a

GAO

United States Government Accountability Office

Report to the Chairman and Ranking 

Minority Member, Committee on 

Finance, U.S. Senate

March 2006 TAX 

ADMINISTRATION

Opportunities to 

Improve Compliance 

Decisions and Service 

to Taxpayers through 

Enhancements to 

Appeals’ Feedback 

Project

GAO-06-396
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

www.gao.gov/cgi-bin/getrpt?GAO-06-396.

To view the full product, including the scope 

and methodology, click on the link above. 

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Highlights of GAO-06-396, a report to the 

Committee on Finance, U.S. Senate 

March 2006

TAX ADMINISTRATION

Opportunities to Improve Compliance 

Decisions and Service to Taxpayers 

through Enhancements to Appeals' 

Feedback Project 

Appeals’ case result information has the potential to help compliance programs 

improve taxpayer service, but realizing improvements requires investments in 

data collection and analysis that must be considered in light of the likely 

benefits. Based on a review of 153 Appeals cases, GAO estimates that 41 percent 

of the 102,623 cases closed in fiscal year 2004 were not fully sustained. Of these, 

about half were not sustained because Appeals applied a law or regulation 

differently than the programs. Lacking such information, officials could not 

assess whether actions like additional guidance were needed. However, 

identifying specific provisions that were interpreted differently would require 

data gathering and analysis. Because the differences span a host of laws and 

regulations, corrective action may only affect a small number of cases. 

Improved decision making, however, can benefit compliance programs, Appeals, 

and taxpayers. An initial data analysis, such as identifying programs with high 

nonsustention rates due to differences in applying laws or regulations, would 

help to target areas most likely to benefit from feedback. 

Appeals has taken several initial steps to launch the feedback project. During 

2005, for example, Appeals and the compliance programs began to identify 

additional information needs. In addition, Appeals and the compliance programs 

could refine the feedback project’s objectives to target the results-oriented 

improvements that are logical benefits of information sharing. Obtaining 

agreement between Appeals and the programs on objectives may not be easy 

because their perspectives differ on the steps needed to improve operations, but 

is necessary. Also, Appeals’ plans to update its information system to provide 

additional data on case results will be hindered by inaccurate data. We found 

that several important data fields had error rates up to 14 percent. Appeals staff 

cited several reasons for this, including weak data verification procedures. 

IRS’s Appeals System 

Taxpayers disagreeing with 

Internal Revenue Service (IRS) 

compliance decisions can request 

an independent review by IRS’s 

Appeals Office (Appeals). In 2004 

the Commissioner requested that 

Appeals establish a feedback 

program to share the results of 

Appeals’ reviews with the 

compliance programs. 

GAO was asked to assess whether 

 (1) information on Appeals results 

would provide useful feedback to 

IRS operating divisions to benefit 

compliance programs, Appeals, and 

taxpayers through better case 

resolution and (2) the feedback 

project is being effectively 

managed to maximize its potential 

to improve IRS’s performance and 

thereby reduce disputes with 

taxpayers. 

What GAO Recommends

GAO recommends that IRS 

(1) perform an initial analysis of 

feedback data to identify areas 

most likely to generate benefits for 

compliance programs, Appeals, and 

taxpayers, (2) investigate whether 

additional actions are needed to 

improve the consistency of 

decisions, (3) further develop 

results-oriented objectives and 

measures for the feedback project, 

and (4) build upon current efforts 

to improve feedback data by 

establishing internal controls to 

verify data accuracy on an ongoing 

basis. In commenting on a draft of 

this report, IRS agreed with our 

recommendations. 
Page i GAO-06-396 Appeals Feedback

Contents

Letter 1

Results in Brief 2

Background 4

Feedback Information Could Be Useful for Improving 

Performance 8

Appeals Can Build on Existing Efforts to Improve the Feedback 

Project 16

Conclusions 22

Recommendations 22

Agency Comments and Our Evaluation 23

Appendixes

Appendix I: Objectives, Scope, and Methodology 25

Appendix II: Appeals Workstreams 30

Appendix III: Appeal Rates 33

Appendix IV: Comments from the Commissioner of Internal Revenue 36

Related GAO Products 40

Tables Table 1: Reasons Appeals Did Not Fully Sustain Compliance 

Decisions, Percentage of Nonsustained Cases in GAO’s 

Sample by Reason, and Illustrative Examples, Fiscal Year 

2004. 10

Table 2: Comparison of the Composition of Appeals Workload, 

Rate of Compliance Cases Appealed, Percentage of 

Appeals Workload, and Cases Not Fully Sustained 12

Table 3: Reasons that Appeals Did Not Fully Sustain Compliance 

Program Decisions, Percentage of Cases Not Fully 

Sustained, Sample of Cases Closed in Fiscal Year 2004 15

Table 4: Confidence Intervals for Table 1 27

Table 5: Confidence Intervals for Table 2 27

Table 6: Confidence Intervals for Table 3 28

Table 7: Description of Appeals Workstreams 31

Table 8: Appeal Rates by Workstream, Fiscal Year 2004 34

Figure Figure 1: IRS’s Appeals System 7
Contents

Page ii GAO-06-396 Appeals Feedback

Abbreviations

ACDS Appeals Centralized Database System

ACM Appeals Case Memorandum

CIC Coordinated Industry Case

CDP Collection Due Process

DCI Data Collection Instrument

EITC Earned Income Tax Credit 

IC Industry Case

IS Innocent Spouse 

IRS Internal Revenue Service

LMSB Large and Mid-Sized Business Division

OIC Offer-In-Compromise

SB/SE Small Business/Self-Employed Division

TE/GE Tax-Exempt and Government Entities Division

W&I Wage and Investment Division

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other material, permission from the copyright holder may be necessary if you wish to 

reproduce this material separately.
Page 1 GAO-06-396 Appeals Feedback

United States Government Accountability Office

Washington, D.C. 20548

A

March 24, 2006 Letr

The Honorable Charles E. Grassley

Chairman

The Honorable Max Baucus

Ranking Minority Member

Committee on Finance

United States Senate

To help maintain the public’s confidence in the tax system, the Internal 

Revenue Service (IRS) believes it needs to ensure that taxpayers receive a 

fair, impartial, and uniform resolution of tax disputes. If taxpayers disagree 

with IRS decisions to assess additional tax or take collection action, they 

can bring their cases before the IRS Appeals function (Appeals), which 

independently reviews whether compliance decisions correctly reflect the 

facts as well as applicable law, regulations, and IRS procedures.1

 With a 

staff of about 1,900 employees and a budget of about $193 million in fiscal 

year 2005, Appeals annually closes over 100,000 cases where taxpayers 

disputed IRS’s compliance decisions. 

Our prior reports have found that results-oriented organizations use 

performance information to continuously identify performance gaps and 

put that information to work to improve their operations. One possible 

source of this information in IRS is the results of Appeals cases. Using this 

information, IRS compliance programs may possibly identify whether 

Appeals would agree that the case decision represents the best result for 

IRS and the taxpayer. Then, using Appeals case results information, 

compliance program managers may possibly be able to identify 

weaknesses in their programs and improve operations, providing better 

service to taxpayers, and possibly resolving more cases before an appeal. 

In line with this concept, the Commissioner recently requested that 

Appeals establish a feedback project intended to maximize the benefits of 

sharing Appeals decisions with the compliance programs.

Based on your request, this report’s objectives are to determine whether

(1) information on Appeals results would provide useful feedback to IRS 

1

Compliance programs include numerous IRS examination programs, which may assess 

additional taxes, and its collection programs, which may take enforcement actions (e.g., 

liens, levies, seizures) to collect delinquent taxes. Each IRS operating division manages 

multiple compliance programs. 
Page 2 GAO-06-396 Appeals Feedback

operating divisions to benefit compliance programs, Appeals, and 

taxpayers through better case resolution and (2) the feedback project is 

being effectively managed to maximize its potential to improve IRS’s 

performance and thereby reduce disputes with taxpayers. 

To make determinations in both areas, we reviewed Appeals and 

compliance program documents and our prior work on performance 

management, and interviewed Appeals and compliance program officials. 

To determine whether information on the results of Appeals cases has the 

potential to provide useful feedback, we reviewed a random sample of 

Appeals cases closed in fiscal year 2004 to determine whether the cases 

contained information that could be useful for improving case results. 

Principally, we collected data on whether Appeals sustained or overturned 

the compliance program’s decision in each case and identified the main 

reasons for the Appeals decision. The results from that sample have 

related confidence intervals and precision estimates that are presented in 

this letter and in appendix I. We conducted our review from October 2004 

through October 2005 in accordance with generally accepted government 

auditing standards. 

Results in Brief As an independent reviewer of IRS compliance program’s cases, Appeals’ 

case results information has the potential to help those programs improve 

their service to taxpayers, but realizing improvements requires investments 

in data collection and analysis that must be considered in light of the likely 

benefits to the compliance programs, Appeals, and taxpayers. Based on 

our review of 153 compliance program cases closed in fiscal year 2004, we 

estimate that 41 percent of the 102,623 cases closed in that year (42,075 

cases) were not fully sustained by Appeals.2

 Of these cases, Appeals did 

not sustain 52 percent (21,879 cases) because, at least in part, it applied a 

law or regulation differently than the compliance programs.3

 Because they 

have not received this type of information, the compliance programs could 

not assess whether additional guidance, training, or other initiatives were 

needed. However, identifying more specifically which laws or regulations 

2

This estimate is based on our random sample. We are 95 percent confident that the actual 

proportion is between 33 percent and 49 percent. 

3

Fifty-two percent of the cases in our sample were not fully sustained for this reason. We 

are 95 percent confident that the actual proportion is between 40.0 percent and 64.8 percent. 
Page 3 GAO-06-396 Appeals Feedback

were interpreted differently by the programs would require an investment 

to gather and analyze additional data. Because these differing applications 

span a host of laws and regulations across all of IRS’s compliance 

programs, in many cases the corrective action that might be taken may only 

affect a relatively small number of cases. Improved decision making, 

however, can benefit compliance programs, Appeals, and taxpayers. 

Systematic data analysis, such as identifying programs with high 

nonsustention rates due to differences in applying laws or regulations, 

would help identify those programs most likely to benefit from feedback.4

 

This analysis would also help to focus attention on the costs of developing 

the feedback data and benefits to be obtained. Currently, IRS does not 

have plans for these analyses. 

Appeals has taken several initial steps to launch the feedback project 

requested by the IRS Commissioner. During 2005, several informationsharing and cooperative projects (e.g., providing copies of case 

memorandums and basic summary data) were established with some 

compliance programs on Appeals case results. Appeals and compliance 

managers can take further steps to build upon those efforts. For example, 

Appeals plans to update its information system to provide additional 

information on case results, such as the reasons for Appeal’s decisions. In 

addition, Appeals developed the feedback project’s objectives and 

measures with limited input from the compliance programs. Appeals and 

the compliance programs can partner on further developing resultsoriented objectives that take into account compliance programs’ diverse 

circumstances and clearly articulate the feedback project’s expected 

outcomes and associated performance measures. Obtaining agreement 

between Appeals and the compliance programs on objectives and 

performance measures may not be easy because their perspectives differ 

on the steps needed to improve IRS operations, but it is a necessary step 

because the programs themselves must play active roles in the project to 

make any changes that will improve their case results. However, the 

program will be hindered by inaccurate data. For example, we found that 

several important data fields related to Appeals case results had error rates 

up to 14 percent.5

 Appeals staff cited several reasons for the errors 

4

Sustention rate is the proportion of cases sent to Appeals that are not changed following 

review. 

5

Of the cases in our sample, 14.1 percent identified errors in the revised tax field (Appeals’ 

determination of the tax liability). We are 95 percent confident that the actual proportion is 

between 7.7 percent and 23.0 percent.
Page 4 GAO-06-396 Appeals Feedback

including a lack of attention to complete and accurate data, confusion 

about the results of the appeal by those entering the data, and weak data 

verification procedures. 

In order to maximize the opportunities for the Appeals feedback project to 

improve IRS’s compliance decisions and service to taxpayers, we are 

recommending that IRS analyze feedback data to identify areas most likely 

to benefit from feedback projects; further investigate the most promising 

areas and assess whether additional actions, such as new guidance or 

training, are needed to improve the consistency of decisions; further 

develop results-oriented objectives and associated performance measures 

for feedback projects; and build upon its current efforts to improve 

Appeals information for the feedback projects by establishing internal 

controls to verify, on an ongoing basis, the accuracy of information on case 

outcomes. In written comments on a draft of this report, the 

Commissioner of Internal Revenue agreed with our recommendations and 

said they will help IRS develop a much stronger feedback program. 

Background America’s tax system is based on taxpayers voluntarily filing tax returns 

that report the full amount of tax owed and paying any taxes that are due. 

IRS has four operating divisions: 

• Wage and Investment Division (W&I) serves the vast number of 

individual taxpayers including those who file jointly and only have wage 

and investment income. 

• Small Business/Self-Employed Division (SB/SE) serves about 45 

million small business, individual taxpayers with rental properties and 

farming businesses, and individuals investing in businesses, such as 

partnerships. SB/SE also serves corporations and partnerships with less 

than $10 million in assets and provides field collection services for the 

other three IRS divisions. 

• Large and Mid-Size Business Division (LMSB) serves corporations, 

subchapter S corporations, and partnerships with assets greater than 

$10 million. These businesses have a large number of employees, have 

complicated tax and accounting issues, and often conduct business 

globally. 

• Tax-Exempt and Government Entities Division (TE/GE) serves three 

very distinct customer segments. Employee Plans serves private and 
Page 5 GAO-06-396 Appeals Feedback

public retirement plan customers. Exempt Organizations serves 

customers that are exempt from income taxes, such as charities, civic 

organizations, and business leagues. Government Entities serves 

customers from federal, state, and local governments; Indian tribal 

governments; and tax-exempt bond issuers. 

These divisions are responsible for providing a full range of services to 

these taxpayers. Typically, these services would include assisting 

taxpayers with filing returns, processing those returns and maintaining 

their accounts, and examining suspected inaccurate returns. Taxpayers 

who are assessed additional tax and penalties or who have a pending 

enforcement action to collect delinquent taxes, such as a proposed levy or 

lien,6

 have the right to request a hearing through an administrative appeal 

before the assessment or collection actions are final.7 IRS notifies the 

taxpayers in writing of these pending actions and explains their appeal 

rights. Generally, the taxpayer has 30 days from this notification to request 

an appeal. 

The Appeals Process Appeals’ mission is to independently resolve tax disputes prior to litigation 

on a basis which is fair and impartial to both the government and the 

taxpayer. To assure their independence, Appeals’ staff cannot discuss 

substantive case issues with compliance staff unless taxpayers or their 

representative are present. Generally, compliance staff does not directly 

participate in an appeal or learn about the resulting decision. To identify 

whether the proposed compliance action should be sustained, Appeals 

staff review the case file prepared by IRS’s compliance program and 

determine whether that evidence demonstrates that the taxpayer and 

compliance staff have followed the applicable law, regulation, and IRS 

procedure. If requested, the taxpayer may meet with Appeals staff and 

provide additional evidence to support their appeal. To close an 

examination case, Appeals may (1) agree with the examination program 

and fully sustain its recommended assessment, (2) disagree and reduce the 

recommended assessment to partially sustain the assessment, or (3) fully 

concede to the taxpayer’s position and not sustain the assessment. For a 

6

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

satisfy a tax delinquency. A “lien” is a legal claim, filed in accordance with state property 

law that attaches to property to secure payment of a debt. 

7

26 CFR 601.106 and Internal Revenue Code sections 6320 and 6330. 
Page 6 GAO-06-396 Appeals Feedback

collection case, Appeals may (1) agree with and sustain the proposed 

enforcement action or (2) not sustain the proposed enforcement action by 

modifying the proposed action (e.g., propose an installment agreement 

rather than a levy), deferring collection, or fully conceding to the taxpayer’s 

position. If the taxpayer and IRS cannot reach agreement on the outcome 

of the case through the Appeals process, the taxpayer may have the case 

reviewed by the U.S. Tax Court, U.S. Court of Federal Claims, or a U.S. 

district court.

In line with its mission to resolve cases prior to litigation, Appeals is also 

authorized to review the facts of the case in light of the hazards that would 

exist if the case were litigated.8

 Appeals is the only IRS organization 

authorized to consider hazards of litigation when deciding whether to allow 

taxes and penalties.9

 This means that Appeals may recommend a fair and 

impartial resolution somewhere between fully sustaining or fully conceding 

the examiner’s proposal that reflects the probable result in the event of 

litigation. 

If taxpayers do not reach agreement with IRS examiners on the proposed 

deficiency, or if they choose not to contact Appeals, IRS will issue a notice 

of deficiency. This notice describes the deficiency and states that the 

taxpayer has 90 days to file a petition with the court for a redetermination 

of the deficiency. However, even though Appeals may be initially bypassed, 

it still has an opportunity to settle these cases.10 Under IRS procedures 

designed to encourage resolution of cases at the lowest possible level, the 

attorney from the local IRS District Counsel’s office handling the court case 

is required to refer the case to Appeals for possible settlement before it is 

scheduled for trial.11 Figure 1 summarizes IRS’s appeals system. 

8

Hazards of litigation are a substantial uncertainty (1) as to how the courts would interpret 

and apply the law, (2) about the court’s likely factual findings, or (3) about the admissibility 

or weight that would be given to a specific item of evidence. 26 CFR 601.106(f)2 and 

Internal Revenue Manual section 8.6.1.3.1. Hazards of litigation are not considered for 

collection cases. 

9

Appeals is the only IRS administrative function with the authority to consider settlements 

of tax controversies and as such has the primary responsibility to resolve these disputes 

without litigation to the maximum extent possible. Internal Revenue Manual section 

1.2.1.8.4.

10Collection Due Process cases must be considered by Appeals before review by a court. 

1126 CFR 601.106(d) 3(iii) and Internal Revenue Manual section 8.4.1.2.
Page 7 GAO-06-396 Appeals Feedback

Figure 1: IRS’s Appeals System

Appeals’ workload is organized into eight “workstreams” that reflect 

similarities in the case workload rather than which of IRS’s four operating 

divisions initiated the case. Two of the eight workstreams relate to 

collection issues and generally originate in two of IRS’s four operating 

divisions responsible for collection issues (Collection Due Process and 

Offer-in-Compromise workstreams). Three of the eight workstreams 

include a wide range of generally smaller examination and returnsprocessing-related penalty cases (Innocent Spouse, Penalty Appeals, and 

Exam/TEGE). The three other workstreams (Coordinated Industry Case, 

Industry Case, and Other) cover a small number of complex examinations 

from IRS’s LMSB programs as well as cases that do not fit into other 

workstreams.12 Appendix II includes definitions of Appeals workstreams, 

12Generally these include requests for abatement of interest, Trust Fund Recovery Penalty 

cases, the Collection Appeals program, and Disclosure issues. 

The IRS

compliance 

programs

propose 

assessment 

of additional tax 

or penalties, 

file a lien, or 

propose a levy 

to collect 

delinquent taxes.

Appeals

sustains, partially 

sustains, 

or denies the 

compliance 

proposal. This is

the final decision 

by IRS.

In most cases, 

if the taxpayer 

does not agree 

with the Appeals

decision, the 

taxpayer can 

request a review 

by a U.S. court. 

A U.S. court 

completes a

review.

If a taxpayer 

does not agree 

with the 

compliance 

proposal, he or 

she can appeal 

the proposal.

1 2 3 4 5

Source: GAO and PhotoDisc (images).

IRS U.S. Courts

The taxpayer can petition a court without contacting Appeals for

additional assessment cases.

If Appeals is

initially 

bypassed, it still 

may participate 

in settling the 

dispute prior to 

trial.
Page 8 GAO-06-396 Appeals Feedback

identifies the related operating divisions for the workstream, and the 

number of cases closed in each workstream during fiscal year 2004.

Strategic Approach Results-oriented organizations consistently strive to improve their 

performance through strategic planning. As part of this approach, agencies 

set objectives and measure performance to evaluate whether performance 

has improved. Specifically, 

• goals or objectives are the results that a program is expected to achieve, 

and 

• performance measures are selected after goals or objectives are 

developed, logically related to these goals or objectives, and used to 

gauge progress toward them. 

Other federal agencies have previously decided that developing and sharing 

information on the results of appeals may help them measure performance 

or at least serve as an indicator of whether their decisions are legally 

correct. For example, the Merit Systems Protection Board, an independent 

quasi-judicial agency established to protect merit systems in the federal 

workplace, has set a performance goal of maintaining or reducing its low 

percentage of appealed decisions that are reversed or sent back to board 

judges for a new decision. The board’s performance plan for fiscal year 

2005 contains an array of case-specific data to measure this performance 

goal.

Feedback Information 

Could Be Useful for 

Improving 

Performance 

Appeals overturned about 41 percent of the fiscal year 2004 cases we 

reviewed and in about half of those cases Appeals disagreed with the way 

compliance programs applied the law or regulations. This suggests that 

providing information on Appeals decisions could help compliance 

program managers improve case results by fostering more proper and 

consistent case decisions. However, finding the source of possible 

inconsistencies will require gathering and analyzing additional information 

and systematic analysis. Improved decision making, however, can benefit 

compliance programs, Appeals, and taxpayers. 

Feedback on Appeals 

Results Could Be Useful

Based on our case review, for cases closed in fiscal year 2004, we estimate 

that Appeals did not sustain about 41 percent of compliance cases (about 
Page 9 GAO-06-396 Appeals Feedback

42,075 of the 102,623) that year. We identified six principal reasons for 

those nonsustentions. As shown in table 1, we estimate that Appeals did 

not sustain compliance decisions in 52 percent of the cases not sustained 

(21,879 cases) at least in part because Appeals disagreed with compliance 

staff’s application of tax law or IRS regulations.13 Providing feedback on 

such disagreements could help compliance managers improve case results 

by taking action to foster the proper and consistent application of tax laws 

and regulations. For example, compliance managers could assess whether 

guidance or manuals, supervision, quality control, or other management 

tools should be revised to ensure that cases are properly closed. 

Identifying more specifically which laws or regulations were applied 

differently by the compliance programs would require an investment to 

gather and analyze additional data. For instance, in table 1 we identified 

the handling of a state tax refund as an example of differing applications of 

tax laws and regulations. To determine whether this is a common problem 

or an isolated instance, officials would have to investigate the issue by, for 

example, drawing a random sample of cases or questioning first-line 

managers and staff. Because these differing applications span a host of 

laws and regulations across IRS’s compliance programs, the corrective 

action that might be taken may only affect a relatively small number of 

cases. In complex cases, Appeals and the compliance managers may need 

to work together to develop a mutual understanding of how laws and 

regulations should be applied. 

13Cases may have multiple reasons for closing because a case may include more than one 

possible instance of noncompliance. Generally, each issue is analyzed separately on its 

merits and the appeals determination may be based on separate reasons for each issue. 
Page 10 GAO-06-396 Appeals Feedback

Table 1: Reasons Appeals Did Not Fully Sustain Compliance Decisions, Percentage of Nonsustained Cases in GAO’s Sample by 

Reason, and Illustrative Examples, Fiscal Year 2004

Source: GAO sample of Appeals cases. 

a These percentages are based on a subset of 63 nonsustained cases. The margin of error for these 

estimates is larger than for the sample as a whole. Confidence intervals are shown in appendix I.

b

Since a case can have multiple reasons why it is not sustained, the percentage of cases not fully 

sustained does not total to 100 percent. 

As also shown in table 1, we estimate that Appeals did not sustain 

compliance decisions in 44 percent of the cases because the taxpayer 

provided additional information to Appeals. For cases in this category, 

officials would need to investigate whether compliance staff could have 

done more to obtain the information needed to resolve the tax before the 

case was appealed. For example, compliance managers might assess 

whether staff clearly articulated the type and extent of information needed, 

Reason Appeals did 

not fully sustain 

compliance decision

Percentage of 

cases not fully 

sustained based 

on the reason a,b Illustrative case examples 

Application of laws or 

regulations

52 Examination revised taxable income to include the state refund for the prior year. 

Appeals determined that the taxpayer had not itemized on his or her federal return for 

the prior year and received no tax benefit. Therefore, examination should not have 

included the refund in taxable income. 

Additional information 

provided by the taxpayer 

or not accepted by 

compliance

44 Examination disallowed a taxpayer’s dependency exemptions and Earned Income Tax 

Credit (EITC) in a correspondence examination of the tax return. On appeal, the 

taxpayer presented supporting documentation, including birth certificates and school 

records, to substantiate the claim. 

Original audit work or 

significant rework by 

Appeals

14 The taxpayer contended that he or she was not liable for a tax assessment since the 

taxpayer had lost his or her wallet and someone else used the taxpayer’s Social 

Security Number to file the return. The taxpayer filed in Tax Court. Since the case had 

not been reviewed by Appeals, Chief Counsel forwarded the case to Appeals for review. 

Appeals determined that the taxpayer was not liable for the deficiency since the 

taxpayer was the victim of identity theft. 

Taxpayer not responsive 

to compliance

13 Examination determined that a taxpayer had not filed a tax return and thus incurred a 

tax deficiency. Both compliance and Appeals requested the tax return. The taxpayer 

did not submit the tax return until the case was sent to Chief Counsel to prepare for a 

Tax Court hearing. Once the tax return was processed, the taxpayer was due a refund.

Hazards of litigation 13 Failure to file and related penalties imposed against the taxpayer were abated when the 

taxpayer presented unique and sympathetic facts (e.g., the corporation was a nonprofit 

organization primarily using volunteer workers) that would be a hazard if the case 

proceeded to litigation.

Appeals changed 

collection alternative

11 Taxpayer requested a Collection Due Process hearing because he or she wanted an 

alternative method of collection other than the levy proposed by compliance. During 

the appeal, the taxpayer requested and entered into an installment agreement that 

allowed the taxpayer to pay the delinquent tax over time through periodic payments.
Page 11 GAO-06-396 Appeals Feedback

gave the taxpayer sufficient time to respond, or received the information 

but did not use it appropriately to resolve the case. 

Similar data gathering and analysis would be needed for the other reasons 

we identified for Appeals not sustaining cases in order for the information 

to be useful in improving compliance’s decision making. For example, for 

cases where Appeals had to perform original audit work or significant 

rework, compliance managers would need to identify why their staff did 

not perform the necessary work while the case was still their responsibility. 

For cases where Appeals accepted a collection alternative, compliance 

managers might assess whether it was because the taxpayer had not 

requested an alternative, the taxpayer’s financial circumstances had 

changed since compliance worked on the case, or a request for an 

alternative was inappropriately rejected by compliance staff. For cases 

where taxpayers did not respond to compliance, compliance managers 

might assess whether staff had made sufficient attempts to contact the 

taxpayer. 

Improved Decision Making 

Would Benefit Compliance 

Programs, Appeals, and 

Taxpayers 

As shown in table 2, the appeal rate--the percentage of cases appealed--

varies across Appeals’ workstreams from 29 percent for LMSB’s 

Coordinated Industry Case program (CIC) cases to one-tenth of 1 percent 

for cases in the Penalty Appeals and Other workstreams.14 Managers of 

programs with high appeal rates told us that they would benefit from 

Appeals feedback information in improving decision making. For example, 

with relatively high appeals rates and complex tax issues frequently 

considered in both the Industry Case (IC) and CIC programs, LMSB 

managers believe that Appeals case result information is important for 

managing their programs to update policies and procedures, modify or 

assess new training needs, or identify needed changes in the tax law.15

Similarly, Offer-in-Compromise program managers say they have benefited 

from working with Appeals staff on studies analyzing why cases were not 

sustained by Appeals. One study indicated that compliance managers and 

Appeals needed to reevaluate or reinforce some of their policies as well as 

be more consistent in following established procedures for assessing 

14The CIC program examines the largest corporate taxpayers in the United States using a 

team of revenue agents rather than a single agent. 

15The IC program examines corporations with $10 million or more in assets that are not in 

the Coordinated Industry program.
Page 12 GAO-06-396 Appeals Feedback

financial information, such as calculating transportation expenses, 

establishing the value of cars, and estimating future income. 

Table 2: Comparison of the Composition of Appeals Workload, Rate of Compliance Cases Appealed, Percentage of Appeals 

Workload, and Cases Not Fully Sustained

Source: GAO sample of Appeals cases closed during fiscal year 2004, IRS Data Book 2003, and IRS data. 

a

N/A means not applicable. IC and CIC workstreams are not included in our sample because these 

cases are very complex and the supporting documentation is voluminous. See appendix I. 

b

GAO’s sample results for three workstreams--Collection Due Process, Exam/TEGE, and Offer-inCompromise--are statistically generalizable to the specific workstream population. The rate of cases 

not fully sustained for Exam/TEGE differs from Collection Due Process and from Offer-in-Compromise 

cases. The margin of error for these estimates is larger than for the sample as a whole due to the 

smaller sample sizes when looking at each workstream separately. Confidence intervals are shown in 

appendix I. 

c

GAO’s sample results for Innocent Spouse, Penalty Appeals, and Other are not statistically 

generalizable because the sample sizes were not large enough. Consequently, these workstream 

results apply only to cases in our sample. 

Managers of programs with low appeal rates may not see as much benefit 

in obtaining feedback from Appeals. With an appeal rate of less than onehalf of 1 percent, managers in W&I, the source of many cases in the 

Exam/TEGE workstream, explained that they had limited interest in 

devoting resources to analyzing Appeals feedback information, although 

they would review any analysis Appeals provided to them. Managers told 

us that, given the challenges facing W&I, they needed to focus resources on 

other issues. 

Appeals workstreams

Number of appeals 

cases closed in 

fiscal year 2004

Percentage of 

Appeals workload

Percentage of cases 

compliance closed 

that are appealed

Number 

of cases in 

GAO’s sample

GAO sample 

percentage of 

cases not fully 

sustained

Coordinated Industry 

Case

653 0.6 29 N/Aa N/Aa

Offer-in-Compromise 

(OIC)

17,887 17.2 13 28 14b

Industry Case (IC) 670 0.6 14 N/Aa N/Aa

Innocent Spouse (IS) 4,713 4.5 8 7 57c

Collection Due Process 

(CDP)

32,226 31.0 1 53 19a

Exam/TEGE 28,592 27.5 0.4 40 73b

Penalty Appeals 14,647 14.1 0.1 16 69c

Other 4,558 4.4 0.1 9 56c

Total 103,946 100 0.3 153 41
Page 13 GAO-06-396 Appeals Feedback

However, although managers might not see much direct benefit for their 

programs, reducing the appeal rate for compliance programs could benefit 

Appeals. As shown in table 2, the Exam/TEGE, Penalty Appeals, and Other 

workstreams have appeal rates of less than 1 percent, but the cases from 

these three workstreams make up about half of Appeals’ workload. In 

addition, the cases that are appealed are generally not fully sustained. The 

percentage of cases in our sample that were not sustained ranged from 73 

percent for Exam/TEGE to 56 percent for the Other workstream.16 From 

Appeals’ perspective, improving case results in these workstreams could 

represent a target of opportunity for reducing its case load and increasing 

its efficiency. Analysis of our sample found that across all workstreams, 

Appeals cases that are fully sustained require about half of the staff hours 

of cases that are not fully sustained. 

If providing feedback to compliance programs improved their decision 

making, taxpayers would benefit as well. For example, if compliance 

programs used feedback information to improve their understanding of 

how to apply tax laws and regulations, they could reduce the number of 

taxpayers requesting an appeal and therefore resolve cases more quickly 

and with more uniform decisions. Further, since Appeals managers said 

some taxpayers decide not to pursue an appeal even though they disagree 

with a compliance decision, more consistent application of the tax laws or 

regulations could also improve the fairness and accuracy of their 

outcomes. 

The Exam/TEGE workstream can be used as a hypothetical example of the 

potential effect of these benefits. If the quality of compliance case 

decisions were to improve and as a result the percentage of cases fully 

sustained in Appeals were to increase from 28 percent to 38 percent, 

Appeals would save an estimated 7 staff years.17 Another potential cost 

saving would result if fewer taxpayers appealed because the quality of 

compliance case decisions improved. For example, if the number of cases

16Our sample results for Innocent Spouse, Penalty Appeals, and Other are not statistically 

generalizable because the sample sizes were not large enough. Consequently, these 

workstream results apply only to cases in our sample. 

17Estimate is based on our sample of Appeals cases closed in fiscal year 2004. We estimate 

the savings would be 6.7 staff years and are 95 percent confident that the savings would be 

between 1.1 and 12.3 staff years. 
Page 14 GAO-06-396 Appeals Feedback

from the Exam/ TEGE workstream that are appealed fell by 10 percent, 

Appeals would save an estimated 17 staff years.18 

More Systematic Data 

Analysis Would Help to 

Identify Useful Feedback

 Identifying which compliance programs would benefit most from feedback 

is important given that Appeals hears a wide variety of cases, the cases are 

spread across the operating divisions, and Appeals does not fully sustain 

cases for a variety of reasons. This dispersion means that in some 

situations the costs IRS would incur to analyze Appeals data and devise and 

implement improvements in operations may not be justified given how few 

cases could be affected. 

When analyzing our case sample, we found that overall (1) about half of all 

not fully sustained cases cited either the application of laws and 

regulations or additional information as the reason for nonsustention and 

(2) certain workstreams have significantly higher nonsustention rates than 

others. As shown in table 3, by considering these two facts in combination, 

we found that two workstreams–Penalty Appeal and Exam/TEGE–had a 

large percentage of cases that were not sustained for these two reasons. 

Other information already available might also be used to identify the most 

promising areas in which to conduct feedback projects. For example, 

those cases that are most costly to Appeals to work on, measured for 

instance by staff hours per case, may yield the most savings to Appeals if 

the cases could be resolved in the compliance programs without an appeal 

being made. Appeals and compliance programs have been selecting their 

projects more on the basis of manager judgment than through data 

analysis, such as those cases described above.

18Estimate is based on our sample of Appeals cases closed in fiscal year 2004. We estimate 

the savings would be 16.7 staff years and are 95 percent confident that the savings are 

between 12.4 and 21.1 staff years. 
Page 15 GAO-06-396 Appeals Feedback

Table 3: Reasons that Appeals Did Not Fully Sustain Compliance Program Decisions, Percentage of Cases Not Fully Sustained, 

Sample of Cases Closed in Fiscal Year 2004

Source: GAO sample of Appeals cases. 

a

The 63 cases not fully sustained from the sample of 153 cases cited 93 reasons for nonsustained 

cases. Totals many not add due to rounding.

b

Confidence intervals for the Penalty Appeals and Exam/TEGE application of laws and regulations and 

additional information provided by the taxpayer or not accepted by compliance for Exam/TEGE are 

presented in appendix I. Confidence intervals for the other cells are not provided because the sample 

size is not large enough to project results. 

CN/A means not applicable. These cells are not applicable because Innocent Spouse, Penalty 

Appeals, and Exam/TEGE are Appeals workstreams related to tax assessments, and the alternatives 

for the collection of delinquent tax do not apply. 

As discussed earlier, Appeals and compliance program managers will need 

to sort through possible reasons why some areas appear to have high levels 

of nonsustained cases. This may require several iterations of data analysis, 

discussion, and manager judgment. 

Once officials have identified the areas with the greatest potential for 

improvement, Appeals and compliance programs can explore low-cost 

avenues for using feedback information. For example, in two of the three 

workstreams with the highest percentage of appealed cases, Appeals and 

compliance programs have completed some projects based on Appeals 

case results. The joint study on Offer-in-Compromise cases not sustained 

by Appeals was conducted by a small team of compliance and Appeals staff 

and involved the review of 113 cases in 1 week. In contrast, Appeals and 

LMSB concluded that jointly reviewing fully conceded issues in the CIC 

program was too expensive because these cases can involve numerous 

complex issues. Rather, Appeals has started to provide to LMSB all 

Appeals Case Memorandums (ACM) as a low-cost solution for providing 

Reason Appeals did not fully sustain 

compliance decisionb

Percentage of issues cited in cases not fully sustaineda

CDP OIC

Innocent 

Spouse

Penalty 

Appeals

Exam/ 

TEGE Other Total

Application of laws or regulations 3.2 2.2 4.3 9.7 12.9 3.2 35.5

Additional information provided by the 

taxpayer or not accepted by compliance 4.3 1.1 0.0 1.1 20.4 3.2 30.1

Original audit work or significant rework by 

Appeals 2.2 0.0 0.0 1.1 5.4 1.1 9.7

Taxpayer not responsive to compliance 3.2 0.0 0.0 0.0 5.4 0.0 8.6

Hazards of litigation 0.0 0.0 1.1 3.2 3.2 1.1 8.6

Appeals changed collection alternative 5.4 1.1 N/Ac N/Ac N/Ac 1.1 7.5

Total 100
Page 16 GAO-06-396 Appeals Feedback

the information to target possible areas needing improvement.19 However, 

Appeals has not yet explored potential avenues for using feedback 

information in other large worksteams, such as Penalty Appeals. 

Appeals Can Build on 

Existing Efforts to 

Improve the Feedback 

Project 

Appeals has taken several steps to launch and begin expanding the 

feedback project. As Appeals and compliance managers gain experience in 

analyzing and using feedback information, Appeals, in partnership with 

compliance managers, can build upon those efforts by identifying the 

additional feedback information that needs to be shared and further 

developing results-oriented objectives. In addition, potentially useful 

feedback data contain errors that undermine their usefulness. 

Appeals Is Providing Some 

Feedback Based on 

Officials’ Initial Judgments 

of Its Needs

Appeals has taken several steps to launch and expand the feedback project. 

For example, officials are sending ACMs to certain compliance programs. 

During 2005, Appeals started to send ACMs to

• LMSB Industry Case and Coordinated Industry Case programs,

• W&I for the Innocent Spouse and EITC programs,

• SB/SE for the Collection Due Process, Offer-in-Compromise, and 

International Examination programs, 20 and

• TE/GE for some Exempt Organizations cases. 

The Collection Due Process program also receives some summary-level 

information on whether the taxpayer and Appeals agreed on the outcome 

of an appeal as well as the Appeals inventory level. Appeals and the 

compliance programs are working together to determine which additional 

programs should receive specific feedback information. 

19ACMs document Appeals’ decision in a case and explain why Appeals decided to either 

sustain or overturn compliance decisions. ACMs typically include an analysis of the facts 

and the applicable tax laws and regulations for the case. 

20The EITC is a refundable tax credit originally intended to offset the burden of Social 

Security taxes and provide a work incentive for low-income taxpayers. The IC, CIC, 

Innocent Spouse, Collection Due Process, and Offer-in-Compromise programs are described 

in appendix II. 
Page 17 GAO-06-396 Appeals Feedback

In addition, Appeals and compliance programs’ staff meet regularly 

through advisory board meetings. The advisory boards were created to 

focus on important cross-functional issues, solve problems, identify new 

issues arising in the compliance programs, and generally maintain close 

working relationships. For example, as previously discussed, Appeals and 

the SB/SE collection staff jointly worked on a review of Offer-InCompromise cases to determine why Appeals accepted some offers that 

the compliance program rejected and are considering similar efforts with 

other compliance programs.

Generally, decisions on what information to initially share with the 

compliance programs have grown out of discussions between Appeals and 

compliance staff and reflect their best judgment about the information that 

likely will help the compliance programs improve case results. Appeals 

and the compliance programs are still determining what additional 

feedback information should be shared. Appeals, in coordination with the 

compliance programs, is revising its case closing documents to provide 

additional information describing the basis for the resolution of a case. For 

example, Appeals is working with the compliance programs to provide 

information on whether additional information was considered by Appeals, 

cases were closed based on hazards of litigation, or taxpayers did not 

respond or delayed their responses. Compliance program managers told us 

that providing more detailed information tailored to their needs will help 

them to improve their results. Appeals plans to implement a revised 

Appeals case closing system during 2006. Appeals managers believe, and 

we agree, that the compliance programs will likely identify additional 

information needs in the future as they begin to analyze and use the 

information. For example, some compliance managers have told us that 

information on sustention rates would be useful. However, Appeals’ has no 

plans to develop this information. 

Partnership with 

Compliance Programs 

Could Help Ensure That 

Feedback Information Will 

Be Used to Achieve Desired 

Program Results 

Although Appeals has worked with the compliance programs on many 

aspects of the feedback project, Appeals developed the objectives and 

performance measures for the feedback project with relatively little input 

from the compliance programs. After initially developing the objectives 

and measures, Appeals distributed them to compliance program 

representatives for comment but received little response. Appeals officials 

therefore concluded the compliance programs agreed with the objectives 

and measures.
Page 18 GAO-06-396 Appeals Feedback

Best practices in strategic planning, of which setting objectives is a part, 

call for the involvement of stakeholders.21 In the case of the feedback 

project, involving the compliance programs in establishing the project 

objectives is particularly important because the programs themselves must 

play active roles in the project to make any changes that will improve their 

case results. Appeals officials acknowledge that mutually agreed upon 

objectives and measures would increase the likelihood that compliance 

programs would use the feedback information provided. 

However, gaining consensus may not be easy. The following illustrates the 

importance of involving the compliance programs in these decisions and of 

the potential difficulties that could arise. Appeals could adopt an objective 

for the feedback project of improving the sustention rate for compliance 

program cases that go to Appeals. That is, if the quality of compliance 

decisions is improved through feedback of Appeals case results, more 

appealed cases should be upheld. However, some of the compliance 

program officials we interviewed do not want improvement in the 

sustention rate to be an objective for a variety of reasons. For example, 

officials note that Appeals can change a case result for reasons that are out 

of their control. As discussed before, Appeals is authorized to close cases 

based on hazards of litigation and compliance programs are not. As a 

result, compliance managers are concerned that including cases closed 

based on hazards of litigation as part of a sustention rate would be unfair. 

Other managers do not agree that Appeals always makes the correct 

decisions on compliance cases. Thus, the active involvement of 

compliance program officials in the selection of objectives would be 

important to determining the strengths and weaknesses of potential 

objectives. 

Further, the involvement of compliance programs in establishing objectives 

and project measures may better ensure that the feedback project is 

focusing on desired results. As defined by Appeals in April 2005, the 

objectives of the case feedback project are to 

• build strong relationships between Appeals and operating divisions and 

functions,

• capture and share trend data,

21GAO, Executive Guide: Effectively Implementing the Government Performance and 

Results Act, GAO/GGD-96-118 (Washington, D.C.: June 1996), p. 13.
Page 19 GAO-06-396 Appeals Feedback

• analyze trend data–and provide meaningful commentary to the 

operating divisions and functions, and 

• influence operating division policy and procedure. 

Although these objectives indicate some of the activities that are integral to 

feedback sharing and a desired outcome--influence on operating divisions’ 

policies and procedures--involving the operating divisions in considering 

program objectives would provide an opportunity to build on these 

objectives to more fully define the results intended for the feedback 

project. The Commissioner did not specify the benefits that he thought 

should result from sharing of Appeals case information with the operating 

divisions and their compliance programs. However, as discussed earlier, 

sharing this information has the potential to improve the operations of the 

divisions and, consequently, the quality of their case decisions, potentially 

increasing the case sustention rate and taxpayer satisfaction with the 

Appeals process while also decreasing the time to complete an appeal. In 

addition, sharing information may also improve Appeals’ decision making 

by, for example, clarifying IRS’s interpretation of new or particularly 

complex tax laws so that both Appeals and compliance managers apply 

them consistently. By working with the compliance programs, Appeals 

would have the opportunity to further refine the project objectives to more 

specifically identify which of these possible results-oriented improvements 

are being sought by the project. For example, as mentioned earlier, the 

Merit Systems Protection Board has set a performance goal of maintaining 

or reducing its low percentage of appealed decisions that are reversed or 

sent back to the board. To the extent that new objectives are identified, 

Appeals and the compliance programs would need to ensure that 

appropriate performance measures are developed to track progress toward 

those objectives. 

Project Is Correcting Flaws 

in Data, but Sufficient 

Internal Controls to Monitor 

and Verify Data Not Yet 

Developed

When we compared data in Appeals’ Centralized Database System 

(ACDS)22 to documentation in closed Appeal case files, we found 

significant error rates related to data that would be used for a case 

feedback project. The highest error rates in the fields were related to the

22ACDS is a computer-based system used to control and track cases throughout the appeal 

process. It generates Appeals management statistics and reports.
Page 20 GAO-06-396 Appeals Feedback

results of an appeal, such as in the revised tax, revised penalty amounts, or 

case-closing code field.23 For example, 14 percent of the cases contained 

errors in the revised tax field. These errors related to the outcome data 

that likely would be included as part of any feedback information provided 

to the compliance programs and would diminish the information’s 

usefulness to compliance program managers. Further, 12 of 165 cases 

(7 percent) could not be analyzed because the files could not be located or 

essential Appeals documents were not available.24 

On the basis of error rates identified, we reviewed internal controls25 for 

processing case results data and identified several internal control 

weaknesses that may have contributed to inaccurate data in ACDS. For 

example, we were informed by Appeals that some appeals officers, who are 

responsible for working the taxpayers’ case, did not verify that ACDS data, 

such as the amount of tax or penalty owed by the taxpayer, was entered 

into ACDS accurately. Appeals policy requires that the appeals officers 

verify the key data in ACDS, such as the statute of limitations date, when a 

case is received. When a case is completed, Appeals procedures require 

the case manager, who supervises the appeals officer, to review and sign 

case-closing documents, which include data such as the amount of 

proposed tax or penalty and case-closing code. The closed-case data are 

then entered into the ACDS information system by the Appeals Processing 

Services staff. According to Appeals, once the case is sent to Processing 

Services for data entry, the appeals officer and case manager generally do 

not see the case again and do not know whether the closing data have been 

entered into ACDS accurately. Appeals guidance does not require that the 

appeals officer or Processing Services staff verify whether the data were 

accurately entered. 

According to Processing Services staff, appeals officers may not ensure 

that case-closing documents are complete. For example, data, such as the 

amount of revised tax or penalty (the amount of tax or penalty as 

determined by Appeals) or the closing code, may not be entered on the 

23The case-closing field primarily describes whether the taxpayer agreed or disagreed with 

Appeals’ determination and whether the case was appealed to court. For some 

workstreams, closing codes also describe whether Appeals sustained the case. 

24Another ongoing assignment also has not located a significant percentage of Appeals files. 

A subsequent study will more fully analyze the issues related to unavailable case files. 

25Agencies establish internal controls to prevent and detect errors and fraud. 
Page 21 GAO-06-396 Appeals Feedback

closing document by the appeals officers. Processing Services staff said 

that in these cases, they must review the case file to determine the correct 

closing data and enter that data into ACDS. The staff stated that identifying 

the correct data may be difficult in complex cases.

Other internal controls only partly compensate for the lack of data entry 

verification. Appeals performs an annual Inventory Validation Listing 

process for open cases where critical fields in ACDS are verified and errors 

identified are corrected in ACDS. Since only open cases are reviewed, 

fields with closing data, such as revised tax, revised penalty, and closing 

code, are not reviewed. These closing fields are critical to the feedback 

loop process and without verification inaccurate data could be sent to the 

compliance programs. 

Appeals is making efforts to improve the accuracy of the data in ACDS. 

Appeals, for the first time, completed a data reliability study of ACDS in 

2005. This study consisted of a random probability sample of 1,568 Appeals 

cases where data fields that were considered critical or were used daily 

were tested. From the study, Appeals identified data accuracy and internal 

control issues that were consistent with our findings. Appeals found that 

some fields in ACDS had lower than expected accuracy rates. For 

example, the revised tax field for the Innocent Spouse workstream had an 

accuracy rate of 71.9 percent, while the revised penalty field for the Other 

workstream was 78.1 percent.26 Appeals also identified that improvements 

were needed in (1) internal controls including training of Processing 

Services staff on ACDS input procedures, (2) ACDS data fields with lower 

than expected accuracy rates, and (3) Appeals’ section of the Internal 

Revenue Manual, which includes guidelines for standard data accuracy 

reviews. 

Appeals has been revising its database and related data entry procedures to 

improve the accuracy of the data in ACDS. Case-closing documents are 

being redesigned in a computer-based format so that only data which are 

appropriate to the case under appeal could be selected, thus reducing the 

potential for errors. Although Appeals is making efforts to improve the 

accuracy of the data in ACDS, it has not completed plans to address all of 

the identified data accuracy issues. Appeals will likely continue to 

26Appeals is 95 percent confident that for the revised tax field, the actual proportion is 

between 65.0 and 78.7 percent, and for the revised penalty field, the actual proportion is 

between 71.9 and 84.3 percent.
Page 22 GAO-06-396 Appeals Feedback

experience data accuracy issues unless it improves its internal controls to 

verify, on an ongoing basis, the accuracy of case data entered into ACDS.

Conclusions Using the results of Appeals case outcomes has the potential to improve 

compliance programs’ case results and service to taxpayers with benefits 

that could accrue to the divisions, Appeals, and taxpayers. Nevertheless, 

given the scope of Appeals’ work, careful targeting of investments to use 

Appeals information is needed to ensure that the benefits will be significant 

enough to justify the costs IRS incurs to collect and analyze Appeals data 

and make changes in policies, procedures, or practices based on those 

analyses. Because relatively few compliance program cases may be 

affected by the use of some Appeals feedback information, officials need to 

be judicious in selecting topical areas to study. Opportunities exist to move 

beyond professional judgment in selecting these areas to a more datadriven approach. 

However, to maximize the benefits of sharing Appeals information, as 

intended by the Commissioner, the officials need to better define what the 

program is intended to achieve and how results will be measured. Appeals 

and the compliance programs need to enter into an active partnership to 

develop results-oriented objectives and associated performance measures 

for the feedback project. Finally, the feedback project must be built on 

reliable data, which requires that better internal controls be instituted to 

drive down the error rates in key data that will be provided to the 

compliance programs. 

Recommendations We are making recommendations to the Commissioner of Internal Revenue 

to ensure that the feedback project reaches its maximum potential in 

improving case results. Specifically, we recommend that the 

Commissioner direct Appeals 

• in partnership with the compliance programs, to analyze Appeals caseresults data, such as the workstream sustention rates, reasons for 

nonsustention, or staff hours spent per case, to identify areas in which 

improvements are likely to generate the greatest benefits to the 

compliance programs, Appeals, and taxpayers; 

• in partnership with the compliance programs, to further investigate the 

most promising areas and assess whether actions, such as additional 
Page 23 GAO-06-396 Appeals Feedback

guidance or training, are needed to improve the quality of compliance 

programs’ case decisions; 

• in partnership with the compliance programs, to further develop resultsoriented objectives and associated performance measures for the 

feedback project; and

• to build upon its current efforts to improve the quality of Appeals 

information for the feedback project by establishing internal controls to 

verify, on an ongoing basis, the accuracy of the data entered into 

Appeals information systems on case results.

Agency Comments and 

Our Evaluation

The Commissioner of Internal Revenue provided written comments on a 

draft of this report in a March 6, 2006, letter which is reprinted in appendix 

V. The Commissioner agreed with our recommendations and said they will 

help IRS develop a much stronger feedback program. 

With regard to the first recommendation, the Commissioner said IRS would 

continue quarterly meetings between the operating divisions and Appeals 

and report national-level feedback data at least annually to identify specific 

compliance programs where shared benefits would be realized. We agree 

that these actions would be a first step toward implementing the 

recommendation. However, as discussed in the report, more systematic 

data analysis would help Appeals and the compliance programs identify 

areas more likely to realize the benefits of using feedback data. As 

discussed in the Commissioner’s comments, this may involve reviewing 

external data, such as the National Taxpayer Advocate’s reports, as well as 

other data to identify areas that may yield the most savings to IRS if the 

cases were resolved in the compliance programs without appeals. The 

analysis of existing data is a necessary step toward tailoring analyses to 

each of IRS’s compliance programs. 

As agreed with your offices unless you publicly announce its contents 

earlier, we plan no further distribution of this report until 30 days after its 

issue date. At that time, we will send copies of this report to the Secretary 

of the Treasury, The Commissioner of Internal Revenue, and other 

interested parties. Copies will be made available to others upon request. 

This report is available at no charge on GAO's Web site at 

http://www.gao.gov.
Page 24 GAO-06-396 Appeals Feedback

If you or your staff have any questions, please contact me at (202) 512-9110 

or Jonda Van Pelt, Assistant Director, at (415) 904-2186. We can also be 

reached by e-mail at brostekm@gao.gov or vanpeltj@gao.gov, respectively. 

Contact points for our offices of Congressional Relations and Public Affairs 

may be found on the last page of this report. Key contributors to this report 

were Carl Barden, Evan Gilman, Leon Green, Shirley Jones, Laurie King, 

Ellen Rominger, and Michael Rose. 

Michael Brostek 

Director, Tax Issues

Strategic Issues Team
Page 25 GAO-06-396 Appeals Feedback

Appendix I

Objectives, Scope, and Methodology AAppenednxidexiIs

Our objectives were to determine whether (1) information on Appeals 

results has the potential to provide useful feedback to the Internal Revenue 

Service (IRS) operating divisions to benefit compliance programs, Appeals, 

and taxpayers through better case resolution and (2) the feedback project 

was being effectively managed to maximize its potential to improve IRS’s 

performance and thereby reduce disputes with taxpayers. 

To determine whether information on the results of Appeals cases has the 

potential to provide useful feedback and whether the feedback project is 

being effectively managed, we interviewed 24 Appeals executives, 

managers, and staff who work with compliance program staff on feedback 

issues, coordination, or information systems issues. We also interviewed 

58 compliance program executives, managers, and staff selected by 

operating division liaisons to represent their compliance programs because 

of their familiarity with Appeals issues. We discussed with these officials 

the type of feedback data that are being collected by Appeals and sent to 

the compliance program officials as well as the type of feedback data 

compliance program officials would like to receive from Appeals. We 

reviewed documents provided by Appeals on the feedback project. 

We reviewed the Appeals Centralized Database System (ACDS) to 

determine whether it contained sufficient case results information. We 

found that it did not contain sufficient information for our analyses, such as 

whether Appeals agreed with the compliance decision. Therefore, to 

develop this information, we selected a random probability sample of case 

files to review. The sample was drawn from an initial population of 103,946 

Appeals cases closed in ACDS for fiscal year 2004. However, since Industry 

Case (IC) and Coordinated Industry Case (CIC) cases, which originate from 

IRS’s Large and Mid-Size Business Division (LSMB), are complex and the 

supporting documentation is voluminous, we excluded these 1,323 cases 

from the population. Therefore, the final population size was 102,623 

cases. 

Of the 165 cases selected in our sample, we reviewed 153 cases to 

determine the results of the cases. The remaining 12 cases could not be 

analyzed because the files could not be located or essential Appeals 

documents were not available. We assessed the known characteristics of 

the 12 cases not received against those of the 153 received for potential 

systematic differences. Based on this nonresponse bias analysis, we 

concluded that it was acceptable to treat the 12 cases as missing at random.
Appendix I

Objectives, Scope, and Methodology

Page 26 GAO-06-396 Appeals Feedback

We reviewed documents, such as the Appeals Case Memorandum and the 

Case Activity Record, and determined whether the cases were fully 

sustained, partially sustained, or not sustained. In determining the extent 

to which a case was sustained, we based our decision on the determination 

made by Appeals in the Appeals Case Memorandum using the following 

scale: “fully sustained” indicated that in our judgment Appeals agreed with 

compliance on all issues appealed by the taxpayer; “partially sustained” 

indicated that Appeals agreed with at least one but not all of the issues; and 

“not sustained” indicated that Appeals did not agree with any of the issues. 

We also reviewed the cases to determine the reasons the cases were not 

sustained by Appeals. Since cases could include several compliance issues, 

there may have been multiple reasons why a case was not sustained. We 

recorded each decision and the reason for the decision cited in the Appeals 

case file for a case not being sustained on a data collection instrument 

(DCI) that we developed. The analysts who participated in reviewing the 

case files and recording the information on the data collection instrument 

were knowledgeable about the appeals process and how to interpret the 

information in the case files. 

To ensure that the data entered on the DCIs conformed to GAO's data 

quality standards, each completed DCI was reviewed by at least one other 

GAO analyst. The reviewer compared the data recorded on the DCI to the 

data in the case files to determine whether he or she concurred with the 

interpretation of the case files and the way the data were recorded on the 

DCI. When there were differing perspectives, the analysts met and 

reconciled them. 

Tabulations of the DCI items were automatically generated using a 

statistical software package to develop case outcome information. For 

these analyses, the computer programs were checked by a second, 

independent analyst.

We developed case outcome information for each of the Appeals 

workstreams except IC and CIC. For the CDP, Exam/TEGE, and OIC 

workstreams, our sample sizes were large enough to generalize the results 

separately for each workstream, or to have a margin of error small enough 

to produce meaningful workstream estimates. 

Because we followed a probability procedure based on random selection, 

our sample is only one of a large number of samples that we might have 

drawn. Since each sample could have provided different estimates, we 

express our confidence in the precision of our particular sample’s results as 
Appendix I

Objectives, Scope, and Methodology

Page 27 GAO-06-396 Appeals Feedback

a 95 percent confidence interval, plus or minus 8 percentage points. This is 

the interval that would contain the actual population value for 95 percent of 

the samples we could have drawn. For example, Appeals did not sustain 41 

percent of the cases in the sample, which has a 95 percent confidence 

interval of 33 percent as a lower bound and 49 percent as an upper bound. 

Workstream estimates come from subsets of the sample. Thus 

workstream-specific estimates have larger confidence intervals due to the 

smaller sample size. Tables 4, 5, and 6 present the confidence intervals for 

sample data presented in the report. 

Table 4: Confidence Intervals for Table 1

Source: GAO. 

Note: Based on a subset of 63 cases not sustained by Appeals. 

Table 5: Confidence Intervals for Table 2

Source: GAO.

Reason Appeals did not fully sustain compliance decision

Percentage of 

cases not fully 

sustained 

Confidence intervals

Lower bound Upper bound

Application of laws or regulations 52 40.0 64.8

Additional information provided by the taxpayer or not accepted by 

compliance

44 32.1 56.8

Original audit work or significant rework by Appeals 14 6.7 25.5

Taxpayer not responsive to compliance 13 5.6 23.6

Hazards of litigation 13 5.6 23.6

Appeals changed collection alternative 11 4.5 21.7

Appeals workstreams 

GAO sample: 

percentage of Appeals 

cases not fully 

sustained 

Number of cases in the 

sample for this 

workstream 

Confidence intervals

Lower bound Upper bound

Offer-in-Compromise 14 28 4 33

Innocent Spouse 57 7 18 90

Collection Due Process 19 53 9 32

Exam/TEGE 73 40 56 85

Penalty Appeals 69 16 41 89

Other 56 9 21 86

Total 41 153 33 49
Appendix I

Objectives, Scope, and Methodology

Page 28 GAO-06-396 Appeals Feedback

Table 6: Confidence Intervals for Table 3

Source: GAO.

Note: N/A means not applicable because the confidence interval was not computed. 

To determine how effectively the feedback project was being managed, we 

reviewed documents supplied by Appeals and compliance program 

officials, such as meeting minutes for the advisory boards and strategic 

planning documents. We also interviewed these officials and reviewed our 

prior work on best practices for developing information that can be used to 

improve agency performance. 

To compute appeal rates, we compared compliance cases closed in fiscal 

year 2003 by worksteam to the Appeals cases closed in fiscal year 2004. 

Since Appeals typically required about a year to complete a case, the 2004 

Appeals closings were cases that were most likely closed by compliance 

programs during 2003. Further, IRS uses a similar approach to compute 

audit rates. To identify the number of compliance cases by worksteam, we 

used data published in IRS’s fiscal year 2003 Databook. Data on cases 

closed for the Innocent Spouse and Offer-in-Compromise workstreams was 

not available in the Databook and was provided by IRS staff. 

Data Reliability We assessed whether the case results data contained in ACDS were 

sufficiently reliable for our use. We selected the first 100 cases from our 

random sample of 165 cases to make this determination. We interviewed 

knowledgeable Appeals officials about the data, performed electronic 

testing of relevant data fields for obvious errors in accuracy and 

completeness, and collected and reviewed documentation about the data 

and the system. We also reviewed prior Treasury Inspector General for Tax 

Administration reports.

Reasons Appeals did not fully 

sustain compliance decision

Penalty Appeals Exam/TEGE

Percentage 

not sustained

Confidence interval

Percentage not 

sustained

Confidence interval

Lower 

bound

Upper 

bound

Lower 

bound

Upper 

bound

Application of laws and 

regulations 9.7 4.5 17.6 12.9 6.8 21.5

Additional information provided 

by the taxpayer or not accepted 

by compliance 1.1 N/A N/A 20.4 12.8 30.1
Appendix I

Objectives, Scope, and Methodology

Page 29 GAO-06-396 Appeals Feedback

Of the 100 cases selected for our sample, we reviewed 92 cases from all of 

the Appeals workstreams except as mentioned earlier, the IC and CIC 

workstreams. The remaining 8 cases could not be analyzed because 

essential Appeal documents were not available. We compared documents 

in closed Appeals cases, such as the Appeals Case Memorandum, to data in 

ACDS. However, Appeals did not always provide documentation for the 

basis of the compliance determination; therefore, in some cases, we were 

unable to determine if data, such as the amount of tax proposed by 

compliance, were accurate. 

We had Appeals verify data errors in fields that were specific to case results 

information, such as the amount of revised tax and penalty, as well as the 

closing code. Due to the high error rate of some data fields in our sample, 

we reviewed internal controls used in the processing of case results data at 

one Appeals area office. This review consisted of observation and inquiry 

of Appeals officials on Appeals’ case processing procedures and review of 

Appeals documentation. We also spoke to officials in Appeals 

headquarters concerning weaknesses identified in Appeals’ internal 

controls. 

On the basis of our data reliability review of ACDS, we determined that 

data in ACDS were not sufficiently reliable for our use. Instead of relying 

on that data, we used data developed from our sample of Appeals cases and 

continued our analyses of Appeals’ internal controls. 

We conducted our review at Appeals headquarters in Washington, D.C., and 

one Appeals area office from October 2004 through October 2005 in 

accordance with generally accepted government auditing standards. 
Page 30 GAO-06-396 Appeals Feedback

Appendix II

Appeals Workstreams ApendxiI

Appeals’ workload is organized into eight workstreams. These 

workstreams include cases that have similar characteristics rather than 

reflecting the IRS operating division where they originated. For example, 

cases in the Collection Due Process workstream include only appeals by 

taxpayers under provisions of the IRS Restructuring and Reform Act 1998, 

which authorizes an independent review by Appeals of proposed levies and 

filed liens. These cases could originate in either the Wage and Investment 

Division or the Small Business and Self-Employed Division, since either 

division could propose a levy or file a lien. Other workstreams include a 

wide range of cases from across IRS operating divisions. The Exam/TEGE 

workstream includes appeals for compliance actions, including 

recommended assessments and proposed penalties originating from much 

of IRS’s reporting and filing compliance program, with the exclusion of 

LMSB cases. These appeals can include diverse issues, such as 

recommended assessments related to the Earned Income Tax Credit or 

large charitable organizations, such as universities or hospitals. During 

fiscal year 2004, Appeals completed nearly 104,000 cases. Table 7 describes 

these workstreams and the IRS operating divisions where these cases 

where proposed. 
Appendix II

Appeals Workstreams

Page 31 GAO-06-396 Appeals Feedback

Table 7: Description of Appeals Workstreams 

Appeals 

workstream Definition

Originating IRS 

division (s)

Appeals 

cases closed 

in fiscal year 

2004

Percentage of 

total cases

Collection Due 

Process (CDP)

The IRS Restructuring and Reform Act of 1998 authorized 

an independent review by Appeals and by the courts of 

proposed levies and filed liens. The taxpayers, under 

some circumstances, could have the original assessment 

reviewed and can request an appeal for liens and levies that 

are past the 30- day period. 

SB/SE

W&I

32,226 31.0

Exam/TEGE This workstream includes appeals for tax disputes 

originating with three of four IRS operating divisions’ 

examination functions. The workstream does not include 

cases originating in LMSB’s Industry Case and Coordinated 

Industry Case programs. This workstream includes cases 

from a wide range of major IRS compliance programs, 

including the campus compliance, field examination, 

exempt organization examinations, employee plans 

examinations, international issues examinations, tax 

shelters, and examinations of excise, employment, and 

estate and gift tax returns.

W&I

SB/SE

TE/GE

28,592 27.5

Offer-inCompromise (OIC)The Internal Revenue Code authorizes the Secretary 

of the Treasury to compromise tax debts prior to 

reference to the Department of Justice for 

prosecution or defense. Under current regulations, 

debts may be compromised if there is doubt as to 

liability, doubt as to collectibility, and for effective tax 

administration. Appeals cases in this workstream 

are primarily reviewed by SBSE’s centralized OIC 

collection functions at the Brookhaven and Memphis 

campuses since offer cases may include taxpayers 

from each of IRS’s four operating divisions. 

SB/SE

LMSB

W&I

TE/GE

17,887 17.2

Penalty Appeals Most of the requests in this workstream relate to requests 

for abatement of penalties for a taxpayer’s failure to file, 

failure to pay, and failure to deposit. Typically, these are 

penalties generated through automated compliance tests. 

W&I

SB/SE

TE/GE

LMSB

14,647 14.1

Innocent Spouse Under the Innocent Spouse program, one spouse requests 

relief from a joint tax liability after assessment because 

(1) a joint return had an understatement of tax due to 

erroneous items of the nonrequesting spouse, (2) the 

requesting spouse did not know and had no reason to know 

there was a tax understatement at the time the return was 

signed, and (3) taking into account all facts and 

circumstances, holding the requester for relief liable for the 

tax would be unfair. Appeals reviews determinations after 

rejection by W&I. 

W&I 4,713 4.5
Appendix II

Appeals Workstreams

Page 32 GAO-06-396 Appeals Feedback

Source: GAO. 

a

Appeals cases from the Coordinated Industry Case and Industry Case program were not included in 

our sample. 

Other These include appeals for several other tax disputes that 

are not included in other Appeals workstreams. These 

cases include the Collection Appeals program cases, trust 

fund recovery penalty cases, requests for abatement of 

interest, and tax disclosure cases. 

W&I

SB/SE

LMSB

TE/GE

Disclosure

4,558 4.4

Coordinated 

Industry Case

These are appeals related to the recommended 

assessment of additional tax and penalties for the largest 

corporate taxpayers in the United States. These taxpayers 

have been audited by a team of revenue agents rather than 

a single agent.a

LMSB 653 .6

Industry Case These are appeals related to the recommended 

assessment of additional tax and penalties for corporations 

with $10 million or more in assets that are not in the 

Coordinated Industry Case program.a

LMSB 670 .6

Total cases closed by Appeals 103,946 100

(Continued From Previous Page)

Appeals 

workstream Definition

Originating IRS 

division (s)

Appeals 

cases closed 

in fiscal year 

2004

Percentage of 

total cases
Page 33 GAO-06-396 Appeals Feedback

Appendix III

Appeal Rates ApendxiI

Taxpayers in each workstream requested Appeals of recommended 

assessments or other compliance actions, such as proposed levies and filed 

liens, at widely differing rates. To compute the appeal rate for each 

workstream, we compared the number of compliance cases closed for each 

workstream to the number of cases Appeals closed. We compared fiscal 

year 2003 compliance case closings to fiscal year 2004 Appeals case 

closings because Appeals averaged 260 calendar days during fiscal year 

2004 to complete its work on a case.1

 For example, as reported in table 16 

of the IRS Databook for 2003, during fiscal year 2003, IRS filed 548,683 

notices of federal tax liens, served 1,680,844 notices of levy, and made 399 

seizures for a total of 2,229,926 compliance actions. Each of these actions 

could be the basis for a CDP appeal. During fiscal year 2004, Appeals 

completed work on 32,226 CDP cases, for an Appeal rate of 1.445 percent 

or 1 percent. 

1

This computation also follows the approach that IRS uses to compute audit rates. For that 

computation, IRS compares the number of returns filed to the number of audits closed in 

the following year. 
Appendix III

Appeal Rates

Page 34 GAO-06-396 Appeals Feedback

Table 8: Appeal Rates by Workstream, Fiscal Year 2004 

Sources: GAO analysis of IRS data. 

Note: Compliance cases closed in fiscal year 2003 are most likely to have been closed by Appeals 

during fiscal year 2004. 

a

Offers received in 2003; offer closing data not available. 

b Case closing data provided by IRS. 

c

Number of liens filed and levy notices issued, rather than cases closed. 

d

Total examinations, less IC and CIC examinations, plus Information Returns program cases, EP/EO 

examinations, and EITC notices. 

e

Excluding employment tax penalties. 

f

Total employment tax penalties. Total compliance cases closed in fiscal year 2003 does not include 

disclosure appeals and abatement of interest. Data on these compliance actions would not have a 

material effect on the computation of the appeal rate. 

Other approaches could be used to compute appeal rates. Our analysis 

used compliance cases closed as the basis for measuring appeal rates 

because (1) a uniform, published source of data was available and provided 

data on six of the eight Appeals workstreams and (2) it broadly compares 

IRS compliance programs to the Appeals program. Another approach for 

measuring appeal rates, for example, could use only cases closed where 

IRS recommended an additional tax assessment and not include cases 

where no tax was proposed, because taxpayers would not have a basis for 

requesting an appeal. In some programs this difference may be substantial. 

For example, in the Offer-in-Compromise program, according to 

unpublished data provided by IRS, 58 percent of fiscal year 2003 Offer-inCompromise cases were closed by Compliance because the offer was not 

processable or was returned to the taxpayer. Accordingly, the taxpayer did 

not have a basis for an appeal. Eliminating these cases from the Offer-InAppeals workstream

Number of compliance 

cases closed in fiscal 

year 2003

Number of cases 

closed by 

Appeals in fiscal 

year 2004 Appeal rate

CIC 2,287 653 29

IC 4,769 670 14

OICa 136,822 17,887 13

ISb 57,606 4,713 8

CDPc 2,229,926 32,226 1

Exam/TEGEd 6,926,956 28,592 .4

Penalty Appealse 17,827,467 14,647 .1

Otherf 6,078,884 4,558 .1

Total 33,264,717 103,946 .3
Appendix III

Appeal Rates

Page 35 GAO-06-396 Appeals Feedback

Compromise cases closed in 2003 would more than double the appeal rate 

from 13 percent to 31 percent. 

However, limited data are available to use other approaches for computing 

appeal rates. For example, about 30 percent of the cases closed in Appeals’ 

second largest workstream, Exam/TEGE, originated from the Earned 

Income Tax Credit and the Automated Underreporter programs. Data were 

not published on the proportion of these cases that were closed with 

recommended assessments. 
Page 36 GAO-06-396 Appeals Feedback

Appendix IV

Comments from the Commissioner of Internal 

Revenue ApendxiIV
Appendix IV

Comments from the Commissioner of 

Internal Revenue

Page 37 GAO-06-396 Appeals Feedback
Appendix IV

Comments from the Commissioner of 

Internal Revenue

Page 38 GAO-06-396 Appeals Feedback
Appendix IV

Comments from the Commissioner of 

Internal Revenue

Page 39 GAO-06-396 Appeals Feedback
Page 40 GAO-06-396 Appeals Feedback

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D.C.: January 20, 2004. 

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Performance Measures. GAO-03-143. Washington, D.C.: November 22, 

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IRS Modernization: IRS Should Enhance It’s Performance Management 

System. GAO-01-234. Washington, D.C.: February 23, 2001.

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