place the requisite
management, software development, and technical infrastructures necessary to
successfully implement an ambitious world-class modernization effort like TSM.

Many management and technical issues were unresolved, and promptly addressing

16


143

It is not a difficult process, but you have to recognize that you
have to lay the tracks for this. You have to first research, find, re-
cover.

You have to be able to grasp and report and track these liens.
That’s where it starts, and I know for a fact that’s not done.

We know it’s not a priority, and we know they’re not tracked.
Yes, it could be done outside.

Mr. Horn. You have many years’ of experience in this area. If
a revenue agent or staff of the IRS had no experience, what type
of additional training do they really need to deal with the lien
problem?

Ms. O’TOOLE. Since I’ve written training manuals, since I’ve had
my training manuals published for basic real estate owned, how to
do real estate for the FDIC and RTC in multiple asset sales, it is
not difficult to train staff.

It would probably take a 2-week training class intensive, perhaps
one, if they already have a lot of background.

It’s the policies and procedures that I’m most concerned about.
Are they in place, and are they thorough? I’m sure there is a whole
manual on this, but it will need to be revised and refocused.

Mr. Horn. Well, are there any other costs besides staff and
training the staff that is associated with implementing your pro-
pos:

As I say, the IRS is putting liens on various types of property,
but is there advertising? Are there marketing costs and distribu-
tion of training material which we agree they would need, such as
manuals, bringing in interactions with people that have experience
in this and all that? Where is the rest of the cost in this process?

Ms. O'TOOLE. The IRS does have, by law, the IRS revolving fund.
Those are moneys that are already set aside for the redemption of
properties, but I will say that at the present time that money is
inadequate.

The money only begins to open up the Pandora’s box on these
liens. You need to have this revolving fund sufficient to have the
seed money to go out and redeem these liens.

Through the sale of the asset, through the resale of the real es-
tate, you will repay the resolving fund. You will repay the market-
ing, the advertising. You will repay the cost of running the pro-
gram, and you will have the Treasury recoveries in addition to that
to satisfy part of this national debt.

Mr. Horn. Let me move to Mr. Korb for a minute. According to
your testimony, there are three types of accounts that are not sub-
ject to active collection efforts by the IRS, and I just wonder if you
could elaborate further on these types of accounts and why they’re
not pursued.

Mr. Kors. The first type of account are the deferred accounts.
These are the ones that are at the service center where the notices
have been sent out and they fall below the tolerance levels that
have been set.

I think the IRS believes that it’s not cost-effective to pursue them
any further. They might be a good candidate for using private col-
lection agencies.


10

recommendations we made regarding its TSM program. We discuss each of these

areas in the following sections.

EINANCIAL MANAGEMENT WEAKNESSES PERSIST

For the last 3 fiscal years,’ we have been unable to express an opinion on IRS’
financial statements because of the pervasive nature of its financial management
problems. We were unable to express an opinion on IRS' financial statements for

fiscal year 1994 for the following five primary reasons.

-- One, the amount of total revenue of $1.3 trillion reported in the financial
statements could not be verified or reconciled to accounting records maintained

for individual taxpayers in the aggregate

‘Two, amounts reported for various types of taxes collected, for example, social

security, income, and excise taxes, could also not be substantiated.

1B "

(GAO/AIMD-93-2, June 30, 1993); 7

1923 Financial Statementa (GAO/AIMD.9. -94-120, June 15, 1994); and
(GAO/AIMD-95-141,

August 4, 1995).

2


141

FINAL DISCUSSION

Final discussion items are ones in which to
inerease IRS tax lien recoveries and reduce other foreclosing entity windfalls.

A change in the expiration date on IRS liens against real property could be lengthened
from 120 to a longer period of time. However, it appears that the intent of the 120 expiration
period was to allow foreclosing entities the go forward with recovering their losses without
a protracted holding time. The IRS lien must expire to allow the property title to be free of the
IRS lien and marketable for re-sell. If the IRS redemption period was extended, it would hinder
the foreclosing entities in re-selling the assets and their recovery efforts.

A change in the expiration process is a recommendation to be considered, whereby the
IRS lien never expires. The foreclosing entity would be allowed to foreclose and re-sell the
asset and recover all of their own lien, costs and expenses, AND THEN FORWARD ANY
REMAINING EQUITY NOT TO EXCEED THE AMOUNT OF IRS LIEN AMOUNT TO THE IRS.

IRS will stil need to develope a method of tracking the property liens in order to credit the
debtor's account.

This would, however, require a change !RS codes, policies and new procedures for
foreclosing entities to send notice to the IRS of each asset they are re-selling that is
encumbered with an IRS lien, and receive IRS concurrence and release of the IRS lien to
provide marketable title. This would extend the holding time, processing time and re-sell
Closing time for the foreclosing entity, and the IRS presently does not have an efficient method
of tracking IRS liens to verify the IRS lien to be reconveyed or removed.

The Internal Revenue Service Revolving Fund requires sufficient resources to implement
the Ten Step IRS Lien Recovery Plan. Presently approximately $10 million dollars is available
in the Revolving Fund, which is not sufficient to redeem one medium sized commercial
property. No new faws need to be passed to increase the initial Revolving Fund committment
to implement this Plan. The Fund will be replenished and additional operating capital will be
created for further treasury recoveries through lien collections.

‘The Proposed IRS Property Tax Lien Recovery Plan can be commenced immediately under
current IRS rules and codes, and the proposed program wil be fully self-sustaining through the
recovery of IRS lien redemptions.


29

Treasury had not reported to the Committees on TSM. We are assessing IRS'

actions and will provide a status report to the Committees by March 14, 1996.

Mr. Chairman, that concludes my statement. I would be happy to answer any

questions you or Members of the Subcommittee might have.

21


98

necessarily move up. As long as other accounts come in with a
higher score, they move ahead of it.

o that’s the third stage. Now we've identified a second place
where accounts come to rest and remain unworked for some period
of time. That’s the queue.

In addition, we talked about currently noncollectible. At any
stage of the process, the IRS can determine that an account is cur-
rently noncollectible, and that could be done for a variety of rea-
sons.

Three of the most common are: the taxpayer is unable to pay the
delinquent tax without undue hardship that was talked about; the
IRS is unable to locate the taxpayer or the taxpayer’s assets; or
they have an address for the taxpayer, but they just can’t contact,
them. The taxpayer isn’t responding, not answering the phone.

So those accounts are put into the currently noncollectible status,
and once a year a balance due notice is sent out. So that’s the only
followup at that point in time.

So again, we have three places now we’ve identified, the deferred
accounts at the notice stage. We have the accounts in the queue.
Now, we have these currently noncollectible accounts.

These are the accounts that are sitting there unworked, and that
is, in my view, where the emphasis ought to be placed.

As we all know, the Federal Government’s resources are increas-
ingly limited. Realistically, the Congress cannot authorize a large
number enough of slots at IRS to collect these types of accounts.

And as any private sector business would do, the IRS must nec-
essarily deploy its scarce resources to go after the highest field
cases.

Unfortunately, there are a lot more cases entering into the collec-
tion process than resources will allow to be worked in a timely
fashion.

One way to address this pressing problem is to use private collec-
tion agencies to help collect a portion of these delinquent tax ac-
counts.

So, what I’m suggesting is that the collection function be supple-
mented. It’s very important. I’m talking about supplementing the
current efforts of the IRS to enable the Federal Government to col-
lect these accounts which the IRS, rightfully so, considers a lower
priority and, reasonably, will not use its resources to work.

It is known that the private collection firms do work on a contin-
gent fee basis, and therefore, if you use that approach, that’s goin;
to make sense from the Government’s perspective, since there wil
be no cost to the Government.

There is no training, no startup costs. They've been incurred. It’s
a win-win situation.

In conclusion, I’m proud of past service with the IRS, and I
believe the Service does a job overall. In recent years, the
Service has made progress in accelerating the collection process,
but the reality that we have to face is the IRS cannot work all of
the cases the way they need to be worked in order to collect taxes
that should be collected. One thing people ought to keep in mind
is we are talking about collecting tax doll that taxpayers by and
large admit they owe.


140

Ninth Task: Develop training materials for IRS staff in implementing new polices
and procedures for the implementation of the IRS RECOVERY Pian and
CENTRAL DATABASE.

Tenth Task: Develop, maintain and improve effective financial and operational internal
controls.

|. Develop timeline check points in lien reporting procedures.

2. Monitor internal contro! check and balance of examination unit to marketing unit.

3. Develop balancing of lien assets to recoveries and write-offs.

4, Develop balancing of sold lien assets to accounting reports.

5. Measure cost effectiveness of disposition methods used.

6. Develop lien release procedures.

7. Install Quality Assurance programs in effect.

8. Continue to monitor IRS lien program for updating and modifications
as the national, geographical and local economy and markets change.

9. Create a liaison between IRS and Congressional leaders for continuous

information exchange

10. Provide IRS management, Executive branch and Legislative branch with timely,

complete and accurate reports of IRS property tax lien recoveries.

The development of this IRS TAX LIEN RECOVERY PLAN can be implemented immediately
with existing IRS rules, statutes and codes, with the addition of a new IRS section with new,
‘experienced, expert staffing in the area of real property liens and disposition of government
‘owned assets, that will provide the necessary check and balance for the tax examination unit.

The proposed program will fully sustain itself after the seized, redeemed or liened assets
are re-sold, creating sufficient recovery to repay the IRS Revolving Fund, credit the taxpayer
with recovered monies, and provide going forward operating capital for the on going collection
of IRS REAL PROPERTY TAX LIENS.

oA


91

Part of the problem was grade structure. Part of it was organiza-
tional structure. In order to try to get high grades and therefore
high pay for revenue officers, you had to delegate apparently under
then Civil Service rules.

Immense discretion to individuals to decide whether to seize a
taxpayer's business, therefore putting the taxpayer out of business,
to decide whether to let the taxpayer work along with you or to de-
cide whether to, say, levy on bank account, thereby telling the
world that the taxpayer was in deep troubling and calling down
other creditors who could take action before Internal Revenue was
able to act.

You went through that long period with the chief collection this
afternoon, Mr. Chairman, of those three letters followed by a
friendly trip from a revenue officer.

By the time the revenue officer gets there, the other creditors
have pretty well plucked things bare. So I’m not sure that unless
we can speed up the process and do more on the telephone, learn
more of the private sector—and Internal Revenue has learned a
great deal from the private sector and can learn more, work with
the private sector—you could make much of a dent in future bills
of that $100 billion that is of such concern to you and rightfully
concerned to you.

Back about 20 years ago, people were not concerned about Inter-
nal Revenue being too lenient. They were concerned about it being
too harsh.

I was constantly called to hearings, properly, of course, for Inter-
nal Revenue actions which were far, far tougher, as you’ve pointed
out still are in certain areas of the country than in other areas de-
pendent upon the particular district director's views toward collec-
tion.

And in order to somehow prevent Internal Revenue being politi-
cized, Internal Revenue is divided into a series of 58 little king-
doms by the district director, basically—and most of the time the
district director was a he; we brought in some shes, thank good-
ness—as to how tough collection policy would be.

So if you lived on one side of town, you could expect a lenient
rule. If you lived on the other side of town, you could expect a
harsh rule.

Luckily, that has changed. Congress has helped quite a bit
through the Taxpayer Bill of Rights that was enacted in the 1980's,
and Congress can help more by keeping a watchful eye on Internal
Revenue to try to make sure that it does its job carefully, cour-
teously but effectively.

The hearing this afternoon has demonstrated some of the con-
cerns, and rightly so, about the effectiveness of the process.

Private bill collection, private tax collection is being tried this
year, as you’ve pointed out, and perhaps there are benefits that
outweigh some of the detriments, at least those sent by aged people

me.

The detriments are concerns about taxpayer privacy, concerns
about taxpayer security, and concerns about taxpayer rights.

If you put people on a commission, you're telling them that
they'll be rewarded it they produce a particular result. The same
is true in a law firm.


i

- Three, we could not determine from our testing of IRS' gross and net accounts
receivable estimates of over $69 billion and $35 billion, respectively, which

include delinquent taxes, whether those estimates were reliable.

- Four, IRS continued to be unable to reconcile its Fund Balance With Treasury

accounts.

Five, we could not substantiate a significant portion of IRS‘ $2.1 billion in
nonpayroll expenses included in its total operating expenses of $7.2 billion,
primarily because of lack of documentation. However, we could verify that IRS

properly accounted for and reported its $5.1 billion of payroll expenses.

To help IRS resolve these issues, we have made dozens of recommendations in our
financial audit reports dating back to fiscal year 1992. In total, we have made 59
recommendations on issues covering such areas as tax revenue, administrative costs,
and accounts receivable. While IRS has begun to take action on many of our
recommendations, as of the date of our last report--August 4, 1995--it had fully

implemented only 13 of our 59 recommendations.

IRS has made some progress in responding to the problems we identified in our
previous audits. However, IRS needs to intensify its efforts in this area. IRS needs

to develop a detailed plan with explicit, measurable goals and a set timetable for


97

You have the notice process with a computer. The service centers
generate computer notices, which are really bills sent out to the
taxpayers.

You have ACS, where the telephone contacts are made, and then
you have the revenue officer investigations and personal visits.

In the first stage, when the delinquent notices are sent out, as
has been discussed, once that now third notice goes out by certified
mail, if an account falls below a certain dollar threshold, it becomes
what is called a deferred account.

This account is, basically, put aside and will be collected should
another credit show up, like a refund, or another return filed that,
when that amount is added to the amount that’s in deferred status,
they go over the threshold, and it moves on through the system.

So there is the first place in the system where you have a group
of accounts sitting there, no work being done.

The accounts then move on to the second stage, which is the ACS
level, and this is where the Service attempts to collect the tax by
using telephone to demand full payment of the tax.

They search for taxpayers and for their assets. They make con-
tacts with third persons as well. At that stage, if the accounts are
not collected, they then move on to the third stage, and that is the
revenue officer stage.

At that stage they are put in a computerized holding file called
a queue. I think it was referenced earlier, q-u-e-u-e.

d what happens is accounts are put in the queue, and they’re
given priority for assignment by something called the Resource and
Workload Management System, RWMS.

What this does, is to allow each district to look at its resources
and concentrate the available revenue officer resources on the most
productive cases, and that’s where the revenue officers go out and
make the personal contacts.

Now, how do they determine what the score is? Well, they look
at the expected collectability. That’s what they're trying to deter-
mine.

They look at factors such as information from prior returns, in-
formation matching program documentation, payment history,
whether it’s a first time delinquent. They also factor in the antici-
pated cost of collection.

So a score is assigned to the account. The account then goes into
this queue, the computerized holding period. The chief of collection
for each of the districts—and there will be 30 districts by the end
of this fiscal year, end of September—then makes a judgment for
that particular district what resources they have available to deter-
mine what the cutoff score will be before cases come out of the
queue.

And that’s where you get your variance across the country that
you alluded to earlier, when you were talking about California, for
example. This is where it happens.

So the account stays in the queue until it exceeds the cutoff
score. What this means, of course, is that higher-scored accounts
are worked before lower-scored accounts even if the lower-scored
accounts sit in the queue for months or even years, for some cases.

Now, also keep in mind that this isn’t a static group of accounts.
New accounts are being added all the time. So an account won’t


102

treatment, generally the IRS uses a three-stage process to collect
delinquent taxes: Service Center computer-generated notices and
bills, Automated Collection System telephone contacts, and
investigations and personal visits by revenue officers in the

field.

In the first stage, IRS Service Centers mail delinquent
taxpayers a series of computer-generated notices--really bills--
demanding payment. In most cases, there are between three and five
notices sent to the taxpayer. Before sending the final notice, the

Service Center searches IRS computer records for levy sources

a
levy is the seizure of a taxpayer's property, including assets in
the possession of employers and financial institutions, such as
wages and bank deposits. The final notice is sent by certified
mail and informs the taxpayer that failure to satisfactorily
respond to the IRS may lead to the filing of a notice of federal
tax lien and/or a levy on the assets of the taxpayer in the

possession of third parties.

If the efforts of the Service Center do not secure payment,
accounts which exceed certain dollar thresholds are transferred to
the second stage, which is called the Automated Collection system
or ACS. Note that I said that it is only accounts which exceed the
dollar threshold which are sent on to ACS. The accounts that fall
below the dollar threshold have tax liabilities that the IRS

believes are so small that it is not economical to pursue them


118

second stage (ACS). Accounts remain in this
status until (1) there are additional
delinquencies in later tax periods which result
in the total tax liability exceeding the dollar
threshold or (2) they are ultimately collected by
virtue of refund offsets and/or by operation of
the Federal Tax Lien when the taxpayer attempts
to sell property.

Accounts in the Queue (described in Item I.C.
above). These are the accounts that went through
the second stage (ACS) but did not have a high
enough RWMS score in the particular IRS district
to be assigned to a Revenue Officer in the third
stage. Accounts remain in this status until
either (1) the cutoff score is reduced so that
the account now has a high enough RWMS score to
be assigned to a Revenue Officer, (2) there are
additional delinquencies in later periods which
result in the taxpayer’s RWMS score to rise above
the cutoff score so that the account will be
assigned to a Revenue Officer, (3) they are
ultimately collected by virtue of refund offsets
and/or by operation of the Federal Tax Lien when
the taxpayer attempts to sell property, or (4)
the imminence of the expiration of the 10-year
statute of limitations causes the account to be
assigned to a Revenue Officer.

Accounts classified as CNC (described in Item II.
above). These are the accounts for which the IRS
has concluded that collection is not currently
possible. Accounts remain in this status until
either (1) they are reactivated, (2) they are
ultimately collected by virtue of refund offsets
and/or by the operation of the Federal Tax Lien
when the taxpayer attempts to sell property, or
(3) the expiration of the 10-year statute of
limitations.

Donald L. Korb
Thompson Hine & Flory P.L.L.
March 6, 1996

-5-


65

collection and are included in the accounts receivable inventory, several years will
have passed.

‘Once a final determination is made, however, we are moving to contact
taxpayers promptly. We are moving to collect tax at the earliest possible time ~ by
the Taxpayer Service function after account questions are resolved over the telephone
or at the close of an agreed audit. During the past 3 years, we have shortened the
time between when the delinquency arises and the first telephone contact with the
taxpayer is made. Examples of our efforts and the results are:

Decreasing the number of notices, shortening the notice period, and instituting
earlier intervention by telephone. (During FY 1994, the IRS tested “early
intervention” in two Automated Collection System (ACS) sites with positive
results, In January 1995, using 770 staff years of the FY 1995 Compliance
Initiative in ACS sites (raising ACS staffing from 2300 to about 3100) earty
intervention was implemented nationwide. Although the loss of Compliance
Initiative funding in FY 1996 will have an impact, the early results of this
increase in ACS staffing resulted in additional collection of $111.2 milion.

* In FY 1992, examination secured payment of 8.1% of agreed tax assessments.
As a result of increasing emphasis on payment of agreed tax assessments at
the conclusion of an examination, in FY 1994, examination secured payment of
31.7% of agreed tax assessments and in FY 1995 it secured 64.2%.

‘* Accelerating the collaction of the largest corporate assessments by having the
resolution of an issue in one year carried forward to later years without further
examination, Under this procedure, taxpayers have agreed to about $1.1 billion
(tax and penatties) for the period FY 1993 through FY 1995.

¢ Under the FY 1995 Compliance initiative, we placed 1727 collection personnel
in parts of the country with the most significant workload. Through this targeted
placement, in FY 1995 we collected an additional $545 million in unpaid taxes.

¢ Expanding installment agreement authority. Installment agreements offer the
IRS an opportunity to keep taxpayers in the system who would otherwise not be
able to meet their full tax obligations. Expanding the authority increased the
dollars secured through installment agreements from $2.28 billion in FY 1982 to
$5.4 billion in FY 1995.


71

Mr. Horn. Do we know how much of that $100 billion has al-
ready gone beyond the 10-year period, or are there no 10-year obli-
gations in there?

Mr. DONELSON. The extension of the 10-year statute includes this
year, and starting next year there will be expirations of that stat-
ute, and some of those currently not collectible cases would expire
without any extensions either by a waiver being granted by the
taxpayer or the judicial or administrative action ty us. There will
be some expiring, yes.

Mr. Horn. What is the extension that’s going to be made? I
mean, did I misunderstand you?

Mr. DONELSON. Yes. The statute was extended in 1990 from 6 to
10 years.

Mr. Horn. From 6 to 10 years? It was six in 1990?

Mr. DONELSON. Yes, sir.

Mr. Horn. It’s 10 years now?

Mr. DONELSON. Yes.

Mr. Horn. And how long does that statute run?

Mr. DONELSON. Ten years.

Mr. Horn. Ten years from now, 10 years from 1990. So the year
2000?

Mr. DONELSON. No. Excuse me, sir. What happened was we had
a 6-year statute, and Congress extended the statute to 10 years. So
all the cases that were on the books in 1990 were extended. Cases
that were 3, 4 or 5 years old were also extended.

Mr. Horn. When was the extension to 10 years, what year?

Mr. DONELSON. 1990.

Mr. Horn. 1990. OK. So everybody that was on the books then,
that still had time to go to meet the 6-year test now has to go and
meet the 10-year test?

Mr. DONELSON. Yes, sir.

Mr. Horn. Well, if they were 6 years in 1990, they met it in
1994, didn’t they, because you counted the 6 years, or did the clock
start running again?

Ms. RICHARDSON. The first year that it became effective, I think,
was in fiscal year 1991.

Mr. DONELSON. Congress passed it in late 1990, I believe.

Ms. RICHARDSON. But fiscal year 1996 is the first year that the
10th year is no—we should see a decline from just the mere reten-
tion for the additional 4 years.

Mr. Horn. Well, of the $100 billion, which includes what was de-
clared uncollectible in 1990, 1991, 1992, 1993, 1994, 1995, now
1996, what I’m trying to get at is has anybody analyzed what in
that debt—I mean, there must be in your computer somewhere a
target date when that expires and you can’t take any further ac-
tion.

Do we know what the spread is of that debt over the future?
You're telling me there is still some collectible. That’s news to me,
because no one else in the IRS has told me that.

Mr. DONELSON. Well, each year the money that’s residing in a
currently not collectible status—and it was put there for various
reasons, and I'll be glad to go through some of those categories for
you—we have money applied from future refunds.


16

that reviews be performed to determine if the taxpayer has any outstanding
debts to be satisfied. For expedited refunds, IRS must manually review
various master files to identify outstanding debts. However, out of 358
expedited refunds tested, we identified 10 expedited refunds totaling $173
million where there were outstanding tax debts of $10 million, but IRS did not

offset the funds. Thus, funds owed could have been collected but were not.

IRS could not provide documentation to support $6.5 billion in contingent
liabilities reported as of September 30, 1994. Contingent liabilities represent
taxpayer claims for refunds of assessed taxes which IRS management considers
probable to be paid. These balances are generated from stand-alone systems,
other than the master file, that are located in two separate IRS divisions.
Because these divisions could not provide a listing of transactions for
appropriate analysis, IRS did not know, and we could not determine, the

reliability of these balances.

An area that we identified where the lack of controls could increase the
likelihood of loss of assets and possible fraud was in the reversal of refunds.
Refunds are reversed when a check is undelivered to a taxpayer, an error is
identified, or IRS stops the refund for further review. In many cases, these
refunds are subsequently reissued. If the refund was not actually stopped by

‘Treasury. the taxpayer may receive two refunds. In fiscal year 1994, IRS


99

We're not talking about the audit process. We're talking about
collection after assessment. The IRS EB beleaguered. Its funds are
being cut, and it just doesn’t have the resources to do the job it
needs to do to collect the deferred accounts, the accounts in the
queue and the CNCs we've talked about.

And I think given the current efforts to cut Government spend-
ing, it’s really unrealistic to think this is going to change in the
near term.

So it makes sense to me to supplement, again, supplement the
IRS's collection efforts by contracting out certain activities to get
the job done.

e IRS cannot collect these accounts, but let’s let private collec-
tion agencies supplement the Government’s efforts.

With over 1 million private businesses, 32 State tax collection
agencies, and numerous Federal agencies availing themselves of
these private collectors, why not IRS? Those who pay their
taxes shouldn’t have to carry the additional burden for who

not.

That concludes my prepared remarks, and I'll be pleased to an-
swer any questions.

[The prepared statement of Mr. Korb follows:]


21

These weaknesses were primarily IRS' employees’ capacity to make unauthorized
transactions and activities without detection. IRS has taken some actions to restrict
account access, review and monitor user profiles, provide an automated tool to
analyze computer usage, and install security resources. However, we found that IRS
still lacked sufficient safeguards to prevent or detect unauthorized browsing of
taxpayer information and to prevent staff from changing certain computer programs

to make unauthorized transactions without detection.

‘The deficiencies in financial management and internal controls that I have discussed
throughout this testimony demonstrate the long-standing, pervasive nature of the
weaknesses in IRS' systems and operations--weaknesses which contributed to our
inability to express a more positive opinion on IRS' financial statements. The
erroneous amounts discussed would not likely have been identified if IRS' financial
statements had not been subject to audit. Further, the errors and unsubstantiated
amounts highlighted throughout this testimony suggest that information IRS provides
during the year is vulnerable to errors and uncertainties as to its completeness and

that reported amounts may not be representative of IRS’ actual operations.
IRS HAS TAKEN STEPS TO IMPROVE ITS OPERATIONS

IRS has made some progress in responding to the problems we have identified in

previous reports. It has acknowledged these problems, and the Commissioner has

13


50

fers and compromise and ultimately liens, levies and seizures.
These accounts total $88.8 billion.

Correctly accounting for taxpayers’ payments is an important
way to prevent the creation of a receivable and through the expan-
sion of our electronic filing and our electronic payment options we
are lowering that error rate. As more deposits are received elec-
tronically and more returns are filed that way, errors in posting
and assessments will continue to decline. We are also working to
make that receivables inventory as current as possible.

Unlike in the private sector where liability is established when
goods or services are purchased, we must establish a tax liability
frequently through the audit process and taxpayers can then use
the administrative appeals process and litigation before tax liabil-
ity is ultimately determined.

Thus, several years can elapse between a tax return as due and
filed and the time that the liability is actually finally established.
Once that final determination is made, however, we are moving to
contact taxpayers more promptly. A number of specifics about what
we have done are covered in our written testimony and we will be
happy to respond to any questions you may have about that.

But we are also stepping up our efforts to increase our collection
yield and I think the results from that are quite promising.

For 3 years prior to 1994, collection yield had declined between
4 and 6 percent. Now, some of that decline was attributable to a
decline in staffing. It was also quite frankly a result of a decline
in productivity.

In 1994, our collection yield increased 3 percent, despite a 9.5
percent decrease in our collection staffing.

In 1995, we continued to increase our collection yield by over 7
percent. While we are making progress, I will say the loss of our
compliance money last year may make it difficult for us to continue
to increase the yield in our productivity.

Before I conclude, Mr. Chairman, I would like to touch on two
things very briefly. One, I wanted to tell you about our efforts re-
garding contracting out of collection, of our activities as provided
in our appropriations budget for this year. Yesterday, we issued re-
quests for proposals and we intend to award up to five contracts
and to initially deliver about 125,000 cases relating to taxpayers
who are delinquent in paying their tax obligations. Based on an
evaluation of the contractors’ performance, additional cases may be
provided throughout the contract period.

Payments under the contract will be performance based. How-
ever, they will not be on a contingency fee. Contractors and their
employees will be subject to the disclosure laws, the Privacy Act,
as well as the Taxpayer Bill of Rights and the applicable sections
of the Fair Debt Collection Practices Act.

The startup date we hope will be 45 days from the contract
award and we are looking forward to seeing how this pilot com-
pares to the kinds of collection productivity initiatives we have un-
dertaken.

The other issue I would like to touch on very briefly relates to
the tax systems modernization discussion, particularly the elec-
tronic filing discussion that was had with the GAO. I think there
was a bit of a misunderstanding or perhaps maybe I misunder-


95

stringent rules that Commissioner Richardson mentioned as to the
use of taxpayer information.

There is a criminal penalty that runs along with that, and it’s
sort of hard for me to see how you can subject a private collector
to a criminal penalty applicable primarily to the misuse of taxpayer
information by an Internal Revenue employee. Maybe you can.

So that’s what they’ve tried to do, on the one hand. On the other
hand, they’ve tried to limit the amount of information going to the
private collectors.

Now, that will impede the collection process, as I attempted to
explain earlier.

Mr. Horn. Well, should they just, then, separate out those debts
that they are not contesting versus those debts that, the example
you gave, they have real problems and say, “IRS has the wrong in-
terpretation here,” so when it goes to the private collector, presum-
ably, it’s a debt where most of those questions have been resolved,
and it just isn’t collected?

Mr. ALEXANDER. It will go to the private collectors if the system
recently discussed here at this table of assigning the old ones, the
stale ones, the ones about to go bad to private collectors, it will be
those that IRS has been unable to collect.

Mr. Horn. That’s correct.

Mr. ALEXANDER. And that worries me for two reasons. First, is
if IRS can’t collect it, can a private collector do better? Well, it
would be interesting to find out.

Second, if IRS can’t collect it and a private collector does better,
what methods are the private collector using? Is that an invitation
to a private collector to apply lower standards that otherwise the
private collector would not apply.

I realize, of course, there are State statutes and various other
rules dealing with private collectors and regulating private collec-
tors and that private collectors are not subject to the old stereotype
of Bruno of Jersey City that we used to hear about and that I think
I may have mentioned in the recent past.

Sure, they're better than that. But still, is this a good idea and
in the national interest? If Internal Revenue is looking into it now,
your bill, H.R. 2238, which I commend you for bringing out, which
I think is very good, and I’m delighted to see has brought us some
support, would go a long way toward meeting the Nation’s needs
to try to collect overdue revenues without impairing rights.

Mr. Horn. Well, I appreciate that. Do we have any more ques-
tions from staff? Commissioner, it’s marvelous to see you again and
glad that you could make it to the hearing, and I wish you well.

Mr. ALEXANDER. Thank you, Mr. Chairman.

_Mr. Horn. You did a wonderful job when you were Commis-
sioner.

Mr. ALEXANDER. I tried.

Mr. Horn. We now have the next panel, which is panel 4, Donald
Korb, partner and chair of the Taxation Practice Group Thompson,
Hine and Flory and former assistant to the Commissioner of Inter-
nal Revenue in the marvelous period when they were trying to sim-
plify taxes on Capitol Hill, 1984 to 1986; and Ms. Shannon O’Toole,
the consultant for the county of Orange, CA, Bankruptcy on Real


‘CAROLYN B. MALONEY
Ye atm New Yom

sages Congress of the United States ° guerees

Bouse of Representatives
‘Washington, WE 20515-3214

Rep Carolyn B. Maloney -- Opening Statement
Hearing on Oversight of Intemal Revenue Service Financial Management

March 6, 1996

‘Thank you Mr. Chairman for holding this important hearing. 1 share your concern with
the financial management of the federal government. It is a fundamental issue which must be
addressed in these times of ever-greater budgetary restraint. The Chief Financial Officer Act of
1990 was a major initiative designed to help improve financial management in the federal
government and itis important that we continue vigorous oversight to ensure its implementation.

One of the requirements of the 1990 CFO Act is that the General Accounting Office audit
the Principal Financial Statements of the IRS. That report for fiscal year 1994 is very troubling,
and I look forward to both the GAO's presentation of it and IRS Commissioner Richardson's
response. The GAO reports that it was unable to complete its audit for FY 1994 because of
shortcomings in the accounting practices at the IRS, Perhaps most worrying is the fact that the
total revenue collected, $1.3 trillion, could not be reconciled to the accounts maintained in IRS
master file. For instance, the totals by type of tax for the financial statement came from Treasury
sources, rather than internal accounting systems; the IRS could not substantiate $2.1 billion in
‘non-payroll expenses because of a lack of documentation, and, the GAO could not account for
$6.5 billion in contingent liabilities claimed by the IRS. The IRS claims to have made
significant improvement on these and other accounting deficiencies since 1994. I look forward
to hearing about those improvements.

Lam also concerned with problems the GAO found with the IRS’s Accounts Receivable
‘These represent money owed to the federal government -~ namely to the taxpayer which have
not been collected, I have a longstanding interest in this issue, and have work with Chairman
Hom on the collection of non-tax delinquencies. The IRS estimates that the total uncollected
debt is $69 billion, but of that only $35 billion is collectable. The IRS is required to keep these
accounts open for 10 years and this debt often becomes uncollectible through bankruptcy or
death. The GAO found problems both in the estimates of this debt and in identifying whether or
not individual accounts were collectable.

Other issues to be examined today should include “browsing,” unauthorized examination
of taxpayer returns, and the progress of the IRS's Tax Modernization System. 1 look forward to
hearing from our distinguished witnesses on these and other issues at today's hearing. Thank
you Mr. Chairman,



183

IRS PROPERTY TAX LIEN RECOVERY PLAN
10 STEP PLAN

PLAN TO INCREASE TREASURY RECOVERIES

Presented by Shannon O'Toole
Former Resolution Trust Corporation

Department Head and Section Chief of Real Estate Disposition

PRESENTED TO THE HOUSE SUBCOMMITTEE
on

GOVERNMENT MANAGEMENT, INFORMATION AND TECHNOLOGY

HOUSE COMMITTEE ON GOVERNMENT REFORM AND OVERSIGHT

HEARINGS ON IRS FINANCIAL MANAGEMENT

March 6, 1996


7

stopped 1.2 million refunds totaling $3.2 billion. For 183 of 244, or 75 percent
of our sample of refund reversals, IRS was unable to provide support for who
canceled the refund, why it was canceled, and whether Treasury stopped the
refund check. Service center personnel informed us that they could determine
by a code whether the refund was canceled by an internal IRS process or by
the taxpayer, but, as a policy, no authorization support was required, nor did
procedures exist requiring verification and documentation that the related

refund was not paid.

With regard to controls over the processing of returns, we also found weaknesses.
During fiscal year 1994, IRS processed almost 1 billion information documents and
200 million returns. In most cases, IRS processed these returns correctly. However,
we found instances where IRS’ mishandling of taxpayer information caused additional
burden on the taxpayer and decreased IRS' productivity. In many cases, the
additional taxpayer burden resulted from IRS' implementation of certain enforcement
programs it uses to ensure taxpayer compliance, one of which is the matching
program. This program's problems in timely processing cause additional burden
when taxpayers discover 15 months to almost 3 years after the fact that they have

misreported their income and must pay additional taxes plus interest and penalties.


61

1. Correct Composition of Accounts Recelvable inventory

In 1990, Congress extended the time the IRS would be required to keep
accounts receivable on the books from 6 to 10 years. Thus, unlike accounts
receivable in the private sector, the IRS's Accounts Receivable Dollar Inventory
(‘ARDI’) is not a reflection of an annual underpayment of taxes, but includes current
receivables, plus a ten year carryover of unpaid taxes, along with accrued interest and
penalties.

At the end of FY 1995, IRS gross accounts receivable inventory equaled
$200 billion of which 28.5% or $56.9 billion reflected accrued interest and penalties.
This is a $29 billion increase over the FY 1994 balance. A significant portion of this
growth was due to additional accruals of interest and penalties, the extension of time
we must keep the receivables on the books from 6 to 10 years’, and to our non-filer
program. The non-filer initiative was started in 1992 to encourage taxpayers who
were not filing retums to get back into the system. While we realized the non-fler
program would increase our accounts receivable since many were not filing because
of an inability to pay their tax obligations in full, we believed it was more important to
get taxpayers filing again and then assist them with ways to meet their obligations by
expanding our installment agreement and offer in compromise programs.

The IRS gross accounts receivable inventory for compliance purposes is divided
into two components: Currently Not Collectible and Active Accounts Receivable.

? FY 1995 was the last year in which the ARDI would automatically increase
because of the extension of time we must keep accounts on the books from 6 to 10
years.

10


130

‘THE STRATEGIC PLAN

tt is essential to initiative the IRS Property Lien Recovery Plan to locate IRS liens levied
against real properties by utilizing county title companies and document recording systems to
identify and quantify those liens that are still collectible, and not recorded in the IRS records.

New, expanded technology, better techniques, policies and procedures need to be
developed as outlined in the attached Plan, for identifying, tracking and reporting secured
liens.

Increased efforts are needed to reshape the IRS workforce to meet the needs for
specialization skills and experience, to replace the “cradle to grave” present system.

THE VISION AND MISSION STATEMENT

Focus must be made by the IRS to take all lawful steps to enforce IRS lien statutes, rul
and regulations on a timely basis, to avoid allowing these lawful liens to expire and to be
written off as a loss to the Treasury.

Resources must be committee to develop new, expanded technologies and a database
system for tracking, monitoring, accounting for and reporting on all IRS property liens and
recoveries.

Increase the expertise and experience of IRS staff, who have historically been trained in
accounting techniques, to include those with technological and real property asset based
disposition knowledge and expertise.

‘THE TEN STEP PROGRAM TO IMPLEMENT THE IRS PROPERTY TAX LIEN RECOVERY

The attached Ten Step Plan sets forth the outline of Tasks, Policies and Procedures that
would turn around the present IRS lien program into one that provides f
fecovered revenue for the Treasury. The Ten Steps are summarized below:

1. Prioritize, strengthen and develop IRS Policy to exercise lien authority
for all unpaid taxes, when equity is sufficient to recovery all or a portion
of debtor's unpaid tax. RESEARCH and LOCATE IRS PROPERTY LIENS
THROUGH County Tax Recarder's Office or other focat authorities.

2. Develop policies, procedures and CENTRAL DATABASE for reporting and collecting
data for all IRS tax liens.

3. Improve and expand policies and procedures for determination of asset equity.

4. Develop policies and procedures for determination and approval process for
attachment/foreclosure/redemption action.

5. IRS determination that tax lien is appropriate action, or pass.

6. Notice is sent to central document control unit/CENTRAL DATABASE to log in the
real property tien.



114

EXHIBIT A

HOW IRS PROCESSES ITS
DELINQUENT TAX INVENTORY

The IRS uses a three-stage process to collect
delinquent taxes: Service Center notices and
correspondence, Automated Collection System contacts,
and Revenue Officer field investigations.

A. In the first stage, Service Centers mail
delinquent taxpayers a series of computer-
generated nctices (bills) demanding payment. In
most cases there are between three and five
notices sent to the taxpayer. Prior to sending
the final notice, the Service Center Collection
Branch searches IRS computer records for levy
sources (a levy is the seizure of a taxpayer's
property, including assets in the possession of
employers and financial institutions, such as
wages and bank deposits). The final notice is
sent by certified mail and informs the taxpayer
that failure to satisfactorily respond to the IRS
may lead to the filing of a Notice of a Federal
Tax Lien and/or a levy on assets of the taxpayer
in the possession of third parties. During the
notice process, IRS responds to any taxpayer
replies.

If the efforts of the Service Center do not
secure payment, accounts which exceed certain
dollar thresholds are transferred to the second

stage, called the Automated Collection System
(ACS) .*
1. The accounts that fall below the dollar

threshold have tax liabilities that the IRS
believes are so small that it is not
economical to pursue collection. The IRS
does not publicly disclose the current
criteria for such so-called ‘tolerance

cases." :
2. The accounts that fall below the dollar
threshold go into "deferred status." This

means that no further action will be taken
with respect to these accounts until some
other credit (such as a refund) shows up in
the system and that credit is offset against
the deferred amount. However, if the

2 Note that there are certain cases that bypass the ACS
stage and are sent directly to the districts for assignment to
Revenue Officers.


116

amount of tax liability, whether the
taxpayer is a first time delinquent or has
been delinquent in the past, anticipated
cost of collection, etc

a. The RWMS score is computed for each
module at the time the account becomes
delinquent. The module scores are
added together for the entity score.
The entity score changes as delinquent
modules are satisfied or additional
modules become delinquent for the
particular taxpayer.

Once the account is transferred to the Queue
of the appropriate IRS district, if the case
equals or exceeds the cutoff score
established for that district by its Chief,
Collection function, it will be assigned to
a Revenue Officer for contact. Those cases
which fall below the cutoff score for the
district will remain in the Queue until the
cutoff score is revised (i.e., adjusted to
satisfy current inventory requirements) or
the account is specifically called out of
the Queue.

a. Therefore at the Revenue Officer stage,
accounts are basically worked in order
of RWMS score. Thus, the higher scored
accounts are worked before the lower
scored accounts.

The number of accounts in the Queue that are
worked in any particular IRS district (there
are 63 districts today, but that number will
be reduced to 33 on October 1, 1996) is
dependent upon the resources available to
the Collection function in that district.
In districts such as Manhattan where there
are a significant number of accounts with
high RWMS scores but limited collection
resources, an account would have to score a
high RWMS' score before it leaves the Queue
and is assigned to a Revenue Officer, while
in other parts of the country, accounts with
lower RWMS scores could be assigned to a
Revenue Officer because the cutoff score in
the particular district is lower since more
collection resources are available in that
district.

Accounts that do not score high enough to be
assigned to a Revenue Officer remain in the
Queue until they move “up" in the line as

-3-


4

and, whether it should consider contracting out the responsibility
for recovering those debts to which it is unable to give its attention.

In today’s hearing, we are go'ng to explore the reasons underly-
ing the disclaimer of opinion by the GAO on the IRS's fiscal year
1994 financial statements.

We will review the IRS’s plan for improvement in developing ac-
curate financial information and adequate internal controls that
will ensure that errors are either prevented or detected quickly.

Our examination will include the adequacy of the IRS procedures
for processing delinquent tax inventory, collecting debts owed and
writing off uncollectible debts.

We will also assess the ability of the IRS’s information system
to produce reliable information. This includes the weaknesses in
general controls over the IRS computer system that have increased
the risk of fraud and diminished the reliability of the information
provided to Congress and others.

Today’s hearing includes several witnesses commenting on the
IRS financial management problems. Appearing today are: Gene L.
Dodaro, Assistant Comptroller General, Accounting and Informa-
tion Management Division, General Accounting Office.

The Honorable Margaret M. Richardson, Commissioner of the In-
ternal Revenue Service.

The Honorable Donald C. Alexander, former Commissioner of the
Internal Revenue Service during the Nixon, Ford and Carter ad-
ministrations, and now with Akin, Gump, Strauss, Hauer, & Feld
law firm. Mr. Alexander will provide a historical perspective on
IRS collection efforts since President Nixon’s administration.

The fourth panel will consist of Donald L. Korb, former Assistant
to the Commissioner under President Reagan and now with
Thompson Hine & Flory, and Ms. Shannon O’Toole, a former Reso-
lution Trust Corporation Department Head and Section Chief of
Real Estate Disposition Group.

Mr. Korb will be discussing IRS’s processing of its delinquent tax
inventory and other possible approaches to collecting tax dollars.

Ms. O'Toole will describe a proposal she has developed to im-
prove IRS tax lien recovery efforts.

We thank you all for joining us and look forward to your testi-
mony.

Subcommittees of the House Government Reform and Oversight
Committee have a tradition of swearing in all witnesses for hear-
ings, so, if I might, I would like each of you who will be testifying
to stand and raise your right hand for the oath.

[Witnesses sworn.]
fi Mr. Horn. The clerk will note that all the witnesses have af-

firmed.

Our practice is also to put the written testimony you have in the
record immediately after we introduce you and then generally we
limit most of the people to 5 minutes. I do not mind stretching it
this time because I think we can get through this in a few hours.
So if it takes you 10, OK, but do not read me your testimony.

I want you to look us in the eye and summarize it. And, you
know, I have said that in hearings and people get in there and they
sort of read like I was reading that statement and what you need
to do is get down to the basic points and then we have time for


93

The Subcommittee is to be commended for its interest in reducing delinquencies and improving debt-
collection activities of the government and, in particular, the Internal Revenue Service.

In its vitally important role as the Nation's chief debt collector, the Internal Revenue Service has come
a long way--in the right direction--in the last 20 years. IRS has long possessed very powerful tools
(some say weapons) to carry out its heavy responsibilities. IRS could levy on a taxpayer's bank account
or even put a delinquent taxpayer out of business by seizing the taxpayer's property. IRS was accused,
not without justification, of uneven enforcement, of doing too little for too long and then coming on
too strong. in certain areas of the country, collection enforcement was much stricter than in others.
Grade structure considerations called for delegation of responsibility and discretion to bag-carrying
revenue officers, and it is not surprising that different revenue officers applied different standards in
similar circumstances. Clearly IRS had a duty to re-examine its collection activities, to learn from the
private sector, to use the telephone, to work with rather than against taxpayers who were delinquent
in their tax obligations and to act early rather than late. On the other hand, IRS had a clear duty not to
permit the use of withheld taxes as working capital, and this is a frequent and recurring problem for
small business.

Congress has done much to enhance and protect taxpayers’ rights in the last decade, Also, the IRS has
made great strides in developing more uniform and reasonable treatment of taxpayers and in
substituting installment agreements (working with the taxpayer) for seizures (working against the
taxpayer). Similarly, levies against wages of delinquent individuals have been legislatively and
administratively altered, to the benefit of the system.

To collect the Nation's taxes, the IRS must be given the resources to do the job. Recent curtailment
in IRS's compliance budget threatens to undermine the strides that have been made in recent years
to see to it that our Nation's tax debts are collected, but collected in a reasonable, as well as an
effective, way.


38

Mr. Spratt. OK. And then just that aggregate amount is then
booked on some kind of deposit slip, I am converting this to terms
I can understand, for purposes of that day’s deposit.

Mr. Houtoway. Right. I mean, the deposit slip is what goes to
the bank, the deposit—just like you send the deposit to the bank—
goes to the bank with the money. And then they run those through
their system, and that system is basically a batch processing sys-
tem, where your return and the other things that go with it will
go and get processed. And if everything checks out over—I forget
what the period of time is—ultimately it will post to the master file
to your specific account, but initially on the recording of the receipt
of the cash, your account is not hit.

Mr. SpraTT. All right. How do you get from the journal to the
master file? Is it electronically derived from the batch processing
or does it require another step internally by the Internal Revenue
Service to post the journal to a master file?

Mr. HoutLoway. There are a couple of things that happen. The
return goes down one track, the receipt goes down another track,
and basically what happens is that stuff gets keypunched in, it is
usually batched in groups of 100. If the batch that yours happened
to be in is successfully posted, then you are on the way to master
file. If it does not and something kicks out, then you are probably
going to be held up somewhere in the process until they cure the
issue to perfect that batch and then you go to master file.

Mr. SPRATT. Well, now, to what extent is this problem a problem
of unreconciled accumulated rejects? In a banking business they
used to call that rolling rejects.

Mr. Houioway. Oh, I think there is no question that that is the
inherent problem that IRS has when we talk about the inability to
reconcile the total receipts collected to the master file, is that there
is an in process stream where moneys have been journalized to be
recorded basically as having been received based on we got the
money, but for whatever reason the individual tax receipt has not
posted to the master file for any number of reasons.

Mr. Spratt. But for the most part it is because they got kicked
out in the process.

Mr. Houioway. That is right. It was in a bad batch that got
kicked out, that somehow got delayed. There is a multitude of
things that could happen. It could get misposted. There is a variety
of things that could occur that create problems and that is the dif-
ficulty, is trying to figure out the total receipts number does not
equal what hit the master file for the period in question.

ir. SPRATT. My light is on, but let me ask you, is this a man-
power problem? Is it usually it requires some human attention to
work these rejects. Someboay has got to sit down and cognitively
think through this.

Mr. HouLoway. Oh, they have people that work them. I think
the fundamental problem with the revenue accounting system as
we see it, and this is where we have made a concerted effort to try
to help out is that IRS does not have that whole process docu-
mented to where they know the entire flow and one of the things
we have been working with them on since the last audit was to try
to get that process mapped out so we can figure exactly where
through that process the check could get stuck, in an effort to try


125

controls so that this program can go forward so that we can report
to Congress at any time at any moment how many dollars are out
there in this lien category, what status they're in, not allow an-
other 10-year lien to ever expire and to step into the redemption
period when there is adequate equity to go r it.

This 10-step plan is just a blueprint. It’s just a beginning. It’s
just an outline of what needs to be done but is really so simple.

With our population growing, this lien problem is not going to de-
crease. This problem is going to increase. As we heard earlier
today, as the efforts go from step 1, 2 to 3 for the IRS recovery,
normal steps, we’re increasing the cost of collections, the time.

The cost of money, today’s cost of money is being extended out
ears and years. That money could be in your hand today. It is a
ird in the hand today.

Instead of stretching it out over years and years where the value
of that money decreases but your collection efforts go on and on
and increase, that can be stopped in this area of ‘property tax liens.

I would like to see the attached IRS Property Tax Lien Recovery
Plan strongly recommended by this committee to the IRS to be
adopted. This plan should be made a major priority in restructur-
ing the IRS programs or other entities in deficiency to ensure that
no other IRS property tax liens are permitted to ever expire again
and increase the unnecessary losses for the national Treasury.

This plan is before you now. It can be implemented immediately
without another rule or law, and it is here for your consideration.
Thank you.

[The prepared statement of Ms. O’Toole follows:]


100

HOUSE COMMITTEE ON GOVERNMENT REFORM AND OVERSIGHT
SUBCOMMITTEE ON GOVERNMENT MANAGEMENT,
INFORMATION AND TECHNOLOGY

MARCH 6, 1996

STATEMENT OF DONALD L. KORB
THOMPSON HINE & FLORY P.L.b.
CLEVELAND, OHIO

Mr. Chairman and Distinguished Members of the Subcommittee on

Government Management, Information and Technology:

Thank you for the opportunity to appear here today to explain
how the Internal Revenue Service processes its delinquent tax
inventory. I ama partner in the Cleveland office of the law firm
of Thompson Hine & Flory P.L.L. and the Chair of the firm's
taxation group. From 1984 through 1986, I served as Assistant to
the Commissioner of Internal Revenue, and in that capacity, among
other things, I was the overall coordinator of the IRS's
participation in the legislative process that resulted in the Tax
Reform Act of 1986. Since last year, I have represented
Diversified Collection Services, Inc., which is a national
collection agency specializing in the collection of defaulted.
Federal student loan debt. More recently, I have been retained by
a coalition of private debt collection firms to advise them on ways

to improve Federal debt collection.


41

serious problems, they are both on our high-risk list, but I think
in the IRS’s case we can get there faster.

Mr. Hottoway. I think clearly on the administrative side, if I
were to doa guick analogy, it would be at IRS you can see the light
at the end of the tunnel. In DOD, I do not think you even know
if you are in the tunnel and I think that is the difference because
clearly the things at IRS are fixable and there are clear cures for
those things and a lot of it is just determination and putting good
controls in place and follow through to make sure Feople do their
jobs right and holding them accountable when they do not.

Mr. Horn. Let me ask you, on the famous 59 recommendations
we have been talking about, last year you found 13 had been imple-
mented and you were satisfied with that and you are in the middle
of the process to see how many more are implemented. I am curi-
ous if you have a sense that the most significant of your 59 rec-
ommendations were implemented first or are they simply being im-
plemented in chronological order or are they simply being imple-
mented in the easiest ones first and they are not tackling the big
stuff that might have a greater effect?

What is your reading on that?

Mr. Doparo. I think clearly the more difficult recommendations
to address and to fix are the ones that are still outstanding. Many
of the 13 involve putting in place policies and procedures which
they were able to quickly move and we noted their progress for
doing that. But I think the outstanding items are the more knotty
problems that need to be resolved.

Mr. Hot.toway. But I think the real important thing to note
here, and it goes back to our premiere recommendation which is
the need for a clear plan with clear time tables, with clear
deliverables, with clear accountability, and then hold people ac-
countable if they do not get it done. I mean, the best example is
the reconciliation issue. I mean, that issue dates back to the first
audit. Last year, we were told that it was done and we went and
looked, it was not. This year, they have made progress but the
problem is it is, I do not want to use the word ad Troe, but they
are doing some necessary steps, but there still is not a clear plan
and timetable for deliverables to finish it and I think the impor-
tance of that is it creates focus, it creates determination, and it
gives Congress the opportunity to look at it and say did they do
what they said they were going to do.

And I think it is imperative that that be done because clearly
they have made strides, they brought in a contractor on the rec-
onciliation issue, they took a first step to fix part of the problem
but they still have not resolved the reconciliation. And at least the
have not offered to us a firm time table for at what point that will
be resolved.

Mr. Horn. We mentioned the electronic filing and it did not quite
meet expectations, but you feel confident that they are getting
there. at was the main problem with the first plan? It seems to
me, as I remember, one of the incentives was you would get your
refund much more rapidly. Did that seem to work or did you even
examine that?

Mr. Doparo. In terms of? I am not——

Mr. Horn. Using electronic filing.