Report to the Chairman, Subcommittee

on Oversight, Committee on Ways and

Means, House of Representatives

United States General Accounting Office

GAO

May 2002 TAX

ADMINISTRATION

Impact of Compliance

and Collection

Program Declines on

Taxpayers

GAO-02-674
Page i GAO-02-674 Compliance and Collection Program Declines

Letter 1

Results in Brief 3

Background 5

Compliance and Collection Programs Showed Declines, with

Billions of Unpaid Taxes Not Pursued 9

Taxpayers Face Reduced Sanctions for Noncompliance and

Reduced Incentives to Voluntarily Comply 17

IRS’s New Strategic Assessments Address Tax Noncompliance but

Could Provide More Quantitative Information 20

Conclusions 25

Recommendation 26

Agency Comments 26

Appendix I Objectives, Scope, and Methodology 28

Scope and Methodology 28

Appendix II Comments from the Internal Revenue Service 39

Appendix III GAO Contacts and Staff Acknowledgments 41

GAO Contacts 41

Acknowledgments 41

Tables

Table 1: Percentage Changes in Six IRS Compliance Programs,

Fiscal Years 1996–2001 10

Table 2: Percentage Changes in Two IRS Collection Programs,

Fiscal Years 1996–2001 12

Table 3: Number of Enforcement Sanctions and Proportion of

Sanctions Used to Compel Payment of Delinquent Taxes,

Fiscal Years 1996–2001 13

Table 4: Description of IRS Compliance and Collection Programs 29

Table 5: Definitions of Performance Indicators 30

Figures

Figure 1: Overview of IRS’s Compliance and Collection Process 7

Contents
Page ii GAO-02-674 Compliance and Collection Program Declines

Figure 2: IRS’s Strategic Planning Process 22

Abbreviations

ERIS Enforcement Revenue Information System

GAO General Accounting Office

IRS Internal Revenue Service
Page 1 GAO-02-674 Compliance and Collection Program Declines

May 22, 2002

The Honorable Amo Houghton

Chairman, Subcommittee on Oversight

Committee on Ways and Means

House of Representatives

Dear Mr. Chairman:

For the last several years, Congress and others have been concerned about

declines in the Internal Revenue Service’s (IRS) compliance and collection

programs. Many view these programs—such as audits to determine

whether taxpayers have accurately reported the amount of taxes that they

owe and collection follow-up with taxpayers who have not paid what is

owed—as critical for maintaining the public’s confidence in our tax

system. Taxpayers’ willingness to voluntarily comply with the tax laws

depends in part on their confidence that their friends, neighbors, and

business competitors are paying their share of taxes.

As we previously reported, some declines in compliance and collection

programs have been dramatic.1

 For example, from fiscal year 1996 to fiscal

year 2000, the number of individual tax returns audited by IRS declined by

over 60 percent. Furthermore, IRS was unable to pursue many delinquent

taxpayers, deferring collection action on billions of dollars in unpaid

taxes.

Because of concerns about declines in IRS’s compliance and collection

programs, you asked us to assess the declines’ overall impact on

taxpayers. You asked that in making this assessment, we examine IRS’s

compliance and collection programs as a whole, recognizing that the

amount of unpaid taxes identified by the compliance programs largely

determines the workload of the collection programs. Accordingly, we

agreed to

 1

See U.S. General Accounting Office, IRS Modernization: Continued Improvement in

Management Capability Needed to Support Long-Term Transformation, GAO-01-700T

(Washington, D.C.: May 8, 2001).

United States General Accounting Office

Washington, DC 20548
Page 2 GAO-02-674 Compliance and Collection Program Declines

• describe the changes since 1996 in IRS’s compliance and collection

programs, including the extent of collection deferrals, and the factors

contributing to the program changes;

• determine how the program changes have affected taxpayers, including

their compliance with tax laws, the buildup of penalties and interest,

and the length of time before collection actions are initiated; and

• determine how IRS addressed the program changes, including their

effect on taxpayers, in its strategic assessments.

The preparation of strategic assessments is a first step in IRS’s new

strategic planning, budgeting, and performance management process. In

the assessments, IRS’s operating divisions are to provide the

commissioner and his senior management team with information on

significant trends, issues, and problems facing the divisions and present

proposals for addressing them.

To measure the change in IRS’s compliance and collection programs, we

focused on the performance of eight major programs from fiscal years

1996 to 2001. In general, the six compliance programs were designed to

(1) check for math errors and unpaid balances during returns processing,

(2) determine taxes due from apparent nonfilers detected through

computer matching, (3) determine taxes due from apparent

underreporters detected through computer matching, (4) audit tax returns

filed by individuals, (5) audit tax returns filed by corporations, and

(6) audit other tax returns such as estate and gift returns. For taxpayers

who are delinquent in paying taxes owed, IRS’s collection programs

pursue collection through (1) telephone contacts with the taxpayers and

(2) personal visits with the taxpayers by IRS field staff.

To measure changes across these eight programs, we compiled data on

performance indicators that were common to the programs’ operations

and that, in the aggregate, would provide an overview of the long-term

direction of IRS’s compliance and collection programs. The indicators

show changes in

• workload, such as tax returns filed and therefore available for audit or

tax delinquencies assigned to collection;

• coverage, such as the proportion of tax returns that were audited;

• cases closed, such as the number of apparent nonfiler cases in which

IRS made a determination of taxes due;

• staff time devoted to a program;

• productivity, such as the number of collection cases closed per staff

hour;
Page 3 GAO-02-674 Compliance and Collection Program Declines

• amount of unpaid taxes identified by compliance programs or

collected by collections programs; and

• percentage of unpaid taxes resolved by full payment or alternative

arrangement.

Appendix I contains a detailed discussion of the scope and methodology of

the assignment, including a detailed description of the performance

indicators used and random samples selected to analyze taxpayer

delinquencies and timing of collection actions. Although most data in the

report describe changes between 1996 and 2001, we reviewed interim-year

data to assure that significant changes were not overlooked. We did our

work between October 2000 and April 2002 and in accordance with

generally accepted government auditing standards.

Our indicators showed large and pervasive declines in 5 of the 6

compliance programs (the exception was returns processing) and in both

collection programs between fiscal years 1996 and 2001. For example,

• coverage for the audit and matching compliance programs declined by

29 percent to 69 percent;

• staffing and cases closed declined for the five audit and matching

programs;

• unpaid taxes that were identified declined in four of the five audit and

matching programs; and

• coverage by the telephone and field collection programs declined by

15 percent and 45 percent, respectively.

The decline in collection coverage reflected the collection programs’

inability to work a growing proportion of the delinquent cases referred

from the compliance programs. In response, by fiscal year 2001, IRS was

deferring collection action on about one out of three assigned

delinquencies. We estimate that by the end of fiscal year 2001, IRS had

deferred collecting taxes from about 1.3 million taxpayers2

 who

 2

Because our estimates come from random samples, there is some sampling error

associated with them. We express our confidence in the precision of our results as a 95

percent confidence interval around the estimate. All numerical estimates other than

percentages have sampling errors of ±5 percent or less of the value of those numerical

estimates, unless otherwise shown as footnotes to the report text. All percentage estimates

from the samples have sampling errors of ±5 percentage points or less, unless otherwise

shown as footnotes to the report text.

Results in Brief
Page 4 GAO-02-674 Compliance and Collection Program Declines

collectively owed about $16.1billion.3 IRS officials said that absent

significant operational change, they had little expectation of reopening

many deferred collection cases.

A number of factors contributed to the declines in the programs and in

collection coverage, including declines in overall IRS staffing (about 8

percent), increased workload, and increased compliance and collection

procedural controls mandated by Congress to better safeguard taxpayer

interests. Also, in response to congressional mandates to improve

taxpayer service, IRS temporarily reassigned some compliance and

collection staff to activities such as answering taxpayer questions.

Additionally, IRS officials said that compliance and collection resources

were constrained by the need to commit resources to process tax returns

and issue refunds.

The declines in IRS’s compliance and collection programs affected

taxpayers in several ways.

• The likelihood that taxpayer noncompliance would be detected and

pursued by IRS declined. For example, coverage in the nonfiler

program declined by 69 percent by the end of fiscal year 2001.

• The length of time that taxpayers owed back taxes at the time that they

were assigned to collection increased between 1996 and 2001, although

IRS intended that by deferring collection action on some older

collection cases, it could get to newly assigned cases more quickly.

• The amount of penalties and interest continued to accumulate on

deferred collection cases, making future payment increasingly

demanding if subsequently pursued by IRS.

Taken together, these changes have reduced the incentives for voluntary

compliance, a concern of IRS senior managers. Also, some available, but

very limited, data suggest that voluntary compliance may have begun to

deteriorate. For example, the number of apparent individual nonfilers

increased about three and one-half times faster than the individual tax

filing population.

The strategic assessments, which were prepared to provide a basis for IRS

senior managers to decide on significant program changes in IRS dealings

with individual and small business taxpayers, identified the risk of

 3

The 95 percent confidence interval is $14.8 billion to $17.4 billion.
Page 5 GAO-02-674 Compliance and Collection Program Declines

declining compliance as a major trend, issue, or problem for IRS. These

assessments, part of IRS’s new strategic planning, budgeting, and

performance management process, also proposed a number of compliance

and collection initiatives to address noncompliance. The assessments

could not quantify the impact that the initiatives may have on taxpayer

compliance, because IRS has not yet finished implementing a system for

measuring taxpayer compliance. However, as a partial substitute for such

information, the assessments could have provided quantitative estimates

of the impacts of the initiatives on compliance and collection programs

and the gap between them.

To better assure that the assessments promote informed strategic decision

making, we are recommending that the commissioner of internal revenue

reexamine the extent to which some quantitative information on the

impact of proposed program changes should be included in strategic

assessments.

In a letter dated May 13, 2002, the IRS commissioner agreed with our

recommendations. (See p. 26 for a discussion of agency comments, which

are reprinted in app. II.)

Under our voluntary tax system, taxpayers are responsible for filing tax

returns that report the full amount of taxes owed (referred to as selfassessment of taxes) as well as pay any taxes that are due. IRS has

established eight major compliance and collection programs to check on

taxpayer compliance with these responsibilities and to initiate collection

action if payment is not received. A descriptive overview of these

compliance and collection programs is shown in figure 1. (A detailed

description appears in table 4 in app. I.)

In general, the compliance programs were designed to assure that

taxpayers fully and accurately report and pay the amount of taxes that

they owe to IRS. As shown in figure 1, IRS’s compliance checks begin

when taxpayers file their tax returns. As returns are received and

processed, they are checked for errors (e.g., math errors and omitted

schedules) and unpaid balances. After processing, a tax return may also be

selected for review by other compliance programs. Two of these

compliance programs use computers to analyze information available to

IRS (e.g., earnings on bank deposits) to detect taxpayers who have not

filed tax returns or taxpayers who have underreported the amount of taxes

owed. IRS may also audit the tax returns filed by individuals, corporations,

and others, such as estates, to determine whether the correct tax has been

Background
Page 6 GAO-02-674 Compliance and Collection Program Declines

reported and paid. At this point in the compliance process, taxpayers may

be asked for records to substantiate their returns. If the compliance

programs identify unpaid taxes, IRS makes the tax assessments and

requests the taxpayers to make the appropriate payment.4

 If payment is

not received, IRS sends a series of collection notices to taxpayers

demanding payment of the assessment.

If taxpayers become delinquent—if they do not pay their taxes after being

sent collection notices—IRS may initiate collection action through its

telephone and field collection programs. In addition to requesting payment

from delinquent taxpayers, these programs research the taxpayers’ ability

to pay their tax debts and may use sanctions, including levies, liens, and

seizures, to obtain payment.5

 More-complex unpaid assessments are

referred from telephone collection to field collection.

 4

In general, IRS sends taxpayers a written notice that additional tax will be assessed and

provides 90 days for them to respond. The proposed tax is automatically assessed if the

taxpayer does not respond or does not file an appeal.

5

Under the Internal Revenue Code, “levy” is defined as the seizure of a taxpayer’s assets to

satisfy a tax delinquency. IRS differentiates between the levy of assets in the possession of

the taxpayer (referred to as “seizure”) and the levy of assets, such as bank accounts and

wages, which are in the possession of third parties, such as banks or employers (referred to

as a “levy”). A lien is a legal claim, filed in accordance with state property law, that attaches

to property to secure payment of a debt.
Page 7 GAO-02-674 Compliance and Collection Program Declines

Figure 1: Overview of IRS’s Compliance and Collection Process

Source: GAO analysis of IRS information.

Beginning in fiscal year 2001, IRS reorganized into four operating

divisions, each responsible for administering tax law for a set of taxpayers

with similar needs. By reorganizing in this manner, IRS sought to establish

clearer lines of responsibility and accountability for improving service to

taxpayers and resolving their tax problems. Through such improvements,

IRS expected to better enable taxpayers to comply with the tax laws.

The two largest divisions in terms of staff and number of taxpayers

covered, and the primary focus of this report, are the small business

division and the wage and investment division. The small business division

is responsible for individuals who are fully or partially self-employed and

for businesses with assets up to $10 million. The wage and investment

division is responsible for individuals who are not self-employed (e.g.,

Identifies

taxpayers who

did not make full

payment or

made errors and

omissions in

computing their

tax liabilities

Returns

processing

IRS

Collection programs:

If timely payment is not 

made, IRS follows up 

with taxpayers

Compliance programs:

Unpaid taxes identified, tax assessments made, and

payment requested

Nonfiler

Identifies taxpayers

who have not, but

should have, filed

tax returns

Underreporter

Identifies taxpayers 

who have filed, but 

underreported, their

tax liability

Individual

audit

Examines individual

returns for compliance

with law

Corporate

audit

Examines corporate

returns for compliance

with law

Other

audit

 Examines excise,

 employment, estate,

 and gift tax returns 

 for compliance with

 law

?

?

?

TAX

ON LINE

OR

Tax return

filed

Pursues collection

via phone contacts

with delinquent

taxpayers

Telephone

collection

Field collection

 Involves personal visits 

 by IRS staff to 

 delinquent taxpayers and

 in-depth investigations

 of the taxpayers' ability

 to pay tax debts. 
Page 8 GAO-02-674 Compliance and Collection Program Declines

wage earners). The other two divisions are responsible for large and

midsized businesses and for tax-exempt and government entities.

In general, the IRS operating divisions are responsible for managing the

daily operations of the eight major compliance and collection programs, as

appropriate for their taxpayers. In some instances, however, the programs

are consolidated in one division or two divisions. For example, the field

collection program is housed within the small business division and the

telephone collection program is split between the small business division

and the wage and investment division.

The operations of the compliance and collection programs differ from

each other in many respects. Some of the programs (e.g., returns

processing and underreporter programs) rely on automation and deal with

millions of taxpayers. Some (e.g., corporate audit) are highly labor

intensive and deal with far fewer taxpayers. Others (e.g., the nonfiler

program) are a combination of automated programs and labor intensive

investigations.

Although day-to-day management of IRS’s compliance and collection

programs is the responsibility of the operating divisions, the commissioner

and his senior management team maintain responsibility for making

decisions on major operational changes, allocating resources within IRS,

and developing agencywide strategic plans. The process for making these

decisions starts with the operating divisions’ preparing strategic

assessments that report on major trends, issues, and problems facing the

divisions and proposals for dealing with them. These decisions are subject

to public oversight. The IRS Restructuring and Reform Act of 19986

 (IRS

Restructuring Act) established an IRS oversight board, in part to assist

Congress in reviewing and approving IRS’s budget and strategic planning

decisions.

 6

P.L. 105-206.
Page 9 GAO-02-674 Compliance and Collection Program Declines

Overall, our analysis showed significant and pervasive declines in IRS’s

compliance and collection programs, as measured by indicators such as

those covering staffing, work completed, and work outcomes from fiscal

year 1996 to fiscal year 2001. Moreover, an increasing gap between

collection workload, stemming from assessments made by compliance

programs, and collection case closures has led IRS to defer taking action

to collect on billions of dollars of tax delinquencies. A number of factors

have contributed to these declines. These factors include decreases in

overall staffing, decreases in compliance and collection staffing, decreased

productivity of the remaining compliance and collection staff, increased

compliance and collection procedural controls to better safeguard

taxpayer interests, temporary details of compliance and collection staff to

taxpayer assistance work, and constraints imposed by the need to process

returns and issue refunds.

From fiscal year 1996 through fiscal year 2001, most compliance programs

showed significant declines in the amount of staff time expended on

compliance work, in the number of compliance cases closed, and in the

proportion of the workload reviewed to determine whether additional tax

assessments were warranted (i.e., coverage). About half of the programs

also saw declines in the productivity of the compliance staff (i.e., case

closures per hour of staff time), in the amount of unpaid taxes identified,

and in the percentage of unpaid taxes resolved (i.e., the proportion of the

unpaid taxes collected without involving the two collection programs).

While the declines were not universal, they were pervasive, as illustrated

by the shaded areas in table 1. The declines occurred over a period when

the programs’ workload (e.g., the number of returns filed, apparent

nonfilers, or apparent underreporters) was increasing, as also shown in

table 1.

Compliance and

Collection Programs

Showed Declines,

with Billions of

Unpaid Taxes Not

Pursued

Compliance Programs

Showed Declines in

Staffing and Case

Outcomes
Page 10 GAO-02-674 Compliance and Collection Program Declines

Table 1: Percentage Changes in Six IRS Compliance Programs, Fiscal Years 1996–2001

Performance indicators

Returns

processing Nonfiler Underreporter Individual audit Corporate audit Other audit

Workload +9 +34 +25a +10 +14 +4

Coverage n/ab–69 –29a–63 –60 –59

Cases closed +9 –58 –10c–59 –55 –58

Staff time +7 –57 –20 –41 –14 –18

Productivity +2 –1 +13c –31 –47 –48

Dollars of unpaid taxes

identified

+21 –2 +33 –43 –20 –11

Percentage of unpaid

taxes resolved

—d–12 –2 +68 +29 –23

Note: See appendix I for a description of the trends and data compilation.

a

Fiscal year data were not available. The trend analysis was based on the filing year of underreporting

tax returns.

b

Since all tax returns must be processed, the coverage indicator is not applicable. However, the

amount of work done per return processed has expanded. During the analysis period, returns

processing was assigned additional responsibility for dealing with certain types of erroneous claims

for tax credits that had previously been handled by its individual audit staff. Based on available data,

we estimate that the additional responsibilities increased returns processing error–related work by

about 7 percent.

c

The analysis period covers fiscal years 1997 through 2001; data for fiscal year 1996 were not

available.

d

Less than 1 percent.

Source: GAO review of IRS data.

Compliance coverage fell notably for all compliance programs except

returns processing. The declines ranged from about 29 percent to about 69

percent in the five audit and matching compliance programs. Further, the

number of cases closed by these programs declined by about 55 percent or

more, with the exception of the underreporter program, which declined by

about 10 percent.

Also, these five compliance programs generally experienced marked

declines in the staff time committed to compliance work and, with one

exception, the productivity of staff in closing cases. According to the

underreporter program staff, the increased use of automation enabled the

program to increase productivity but not sufficiently to maintain coverage.

In general, the amount of unpaid taxes identified by these compliance

programs did not decline as much as the number of cases closed. In two of

the six compliance programs, the amount of unpaid taxes identified

increased. The data available to us do not make clear the extent to which
Page 11 GAO-02-674 Compliance and Collection Program Declines

this increase may represent a change in the type of cases worked,

increased levels of noncompliance by taxpayers, or other factors,

including inflation.7

For this period, the data also show a mixed picture with respect to the

percentage of unpaid taxes resolved—that is, the percentage of the

compliance assessments that the compliance programs collect at the

conclusion of their work, without referral to telephone or field collection.8

The individual audit and corporate audit programs tended to collect a

greater proportion of the tax assessments in fiscal year 2001 than in fiscal

year 1996, while the nonfiler, underreporter, and other audit programs

collected a somewhat reduced proportion of the assessments. In general,

the table indicates that the programs that showed the biggest gains in the

proportion of unpaid taxes collected also showed the largest declines in

the amount of unpaid taxes identified. For example, while the individual

audit program showed a 68 percent increase in its collection rate, it also

experienced a 43 percent decline in the amount of unpaid taxes identified.

Overall, there were almost universal declines in the two collection

programs’ performance between fiscal years 1996 and 2001, as indicated

by the shaded areas in table 2. While collection workload (i.e., the number

of delinquencies assigned to collection) declined somewhat as a result of

the reduced levels of compliance work, the programs’ capacity to close

collection cases—such as by securing payment or completing sufficient

analysis to determine that payment cannot be made at that time—declined

much more.

 7

If adjusted only for inflation (as measured by the price indexes for gross domestic

product), for an individual underreporting income at the same rate on a tax return filed in

1996 compared with one filed in 2001, the dollar amount of the unpaid tax would increase

by about 9 percent.

8

In general, payment is requested at the time that any IRS compliance program determines

that additional taxes are due.

Collection Programs

Showed Declines in

Workload, Results, and

Staffing
Page 12 GAO-02-674 Compliance and Collection Program Declines

Table 2: Percentage Changes in Two IRS Collection Programs, Fiscal Years 1996–

2001.

Performance indicators

Telephone

collection

Field

collection

Workloada–24 —b

Coverage –15 –45

Cases closed –36 –45

Direct staff time –12 –28

Productivity –27 –24

Dollars of unpaid taxes collected –15 –7

Percentage of delinquencies resolved 6 —b

a

Cases referred from telephone collection to field collection were included as field collection workload.

b

Less than 1 percent.

Source: GAO review of IRS data.

Cases closed declined by over 36 percent, reflecting significant declines in

both staff time and productivity, as shown in table 2. In turn, the amount

of unpaid taxes collected by the two programs declined, but not as steeply

as did the number of cases closed. The percentage of case closures that

resulted in resolution of delinquencies, either through immediate payment

or through installment arrangements, stayed roughly the same, with no

change for field collections and a 6 percent increase for telephone

collections

Another indicator of the change in the telephone and field collection

programs is IRS’s decreasing use of enforcement sanctions, both in

absolute numbers and as a proportion of closed collection cases. The

number of liens, levies, and seizures dropped precipitously between fiscal

years 1996 and 2000 and then increased somewhat during fiscal year 2001.

Even with this change, however, table 3 shows that the number of levies

and seizures remained 78 and 98 percent below 1996 levels, respectively.

Also, when considered as a proportion of closed collection cases, the use

of levy and seizure sanctions declined by 64 and 96 percent between fiscal

years 1996 and 2001, as shown in table 3. The use of liens showed the most

significant turnaround, but as of 2001, the number of lien filings was down

43 percent and as a percentage of case closures was down 6 percent.

Use of Collection Enforcement

Sanctions Decreased
Page 13 GAO-02-674 Compliance and Collection Program Declines

Table 3: Number of Enforcement Sanctions and Proportion of Sanctions Used to

Compel Payment of Delinquent Taxes, Fiscal Years 1996–2001

Number of enforcement sanctionsa

As a proportion of closed

cases

Sanction 1996 2001

Percentage

change 1996 2001

Percentage

change

Lien 750,225 428,376 –43 15 14 –6

Levy 3,108,926 674,080 –78 62 22 –64

Seizure 10,449 234 –98 —b—b–96

a

For 2000, the number of liens, levies, and seizures were 287,516; 219,778; and 74; respectively.

b

Less than 1 percent.

Source: GAO review of IRS compliance and collection program data.

By March 1999, collection officials recognized that changes were needed.

Their case inventory of delinquent accounts was growing and aging, and

the gap between their workload and their capacity to complete work was

increasing. They recognized that they could not close all collection cases,

and they believed that they needed to be able to deal with taxpayers more

quickly, particularly taxpayers who were still in business and owed

employment taxes.9

 The officials believed that getting to these

delinquencies quickly, before they became unmanageable to the taxpayers,

would make collection easier and faster.

In response, collection managers introduced a new collection case

selection system. The selection system delivered to collection staff

delinquencies that met newly established collection priorities based on

delinquency amount and recency, with priority given to employment tax

over income tax delinquencies and to taxpayers who contacted IRS to

resolve their delinquencies. The system also periodically reviewed cases in

telephone collection and field collection backlog and automatically purged

those that met certain aging criteria as a result of having been passed over

for more recent delinquencies. The automatic purging was accomplished

by closing the collection cases as not collectible. This had the effect of

 9

IRS considers employment tax compliance to be among the most challenging issues for

small business, since delinquent tax can rapidly compound beyond the employer’s ability to

pay. See U.S. General Accounting Office, Tax Administration: IRS’s Efforts to Improve

Compliance with Employment Tax Requirements Should Be Evaluated, GAO-02-92

(Washington, D.C.: Jan. 15, 2002).

Increasing Gap between

Compliance and Collection

Capacity Has Led IRS to

Defer Collection Action on

Billions of Dollars in Tax

Delinquencies
Page 14 GAO-02-674 Compliance and Collection Program Declines

deferring collection action, in that IRS maintained the right to reinitiate

collection action.

Once collection action has been deferred, however, two conditions must

be met before IRS will consider reopening a collection case, according to

IRS officials. The two conditions are (1) if the taxpayer becomes

delinquent again or if IRS receives information indicating that the taxpayer

had additional assets that could help pay off the delinquency and (2) if IRS

finds the resources to work the collection cases. The taxpayers will,

however, be sent annual notices of taxes due and will be subject to having

any refunds from subsequently filed tax returns offset by IRS to cover

unpaid taxes. Also, IRS will continue to monitor the deferred collection

accounts for possible collection action until IRS’s statutory right to collect

the taxes expires, generally 10 years after taxes are assessed.

Even though IRS has systems for monitoring deferred collection cases, the

senior IRS officials responsible for managing collection programs

indicated that, absent significant operational changes, they had little

expectation that a telephone or field collection case would be reopened

for these tax debts alone once collection action had been deferred.

On the basis of our random sample of unpaid tax accounts, we estimate

that by the end of fiscal year 2001, after the deferral policy had been in

place for about two and one-half years, IRS had deferred collection action

on the tax debts of an estimated 1.3 million taxpayers. We also estimate

that these 1.3 million taxpayers owed about $16.1 billion10 in unpaid taxes,

interest, and penalties that originated from assessments by all six

compliance programs.11 By fiscal year 2001, IRS was deferring collection

action on tax debts at a rate equal to one of three new delinquencies

assigned to the collection programs.

While the amounts owed by these taxpayers were not inconsequential, we

found that, consistent with IRS’s stated collection deferral priorities, these

taxpayers owed less and had been delinquent longer than other delinquent

taxpayers. We estimate that the median amount owed by the taxpayers for

 10The 95 percent confidence interval is $14.8 billion to $17.4 billion.

11We estimate that about 34 percent of the assessments were originated by the nonfiler

program, about 34 percent by the returns processing program, about 13 percent by the 3

audit programs, about 7 percent by the underreporter program, and about 11 percent by

other sources, such as penalties.
Page 15 GAO-02-674 Compliance and Collection Program Declines

whom collection action was deferred was about $4,500,12 compared with

$5,50013 for other delinquent taxpayers in the collection population. Also,

the taxpayers for whom collection action was deferred tended to have

been delinquent for a longer period of time—about an estimated 5.6 years

versus an estimated 3.9 years.

A number of factors contributed to the decline in compliance and

collection programs. Generally, IRS faced overall staffing declines while it

confronted several competing and growing workload demands. Overall,

• aggregate staffing, measured by full-time equivalents, was about

107,000 in fiscal year 1996 and about 98,000 in fiscal year 2001—about

an 8 percent decline;

• individual income tax returns filed increased from about 119 million in

fiscal year 1996 to about 130 million in fiscal year 2001—about a

9 percent increase; and

• business income returns (corporate and partnership), which are filed

by taxpayers that have more complex dealings with IRS, increased by

17 percent, from 6.5 million returns in 1996 to 7.6 million returns in

2001.

While overall staffing declined about 8 percent, the impacts on almost all

of the compliance and collection programs were generally much larger, as

shown in tables 1 and 2. According to IRS senior officials, to assure that

the tax returns filed by taxpayers are processed timely and that timely

payments are made to taxpayers owed refunds, IRS first allocated its

resources to meet the returns processing program’s increasing workload

before it funded the other compliance and collection programs. Also, the

officials provided data that showed that at the beginning of the six-year

period, IRS was adjusting down from compliance and collection staffing

increases during the late 1980s and early 1990s. Comparing IRS data on

professional staff levels for audit and field collection in fiscal year 2001

with data on the pre-1987 buildup shows a decline of about 21 percent.

 12We also estimate that the average amount of the tax debts was about $12,400, with a 95

percent confidence interval of $11,400 to $13,400.

13We also estimate that the average amount of the tax debts was about $28,300, with a 95

percent confidence interval of $26,900 to $29,700.

Declining Staff and

Productivity and an

Emphasis on Taxpayer

Service Contributed to

Compliance and Collection

Declines
Page 16 GAO-02-674 Compliance and Collection Program Declines

Also during this period, the IRS Restructuring Act, enacted in 1998,

provided additional rights for taxpayers and imposed additional

administrative responsibilities on IRS’s compliance and collection

programs. For example, prior to IRS’s using enforcement sanctions to

collect unpaid taxes, additional notifications and opportunities for appeals

were required to be provided to taxpayers. Also, compliance and

collection staff were required to keep records of contacts with third

parties and to make taxpayers aware of such contacts. Further, collection

staff were required to prepare additional documentation, such as

certifications that they had verified that the taxes were past due and that

the sanctions were appropriate given the taxpayers’ circumstances, and to

submit that documentation to a higher-level manager for review and

approval. Deviations from this and other requirements of the act may

subject compliance and collection staff to disciplinary action, including

mandatory termination of employment, for actions such as willfully not

obtaining certain required approval signatures or for actions constituting

taxpayer harassment.14 According to some senior officials, the potential for

disciplinary action has resulted in IRS compliance and collection staff’s

working more slowly and hesitantly, spending much more time

documenting their actions.

In addition, the act mandated that IRS improve service to taxpayers, such

as telephone assistance; following this mandate, IRS undertook a major

organizational restructuring and modernization effort. In response to these

demands, and with a declining pool of staff resources, IRS reallocated staff

from compliance (other than returns processing) and collection programs

to provide additional support to taxpayer assistance services. Some of the

reallocation was accomplished by allowing attrition to occur without

hiring replacement staff for compliance and collection programs, and

some was accomplished by temporarily detailing compliance and

collection staff to other IRS programs. For example, from fiscal year 1996

to fiscal year 2000, the percentage of field collection professional staff

time detailed to supplement taxpayer assistance staff during the tax filing

season—in large part assisting taxpayers who requested assistance at IRS

 14The act required that the commissioner terminate the employment of an IRS employee if

there is a final administrative or judicial determination that the employee committed any 1

of 10 acts or omissions. These acts include the willful failure to obtain the required

approval signatures on documents authorizing the seizure of a taxpayer’s home, personal

belongings, or business assets or violations of the Internal Revenue Code, Treasury

regulations, or IRS policies for the purpose of retaliating against or harassing a taxpayer,

taxpayer representative, or other IRS employee.
Page 17 GAO-02-674 Compliance and Collection Program Declines

offices—grew from about 4 percent of collection time in fiscal year 1996 to

about 14 percent in fiscal year 2000 before dropping to 5 percent in 2001.

Staff time charged to compliance and collection programs between fiscal

years 1996 and 2001 declined in all but one program (i.e., returns

processing) and in several instances by 20 percent or more, as shown in

tables 1 and 2.

According to IRS officials, the demands on resources also affected

productivity as indicated by the number of cases closed per staff hour of

compliance and collections staff time. The officials said that some of the

IRS Restructuring Act requirements, such as suspending collection action

to provide time for additional notifications and appeal hearings, increased

the amount of staff time and calendar time required to close a case. They

also noted that some of the potentially available staff time was consumed

in training for the new requirements. In addition, according to IRS

officials, from 1996 through 2001 the complexity of cases worked by

compliance and collection staff had changed, requiring more time to

complete cases. For example, many erroneous claims for tax credits that

had been handled by audit prior to fiscal year 1997 were reassigned to

returns processing, which could handle the claims largely on an automated

basis.

IRS officials did not provide us with any quantitative analysis that

distinguished between the effects of the IRS Restructuring Act and those

of other factors influencing productivity. On the basis of the data available

to us, we could not discern the extent to which the changes in productivity

were attributable to the act or to other factors.

The declines in IRS’s compliance and collection programs affected

taxpayers in several ways. Our analysis showed that noncompliance was

less likely to be detected by compliance programs and pursued or

sanctioned by collection programs. Also, the length of time that taxpayers

had owed back taxes when they were assigned to collection increased

between fiscal years 1996 and 2001, although IRS intended that by

deferring collection action on some older collection cases, it could get to

newly assigned cases quicker. For the deferred cases, penalties and

interest continue to accumulate, making future payment of those

assessments increasingly demanding. Taken together, these changes have

reduced the incentives for voluntary compliance, a concern of IRS senior

managers. Some available, but very limited, data suggest that voluntary

compliance may have begun to deteriorate.

Taxpayers Face

Reduced Sanctions

for Noncompliance

and Reduced

Incentives to

Voluntarily Comply
Page 18 GAO-02-674 Compliance and Collection Program Declines

The data presented earlier on the changes in IRS’s compliance and

collection programs showed that the likelihood that taxpayer

noncompliance would be detected and pursued by IRS declined between

fiscal years 1996 and 2001. For example, in situations where IRS had

information that a tax return was due but not filed, the rate of IRS

compliance follow-up declined about 69 percent. In situations where IRS

had information that a tax return understated the amount of taxes owed,

the decline in follow-up was about 29 percent. Moreover, even when

compliance follow-up took place and the taxpayers were found to owe

back taxes, because of IRS’s practice of deferring collection action, the

taxpayers had about a one in three chance of not being pursued by IRS

collection staff. And, if pursued, the delinquent taxpayers were about 64

percent less likely to experience an enforced collection action such as the

levying of their assets. These changes reduced the incentives to comply

with the tax laws.

Although IRS intended that by deferring collection action on some tax

debts it would be able to initiate collection action for some higher-priority

cases sooner, our random samples showed that the median length of time

that taxpayers had owed back taxes at the time they were assigned to

collection increased between 1996 and 2001. We estimate these increases

as follows:

• Taxpayers who were assigned to collection as of the end of fiscal year

1996 had owed back taxes for about 1.2 years when they were assigned

to telephone or field collections.

• Taxpayers who were assigned to collection as of the end of fiscal year

2000 had owed back taxes for about 1.3 years when they were assigned

to telephone or field collections

• Taxpayers who were assigned to collection as of the end of fiscal year

2001 had owed back taxes for about 1.6 years when they were assigned

to telephone or field collections.

On the basis of our analysis of randomly sampled collection case files

related to taxpayers who were delinquent at the end of fiscal year 2000

(2001 case files were not available at the time of our field work), we noted

that much of this timeframe was attributable to the concluding of interim

matters—for example, resolving questions on the amount of the taxpayers’

tax liability or providing time for the taxpayers to make periodic

payments. When we factored in the time taken to conclude these interim

Noncompliance Was Less

Likely to Be Detected and

Pursued

Some Increased Time in

Initiating Collection
Page 19 GAO-02-674 Compliance and Collection Program Declines

matters, our sample showed that, on average, the taxpayers had been

potentially eligible for collection actions for about 6 months15 when they

were contacted by collection staff. Also, on comparing the sampled

collection cases that were initiated before and after IRS started deferring

collection cases, we found no statistically significant difference in the

timing of the collection action.

Accordingly, as shown by our samples, deferring some collection cases

helped IRS to keep its collection caseload from ballooning but did not

improve collection timeliness. According to IRS senior officials, some

recent procedural changes, designed to speed up the assignment of

priority cases to collection staff, should improve the timing of the

collection actions that are initiated.

As expected, our random sample of unpaid tax assessments as of the end

of fiscal year 2001 showed that taxpayers for whom collection action was

deferred were statistically different from taxpayers who were assigned to

telephone and field collection. We estimate these differences as follows:

• Taxpayers who were assigned to telephone or field collection were

about three times as likely to have made payments on their

delinquencies during the previous year as those for whom collection

action was deferred.

• Taxpayers for whom collection action was deferred owed about 7

times more in penalties and interest as a percentage of their income (or

of payroll for businesses) than the taxpayers who were assigned to

collection.16

Not surprisingly, these differences indicate that follow-up by telephone or

field collections may have a strong impact on generating payment on tax

liabilities and preventing a buildup of penalties and interest. In turn,

deferring collection action to a later date would make resolution of the

delinquencies more demanding on affected taxpayers.

 15The 95 percent confidence interval is 4 to 8 months.

16The 95 percent confidence interval is 6.7 to 7.9 times. Analyses are based on comparisons

of taxpayers whose delinquencies were at the median level and whose account data

showed that a tax return had been filed within the previous two years. For individuals,

income was the reported adjusted gross income. Given the differences in the ways that IRS

captured business data, for consistency we used total compensation paid (i.e., payroll) as

the measurement base.

Taxpayers Face Buildup of

Penalties and Interest

When IRS Defers Taking

Collection Action
Page 20 GAO-02-674 Compliance and Collection Program Declines

Improving voluntary compliance—the percentage of the taxes owed that

taxpayers voluntarily report and pay—is a major goal of IRS’s compliance

and collection programs. Although the compliance and collection

programs may focus on noncompliant taxpayers, IRS believes that the

deterrent effect of the programs influences the compliance of all

taxpayers. Currently, IRS does not have a measure of voluntary

compliance.

The declines in IRS’s compliance and collection programs that occurred

from fiscal year 1996 through fiscal year 2001 have reduced some of the

incentives useful for (1) inducing noncompliant taxpayers to become

compliant and (2) reassuring compliant taxpayers that they are not being

disadvantaged by voluntarily reporting and paying the full amount of taxes

that they owe. Because only a little more than two years of data were

available for analyzing taxpayers for whom collection action was deferred,

we were not able to determine whether the deferral will have any longterm effects on the taxpayers’ future payment compliance and on the

amount of interest and penalties owed. If no action is taken to collect the

delinquent tax, however, the motivation to pay the taxes owed is reduced.

Available, but very limited, data suggest that voluntary compliance may

have deteriorated. For example, the growth in the number of apparent

nonfilers (i.e., individuals who have not filed tax returns, as identified by

IRS document matching over the period fiscal years 1996 to 2001)

increased about three and one-half times faster than the tax filing

population. Similarly, the number of apparent underreporters increased

about one and one-half times faster. As discussed in the following section,

compliance trends are a concern of IRS senior managers.

The strategic assessments prepared by the wage and investment and small

business operating divisions identified the risk of declining compliance as

a major issue for IRS. These assessments, part of IRS’s new strategic

planning, budgeting, and performance management process, also

proposed a number of compliance and collection initiatives to address

noncompliance. The operating divisions could not quantify the impact that

their initiatives are expected to have on compliance, because IRS is

several years away from finishing a system for making compliance

estimates. However, as a partial substitute for such information, the

assessments could have provided quantitative information on the expected

impacts of the initiatives on compliance and collection programs.

Incentives to Voluntarily

Comply Are Reduced

IRS’s New Strategic

Assessments Address

Tax Noncompliance

but Could Provide

More Quantitative

Information
Page 21 GAO-02-674 Compliance and Collection Program Declines

To make decisions for fiscal year 2002 and subsequent year operations,

IRS implemented a new strategic planning, budgeting, and performance

management process during fiscal year 2000. The process begins, as

outlined in figure 2, with the operating divisions’ preparing strategic

assessments. After receipt and review of the strategic assessments, the

commissioner provides detailed guidance (step 2) to the operating

divisions for developing their strategy and program plans (step 3). These

plans are then incorporated (step 4) into an IRS-wide performance plan

(which sets out measurable objectives such as the number of audits to be

done). These plans are, in turn, incorporated into IRS’s budget justification

(which sets out its resource requests to Congress). The remaining steps (5

and 6) involve allocating resources across IRS divisions and programs and

monitoring division adherence to the planning and budgeting decisions.

According to IRS senior management, the strategic assessments are

intended to provide “big picture” information for making decisions on

significant operational changes. To obtain that decision-making

information, senior management instructed the operating divisions to

prepare brief strategic assessment documents that summarize

• important trends, issues, and problems facing the operating divisions

and IRS and

• proposals for dealing with those trends, issues, and problems.

The operating divisions were instructed to describe the trends, issues, and

problems, using quantifiable, measurable data when possible. Also, in

proposing changes, the operating divisions were to determine the most

critical trends requiring attention by considering their impact on the

achievement of IRS’s goals. These goals included increasing taxpayer

compliance and increasing the fairness of the compliance programs.

Strategic Assessments Are

a Key First Step in IRS’s

Strategic Planning,

Budgeting, and

Performance Management

Process
Page 22 GAO-02-674 Compliance and Collection Program Declines

Figure 2: IRS’s Strategic Planning Process

Source: GAO review of IRS planning documentation.

The planning process helps IRS to implement the Government

Performance and Results Act (Results Act).17 The act’s goal was to improve

the management of federal programs by having federal agency decision

making focus on impacts (i.e., the measurable results achieved by their

programs). The agencies were required to periodically develop strategic

plans, identify measures for assessing progress in achieving plan goals,

and use the measures to report on the progress in meeting plan goals.

Operationalizing the act’s mandate was left to the agencies. We have

reported in the past that IRS’s approach, designed to reconcile competing

 17P.L. 103-62.

Step 2:

Commissioner’s

planning guidance

Step 3:

Strategy and

program plan

Step 6:

Execute and review

strategy, programs,

and budget

Step 5:

Business resource

allocation plan

Step 1:

Strategic

assessment

Step 4:

Performance plan

and budget

justification
Page 23 GAO-02-674 Compliance and Collection Program Declines

priorities and initiatives with the realities of available resources, has

helped it to make progress in defining its strategic direction.18

In addition, IRS’s strategic plans and budgets are reviewed by an oversight

board before they are submitted to the Congress. The board was

established by the IRS Restructuring Act as a means of providing Congress

with advice on IRS’s strategic plans and budget.

In the strategic assessments that we reviewed, both the wage and

investment and small business operating divisions recognized that declines

in their compliance and collection activities created a risk that taxpayer

compliance could be negatively affected. Some of the identified risks

included the potential for decreased tax collections, potential for

increased numbers of nonfilers, and potential for increased underreporting

of taxes owed.

To counter declines in both compliance and collection activities and to

deal with the potential risks, the IRS operating divisions identified a

number of changes warranting priority attention, including the need to

• reengineer the audit process,

• reengineer the collection process,

• reevaluate the telephone collection selection criteria for individuals,

• use more document matching to identify underreporters,19 and

• increase audit and underreporter program resources.

The proposed initiatives have the potential both to increase compliance

and collection activities and to rebalance those activities. For example, if

productivity gains result from collection process reengineering, the

collection staff will be able to close additional delinquency cases. Also,

according to IRS officials, additional delinquencies could possibly be

closed by outsourcing some collection activities. The officials indicated

that outsourcing is an issue being studied by the collection reengineering

team.

 18See U.S. General Accounting Office, IRS Modernization: Continued Improvement in

Management Capability Needed to Support Long-Term Transformation, GAO-01-700T

(Washington, D.C.: May 8, 2001).

19IRS has embarked on a program to match information on income distributions from

partnerships and certain corporations to their owners.

Strategic Assessments

Proposed Initiatives to

Address Noncompliance

but Provided No

Quantitative Information

on the Expected Impact
Page 24 GAO-02-674 Compliance and Collection Program Declines

Because of a lack of information, the operating divisions’ strategic

assessments could not quantify the impact that their changes may have on

taxpayer compliance. Currently, IRS lacks reliable data on the voluntary

compliance rate and information on how IRS’s compliance and collection

programs influence that rate. In May 2000, IRS established a research

office to develop a new approach for measuring compliance. However, IRS

will not have new data on the compliance rate for individuals and

businesses for several years and could take longer to develop estimates of

how compliance and collection programs influence the rate.20

The assessments that we reviewed, however, missed opportunities to at

least partially compensate for the lack of quantitative estimates of the

impact that the proposed changes would have on compliance. Some

examples of the type of quantitative estimates that could be provided are

suggested by the information that we presented in the first two sections of

this report. Such quantitative estimates might include the impact on

compliance and collection workload, coverage, cases closed, staffing,

productivity, dollars of unpaid taxes identified, and percentage of taxes

resolved. Other quantitative estimates could address the benefits and costs

associated with the proposed changes. Although such estimates would be

only a partial substitute for an estimate of the impact on the ultimate

result, compliance, they would provide quantitative information about the

expected impact on the declines in compliance and collection programs

and the growing gap between them.

Senior managers told us that the strategic assessments were important,

providing the starting point in the management decision-making chain for

rationing IRS’s limited resources to the most important priorities. The

officials also said that even if the basis for some aspects of strategic

decision making, such as the balance between compliance and collection

programs, were not explicitly addressed in the strategic assessments, they

believed that sound decisions had been made as a result of IRS’s

implementing the new strategic planning process. For example, they

indicated that the collection reengineering effort had the potential to

 20During October 2002, IRS expects to begin a study on the extent to which individual

taxpayers voluntarily report the full amount of taxes that they owe. IRS expects the final

report in April 2004. This report will be supplemented with an analysis of IRS data on (1)

the extent to which currently filed returns are accompanied by full payment and (2) the

extent to which individuals who are required to file tax returns actually do so. IRS has

already produced data on nonfilers and expects to complete a payment analysis shortly,

according to IRS senior officials.
Page 25 GAO-02-674 Compliance and Collection Program Declines

affect the balance between collection and compliance activities. They said

that as managers gained more experience with the process, their strategic

assessment reports would improve.

Estimating the impacts of proposed initiatives would have some costs and

could lengthen a document intended to be “strategic” and therefore brief.

However, both IRS guidance and the Results Act emphasize the value of

quantitative information related to performance, especially the impact or

results that programs were achieving. Some quantitative information about

the expected impacts of proposed program changes could provide IRS

senior managers a fuller understanding of the trade-offs involved in

planning the allocation of IRS resources to compliance and collections

programs.

In addition, quantitative information might have other benefits. Internally,

it might provide lower-level managers not directly involved in strategic

decision making a better understanding of the reasons for decisions and

expected results. Externally, quantitative information from the strategic

assessments might facilitate decision making by Congress, the oversight

board, and others. For example, quantitative information from the

strategic assessments could be incorporated into documents going to

Congress, such as the annual budget request.

The commissioner and senior managers recognize that the declines in

IRS’s compliance and collection programs are a strategic problem that

puts a major part of the agency’s mission, ensuring compliance with the

tax laws, at risk. Problems of this magnitude, involving the level of IRS

resources and the allocation of those resources within the agency, must be

dealt with by top management and external stakeholders including

Congress and the oversight board. To facilitate such decision making, IRS

has implemented its new strategic planning, budgeting, and performance

management process. Strategic assessments are the basis for the process

and, by extension, are also part of the basis for decisions about IRS’s

budget and strategy made by Congress and others.

We support IRS’s new approach to strategic planning, an approach that

seeks to integrate planning and budgeting based on quantifiable

information with management decision making. We also recognize that

IRS’s strategic assessments, and thus strategic planning, are constrained

by the absence of data on the impact that IRS operations have on taxpayer

compliance. Nonetheless, opportunities exist to make the strategic

assessments more informative. How much quantitative information should

Conclusions
Page 26 GAO-02-674 Compliance and Collection Program Declines

be provided in strategic assessments is a decision for the primary users of

the assessments, IRS’s top managers. Making the strategic assessments

more quantitative will not resolve IRS’s strategic problems but could

contribute more information to the decision-making process.

Based on experience to date using strategic assessments, we recommend

that the commissioner of internal revenue reexamine the extent to which

some quantitative information on the impact of proposed program changes

should be included in strategic assessments.

The commissioner of internal revenue provided written comments on a

draft of this report in a May 13, 2002, letter, which is reprinted in appendix

II. The commissioner agreed with our findings and recommendation and

described some ongoing efforts to improve productivity and to reverse

declines in compliance and collection programs. He said that steps were

being taken to increase the use of quantitative data in strategic decision

making, including the development of a methodology for assessing costs

and benefits that will be refined as IRS proceeds through future planning

cycles.

As arranged with your office, we plan no further distribution of this report

until 30 days from its date of issue, unless you publicly announce its

contents earlier. After that period, we will send copies to Representative

William M. Thomas, chairman, and Representative Charles B. Rangel,

ranking minority member, House Committee on Ways and Means;

Representative William J. Coyne, ranking minority member, Subcommittee

on Oversight, House Committee on Ways and Means; and Senator Max

Baucus, chairman, and Senator Charles E. Grassley, ranking republican

member, Senate Committee on Finance. We will also send copies to the

Honorable Paul H. O’Neil, secretary of the treasury; the Honorable Charles

O. Rossotti, commissioner of internal revenue; the Honorable Mitchell E.

Daniels, Jr., director, Office of Management and Budget; and other

interested parties. Copies of this report will be made available to others on

request. In addition, the report will be available at no charge on the GAO

Web site (www.gao.gov).

Recommendation

Agency Comments
Page 27 GAO-02-674 Compliance and Collection Program Declines

If you have any questions, please contact me or Thomas Richards at

(202) 512-9110. Key contributors to this report are acknowledged in

appendix III.

Sincerely yours,

James R. White

Director, Tax Issues
Appendix I: Objectives, Scope, and

Methodology

Page 28 GAO-02-674 Compliance and Collection Program Declines

As requested, the objectives of GAO’s review were to

• describe the changes since 1996 in IRS’s compliance and collection

programs, including the extent of collection deferrals, and the factors

contributing to the program changes;

• determine how the program changes have affected taxpayers, including

their compliance with tax laws, the buildup of penalties and interest,

and the length of time before collection actions are initiated; and

• determine how IRS addressed the program changes, including their

effect on taxpayers, in its strategic assessments.

We first identified IRS’s major compliance and collection programs. On the

basis of our analysis of IRS data system reports and discussions with IRS

officials, we identified 8 such programs. In general, compliance programs

are designed to assure that taxpayers fairly and accurately report and pay

the amount of taxes that they owe. Collection programs are to follow up

with taxpayers to obtain payment and initiate enforcement action if

taxpayers become delinquent by not paying their tax after being sent

notices. Descriptions of the compliance and collection programs appear in

table 4.

Appendix I: Objectives, Scope, and

Methodology

Scope and

Methodology
Appendix I: Objectives, Scope, and

Methodology

Page 29 GAO-02-674 Compliance and Collection Program Declines

Table 4: Description of IRS Compliance and Collection Programs

Program Description

Compliance programs

Returns processing Designed to identify and correspond with taxpayers who did not make full payment with their tax

return filing (“balance-due returns”) or who filed returns with errors or certain other omissions (“math

errors”).

Nonfiler Designed to correspond and, if necessary, make telephone or field contacts with taxpayers who

according to IRS records have not, but should have, filed tax returns. IRS identifies these apparent

nonfilers by computer-matching information returns, such as those filed by banks reporting earnings

by taxpayers, with the tax returns that are filed with IRS and IRS’s masterfile records on taxpayers.

Underreporter Designed to correspond with taxpayers whose tax returns, according to IRS records, have

underreported the amount of taxes owed. IRS identifies these apparent underreporters by computermatching information returns, such as those filed by banks reporting earnings by taxpayers, with the

taxpayers’ tax returns that are filed with IRS.

Individual audits Designed to examine individual income tax returns for compliance with tax law.

Corporate audits Designed to examine corporate income tax returns for compliance with tax law.

Other audits Designed to examine other tax returns such as those for partnerships, estate and trust income, estate

tax, employment, and excise taxes for compliance with tax law.

Collection programs

Telephone collection If taxpayers become delinquent (i.e., do not pay their taxes after being notified of the amount past

due), the IRS staff assigned to the telephone collection program may initiate collection action over the

phone or in writing. If the contacted taxpayers are not responsive to attempts to resolve their

delinquencies, the collection staff is authorized, under certain circumstances, to initiate enforced

collection action. These actions include recording liens on taxpayer property and sending notices to

levy taxpayer wages, bank accounts, and other financial assets held by third parties.a

 If more in-depth

analyses are required, telephone collections may refer the case to field collections.

Field collection To collect delinquent taxes, IRS field collection staff may visit delinquent taxpayers at their homes or

businesses as well as contact them by telephone and mail. The staff are responsible for making indepth investigations of taxpayers’ ability to pay their tax debts. To compel compliance, the staff are

authorized, under certain circumstances, to record liens on taxpayer property or levy taxpayer wages,

bank accounts, and other financial assets held by third parties and to seize other assets owned by the

taxpayer.a

a

Under the Internal Revenue Code, “levy” is defined as the seizure of a taxpayer’s assets to satisfy a

tax delinquency. IRS differentiates between the levy of assets in the possession of the taxpayer

(referred to as “seizure”) and the levy of assets, such as bank accounts and wages, that are in the

possession of third parties, such as banks or employers (referred to as “levy”). A lien is a legal claim,

filed in accordance with state property law, that attaches to property to secure payment of a debt.

Source: GAO review of IRS data.

As indicated by table 4, the separation point between compliance and

collection programs is the point at which a taxpayer is determined to be

delinquent. At that point, the taxpayer has not paid taxes after being

notified by the compliance component of the amount due and after being

sent collection notices—usually three or more to individuals and two to

businesses.
Appendix I: Objectives, Scope, and

Methodology

Page 30 GAO-02-674 Compliance and Collection Program Declines

To measure changes across the eight programs, now managed by four

divisions, we identified performance indicators that would be common to

their operations and that, in the aggregate, would provide an overview of

the long-term direction of IRS’s compliance and collection programs. The

indicators were not intended to provide a comprehensive evaluation of

program performance. Rather, the indicators were to provide a general

overview of changes in compliance and collection workload, staff

resources committed to dealing with the workload, productivity of the

resources, work completed, extent of the workload addressed, and work

outcomes in terms of unpaid taxes identified and unpaid taxes resolved.

Table 5 provides a general description of the seven performance

indicators, together with a more detailed description of the indicators as

they apply to the eight compliance or collection programs.

Table 5: Definitions of Performance Indicators

Performance indicator Program-specific performance indicator

Returns processing: Comparison of the numbers of tax returns filed (individual income,

individual estimated tax, corporation income, partnership, estate and trust income, estate

tax, employment, excise tax, exempt organizations, employee plans, and supplemental

filings) for fiscal year 1996 with comparable data for fiscal year 2001.

Nonfiler: Comparison of the total number of apparent individual nonfilers available for

compliance follow-up in fiscal year 1996 with comparable data for fiscal year 2001. IRS

identified the population of apparent nonfilers by matching information returns against

individual return filings on a tax year basis. Given that the nonfiler program worked tax year

1994 cases in fiscal year 1996 and tax year 1999 cases in fiscal year 2001, this tax year

data is reported as fiscal years 1996 and 2001 workload data. Data on apparent business

nonfilers was not available for 1996 and therefore cannot be compared with data for fiscal

year 2001. Accordingly, business nonfilers have not been included as part of potential

workload.

Underreporter: Comparison of the total number of apparent individual underreporters

available for compliance follow-up in fiscal year 1996 with comparable data for fiscal year

2001. IRS identified the population of apparent underreporters through matching

information returns against individual return filings on a tax year basis. Most of the

underreporter program for fiscal year 1996 involved reviewing tax year 1992 and 1993

returns, and most of fiscal year 2001 data involved reviewing tax year 1998 and 1999 tax

returns

Individual audit: Comparison of the number of individual income tax returns available for

examination in fiscal year 1996 with comparable data for fiscal year 2001. We used IRS’s

method for determining the number of individual income tax returns available for

examination, which considers tax returns filed in the previous year as those available for

examination. For fiscal year 1996 workload, we used tax returns filed in calendar year

1995, and for fiscal year 2001 workload, we used tax returns filed in calendar year 2000.

Workload: Comparison of the number of

work units that were available to be

worked in fiscal year 1996 with

comparable data for fiscal year 2001.

Corporate audit: Comparison of the number of corporate tax returns available for

examination in fiscal year 1996 with comparable data for fiscal year 2001. We used IRS’s

method for determining the total number of corporation income tax returns available for

examination, which considers tax returns filed in the previous year as those available for

examination. For fiscal year 1996 workload, we used tax returns filed in calendar year

1995, and for fiscal year 2001 workload, we used tax returns filed in calendar year 2000.

Changes in Compliance

and Collection Programs
Appendix I: Objectives, Scope, and

Methodology

Page 31 GAO-02-674 Compliance and Collection Program Declines

Performance indicator Program-specific performance indicator

Other audit: Comparison of the number of partnership, estate and trust income, estate tax,

employment, and excise for tax returns available for examination in fiscal year 1996 with

comparable data for fiscal year 2001. We used IRS’s method for determining the total

number of tax returns available for examination, which considers tax returns filed in the

previous year as those available for examination. For fiscal year 1996 workload, we used

tax returns filed in calendar year 1995, and for fiscal year 2001 workload, we used tax

returns filed in calendar year 2000.

Telephone collection: Comparison of the number of delinquent accounts assigned

(issued) to the telephone collection program during fiscal year 1996 with comparable data

for fiscal year 2001. The totals were adjusted to account for the number of modules

referred from the telephone program to field collection and from field collection to the

telephone program during the year.

Field collection: Comparison of the number of delinquent accounts assigned (issued) to

field collection, including support components (a backlog holding area referred to as the

queue and service center collection branch) during fiscal year 1996 with comparable data

for fiscal year 2001. The totals were adjusted to account for the number of modules

referred from the telephone program to field collection and from field collection to the

telephone program during the year.

Returns processing: Comparison of the total tax returns processed during fiscal year

1996 with comparable data for fiscal year 2001.

Nonfiler: Comparison of the number of apparent nonfiler cases closed in fiscal year 1996

with comparable data for fiscal year 2001. Nonfiler program case closures include

dispositions such as those made through correspondence, investigations, or examinations

but exclude cases closed without being worked to a conclusion, such as case deferrals. To

avoid double-counting closures, collection referrals to audit were subtracted from collection

dispositions because audit closures had been added to the total.

Underreporter: Comparison of the number of apparent underreporter cases that were

closed (a determination made as to whether additional taxes were owed) in fiscal year

1997 with data for fiscal year 2001. Fiscal year 1997 data were used because fiscal year

1996 data on case closures was not available.

Individual audit: Comparison of the number of individual examinations closed in fiscal

year 1996 with comparable data for fiscal year 2001.

Corporate audit: Comparison of the number of corporate examinations closed in fiscal

year 1996 with comparable data for fiscal year 2001.

Other audit: Comparison of the number of partnership, estate and trust income, estate tax,

employment, and excise tax return examinations closed in fiscal year 1996 with

comparable data for fiscal year 2001.

Telephone collection: Comparison of the number of delinquent accounts worked to

closure (i.e., excludes deferrals) in fiscal year 1996 with comparable data for fiscal year

2001.

Cases closed: Comparison of the

number of compliance and collection

work units closed (i.e., closure

represents a compliance decision as to

the accuracy of the reported tax liability

or a collection decision on collection of a

liability) in fiscal year 1996 with

comparable data for fiscal year 2001.

Field collection: Comparison of the number of delinquent accounts worked to closure

(i.e., excludes deferrals) in fiscal year 1996 with comparable data for fiscal year 2001.

These data include closures by supporting components, such as the service center

collections branch.

Coverage: Comparison of the proportion

of workload reviewed in fiscal year 1996

(i.e., cases closed during the year as a

percentage of cases available to be

worked during the year) with comparable

data for fiscal year 2001.

Returns processing: Comparison of the proportion of filed tax returns that are processed

by returns processing in fiscal year 1996 with comparable data for fiscal year 2001.

Processing all income tax returns in the same year that they are received for both fiscal

year 1996 and fiscal year 2001 would constitute 100 percent coverage in each year and a

0 percent change in coverage.
Appendix I: Objectives, Scope, and

Methodology

Page 32 GAO-02-674 Compliance and Collection Program Declines

Performance indicator Program-specific performance indicator

Nonfiler: Comparison of the proportion of apparent nonfiler cases that were worked to

resolution in fiscal year 1996 (i.e., fiscal year 1996 nonfiler closures as a percentage of

apparent nonfilers cases available to be worked in fiscal year 1996) with comparable data

for fiscal year 2001.

Underreporter: Comparison of the proportion of apparent underreporter cases that were

closed in fiscal year 1996 with comparable data for fiscal year 2001. IRS identified the

population of apparent underreporters through matching information returns against

individual return filings on a tax year basis. Most of the underreporter program for fiscal

year 1996 involved reviewing tax years 1992 and 1993 returns, and most of fiscal year

2001 data involved reviewing tax years 1998 and 1999 tax returns. Coverage for fiscal

year 1996 is measured by comparing the number of closed returns for tax years 1992 and

1993 with the workload. Coverage for fiscal year 2001 is measured by comparing the

number of closed returns for tax years 1998 and 1999 with the workload.

Individual audit: Comparison of the proportion of individual income tax return filings that

were examined in fiscal year 1996 with comparable data for fiscal year 2001. Consistent

with IRS’s practice in computing audit rates, the comparison involved relating audit

closures in fiscal years 1996 and 2001 with returns filed in calendar years 1995 and 2000,

respectively.

Corporation audit: Comparison of the proportion of corporation income tax return filings

that were examined in fiscal year 1996 with comparable data for fiscal year 2001.

Consistent with IRS’s practice in computing audit rates, the comparison involved relating

audit closures in fiscal years 1996 and 2001 with returns filed in calendar years 1995 and

2000, respectively.

Other audit: Comparison of the proportion of partnership, estate and trust income, estate

tax, employment, and excise tax returns filings that were examined in fiscal year 1996 to

comparable data for fiscal year 2001. Consistent with IRS’s practice in computing audit

rates, the comparison involved relating audit closures in fiscal years 1996 and 2001 with

returns filed in calendar year 1995 and 2000, respectively.

Telephone collection: Comparison of the proportion of delinquencies assigned to

telephone collection that were worked to conclusion in fiscal year 1996 with comparable

data for fiscal year 2001. The comparison involved relating the number of delinquencies

worked to closure (i.e., excludes deferrals) during each fiscal year to the number of new

delinquencies assigned as workload during the fiscal year.

Field collection: Comparison of the proportion of delinquencies assigned to field collection

(including support units) that were worked to conclusion in fiscal year 1996 with

comparable data for fiscal year 2001. The comparison involved relating the number of

delinquencies worked to closure (i.e., excludes deferrals) during each fiscal year to the

number of new delinquencies assigned as workload during the fiscal year.

Returns processing: Comparison of program staff years for core services needed to

process tax returns and balance-due and math error notices (processing center receipt and

control branch, document perfection branch, data conversion branch, and data processing

division) for which consistent data were available for fiscal year 1996 with comparable data

for fiscal year 2001.

Nonfiler: Comparison of program staff hours charged by compliance program staff in

service centers, telephone collections, field collection, and audit programs to carry out

nonfiler programs in fiscal year 1996 with comparable data for fiscal year 2001.

Underreporter: Comparison of program staff years used for the underreporter program in

fiscal year 1996 with comparable data for fiscal year 2001.

Staff time: Comparison of staff time

charged to compliance programs for

fiscal year 1996 with comparable data for

fiscal year 2001.

Individual audit: Comparison of the number of staff hours charged by examination staff to

complete audits closed in fiscal year 1996 with comparable data obtained from IRS’s Audit

Information Management System for fiscal year 2001.
Appendix I: Objectives, Scope, and

Methodology

Page 33 GAO-02-674 Compliance and Collection Program Declines

Performance indicator Program-specific performance indicator

Corporate audit: Comparison of the number of staff hours charged by examination staff to

complete audits closed in fiscal year 1996 with comparable data obtained from IRS’s Audit

Information Management System for fiscal year 2001.

Other audit: Comparison of the number of staff hours charged by examination staff to

complete audits closed in fiscal year 1996 with comparable data obtained from IRS’s Audit

Information Management System for fiscal year 2001.

Telephone collection: Comparison of the number of staff hours (including administrative

overhead) charged to delinquent account activities in fiscal year 1996 with comparable

data for fiscal year 2001.

Field collection: Comparison of the number of staff hours charged by collection staff to

delinquent account activities in fiscal year 1996 with comparable data for fiscal year 2001.

Returns processing: Comparison of the number of tax return filings processed and math

error and balance-due notices issued per staff year that were used to process that

workload in fiscal year 1996 with comparable data for fiscal year 2001. Math error and

balance-due notices were added to return filings to match work outputs to the resources

used to process that output. The number of math error and balance-due notices processed

included available data for calendar years 1996 and 2001.

Nonfiler: Comparison of the number of case closures per staff hour charged by

compliance program staff in IRS service centers, telephone and field collection, and audit

programs to carry the out the nonfiler program in fiscal year 1996 with comparable data for

fiscal year 2001.

Underreporter: Comparison of the number of underreporter cases closed per staff year

used for the underreporter program in fiscal year 1997 with comparable data for fiscal year

2001. Fiscal year 1997 data was used because fiscal year 1996 data on case closures was

not available.

Individual audit: Comparison of the number of individual examinations closed per staff

hour charged by examination staff to complete audits closed in fiscal year 1996 with

comparable data for fiscal year 2001.

Corporate audit: Comparison of the number of corporation examinations closed per staff

hour charged by examination staff to complete audits closed in fiscal year 1996 with

comparable data for fiscal year 2001.

Other audit: Comparison of the number of partnership, estate and trust income, estate tax,

employment, and excise tax return examinations closed per staff hour charged by

examination staff to complete audits that were closed in fiscal year 1996 with comparable

data for fiscal year 2001.

Productivity: Comparison of the number

of compliance and collection work units

(e.g., audits) closed in fiscal year 1996

per staff time available that year for

compliance work with comparable data

for fiscal year 2001.

Telephone collection: Comparison of the number of delinquent accounts closed

(excluding deferrals) per staff hour charged to taxpayer delinquent account activities in

fiscal year 1996 with comparable data for fiscal year 2001.

Field collection: Comparison of the number of delinquent accounts closed (excluding

deferrals) per staff hour charged to taxpayer delinquent account activities in fiscal year

1996 with comparable data for fiscal year 2001.
Appendix I: Objectives, Scope, and

Methodology

Page 34 GAO-02-674 Compliance and Collection Program Declines

Returns processing: Comparison of the amount of tax assessments related to unpaid

taxes on balance-due and math error returns made by returns processing in fiscal year

1996 with comparable data for fiscal year 2001.

Nonfiler: Comparison of the amount of tax assessments made by the nonfiler program in

fiscal year 1996 with comparable data for fiscal year 2001.

Underreporter: Comparison of the amount of tax assessments made by the underreporter

program in fiscal year 1996 with comparable data for fiscal year 2001.

Individual audit: Comparison of the amount of tax assessments made by the individual

audit program in fiscal year 1996 with comparable data for fiscal year 2001. Data include

assessments that may be subsequently appealed.

Corporate audit: Comparison of the amount of tax assessments made by the corporation

audit program in fiscal year 1996 with comparable data for fiscal year 2001. Data include

assessments that may be subsequently appealed.

Other audit: Comparison of tax assessments related to the audit of estate and trust

income, estate tax, employment, and excise tax returns in fiscal year 1996 with

comparable data for fiscal year 2001. Data include assessments that may be subsequently

appealed. Assessments related to the audit of partnership returns are excluded to

eliminate double-counting for pass-throughs to the partners’ returns.

Telephone collection: Comparison of the amount of delinquent taxes collected by

telephone collection in fiscal year 1996 with comparable data for fiscal year 2001.

Dollars of unpaid taxes identified

(compliance programs) or collected

(collection programs):

• For compliance programs, a

comparison of the total amount of tax

assessments (including assessed

interest and penalties) generated by

the compliance programs in fiscal year

1996 with comparable data for fiscal

year 2001

• For collection programs, a comparison

of the amounts collected by collection

programs in fiscal year 1996 with

comparable data for fiscal year 2001.

Field collection: Comparison of the amount of delinquent taxes collected by field

collection in fiscal year 1996 with comparable data for fiscal year 2001.

Returns processing: Comparison of the percentage of unpaid taxes assessed during

fiscal year 1996 that were collected in the year of assessment without involving telephone

or field collections with comparable data for fiscal year 2001.

Nonfiler: Comparison of the percentage of unpaid taxes assessed during fiscal year 1996

that were collected in the year of assessment without involving telephone or field

collections with comparable data for fiscal year 2001.

Underreporter: Comparison of the percentage of unpaid taxes assessed during fiscal year

1996 that were collected in the year of assessment without involving telephone or field

collections with comparable data for fiscal year 2001.

Individual audit: Comparison of the percentage of unpaid taxes assessed during fiscal

year 1996 that were collected in the year of assessment without involving telephone or

field collections with comparable data for fiscal year 2001.

Corporate audit: Comparison of the percentage of unpaid taxes assessed during fiscal

year 1996 that were collected in the year of assessment without involving telephone or

field collections with comparable data for fiscal year 2001.

Other audit: Comparison of the percentage of unpaid taxes assessed during fiscal year

1996 that were collected in the year of assessment without involving telephone or field

collections with comparable data for fiscal year 2001.

Telephone collection: Comparison of the percentage of closures from the telephone

collection program that fully resolved the tax delinquencies (i.e., full payment received or

installment agreement arranged) in fiscal year 1996 with comparable data for fiscal year

2001.

Percentage of unpaid taxes resolved:

• For compliance programs, a

comparison of the percentage of the

fiscal year 1996 tax assessments

(including assessed interest and

penalties) that were collected by the

compliance components through

collection notices during the year with

comparable data for fiscal year 2001.

• For collection programs, a comparison

of the percentage of delinquent

assessments fully resolved in fiscal

year 1996 with comparable data for

fiscal year 2001.

Field collection: Comparison of the percentage of closures from the field collection

program that fully resolved the tax delinquencies (i.e., full payment received or installment

agreement arranged) in fiscal year 1996 with comparable data for fiscal year 2001.

To compile the performance data related to these performance indicators,

we substantially relied on the data output from various IRS information
Appendix I: Objectives, Scope, and

Methodology

Page 35 GAO-02-674 Compliance and Collection Program Declines

systems. For example, IRS uniformly collects data on resources, typically

staff hours or staff years used, as program input. We did not evaluate the

internal controls over the collection and processing of this IRS

information system data. Because IRS managers routinely use the

information from these systems to manage program operations, we believe

that the information is appropriate for use in compiling an overview of

program changes.

The routine output from the IRS data systems alone, however, was not

sufficient to provide data on the following:

1. The nonfiler program. Because IRS’s nonfiler program involved

cases managed by several IRS divisions, we worked with IRS managers

to consolidate data from a number of different sources to compile the

trend data. In doing this, we obtained data from IRS’s Audit

Management Information System, collection reports prepared through

IRS’s Integrated Data Retrieval System, and supplemental data

prepared by IRS’s Nonfiler Program office in response to internal IRS

requirements.

2. The amount of additional tax assessments made by the returns

processing program. To develop data on compliance assessments

made by returns processing, we obtained a data extract from IRS’s

Enforcement Revenue Information System (ERIS). That system was

designed by IRS to accumulate collection data for assessments that

result from IRS’s compliance work.

From the ERIS data extract, we first derived data to indicate the

amount of additional tax assessments made by returns processing

compliance work, such as identifying returns with a balance due or

making assessments to correct errors or omissions identified on the tax

returns. To do this, given the manner in which IRS accounts for the

assessments, we

• identified the total assessments made by returns processing, other

than returns that were filed with full payment or with no errors

requiring an IRS notice;

• identified the amount of payment made on the accounts prior to

IRS’s notifying the taxpayer of the amount due; and

• subtracted the prenotification payments from the total assessments.

We subtracted the prenotification payments from the total assessments

in order to eliminate taxes that were voluntarily reported and paid by

taxpayers.
Appendix I: Objectives, Scope, and

Methodology

Page 36 GAO-02-674 Compliance and Collection Program Declines

3. The amount of unpaid tax assessments resolved by the five

compliance programs. From the ERIS data, we also derived data to

compute the percentage of unpaid tax assessments that were collected

by the five compliance programs.1

 We included as collections any

payments made by the taxpayers in response to written notices sent to

the taxpayers. Data were not available to extend the analysis period

for collections for fiscal years beyond 2001. Therefore, to ensure

comparable collection data on the proportion of fiscal year 1996 and

2001 assessments collected by the assessing compliance program, we

limited the collection period to the fiscal year of the assessment.

We also interviewed officials from IRS’s operational divisions responsible

for wage earners, small businesses, and large and midsized businesses to

obtain an understanding of compliance and collection programs and to

discuss reasons for compliance and collection trends. We provided our

performance trends and supporting computations to IRS staff, who

reviewed and commented on our analyses.

To determine how these changes have affected taxpayers, we examined

two samples of IRS data. The first sample from IRS’s automated masterfile

records of unpaid tax accounts provided the data to examine overall

changes in the number of accounts with unpaid balances; changes in the

characteristics of delinquent taxpayers, such as the amounts of interest

and penalties owed; and the age of the accounts. In order to examine

contacts between taxpayers and the IRS and events affecting the

timeliness of resolution, we examined a sample of taxpayer collection case

files.

To analyze the delinquent taxpayer characteristics, we selected a random

sample of taxpayers who had an unpaid tax assessment outstanding at the

end of fiscal years 1996, 1998, 2000, and 2001. In developing this sample,

we partitioned the population into different groups, or strata, based on the

collection status of their modules on September 30 of each year and by

type of taxpayer (i.e., individuals and businesses). We stratified this

sample to ensure that taxpayers at different stages in IRS’s collection

process were represented. Once we had selected a sample of taxpayers,

we also obtained information on recent payments made to IRS by those

taxpayers and information from recent tax returns filed by the taxpayers

 1

Data exclude amounts collected by Appeals, because the source of assessments was not

identified in IRS’s data system.

Effect of Compliance and

Collection Program

Changes on Taxpayers

Accounts Receivable Sample
Appendix I: Objectives, Scope, and

Methodology

Page 37 GAO-02-674 Compliance and Collection Program Declines

and posted to IRS data systems. To review this sample, we used analysis

software to produce statistically reliable estimates of the characteristics of

the population of taxpayers whom IRS had identified as not having paid

their taxes as of the end of the four fiscal years.

To examine data on collection actions taken with respect to taxpayers—

such as the length of time from when the delinquencies became available

for assignment to telephone or field collection staff to when the taxpayers

were contacted by the collection staff—we used a random sample that

was taken as part of our audit of IRS’s financial statement for fiscal year

2000. This sample consisted of randomly selected unpaid tax assessments

that were owed by 520 taxpayers.

From this sample, we reviewed IRS collection case file documentation on

108 taxpayers, that is, those taxpayers who had been assigned to either

telephone or field collection and about whom IRS had sufficient collection

case file documentation for us to analyze. IRS had limited the

accumulation of case files to those relevant to estimation of the

collectibility of its accounts receivable.

We analyzed these cases with two different data collection instruments.

The first captured (1) dates that distinct field collection phases started and

ended, (2) occurrences of IRS collection contacts or attempted contacts

with taxpayers, and (3) the disposition of cases when the collection

phases ended. The second data collection instrument captured

information from IRS’s masterfile records on these taxpayers. This

information described the number of delinquencies, type of taxes owed,

and dollar amounts. It also provided a history of the collection-related

transactions (i.e., payments, defaults on installment agreements, or

litigation pending) for the taxpayer.

Because our estimates come from random samples, there is some

sampling error associated with them. We express our confidence in the

precision of our results as a 95 percent confidence interval around the

estimate. For example, for the estimate of 1.3 million taxpayers, the actual

value would be between 1.25 million and 1.35 million taxpayers. All

percentage estimates from the samples have sampling errors of ±5

percentage points or less, unless otherwise shown in footnotes to the

report text. All numerical estimates other than percentages have sampling

errors of ±5 percent or less of the value of those numerical estimates,

unless otherwise shown in footnotes to the report text.

Taxpayer Case File Sample

Sampling Error
Appendix I: Objectives, Scope, and

Methodology

Page 38 GAO-02-674 Compliance and Collection Program Declines

With respect to objective 3, we reviewed the strategic assessments made

by the IRS operating division responsible for individual taxpayers other

than the self-employed and by the operating division responsible for small

businesses and self-employed individuals. The assessments were made

during the first half of fiscal year 2001 for consideration by senior

management in developing strategy and program plans for fiscal year 2002

and 2003. We reviewed the strategic assessments along with IRS

instructions for preparation of the assessments. Our review of these

documents focused on identifying how the strategic assessments

addressed the compliance and collection trends and taxpayer impacts that

we identified in response to objectives 1 and 2. We also interviewed IRS

strategic planning, small business, and wage and investment officials

responsible for developing and monitoring strategic plans. We did not

evaluate the strategic assessment’s selection of IRS’s priorities, proposed

improvement projects, and resources needed to implement the projects.

Evaluating the operating division’s plans would require an assessment of

IRS’s entire strategic planning process, which was outside the scope of

this assignment.

We performed our work at IRS’s national office in Washington, D.C.; IRS’s

Kansas City Submissions Processing Center, Missouri; and IRS’s Oakland,

California, area office between October 2000 and April 2002 and in

accordance with generally accepted government auditing standards.

We requested comments on a draft of this report from the commissioner of

internal revenue. We received written comments from the commissioner

on May 14, 2002. The comments are reprinted in appendix II and discussed

in our report.

Strategic Planning
Appendix II: Comments from the Internal

Revenue Service

Page 39 GAO-02-674 Compliance and Collection Program Declines

Appendix II: Comments from the Internal

Revenue Service
Appendix II: Comments from the Internal

Revenue Service

Page 40 GAO-02-674 Compliance and Collection Program Declines
Appendix III: GAO Contacts and Staff

Acknowledgments

Page 41 GAO-02-674 Compliance and Collection Program Declines

James R. White, (202) 512-9110

Thomas M. Richards, (202) 512-9110

In addition to those named above, Leon Green, Mary Jankowski, John

Mingus, Sam Scrutchins, Anjali Tekchandani, Thom Venezia, Wendy

Ahmed, Cheryl Peterson, Susan Baker, Anne Laffoon, Kristina Boughton,

and Avram Ashery made key contributions to this product.

Appendix III: GAO Contacts and Staff

Acknowledgments

GAO Contacts

Acknowledgments

(440006)

The General Accounting Office, the investigative arm of Congress, exists to

support Congress in meeting its constitutional responsibilities and to help

improve the performance and accountability of the federal government for the

American people. GAO examines the use of public funds; evaluates federal

programs and policies; and provides analyses, recommendations, and other

assistance to help Congress make informed oversight, policy, and funding

decisions. GAO’s commitment to good government is reflected in its core values

of accountability, integrity, and reliability.

The fastest and easiest way to obtain copies of GAO documents at no cost is

through the Internet. GAO’s Web site (www.gao.gov) contains abstracts and fulltext files of current reports and testimony and an expanding archive of older

products. The Web site features a search engine to help you locate documents

using key words and phrases. You can print these documents in their entirety,

including charts and other graphics.

Each day, GAO issues a list of newly released reports, testimony, and

correspondence. GAO posts this list, known as “Today’s Reports,” on its Web site

daily. The list contains links to the full-text document files. To have GAO e-mail

this list to you every afternoon, go to www.gao.gov and select “Subscribe to daily

E-mail alert for newly released products” under the GAO Reports heading.

The first copy of each printed report is free. Additional copies are $2 each. A

check or money order should be made out to the Superintendent of Documents.

GAO also accepts VISA and Mastercard. Orders for 100 or more copies mailed to a

single address are discounted 25 percent. Orders should be sent to:

U.S. General Accounting Office

441 G Street NW, Room LM

Washington, D.C. 20548

To order by Phone: Voice: (202) 512-6000

TDD: (202) 512-2537

Fax: (202) 512-6061

Contact:

Web site: www.gao.gov/fraudnet/fraudnet.htm

E-mail: fraudnet@gao.gov

Automated answering system: (800) 424-5454 or (202) 512-7470

Jeff Nelligan, managing director, NelliganJ@gao.gov (202) 512-4800

U.S. General Accounting Office, 441 G Street NW, Room 7149

Washington, D.C. 20548

GAO’s Mission

Obtaining Copies of

GAO Reports and

Testimony

Order by Mail or Phone

To Report Fraud,

Waste, and Abuse in

Federal Programs

Public Affairs