GAO Report to the Permanent Subcommittee 

on Investigations, Committee on 

Homeland Security and Governmental 

Affairs, U.S. Senate 

INTERNAL REVENUE 

SERVICE 

Procedural Changes 

Could Enhance Tax 

Collections 

November 2006 

GAO-07-26 
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

November 2006

INTERNAL REVENUE SERVICE

Procedural Changes Could Enhance Tax 

Highlights of GAO-07-26, a report to the Collections 

Permanent Subcommittee on 

Investigations, Committee on Homeland 

Security and Governmental Affairs, U.S. 

Senate 

GAO previously testified that

federal contractors abused the tax

system with little consequence. 

While performing those audits, 

GAO noted that the Internal

Revenue Service (IRS) records 

sometimes contained inaccurate or

outdated tax information that 

prevented IRS from taking 

appropriate collection actions 

against those contractors, including

submitting their tax debt to the

Federal Payment Levy Program 

(FPLP) for collection. 

As a result, GAO was asked to

review IRS’s coding of tax debt

excluded from the FPLP to

determine whether (1) IRS tax 

records contain inaccurate status 

or transaction codes that exclude 

tax debt from the FPLP, (2) IRS’s 

monitoring could be strengthened

to ensure the accuracy of its status

and transaction codes, and

(3) other opportunities exist to 

increase the amount of tax debt

included in the FPLP. 

What GAO Recommends

GAO makes four recommendations

to IRS to increase the amount of

tax debt eligible for the FPLP and 

six recommendations to evaluate

the appropriateness and ongoing 

validity of IRS’s hardship 

designations. IRS agreed with five 

of our recommendations and 

partially agreed with two others. 

IRS disagreed with three 

recommendations due to workload,

cost, or taxpayer rights 

considerations. GAO reiterated its 

support for its recommendations. 

IRS tax records had inaccurate information that resulted in it erroneously 

excluding cases from the FPLP and other tax collection actions. The FPLP is 

a cost-effective automated system used to collect unpaid taxes from certain 

federal payments. GAO estimates that as of September 30, 2005, over 500,000 

tax records—equating to about $2.4 billion in tax debt—contained 

inaccurate codes that IRS systems used to exclude tax debts from the FPLP. 

Inaccuracies included tax debts coded as having active installment 

agreements even though the tax debtor had stopped making payments. 

IRS’s monitoring of cases was insufficient to identify and correct the coding 

errors GAO identified. Additionally, IRS’s monitoring of financial hardship 

cases is not sufficient to ensure their ongoing accuracy. IRS grants tax 

debtors experiencing financial difficulty a hardship designation that 

excludes them from the FPLP and other tax collection activities until their 

income increases. To measure this, IRS solely uses the income reported on 

the tax debtor’s annual tax returns. However, IRS does not monitor those tax 

debtors to ensure they are filing and paying current taxes. For 31 financial 

hardship cases GAO examined, 24 had ceased to file tax returns. 

Although IRS has increased the amount of tax debt it submits to the FPLP, 

additional policy changes could further improve the program’s effectiveness. 

Since 1992, IRS has almost tripled the maximum income it allows tax 

debtors in financial hardship to earn; raising it to $84,000 in 2004—almost 

double the national median income. As a result, whereas in 1992 no one 

earning above the median income was considered to be in financial hardship

(and therefore excluded from the FPLP), in 2005 almost two-thirds of the tax 

debt in financial hardship was owed by individuals earning over the median 

income. Although a financial hardship designation may be appropriate in 

many situations, allowing relatively high-income tax debtors to avoid tax 

collection action, including the FPLP, calls into question the fair application 

of the tax system and may contribute to noncompliance.

Tax Debt Associated With Debtors in Financial Hardship Who Can Earn Over the 2004 

National Median Income 

IRS policy also limits the amount of tax debt in the FPLP by excluding $5 

billion in tax debt from the program while IRS is pursuing levies from other 

assets or income sources. Additionally, during notification IRS excludes 

individuals’ tax debt from the FPLP about twice as long as legally necessary. 

www.gao.gov/cgi-bin/getrpt?GAO-07-26.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact Steven J. 

Sebastian at (202) 512-3406 or 

sebastians@gao.gov. 
Contents 

Letter 1

Results in Brief 3 

Background 6

Coding Errors Excluded Tax Debt from the FPLP 12 

More Effective Monitoring Could Prevent Errors and Help Ensure 

Ongoing Accuracy of Account Status 18 

Policy Changes Could Allow Billions of Dollars in Tax Debt to 

Enter the FPLP 23 

Conclusions 32

Recommendations for Executive Action 33 

Agency Comments and Our Evaluation 34 

Appendix I Scope and Methodology 40 

Appendix II Comments from the Internal Revenue Service 42 

Appendix III GAO Contact and Staff Acknowledgments 48 

 

Tables 

Table 1: Results of GAO’s Statistical Sample of IRS Statutory FPLP 

Exclusions 14

Table 2: Results of GAO’s Statistical Sample of IRS Policy FPLP 

Exclusions 17

Table 3: IRS’s Financial Hardship Income Thresholds 25 

Table 4: IRS’s Financial Hardship Income Thresholds Ceilings 27 

Table 5: Historical IRS Maximum Income Thresholds and 

Household Median Incomes 28 

Figures 

Figure 1: Types of Taxes Owed, as of September 30, 2005 7 

Figure 2: IRS Tax Debt by FPLP Status, as of September 30, 2005 10 

Figure 3: Value of Levy Program Collections, Fiscal Years 2003

through 2006 12 

Page i GAO-07-26 Enhancing IRS Collection Procedures
Figure 4: Percentage of Tax Records in Statutory Exclusion 

Population Categories, as of September 30, 2005 13 

Figure 5: Percentage of Tax Records in Policy Exclusion 

Population Categories, as of September 30, 2005 16 

Figure 6: Tax Debt Associated with Debtors in Financial Hardship 

Who Can Earn Over the 2004 National Median Income, as 

of September 30, 2005 26 

Figure 7: Collections from IRS Notification Letters in Fiscal Year 

2005 32

Abbreviations 

ACS Automated Collection System 

FMS Financial Management Service 

FPLP Federal Payment Levy Program 

IRS Internal Revenue Service 

This is a work of the U.S. government and is not subject to copyright protection in the 

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Page ii GAO-07-26 Enhancing IRS Collection Procedures
United States Government Accountability Office

Washington, DC 20548 

November 15, 2006 

The Honorable Norm Coleman 

Chairman 

The Honorable Carl Levin 

Ranking Minority Member 

Permanent Subcommittee on Investigations 

Committee on Homeland Security 

 and Governmental Affairs 

United States Senate 

As the nation’s tax collector, the Internal Revenue Service (IRS) collects 

approximately $2 trillion in taxes from businesses and individuals 

annually. The vast majority of the tax revenues flow into the federal 

government by voluntary payments from compliant taxpayers. However, 

while most taxpayers comply with the tax laws and pay their taxes as 

required, a significant number do not. At September 30, 2005, IRS’s records 

reflected about $250 billion of unpaid taxes. In addition, IRS estimates that 

about $300 billion in additional taxes go unassessed and therefore 

uncollected every year. 

IRS’s collection process is heavily dependent upon its automated 

computer systems and the information that resides within these systems. 

In particular, the status and transaction codes in each taxpayer’s account 

in IRS’s master file taxpayer database1

 are critical to IRS in tracking the 

collection actions it has taken against a tax debtor and in determining 

what, if any, additional actions should be pursued. For example, IRS uses 

a specific transaction code to identify tax debtors it has designated as 

being in financial hardship and who are thus unable to pay their tax debt.

IRS uses these status and transaction codes to identify cases it should 

exclude from the Federal Payment Levy Program (FPLP), which is an 

automated method of collecting tax debt by offsetting federal payments 

made to individuals and businesses, as well as from other collection 

actions. 

 1

IRS’s master files contain detailed records of taxpayer accounts. 

Page 1 GAO-07-26 Enhancing IRS Collection Procedures
In congressional hearings held in February 2004 and June 2005,2

 we 

testified that Department of Defense and civilian agency federal 

contractors abused the federal tax system with little consequence. In those 

hearings, we noted that IRS excluded significant amounts of tax debt from 

the FPLP for either statutory or policy reasons, thus limiting opportunities 

to automatically collect from those who had not paid their federal taxes. 

While performing those audits, we noted that IRS records sometimes 

contained inaccurate or outdated tax information that prevented it from 

taking certain collection actions against those contractors, including using 

the FPLP to collect at least some of the outstanding tax debt.

On the basis of those audits and your request, we initiated a review of the 

status and transaction codes within IRS’s master file database of taxpayer 

accounts to assess the accuracy of these codes and the effect inaccurate

or outdated codes in the master file database could have on the FPLP and 

IRS’s other collection efforts. The specific objectives of this report were to 

determine (1) whether and to what extent IRS tax records contain 

inaccurate or out-of-date status or transaction codes that exclude 

collection of tax debt through the FPLP; (2) whether IRS’s monitoring 

policies, procedures, and practices could be strengthened to ensure the 

accuracy and timely updating of its status and transaction codes; and 

(3) whether opportunities exist to increase the amount of tax debt subject

to collection through the FPLP. 

Tax debts may be excluded from the FPLP for either policy or statutory 

reasons.3

 To meet our objectives, we selected statistical samples of IRS’s 

outstanding tax-due accounts that were excluded from the FPLP as of 

September 30, 2005. We examined the underlying records to determine 

whether or not IRS had documentation supporting the accuracy of the 

status and transaction codes both when they were originally entered in 

IRS’s systems and at the point in time of our review. We supplemented our 

review of IRS records with information gathered through data mining. For 

those sample items for which we determined the codes were inaccurate or 

 2

GAO, Financial Management: Some DOD Contractors Abuse the Federal Tax System 

with Little Consequence, GAO-04-414T (Washington, D.C.: Feb. 12, 2004), and Financial

Management: Thousands of Civilian Agency Contractors Abuse the Federal Tax Systems 

with Little Consequence, GAO-05-683T (Washington, D.C.: June 16, 2005). 

3

In the FPLP, IRS divides tax debt records into either included or excluded categories 

based on the status and transaction codes in the tax debt account. Further, IRS identifies

excluded tax debt records as those that are excluded because of a statutory requirement or

because of an IRS policy decision. 

Page 2 GAO-07-26 Enhancing IRS Collection Procedures
out of date, we reviewed IRS’s policies and procedures related to the FPLP 

to determine whether and how IRS policies, procedures, or practices 

could be strengthened to improve the ongoing accuracy of those codes 

and thus increase the volume of tax debt that would be included in the 

FPLP. Finally, we reviewed IRS’s exclusion categories to identify 

opportunities for IRS to modify its exclusion criteria so that more tax debt 

is subject to collection through the FPLP. See appendix I for more detailed 

information on the scope and methodology of our work. 

Our work was performed from November 2005 through September 2006 in

accordance with generally accepted government auditing standards. 

IRS’s tax records contain inaccurate or out-of-date information that 

resulted in IRS erroneously excluding tax debt from the Federal Payment 

Levy Program (FPLP) and possibly other collection actions. Although our 

review of tax debt excluded from the FPLP did not identify a high 

percentage of FPLP-related coding errors, the errors did prevent IRS from

taking collection against tax debtors owing billions of dollars in tax debt. 

Based on a review of two statistical samples of cases excluded from the 

FPLP, we estimate that 6 percent of tax debts excluded from the FPLP for 

statutory reasons and 1 percent excluded for policy reasons were in error. 

On the basis of those error rates, we estimate that over a half-million tax 

records with about $2.4 billion in tax debt were erroneously excluded 

from the FPLP, as of September 30, 2005. 

Results in Brief 

IRS did not identify and correct the coding errors we found because it did

not sufficiently monitor the timely updating of the status and transaction 

codes or the effect of computer programming changes. In our sample 

transactions, we found that IRS did not identify six computerprogramming-related coding errors because it did not fully assess the 

effect of certain computer-programming changes on taxpayer account 

status codes. Similarly, IRS did not identify a bankruptcy-related coding

error because it did not monitor the timely updating of the bankruptcyrelated transaction codes. In addition, although we found no coding errors 

in the coding of cases designated as financial hardship cases, our analysis 

revealed that IRS’s policies for monitoring the status of such cases are not 

sufficient to ensure the ongoing accuracy of hardship designations. To 

illustrate, when IRS determines that a tax debtor is in financial hardship 

and, as such, is deemed unable to pay, IRS excludes the debt from the 

FPLP, as well as other collection actions. IRS then limits its monitoring of 

the cases to an automated review of the tax debtor’s income as reported 

on the debtor’s subsequent years’ income tax returns. However, for 24 of 

Page 3 GAO-07-26 Enhancing IRS Collection Procedures
the 31 sample cases coded by IRS as being in financial hardship, the tax

debtor had ceased to file tax returns. As a result of its policy to limit its 

monitoring of financial hardship cases for tax debtors who ceased to file

tax returns, IRS had no way to determine whether the tax debtors’ 

financial condition had improved such that the tax debt should be 

included in the FPLP and other collection actions.

IRS has increased the amount of tax debt subject to collection through the 

FPLP by over $28 billion over the past 2 years. Nonetheless, opportunities 

exist for IRS to amend its policies to allow billions of dollars in additional 

tax debt to be included in the FPLP. For example, of the $247 billion in 

unpaid taxes owed as of September 30, 2005, $23 billion, or almost 10 

percent, is owed by tax debtors IRS has designated as being in financial

hardship; therefore, IRS does not attempt to collect their outstanding tax

debt. IRS allows tax debtors earning up to $84,000—almost twice the 

median income for all households in the United States—to be designated 

as being in financial hardship. In total, IRS has placed tax debtors 

collectively owing over $6 billion in tax debt in its top financial hardship 

income threshold of between $76,000 and $84,000. Because they have been 

designated by IRS as being in financial hardship, although they are earning 

relatively high incomes, these tax debtors are excluded from the FPLP and 

do not face other tax collection action from IRS. From 1992 to 2004, IRS 

almost tripled the maximum amount it allows tax debtors to earn before 

being subject to collection action, far above the rate of inflation. IRS could 

not provide us any data analysis that supported those increases. As a 

result of those large increases, almost two-thirds of all tax debt IRS has 

designated as being in financial hardship is owed by tax debtors IRS 

allows to earn more than the national median household income before 

their unpaid tax debt again becomes subject to IRS collection action. In 

contrast, in 1992, no tax debtor with a financial hardship designation was 

allowed to earn more than the median household income without 

becoming subject to collection action. 

IRS policies also continue to exclude from the FPLP about $5 billion of tax 

debt that has been assigned to its Automated Collection System (ACS). In 

ACS, IRS enforcement personnel attempt to make telephone contact with

tax debtors to collect the unpaid tax debt. By excluding tax debts in the 

ACS from the FPLP, IRS may be limiting its ability to utilize a viable 

collection mechanism. We also found that IRS’s policies exclude all tax 

debt from the FPLP until IRS completes its notification process. During 

this process, IRS sends a series of up to four separate notices to tax 

debtors demanding payment of their taxes—a process that by IRS policy 

can take up to 6 months for individuals with income tax debt. IRS is 

Page 4 GAO-07-26 Enhancing IRS Collection Procedures
statutorily required to send two notices before initiating the levy process, 

but IRS’s current policies prevent cases from timely entering the FPLP 

while it sends out multiple notice letters, a process that can take almost 

twice as long as statutorily required. Although each notice letter generates 

some collections of tax debt, IRS receives over 70 percent of all notice 

collections from its first notification letter. Once IRS fulfills the two-notice 

statutory requirement, IRS could submit the tax debt to the FPLP while 

continuing to send the tax debtor additional notifications. Doing so could 

facilitate the timely movement of tax debt into the program and could thus 

expedite and increase tax collections. 

We are making ten recommendations to the Commissioner of Internal 

Revenue for executive action, including four recommendations designed 

to improve IRS’s monitoring of tax debt, to increase the amount of tax 

debt in the FPLP, or to accelerate how quickly tax debt enters the 

program, and six recommendations to help ensure IRS’s financial hardship 

designations are appropriate. 

IRS agreed with five of our recommendations, partially agreed with two 

other recommendations, and disagreed with the remaining three 

recommendations. IRS agreed to (1) evaluate steps necessary to ensure 

the timely termination of defaulted installment agreements, (2) evaluate

the appropriateness of its current financial hardship income thresholds, 

(3) implement policy changes to govern how financial hardship thresholds 

are changed in the future, (4) evaluate whether to include noncompliance 

with filing requirements as a factor in reactivating cases in financial 

hardship, and (5) evaluate the feasibility of referring tax debtors with 

financial hardship designations to IRS’s withholding compliance program 

for special attention if they do not pay their current tax obligations. 

IRS partially agreed with our recommendation to add language about IRS’s 

ability to levy income and assets to its early notification letters, stating it 

would consider adding such language to some of the later notices, but not 

the first notice. Based on IRS’s comments, we have modified our 

recommendation to add such language beginning with the second notice.

IRS also partially agreed with our recommendation to review tax debtors’

financial conditions to verify the continued validity of its financial 

hardship designation, stating that it did not agree with conducting such a 

review every 3 years, but that it would study and consider including a time 

factor for such reviews. Based on IRS’s comments, we have modified our 

recommendation to conduct such verification periodically. 

Page 5 GAO-07-26 Enhancing IRS Collection Procedures
IRS disagreed with our recommendation to put tax debt into the FPLP 

early in the notice phase to accelerate the collection process, stating that 

over two-thirds of tax debtors pay their tax debt in full after IRS notifies 

them of the debt. IRS also did not agree with our recommendation that it 

add additional tax debt to the FPLP when collection officials were 

considering using other forms of levy. IRS was concerned with the 

potential to inadvertently issue duplicate levies and thereby cause tax 

debtors unanticipated hardship. In addition, IRS did not agree with our 

recommendation that it change the closing codes for tax debt cases 

designated as being in financial hardship prior to the income threshold 

level changes that occurred in 2004. IRS stated that doing so may be 

difficult and may not be cost effective. 

We continue to believe that all ten current recommendations in this report, 

if implemented, will assist IRS in its tax administration duties. See the 

“Agency Comments and Our Evaluation” section of this report for a more 

detailed discussion of the agency comments. We have reprinted IRS’s 

comments in appendix II of this report. 

In its role as the nation’s tax collector, IRS is responsible for collecting 

taxes, processing tax returns, and enforcing the nation’s tax laws. Since 

1990, we have designated IRS’s enforcement of tax laws as a 

governmentwide high-risk area.4

 In attempting to ensure that taxpayers 

fulfill their obligations, IRS is challenged on virtually every front. While 

IRS’s enforcement workload—measured by the number of tax returns 

filed—has continually increased, only recently have the resources IRS has 

been able to dedicate to enforcing the tax laws begun to increase. IRS 

estimates that the annual gross tax gap, that is, the difference between 

what taxpayers should pay on a timely basis and what they actually pay, is

about $345 billion. IRS has reported that its enforcement activities, 

coupled with late payments, recover about $55 billion of that amount, 

leaving an annual net tax gap of almost $300 billion. IRS has a statutory 

Background 

 4

Additionally, we designated IRS’s financial management and systems modernization as 

high-risk areas in 1995. GAO, High-Risk Series: An Overview, GAO/HR-95-1 (Washington,

D.C.: February 1995). In 2005, two of IRS’s high-risk areas—collection of unpaid taxes and 

earned income credit noncompliance—were consolidated to make a single high-risk area

called enforcement of tax laws. Also in 2005, IRS’s high-risk areas of business systems

modernization and financial management were merged into a single high-risk area called 

business systems modernization. GAO, High-Risk Series, An Update, GAO-05-207 

(Washington, D.C.: January 2005). 

Page 6 GAO-07-26 Enhancing IRS Collection Procedures
limitation on the length of time it can pursue unpaid taxes, generally 10 

years from the date of the assessment.5

The amount of cumulative outstanding tax debt that IRS has identified 

either through taxpayer reporting or through its various compliance 

programs is also substantial. As of September 30, 2005, IRS’s master file 

database of taxpayer accounts reflected about $250 billion in cumulative 

outstanding taxes owed by businesses and individuals. The amount of 

unpaid taxes ranges from small amounts owed by individuals for a single 

tax period to millions of dollars owed by businesses. The taxes owed 

include individual income, corporate income, payroll, and other types of

taxes, as shown in figure 1. 

Figure 1: Types of Taxes Owed, as of September 30, 2005 

As a part of its tax administration, IRS maintains over 24 million separate 

tax debt account records in its master file database for businesses and 

individuals. Within the master file database, IRS records collection actions 

and the current status of tax debts through a series of codes. The codes, 

 5

The 10-year period can be extended or suspended under a variety of circumstances, such

as agreements by the taxpayer to extend the collection period in connection with an

installment agreement, bankruptcy litigation, and court appeals. Consequently, some tax 

assessments can and do remain on IRS’s records for decades.

Page 7 GAO-07-26 Enhancing IRS Collection Procedures
referred to as status or transaction codes, display a host of information, 

including the stage of the collection process the tax debt is in; the capacity 

of a tax debtor to pay, such as whether a tax debtor is considered to be 

experiencing financial hardship; or other data such as whether the tax 

debtor is under an arrangement with the IRS to pay the tax debt in 

installments. IRS uses these codes to monitor and manage its inventory of

outstanding tax debt and its tax collection efforts. 

Federal Payment Levy 

Program 

To improve the collection of unpaid taxes, the Congress, in the Taxpayer 

Relief Act of 1997,6

 authorized IRS to collect delinquent tax debt by 

continuously levying (offsetting) up to 15 percent of certain federal 

payments made to tax debtors.7

 The payments include federal employee 

retirement payments, certain Social Security payments, selected federal 

salaries, and contractor and other vendor payments. Subsequent 

legislation increased the maximum allowable levy amount to 100 percent 

for payments to federal contractors and other vendors for goods or 

services sold or leased to the federal government.

8

 The continuous levy 

program, now referred to as the Federal Payment Levy Program (FPLP), 

was implemented in 2000. Under the FPLP, each week IRS sends the 

Department of the Treasury’s Financial Management Service (FMS) an 

extract of its tax debt files. These files are uploaded into the Treasury 

Offset Program.9

 FMS sends payment data to this offset program to be 

matched against unpaid federal taxes. The program electronically 

compares the names and taxpayer identification numbers on the payment

files to the control names (first four characters of the names) and taxpayer 

identification numbers of the debtors listed in the offset program. If there 

is a match and IRS has updated the weekly data sent to the offset program 

to reflect that it has completed all statutory notifications, the federal 

payment owed to the debtor is reduced (levied) to help satisfy the unpaid

federal taxes. 

 6

Pub. L. No. 105-34, 111 Stat. 788 (Aug. 5, 1997). 

7

26 U.S.C. § 6331(h). 

8

26 U.S.C. § 6331(h)(3). 

9

The Treasury Offset Program is an automated process administered by the Department of

the Treasury’s FMS in which certain federal payments are withheld or reduced (offset) to 

collect delinquent tax and nontax debts owed to federal agencies, including IRS. For the 

FPLP, FMS matches federal payments to the tax-debt records sent to it by IRS, and when a

match occurs, FMS offsets (levies) the federal payments and transmits the amount levied 

to IRS to reduce the tax debtor’s outstanding debt and sends the residual to the debtor. 

Page 8 GAO-07-26 Enhancing IRS Collection Procedures
In creating the weekly extracts of tax debt to forward to FMS for inclusion 

in the offset program, IRS uses the status and transaction codes in the 

master file database to determine which tax debts are to be included in or

excluded from the FPLP. For example, IRS cannot levy the assets of 

individuals and businesses to recover tax debts while the tax debtor is 

involved in a bankruptcy proceeding. In such cases, IRS uses the 

bankruptcy status code in the master file to block the tax debt from being 

submitted to the FPLP. Under other circumstances, IRS collection 

personnel can enter a transaction code into the tax debtor’s tax account to

block the debt from being levied through the FPLP. Consequently, the 

accuracy and appropriateness of status and transaction codes is vital to 

the effective operation of the FPLP. We reported in 2004 that incorrect or 

out-of-date IRS status and transaction codes in IRS’s records had 

inappropriately blocked delinquent tax debt from being referred to the 

FPLP.10

IRS currently excludes 62 percent of all tax debt from the FPLP because of

either statutory or policy reasons. As shown in figure 2, at September 30, 

2005, IRS excluded over $73 billion (29 percent) from the FPLP for 

statutory reasons and about $82 billion (33 percent) for policy reasons. 

 10GAO, Financial Management: Thousands of Civilian Agency Contractors Abuse the

Federal Tax System with Little Consequence, GAO-05-637 (Washington, D.C.: June 16, 

2005). 

Page 9 GAO-07-26 Enhancing IRS Collection Procedures
Figure 2: IRS Tax Debt by FPLP Status, as of September 30, 2005 

Cases excluded from the FPLP for statutory reasons include tax debt that

had not completed IRS’s notification process, or tax debtors who filed for 

bankruptcy protection or other litigation, who agreed to pay their tax debt

through monthly installment payments, or who requested to pay less than 

the full amount owed through an offer in compromise.11

Cases excluded from the FPLP for policy reasons include those tax 

debtors whom IRS has determined to be in financial hardship, those filing 

an amended return, certain cases under criminal investigation, and those 

cases in which IRS has determined that the specific circumstances of the

cases warrant excluding it from the FPLP. 

Improvements in the Levy 

Program 

Since the inception of the FPLP, we have identified numerous issues that 

have impeded the levy program from achieving its full potential. In 

response to many of the issues we raised, IRS and other agencies have 

made numerous improvements to the levy program that have contributed 

to increased tax collections. IRS and FMS officials, along with Department 

of Defense, General Services Administration, Office of Management and 

 11An offer in compromise is an agreement between a tax debtor and IRS that resolves the 

tax debtor’s tax debt by accepting less than full payment. 

Page 10 GAO-07-26 Enhancing IRS Collection Procedures
Budget, and Department of Justice officials, created a multiagency task 

force—referred to as the Federal Contractor Tax Compliance Task 

Force—in 2004, primarily to address the issues raised in our 2004 report 

related to defense contractors and the FPLP.12 The multiagency nature of 

the task force reflected that the involvement of several agencies was 

required for the FPLP to reach its full potential. The task force, which has

now become a semipermanent body, has worked toward its stated goals 

and, along with the efforts of the individual agencies, has been

instrumental in making significant improvements in the program. For 

example, the task force has achieved its goal of adding most of the 

Department of Defense’s payment systems to the FPLP. 

IRS, in conjunction with the task force, has made several policy changes 

directed toward increasing the amount of unpaid tax debt that it is 

submitting to the FPLP. For example, IRS altered its policies to include the 

following tax debt in the levy program that had previously been excluded:

• cases waiting in a “queue” to be actively worked by an IRS collections 

official—formerly IRS blocked such cases from the FPLP for a year 

each time a case entered the queue; 

• nearly half of the cases assigned to its Automated Collection System 

(ACS);13

• most cases in the field that are being worked by an IRS revenue officer; 

and 

• cases that have low dollar balances and cases for which the IRS has 

been unable to locate or contact the tax debtor. 

IRS has also worked with FMS to improve the process of matching tax

debtor names between FMS’s payment files and IRS’s tax debt files to 

increase the number of payments and debts that are matched. This work 

was important because the FPLP relies on matching both the tax 

identification number and the control name in the payment to those in the 

tax files to identify a federal payment for levy. 

 12Federal Contractor Tax Compliance Task Force, Report to Senate Committee on

Governmental Affairs Permanent Subcommittee on Investigations (Washington, D.C.: 

Oct. 26, 2004). 

13The ACS is an automated telephone-based system designed to schedule and follow up on 

incoming calls from, and outgoing calls to, tax debtors. ACS personnel make contact with 

tax debtors by phone to attempt to collect outstanding tax debt. 

Page 11 GAO-07-26 Enhancing IRS Collection Procedures
The FPLP has proved to be a cost-effective means of collecting 

outstanding tax debt from tax debtors who receive payments from the 

federal government, and the improvements IRS and other agencies have 

made in the program have significantly increased tax collections since 

2003, as shown in figure 3. 

Figure 3: Value of Levy Program Collections, Fiscal Years 2003 through 2006 

Although the FPLP collected almost $300 billion dollars in previously 

unpaid taxes during fiscal year 2006, the program has an even greater 

effect on total tax collections. In previous reports, we have estimated that 

IRS collects three times the amount of the direct levy collections through 

voluntary revenues received as a result of taxpayers responding to IRS’s 

notice that their federal payments would be levied.

14

To maximize the effectiveness of the FPLP as a tool to collect outstanding 

federal taxes, it is crucial that IRS record and maintain accurate status 

codes for all tax debt within its systems. To test the accuracy of the codes, 

we selected statistical samples of tax debt excluded from the FPLP for 

both statutory and policy reasons to determine if these status codes 

Coding Errors 

Excluded Tax Debt 

from the FPLP

 14GAO, Tax Administration: Federal Payment Levy Program Measures, Performance, 

and Equity Can Be Improved, GAO-03-356 (Washington, D.C.: Mar. 6, 2003). 

Page 12 GAO-07-26 Enhancing IRS Collection Procedures
appropriately reflected the current condition of the tax debt. Our testing of 

IRS’s exclusion codes consisted of samples of 100 tax debts excluded for 

statutory reasons, and 100 tax debts excluded for policy reasons as of 

September 30, 2005. While our review of the sample of tax debts excluded 

for policy reasons did not identify a significant number of coding errors 

that would affect the FPLP, our review of the sample of tax debts excluded 

for statutory reasons did. On the basis of our samples, we estimate that 

over a half-million tax records with over $2.4 billion in tax debt were 

erroneously excluded from the FPLP. 

Errors in Statutory 

Exclusion Codes 

At September 30, 2005, IRS had about $73 billion of outstanding tax debt 

associated with about 9 million tax records that were excluded for 

statutory reasons. As shown in figure 4, these tax records were almost 

exclusively in four statutory exclusion categories: notice, bankruptcy, 

offers in compromise, and installment agreements. 

Figure 4: Percentage of Tax Records in Statutory Exclusion Population Categories, 

as of September 30, 2005 

Page 13 GAO-07-26 Enhancing IRS Collection Procedures
In reviewing the 100 tax records coded as statutorily excluded tax debt,

we identified six instances in which the records were incorrectly coded. 

Table 1 presents the number of errors we found by exclusion category.15

Table 1: Results of GAO’s Statistical Sample of IRS Statutory FPLP Exclusions 

Statutory exclusions Number of cases Number of errors

Installment agreements 44 4

Notice phase 40 1

Bankruptcy/litigation 11 1

Offers in compromise 5 0

Total statutory exclusions 100 6

Source: GAO analysis of IRS data. 

As indicated in table 1, four of the errors we identified involved tax 

debtors erroneously coded as paying on an installment agreement and 

thus excluded from the FPLP.16 In each of the four cases, IRS had not 

terminated the installment agreement within 5 months after the tax debtor

stopped making agreed-to payments. Although IRS’s guidance on the 

installment agreement termination process does not contain a specific

time frame, 5 months is the minimum amount of time that would elapse if 

IRS’s Internal Revenue Manual requirements on terminating installment 

agreements were laid out in a timeline. In one of the cases, IRS took 23 

months to terminate the agreement after the tax debtor had stopped 

making payments. 

One error involved tax debt that had been erroneously kept in IRS’s notice 

phase. The notice phase is IRS’s first phase in the tax debt collection 

process and consists of a series of letters IRS sends to tax debtors 

informing them of the tax debt and requesting payment. Each letter is 

represented by a specific status code. The one error we identified in this 

exclusion category resulted when an IRS computer programming change

in 2005 inadvertently blocked certain status codes from being updated and 

thus prevented the related tax debt from exiting the notice phase. IRS 

 15We did not project an error rate for the individual statutory exclusion subcategories

because a statistical projection was valid only for the statutory exclusion category as a

whole. 

16As noted in their titles, fig. 4 shows the percentage of tax records in the population by

category, whereas table 1 shows number of tax records in our sample by category. 

Page 14 GAO-07-26 Enhancing IRS Collection Procedures
personnel took action to correct this systemic error after we informed 

them of the issue. 

We also found one bankruptcy-related case erroneously excluded from the 

FPLP due to IRS failing to reverse a bankruptcy transaction code after the 

bankruptcy had ended. According to IRS officials, IRS’s time frame for 

initiating action to reverse a bankruptcy code is 30 days after bankruptcy 

actions have been completed. However, in this case, the bankruptcy had 

ended almost a year before the time of our review, yet IRS had not 

updated the status code in the tax debtor’s account. IRS reversed the 

bankruptcy code after we informed IRS personnel of the issue. However, 

as a result of the error, the tax debt had been erroneously excluded from 

the FPLP and all other collection action for almost a year. We found no 

errors in the status codes for the five offer in compromise cases we 

reviewed.17

In total, the errors we found in the sample of tax records excluded for 

statutory reasons equate to a 6 percent projected error rate. As a result of 

these errors, we estimate that over a half-million tax records containing 

about $2.4 billion in uncollected tax debt were erroneously excluded from 

the FPLP.18

Errors in Policy Exclusion 

Codes 

At September 30, 2005, IRS had about $82 billion of outstanding tax debt 

associated with about 7 million tax-period records that were excluded for 

policy reasons. As shown in figure 5, tax records were excluded primarily 

for three reasons: cases designated as financial hardship, cases currently 

in or awaiting assignment to IRS’s collection function,19 and cases 

 17When tax debtors believe that they cannot pay their delinquent tax debt in full, they can 

make an offer to IRS to pay something less than the full amount to satisfy their debt. IRS 

may accept offers that are commensurate with the tax debtor’s ability to pay, which IRS 

determines through an analysis of the taxpayer’s financial condition. IRS is statutorily 

prohibited from levying the property of the tax debtor while it considers the tax debtor’s

offer. 

18The 95 percent confidence interval associated with the projected 6 percent error rate

ranges from 2.2 percent to 12.6 percent. This range means that we are 95 percent certain 

that the true error in the entire population of statutorily excluded tax debt is between 2.2 

percent and 12.6 percent. The range means that between 202,000 and 1,142,000 tax records 

equating to between $56 million and $6.8 billion in tax debt were erroneously excluded 

from the FPLP. 

19When IRS has completed sending its initial series of notices to the tax debtor, IRS assigns

the tax debt to active collection whether through the ACS system or to a revenue officer in

the field, or it puts the tax debt into a queue awaiting assignment to active collection. 

Page 15 GAO-07-26 Enhancing IRS Collection Procedures
designated as currently not collectible for reasons other than financial 

hardship, including low-dollar cases.

Figure 5: Percentage of Tax Records in Policy Exclusion Population Categories, as 

of September 30, 2005 

IRS is authorized to exclude tax debt from the FPLP based on a policy 

determination of financial hardship.20 Tax debt in the other two categories 

is excluded on a case-by-case basis. In other words, the categories, 

themselves, are not explicitly excluded from the FPLP, but individual 

cases in those categories may be excluded by IRS personnel based on the 

circumstances of the particular case. For example, cases that are in IRS’s 

field collection status being worked by a revenue officer are generally 

eligible for the FPLP; however, the revenue officer can block the tax debt

from inclusion in the FPLP when the officer determines that pursuing 

other collection actions may be more effective. 

 20IRS is required to release the levy on all or part of the tax debtors’ property, including

property subject to FPLP, if IRS determines that levying the property is creating a financial 

hardship on the tax debtor. 26 U.S.C. § 6343(a)(1). 

Page 16 GAO-07-26 Enhancing IRS Collection Procedures
In reviewing the 100 tax records coded as excluded for policy reasons, we 

identified one instance in which the records were incorrectly coded. Table 

2 presents the results of our review of the sampled cases. 

Table 2: Results of GAO’s Statistical Sample of IRS Policy FPLP Exclusions

Policy exclusions

Number of 

cases

Number of 

errors

Cases in, or awaiting assignment to, collection 36 1

Cases IRS considers not currently collectible, other 

than hardship, including low-dollar cases 

33 0

Financial hardships 31 0

Total policy exclusions 100 1

Source: GAO analysis of IRS data. 

The one coding error we found involved a tax debtor who defaulted on an 

offer in compromise, but IRS did not put the tax debt into the FPLP. 

Although IRS correctly coded the tax debtor as having defaulted on the 

agreed-to payment terms of the offer, IRS’s system had not been 

programmed to reverse the original “pending” code that IRS personnel 

placed in the tax debt record while IRS was considering the tax debtor’s 

offer.21 Even though the tax debtor had defaulted on the offer, the 

unreversed pending offer code continued to exclude the case from the 

FPLP. On the basis of our finding, IRS implemented a computer 

programming change to reverse existing pending codes for defaulted offer

in compromise cases. 

We found no errors in the cases that IRS had designated as currently not 

collectible for reasons other than financial hardship. Although IRS is not 

going to actively seek collection from them, these cases are generally

included in the FPLP. However, IRS tax collections personnel can exclude 

these cases from the FPLP on a case-by-case basis. 

 21When a tax debtor submits an offer in compromise, IRS personnel place a transaction 

code in the computer system indicating that they are considering the merits of the offer. 

This “pending” transaction code also stops all tax collection actions until IRS has decided 

whether or not to accept the tax debtor’s offer. Once accepted, IRS places an additional 

code in the system indicating that there is an “active” offer in compromise. Both the 

pending and the active offer codes need to be reversed before a tax debt can be made

eligible for the FPLP.

Page 17 GAO-07-26 Enhancing IRS Collection Procedures
Our review of the limited data IRS retains related to financial hardship 

cases and our own review of the tax debtor’s financial condition using 

available IRS information and outside data sources did not identify any 

cases in which we believe IRS had erroneously coded a tax debtor as being 

in financial hardship. However, as discussed later, we do believe that IRS’s 

existing processes increase the risk that outdated status codes related to 

financial hardship cases could occur and not be detected.

In total, the errors we found in the sample of tax records excluded for 

policy reasons equate to a 1 percent projected error rate.22

IRS’s current monitoring of the ongoing status of accounts did not identify

and correct the errors in our sample. In addition, although we found no 

errors in the coding of financial hardship cases, our analysis revealed that 

the design of IRS’s policies for monitoring the status of such cases is not 

sufficient to ensure the ongoing accuracy of hardship designations. 

The coding errors we identified in our samples of tax debts excluded from

the levy program for statutory and policy reasons could have been avoided 

if IRS had more effectively monitored the ongoing status of accounts to 

detect and prevent delays in putting tax debt into the FPLP. 

More Effective 

Monitoring Could 

Prevent Errors and 

Help Ensure Ongoing 

Accuracy of Account 

Status 

Monitoring Did Not 

Identify Tax Debt That 

Should Have Been Eligible 

for Levy 

In the one case from our sample of statutory exclusions involving a 

bankruptcy-related coding error, the transaction code blocking the case 

from inclusion in the FPLP was not reversed within IRS’s stated time 

frame. IRS policy is that bankruptcy codes should be reversed within 30 

days after a bankruptcy judge has dismissed the case.23 In such cases, the 

tax debtor again becomes liable for repaying the tax debt. IRS did not 

reverse the bankruptcy code in a timely manner because the case was 

 22The estimated error is 1 percent and is associated with a 95 percent confidence interval of

from 0.03 percent to 5.4 percent. We did not project an error rate for the dollars associated 

with policy error rate. We also did not project an error rate for the individual policy 

exclusion subcategories because a statistical projection was valid only for the overall 

policy exclusion category as a whole. 

23When a judge dismisses a bankruptcy case, the debtor is denied any debt relief. 

Page 18 GAO-07-26 Enhancing IRS Collection Procedures
repeatedly transferred to different IRS personnel without anyone taking

action to reverse the code. As a result of confusion caused by the repeated

transfer of the case within IRS and no one person having responsibility for 

monitoring the disposition of the case, IRS did not recognize that the 

bankruptcy code had not been reversed until we notified IRS officials 

during our review of the case. 

In the four coding errors we identified involving installment agreement 

cases, the errors were caused by a computer programming problem—

corrected in January 2006—that prevented the installment agreement 

codes from automatically reversing within IRS’s systems.24 Generally, IRS’s 

computer systems automatically begin the process to reverse an active 

installment agreement code after a tax debtor fails to make two scheduled 

monthly payments, but that did not happen in these cases. IRS officials 

were unable to determine specifically why this occurred, and stated that 

they do not monitor whether installment agreement transaction codes are 

reversed within the 5-month time frame indicated by IRS’s Internal 

Revenue Manual for terminating installment agreements.25 Until the 

installment agreement code is reversed in the system, the tax debt remains 

excluded from the FPLP. Had IRS been monitoring the timely termination 

of installment agreements, these cases would have come to IRS’s attention 

and afforded it an opportunity to investigate the cause. 

Two coding errors—one statutory exclusion case and the other a policy 

exclusion case—were also caused by deficiencies in IRS’s computer 

programs. In the statutory exclusion case, the tax debt did not

automatically move through the notice process because IRS did not 

include one of its several notice status codes in a computer programming 

change. As a result, when the programming change was implemented, the 

existing cases in that notice status were prevented from automatically 

continuing their movement through the notice phase and into collection.

 24When IRS agrees to allow a tax debtor to repay tax debt through installment payments, 

IRS personnel place a transaction code into IRS computer systems. This transaction code

stops all tax collection actions except the installment agreement payments until the code is 

reversed. 

25The 5-month time frame is not specifically cited in the Internal Revenue Manual. Rather, 

the manual lays out the process for terminating an installment agreement as follows. IRS 

waits 1 month after the tax debtor misses the first payment. If the tax debtor does not send 

in the next payment, IRS’s computer system generates a letter informing the tax debtor that 

IRS intends to terminate the agreement. IRS gives the tax debtor 90 days—3 months—to 

respond. IRS allows a total of about a month for processing and mailing, bringing the total 

time to 5 months. 

Page 19 GAO-07-26 Enhancing IRS Collection Procedures
As a result, these cases remained excluded from the FPLP and other 

collection actions. After we brought this case to IRS’s attention, it took 

corrective action to address this programming deficiency. In the second 

case, involving a policy exclusion related to a defaulted offer in 

compromise, IRS continued to exclude the tax debt from the FPLP 

because, although IRS personnel properly entered a code indicating a 

default on an offer in compromise, IRS’s systems did not reverse the code

indicating the case had an initial pending offer. IRS had recently 

implemented a programming change to the way it processes offer in 

compromise-related transaction codes so that the code that reverses an 

active offer in compromise transaction code also reverses any pending 

offer in compromise codes related to the same tax case. However, the

programming change only affected offer in compromise cases occurring 

subsequent to the date the change was implemented; it did not affect 

pending offer codes that existed prior to the programming change. After 

we notified IRS personnel of the error we identified, they took corrective 

action to reverse the status code in this and similar cases. 

Monitoring of Financial 

Hardship Cases Does Not 

Consider Tax Debtors Who 

Fail to File Tax Returns or 

Pay Current Taxes 

As discussed earlier, in our sample of tax debt cases excluded from the 

FPLP for policy reasons, we found that all 31 cases that were excluded 

due to the tax debtor being designated by IRS as being in financial 

hardship were correctly coded based on IRS’s existing policy and our 

review of the limited documentation IRS maintained regarding the tax

debtor’s income. However, we found deficiencies in IRS’s procedures for 

monitoring the ongoing status of financial hardship cases, which hinders 

IRS’s ability to ensure the ongoing accuracy of the financial hardship 

designation. This, in turn, could result in additional tax debt that should be 

eligible for levy not being forwarded to the FPLP.

To make the determination of whether a tax debtor is facing financial 

hardship and thus does not have the means to pay the tax debt, IRS 

analyzes the tax debtor’s financial condition using guidelines for allowable 

costs. On the basis of these guidelines, IRS officials place individuals in 

one of nine income categories, or income thresholds. These thresholds 

represent income level ceilings above which the tax debtor again becomes 

subject to IRS’s collection actions, including forwarding of the tax debt to 

the FPLP. Once IRS designates a tax debtor as being in financial hardship,

it performs an automated evaluation of the debtor’s income based upon 

their annual tax return filings. Specifically, IRS compares the income 

reported on the tax debtor’s tax return to the threshold level assigned to 

the tax debtor. If the reported income exceeds the threshold, the financial

Page 20 GAO-07-26 Enhancing IRS Collection Procedures
hardship designation is terminated and the tax debt becomes subject to 

collection and can be put into the FPLP. 

IRS policy discourages any other monitoring or follow-up of financial 

hardship cases beyond the automated match. IRS does not routinely 

update the tax debtor’s allowable expenses or perform a periodic review—

such as once every 3 years—of the tax debtor’s overall financial condition. 

In fact, the Internal Revenue Manual directs IRS personnel working 

financial hardship cases to not request future follow-up reviews to check 

on compliance with future income tax filing requirements or to update a 

tax debtor’s financial condition. 

Consequently, IRS relies only on the accuracy of the information reported

in the tax return filed by the tax debtor, with no review of income 

information reported to IRS by third parties, such as Form W-2 and Form 

1099 information reports,26 to assess the ongoing accuracy of hardship 

designations. IRS’s procedures do not require it to remove a tax debtor 

from the financial hardship status if the tax debtor fails to file a tax return, 

and failing to file does not flag the case for IRS personnel to perform a 

review of the financial hardship designation. Because of its monitoring 

policy, when a tax debtor with a financial hardship designation does not 

subsequently file an annual income tax return, IRS has no means of 

determining whether the tax debtor’s financial condition has improved and 

the hardship designation should be terminated. Since individuals 

designated as being in financial hardship are excluded from the FPLP—as

well as all other tax collection actions—not knowing whether the hardship 

designation remains valid can result in IRS inappropriately excluding the 

tax debt from the FPLP. 

Generally, individuals with a financial hardship designation who do not file

a tax return are treated like other nonfilers: they can be eventually subject

to review by IRS’s automated substitute-for-return process. In that review, 

IRS examines other available data on the taxpayer, assesses whether a tax 

return should have been filed, and estimates the amount of tax due. 

However, that process generally does not occur for more than a year after 

the failure to file, and only individuals who meet certain criteria are 

 26IRS receives various information returns from third parties, including forms W-2 and 1099, 

that are used to report an individual’s income. The W-2, the wage and tax statement, 

reports wages, salaries, and tips paid to employees and the taxes withheld from them. The

Form 1099 is used to report various types of income other than wages, salaries, and tips. 

Page 21 GAO-07-26 Enhancing IRS Collection Procedures
reviewed. A financial hardship designation is not one of the criteria and, 

therefore, these cases do not have a high priority.

On the basis of our review of the sample cases, ceasing to file is not an 

uncommon occurrence for tax debtors with hardship designations. 

Twenty-four of the 31 tax debtors designated as financial hardship in our 

sample cases had ceased filing tax returns after IRS had determined the 

tax debtor was in financial hardship.

IRS’s current practices also do not prevent tax debtors with a financial 

hardship designation from accumulating additional tax debt by not paying

their current taxes. A financial hardship designation puts a tax debtor’s 

past debt in abeyance, but the hardship designation does not automatically 

exempt the tax debtor from paying current taxes. However, we found that 

IRS does little to prevent the further accumulation of tax debt by these tax

debtors. Of the 31 tax debtors with financial hardship designations in our 

sample cases, we found that 4 filed but had not paid income taxes 

subsequent to being identified as a financial hardship case. As with not 

filing a tax return, accumulating new tax debt does not cause IRS to 

automatically terminate the financial hardship designation, and IRS’s 

procedures allow IRS personnel to include the newly acquired tax debt 

into the hardship designation, sometimes without any additional analysis 

of the tax debtor’s financial condition. Thus, a tax debtor’s ever-increasing 

tax debt can remain excluded from the FPLP as well as other collection 

actions. 

The effect of IRS’s collection policy regarding financial hardship tax 

debtors who accumulate new debt is essentially to both cease collection of

old debt and not require tax debtors to pay the current taxes they owe. 

Allowing such tax debtors to continually not pay current taxes without 

consequence appears to be giving tax debtors with financial hardship 

designations an additional exemption from paying current taxes as well as 

old tax debt and may contribute to the noncompliance of other taxpayers.

In fiscal year 2006, IRS initiated a withholding compliance program that 

has potential to help prevent wage-earning tax debtors from accumulating

more unpaid tax debt. The program is designed to identify individuals who 

incur tax debt because they did not have their employer withhold 

sufficient wages to cover their taxes due for the current year. The program 

identifies those debtors and requires their employers to increase the 

withholdings. However, due to resource constraints, IRS actively pursues

only a small portion of the tax debtors who underwithhold. Additionally, 

Page 22 GAO-07-26 Enhancing IRS Collection Procedures
while the program prioritizes cases for review, a financial hardship 

designation is not a prioritization criterion. 

IRS has significantly improved the effectiveness of the FPLP by making an 

additional $28 billion in unpaid tax debt eligible for the program since 

2004. However, certain changes in IRS’s policies could result in additional

billions of dollars in tax debt entering the levy program for potential 

collection or entering the program earlier. Under current IRS policy, all tax 

debt for which the debtor is designated as being in financial hardship, 

including those debts associated with tax debtors earning relatively high 

income levels, are excluded from the levy program. In addition, half of the

cases in IRS’s ACS are excluded from the program, as are all cases 

throughout IRS’s notification process. 

IRS has established policies that allow it to designate tax debtors earning 

up to $84,000—nearly twice the national median income of about 

$44,00027—as being in financial hardship. IRS is authorized to grant tax 

debtors a designation of financial hardship when collection of the tax debt

would cause the tax debtor to be unable to pay his or her reasonable basic 

living expenses.28 IRS’s Internal Revenue Manual provides examples of 

financial hardship cases, such as a disabled taxpayer who lives in a modest 

house that has been equipped to accommodate the disability and whose 

fixed income is not sufficient to both meet his or her living expenses and 

pay the tax debt. IRS has the authority to determine allowable living 

expenses according to the unique circumstances of individual tax debtors;

however, unique circumstances do not include the maintenance of an

affluent or luxurious standard of living. 

Policy Changes Could 

Allow Billions of 

Dollars in Tax Debt to 

Enter the FPLP 

IRS Excludes Many Cases 

from the FPLP with 

Incomes Exceeding the 

National Median Income 

Once designated as being in financial hardship, the tax debtors are 

excluded from the FPLP and are also exempt from any other IRS 

collection action until their self-reported income rises above one of nine

designated income thresholds. Since 1992, IRS has almost tripled the 

 27Department of Commerce, Economics and Statistics Administration, U.S. Census Bureau,

Income, Poverty, and Health Insurance Coverage in the United States: 2004, issued

August 2005. National median income is based on 2004 data for all races and all 

households. Fifty percent of households have incomes below and 50 percent have incomes

above the median. 

28See 26 C.F.R. §301.6343-1(b)(4). 

Page 23 GAO-07-26 Enhancing IRS Collection Procedures
income it allows tax debtors in financial hardship to earn without pursuing 

collection, but IRS does not have documentation of any data analysis that

justified the large increases. Consequently, as of September 30, 2005, about 

65 percent of the tax debt in the financial hardship category was owed by 

tax debtors who were allowed to earn more than the national median 

income before being subject to collection actions. Of the $247 billion total 

tax debt in IRS’s records, IRS is not pursuing collection of almost 10 

percent of that amount—$22.6 billion—as a result of its financial hardship 

determinations. 

As discussed previously, IRS makes a determination as to whether a tax

debtor qualifies as a financial hardship case based on an analysis of the 

amount of income earned and the allowable expenses owed by the tax

debtor.29 If IRS determines that a tax debtor is unable to pay the 

outstanding tax liability due to financial hardship, it places a financial

hardship transaction code in the tax debtor’s account. The transaction 

code is assigned one of nine subcodes (called closing codes) indicating the 

income threshold level ceilings at which IRS has determined that the tax

debtor should be able to begin repaying the tax debt. Tax debtors will not 

face any IRS collection action30 until their total positive income—roughly 

equivalent to adjusted gross income—exceeds the designated income 

threshold ceiling. IRS’s financial hardship income thresholds range in 

$8,000 increments from $20,000 to $84,000, as depicted in table 3. 

 29IRS’s Internal Revenue Manual describes allowable expenses as those expenses that are

necessary to provide for a tax debtor’s family’s health and welfare and/or production of 

income. The allowable expenses must be reasonable and are based in part on national and 

regional standards. 

30Although IRS does not engage in active collection actions against a tax debtor with a

financial hardship designation, IRS does retain any future income tax refunds and uses 

them to reduce the tax debtor’s outstanding tax debt. 

Page 24 GAO-07-26 Enhancing IRS Collection Procedures
Table 3: IRS’s Financial Hardship Income Thresholds 

Income threshold 

ceilings effective

2004–present

Number of tax records 

at September 30, 2005 

Total tax debt at

September 30, 2005 

(dollars in billions)

1 $20,000 306,900 $2.1

2 28,000 173,600 1.3

3 36,000 213,900 2.0

4 44,000 223,000 2.5

5 52,000 203,700 2.5

6 60,000 169,000 2.3

7 68,000 148,900 2.3

8 76,000 91,300 1.2

9 84,000 286,600 6.4

Total 1,816,900 $22.6

Source: GAO analysis of IRS data. 

Five of the nine income thresholds included in IRS’s financial hardship 

designation have upper range ceilings above the 2004 national median 

household income of $44,389. Of the approximately 1.8 million tax debt 

records designated as financial hardship in IRS’s unpaid assessments 

database at September 30, 2005, approximately half—about 900,000—were 

debts owed by tax debtors in one of the five income threshold categories 

above the national median. Over 286,000 tax records—with associated tax 

debt of about $6.4 billion—were for tax debtors in the top income level 

threshold for financial hardship of up to $84,000.

The exclusion of tax debt from collection actions may be appropriate in

many circumstances to provide relief for those experiencing financial 

difficulty. However, as shown in figure 6, $14.8 billion in tax debt (65 

percent of the tax debt) in financial hardship is owed by tax debtors whom 

IRS will allow to earn more than the national median household income 

before they have to begin repaying their tax debt.

31

 31Due to the rounding used in table 3, there is a 0.1 difference between the sum in the table 

and the sum in the text and fig. 6 for those tax debtors allowed to earn more than the 

national median household income. 

Page 25 GAO-07-26 Enhancing IRS Collection Procedures
Figure 6: Tax Debt Associated with Debtors in Financial Hardship Who Can Earn

Over the 2004 National Median Income, as of September 30, 2005 

As shown in table 4, IRS’s income thresholds used to determine whether 

tax debtors are experiencing financial hardship and therefore cannot

currently pay their outstanding tax debt have not always been this high. 

IRS significantly increased each of the nine income thresholds in 1997 and 

again in 2004. IRS had previously set rates in 1992. The 2004 increases 

averaged 77 percent but the individual threshold increases ranged from 

100 percent for the lowest threshold to 68 percent for the highest. 

Page 26 GAO-07-26 Enhancing IRS Collection Procedures
Table 4: IRS’s Financial Hardship Income Thresholds Ceilings

Income thresholds

ceilings effective

 1992–1997

Income thresholds

ceilings effective 

 1997–2004 

Income thresholds

 ceilings effective

2004–present

1 $6,000 $10,000 $20,000

2 9,000 15,000 28,000

3 12,000 20,000 36,000

4 15,000 25,000 44,000

5 18,000 30,000 52,000

6 21,000 35,000 60,000

7 24,000 40,000 68,000

8 27,000 45,000 76,000

9 30,000 50,000 84,000

Source: IRS. 

In justifying the large increases from previous threshold ceilings, IRS 

stated that the new 2004 thresholds more accurately reflected current 

economic conditions and that the new values were supported by Bureau of 

Labor Statistics data and were consistent with the allowable expenses in 

IRS guidance. IRS also stated that the revised income thresholds were 

based on an analysis of allowable expense standards for high-cost 

geographic areas considered in conjunction with current Bureau of Labor 

Statistics poverty levels. Though it raised the top threshold to $84,000, IRS 

had considered raising its top threshold for financial hardship to $100,000. 

Other than the above statements, IRS could not provide documentation of 

any data analysis that supported its reasons for the large increases since 

1992. However, measures of median income raise questions about the size 

of the increases to the income thresholds for financial hardship 

determinations. As table 5 depicts, IRS’s increases in the financial hardship 

income thresholds has had the effect of raising the maximum income 

threshold from about equivalent to the national median income in 1992 to

almost twice the median income in 2004. With respect to high-cost areas, 

New Jersey’s $61,359, the highest state median income in 2004,32 was well 

 32Department of Commerce, Economics and Statistics Administration, U.S. Census Bureau,

Income, Earnings, and Poverty From the 2004 American Community Survey, 

(Washington, D.C.: August 2005). 

Page 27 GAO-07-26 Enhancing IRS Collection Procedures
below IRS’s 2004 top three income threshold levels. The lowest state 

median income in 2004 was $31,500.

Table 5: Historical IRS Maximum Income Thresholds and Household Median

Incomes 

Year 

IRS’s maximum 

financial hardship 

income threshold

National median income 

for all householdsa

Percentage maximum 

level above/below

median income

1992 $30,000 $30,636 - 2.1% 

1997 50,000 37,005 + 35.1

2004 84,000 44,389 + 89.2

Source: IRS and U.S. Census Bureau. 

a

Median income is stated in 2004-equivalent dollars. 

As a result of these large increases, almost two-thirds of all tax debtors 

with IRS financial hardship designations are allowed to earn more than the 

national median household income in 2004 before their unpaid tax debt 

again becomes subject to IRS collection action. In contrast, in 1992, no tax

debtor with a financial hardship designation was allowed to earn more 

than the median income without becoming subject to collection action. 

Measures of inflation also raise questions about the size of IRS’s increases. 

Bureau of Labor Statistics national inflation rate data indicate that the 

effects of inflation would have justified lower increases. For example, 

using inflation data from 1997 to 2004, the top 2004 threshold would have

been about $60,000,33 far below IRS’s $84,000 level, and would have kept 

the top threshold at roughly 35 percent above the national median income 

as it was in 1997. 

Exacerbating the effect of IRS’s increases in its hardship thresholds was 

the policy it used to implement the increases. IRS did not change the 

subcodes indicating the income threshold ceilings or reexamine the 

financial condition of tax debtors when it raised the income thresholds 

ceilings. For example, the IRS subcodes indicating that tax debtors were in 

the highest income threshold of $50,000 prior to the threshold increases 

were not updated to reflect the new thresholds. Thus the tax debtors 

remained in the highest income threshold and were allowed to earn up to 

 33Department of Labor, Bureau of Labor Statistics, Consumer Price Index – All Urban 

Consumers, http://www.bls.gov, downloaded August 16, 2006. 

Page 28 GAO-07-26 Enhancing IRS Collection Procedures
$84,000 before IRS would begin taking collection action. Therefore, after 

the 2004 increases, the tax debtors in the top income threshold category 

were allowed to earn $34,000 more annually before IRS would remove the 

tax debtor from the financial hardship exclusion category and begin 

pursuing collection of the outstanding tax debt. IRS neither reassessed the 

financial condition of tax debtors with existing financial hardship 

designations nor changed their existing designation to one that closely 

matched their original income threshold amount. 

Allowing relatively high income tax debtors, such as those earning $84,000,

to avoid tax collection action calls into question the fair application of the

tax system and may contribute to noncompliance by other taxpayers. In 

addition, dramatically increasing the financial hardship income threshold 

ceilings has effectively resulted in increasing the number of tax debtors 

IRS classifies as being in financial hardship. This, in turn, reduces the 

portion of IRS’s inventory of tax debt under active collection and reduces 

the portion eligible for inclusion in the FPLP. 

IRS Continues to Exclude 

Substantial Tax Debt in 

ACS from the FPLP 

Although IRS made policy changes in 2004 to allow about 40 percent of the 

tax debt in ACS to enter the FPLP, IRS continues to exclude the other 60 

percent. The ACS is an automated call system designed to schedule and 

follow up on IRS’s outgoing calls to, and incoming calls from, tax debtors. 

ACS personnel’s primary activity is to contact tax debtors by phone to 

attempt to collect outstanding tax debt. At September 30, 2005, the ACS 

contained an inventory of about $8 billion of unpaid tax debt. To manage 

the large inventory of tax debt in ACS, IRS has divided the ACS inventory

into 40 subcategories. In general, those subcategories describe the status

of IRS collection actions within ACS, such as indicating that an installment 

agreement is pending or specifying a collection action that is awaiting 

approval by a supervisor. 

Prior to 2005, all the tax debt in ACS was excluded from the FPLP. In 2005, 

in response to issues raised in our 2004 review of Department of Defense 

contractors with outstanding tax debt,

34 IRS changed its policies to allow 

some of the tax debt assigned to ACS to enter the FPLP. However, IRS has 

continued to exclude tax debt in 19 of the 40 ACS subcategories from the 

FPLP. Those 19 subcategories contain 60 percent, or about $5 billion, of 

 34GAO, Financial Management: Some DOD Contractors Abuse the Federal Tax System 

with Little Consequence, GAO-04-95 (Washington, D.C.: Feb. 12, 2004). 

Page 29 GAO-07-26 Enhancing IRS Collection Procedures
the total tax debt in the ACS inventory. Two of the excluded 

subcategories, which IRS calls R-5 and I-6, contain approximately $3.9 

billion of tax debt, and involve cases in which IRS is placing a levy against 

a tax debtor’s assets. These “paper” levies, as IRS refers to them to 

distinguish them from automated FPLP levies, are generally one-time 

levies placed against a tax debtor’s bank accounts or other financial 

assets, although they can also be an ongoing garnishment of wages. FPLP 

levies, in contrast, are continuous levies of all federal payments, including

federal salaries, pensions, social security, and contractor-related 

payments. 

IRS has the authority to levy a tax debtor’s assets to collect outstanding 

tax debt. Therefore, simultaneously levying through both the paper levy 

process and the FPLP would seem to be appropriate, especially since 

many paper levies are one-time levies of a tax debtor’s assets. Additionally, 

the FPLP is a cost-effective means of collecting from tax debtors. By 

excluding tax debt from the FPLP while IRS personnel are working on a 

paper levy, IRS is relegating the FPLP to a secondary role in the tax 

collection process. Because of its potential, we have previously 

recommended that IRS use the FPLP as one of the first steps in the IRS 

collection process and keep the debt in the levy program until the taxes 

are fully paid.

35

IRS Excludes All Tax Debt 

from Levy during the 

Notification Process 

At September 30, 2005, IRS had excluded $25.1 billion from the FPLP 

because it was in the process of notifying the tax debtor of the taxes owed. 

The Internal Revenue Code prohibits IRS from levying a tax debtor’s 

assets, including doing so through the FPLP, until the tax debtor has been

given time to respond to a notice from IRS that a tax debt exists. IRS’s 

process of issuing a series of notice letters and waiting for the tax debtor 

to respond can take 6 months for individuals. IRS excludes tax debt from

the FPLP during the entire notice phase. 

For individuals, the notification process consists of sending a series of 

three or four computer-generated letters with increasingly urgent language

notifying the tax debtor of the debt and requesting payment. Per the 

Internal Revenue Manual, IRS waits 5 weeks between letters and up to 10 

weeks after the last letter before moving the tax debt into one of IRS’s 

active collection statuses such as ACS. Consequently, the notification 

 35GAO-04-95. 

Page 30 GAO-07-26 Enhancing IRS Collection Procedures
process can take up to 6 months or longer to complete, during which time 

IRS excludes the tax debt from other collection activity, including the 

FPLP. 

Although IRS excludes all tax debt from the FPLP during the entire notice 

process, legally, tax debt could be included in the FPLP in about 3 

months—about half way through the general notice process for 

individuals.36 IRS must allow the tax debtor 90 days after notification of a 

potential tax debt liability to respond. If IRS does not receive a response 

within that period, it can issue a notice of tax deficiency and demand for 

payment. If the tax debt is not paid within 10 days after notice and demand

for payment, IRS can initiate the procedures for levy, including forwarding 

the tax debt to the FPLP. Under this scenario, IRS could forward tax debt 

to the FPLP about 14 to 15 weeks after the first notice is sent to the tax 

debtor, and IRS could fulfill its statutory requirement with only two 

notices before initiating the levy process.37 For business tax debt, IRS 

essentially follows this sequence. The notice process for business tax debt

consists of only two notices and is generally completed in about 15 weeks, 

at which time the tax debt can be included in the FPLP. 

In addition to putting tax debt into the FPLP sooner in the overall tax 

collection process, IRS could potentially enhance the tax collection 

potential of notices by informing the tax debtor early in the process of 

sending notice letters that unpaid tax debt can be subject to levy. As 

shown in figure 7, about 70 percent of tax collections resulting from notice 

letters are received as a result of IRS’s first notice letter. Very little is 

collected from subsequent notices until the last notice letter, which 

includes specific language of IRS’s authority to levy or place a lien on the 

tax debtor’s property. 

 3626 U.S.C. §§ 6212(a), 6303(a), and 6331(a),(d). The time frames described in the text

assume the tax debtor does not contest the amount of the tax assessment. If contested, the

time frames are extended until there is resolution as to the amount owed. 

37Prior to initiating the levy process, IRS is required to assess the tax due liability in 

accordance with 26 U.S.C. § 6201. Prior to actually making the levy, IRS is required to send

a notice of intent to levy, 26 U.S.C. § 6331(a), and a prelevy Collection Due Process hearing

notice that informs the tax debtor of his or her right to a hearing, 26 U.S.C. § 6330(a). Both

the intent to levy and the Collection Due Process notice can be combined on one letter. IRS 

typically waits 10 weeks after issuing the Collection Due Process notice before actually 

making the levy through the FPLP. IRS can inform the taxpayer of IRS’s levy authority 

within the first communication to the taxpayer, including the deficiency notice, or in any 

other notice letters. 

Page 31 GAO-07-26 Enhancing IRS Collection Procedures
Figure 7: Collections from IRS Notification Letters in Fiscal Year 2005

The FPLP is a powerful tool for encouraging collection that goes beyond 

the direct taxes collected through federal payment levies. We have 

previously estimated that the threat of a levy brings in over three times 

more collections than the levy itself.38 IRS could take advantage of this 

potential during the notice phase if it were to inform tax debtors early in 

the notice process that their tax debt could be included in the FPLP. 

Although the collection of taxes is always important, it takes on added 

prominence in times of severe budgetary uncertainty. As the nation’s tax 

collector, IRS must seek out and utilize the most cost-effective means of 

collection at its disposal and apply those means to the broadest 

application of tax debt. The FPLP is a cost-effective program that has 

enabled IRS to greatly increase collection. The program’s full success is 

dependent on the accuracy of IRS’s status and transaction codes as well as 

the appropriateness of IRS’s policies, procedures, and practices regarding

the exclusion of tax debt from the FPLP. Improvements are needed in both 

arenas. The errors we identified in the status and transaction codes of tax

debt cases highlight potential problem areas that have led to tax debt 

Conclusions 

 38GAO-03-356. 

Page 32 GAO-07-26 Enhancing IRS Collection Procedures
being inappropriately excluded from levy action and therefore require 

IRS’s attention. With regard to its current policies, IRS continues to 

exclude over 60 percent of all tax debt from the FPLP and does not appear 

to have fully adopted our previous recommendation to use the FPLP as 

one of the first steps in the tax collection process. Viewing the FPLP as a 

primary and efficient collection tool could lead IRS to reevaluate its FPLP 

exclusion policies and to reduce the extent and length of time tax debt is 

excluded. Such changes hold the potential to subject billions of dollars in 

additional tax debt to the FPLP, thus increasing the government’s chances 

of collecting some of this tax debt. 

IRS faces tough challenges in balancing its tax collection activities against 

its available resources. In times of tough budgetary constraints, this can 

provide an incentive to close cases quickly or otherwise reduce the active 

tax collection inventory, possibly at the expense of maximizing tax 

collections. While reducing the number of active cases does, in fact, 

reduce the resources required, it can also have the effect of reducing 

collections, diminishing compliance, and eroding the public’s confidence 

in the fairness of the tax system. For instance, in financial hardship cases, 

beyond those tax debtors granted relief from paying tax debt due to 

unexpected financial difficulty, each tax debtor who is allowed to avoid 

filing required tax returns or paying current taxes, or who is perceived to

live well while facing little tax collection consequence, represents not only 

less money for vital federal programs but one more advertisement for 

others to do the same. Therefore, in setting financial hardship or other tax 

collection policies, it is incumbent upon IRS to be particularly judicious in

setting income threshold levels and monitoring tax debt to ensure that it is 

acting fairly toward all taxpayers. 

To increase the amount of tax debt eligible for, and to expedite the entry 

of tax debt into, the FPLP, we recommend that the Commissioner of 

Internal Revenue take the following actions: 

Recommendations for 

Executive Action 

• monitor the timely termination of defaulted installment agreements to 

help ensure tax debt is made available to the FPLP as soon as possible; 

• place tax debt in the notice phase into the FPLP as soon as legally 

possible; 

• consider adding language to IRS’s second communication in the notice 

process informing the tax debtor that IRS has the authority to collect 

the debt by levying the tax debtor’s income and assets if the tax debt is 

not paid voluntarily; and

Page 33 GAO-07-26 Enhancing IRS Collection Procedures
• modify FPLP exclusion policy to allow tax debt in ACS subcategories 

R-5 and I-6 that is being considered for a levy on financial assets 

through paper levies to be concurrently included in the FPLP. 

To help ensure that IRS’s financial hardship FPLP exclusions are 

appropriate, we recommend that the Commissioner of Internal Revenue 

take the following actions: 

• reevaluate whether the dollar ranges for existing financial hardship 

income thresholds, especially those that exceed the national median 

income, are appropriate and reasonable; 

• consider changing the financial hardship closing codes for tax debtors 

designated as being in financial hardship prior to the 2004 income 

threshold increases to a closing code that most closely corresponds to 

the originally designated income threshold—for example, tax debtors 

who were in a threshold of $50,000 prior to the change would be given 

a different subcode (closing code) so that the tax debtor’s income 

ceiling stays as close to the original $50,000 ceiling as possible under 

the new income thresholds; 

• establish a policy so that in implementing future financial hardship 

income threshold changes, tax debtors’ financial hardship subcodes 

(closing codes) are changed to ones that maintain the tax debtor’s 

income ceiling as close as possible to the ceiling prior to the change; 

• establish a policy to review tax debtors’ financial condition periodically 

to verify the continued validity of the financial hardship designation; 

• evaluate the ongoing validity of the financial hardship designations 

whenever tax debtors fail to file their annual tax returns by comparing 

third-party income information to the tax debtors’ designated financial

hardship income threshold ceilings; and 

• refer tax debtors with a financial hardship designation to IRS’s 

withholding compliance program for special attention if those tax 

debtors do not pay their current income tax obligations. 

In commenting on a draft of this report, IRS noted improvements made to 

the FPLP and the extent to which such improvements have resulted in 

increased collections while at the same time ensuring that taxpayer rights

have been protected. IRS also described several initiatives it had 

undertaken to improve its program for taxpayer accounts classified as 

currently not collectible, including a study to determine whether changes 

to IRS’s allowable living expense tables, used in the determination of 

financial hardship status, would be appropriate given the availability of 

additional economic data. We made 10 recommendations: IRS agreed with 

5, partially agreed with 2, and disagreed with 3. We modified the 2 

Agency Comments 

and Our Evaluation 

Page 34 GAO-07-26 Enhancing IRS Collection Procedures
recommendations with which IRS partially agreed in order to address 

issues raised by IRS while retaining the intent of our recommendations. 

With respect to the four recommendations we made to either increase the 

amount of tax debt eligible for the FPLP or expedite the entry of tax debt 

into the FPLP, IRS agreed with one recommendation, partially agreed with 

another, and disagreed with the remaining two recommendations. IRS 

agreed with our recommendation that it monitor the timely termination of 

defaulted installment agreements, and noted it would identify those 

taxpayer accounts in installment agreement status but which show no 

payment activity within the last 60 days and determine if it needs to 

change the way it monitors installment agreements. While IRS disagreed 

with our recommendation that it add language about its legal authority to 

levy income and assets to its first notice letter, it stated that it would 

consider adding stronger language regarding possible enforcement activity 

in subsequent collection notices. As an explanation for its reluctance to 

include this course of action in the event of nonpayment, IRS noted that it

had received criticism in the past for early aggressiveness and not 

affording taxpayers an opportunity to voluntarily satisfy their liability. 

While IRS is not legally precluded from providing language concerning its 

enforcement powers in the initial taxpayer notice, we understand IRS’s 

desire to attempt to provide sufficient opportunity for taxpayers to 

voluntarily comply with their tax obligations without threat of

enforcement action. Accordingly, we have modified our recommendation 

to add informative language about IRS’s levy starting with the second 

taxpayer notice rather than the first. The important point to us is that IRS 

inform the tax debtor of its levy authority earlier in the process. 

IRS disagreed with our recommendation that it place tax debt in the notice 

phase into the FPLP as soon as legally possible, stating that it believed its 

current notification process was the most cost effective. In stating its 

position, IRS noted that over three-fourths of tax debtors pay their tax 

debt after receiving the first notice, and that it believed the action 

recommended is not appropriate for individual taxpayers who have a high

payment rate during the notice process. We do not believe that our 

recommendation would diminish the effectiveness of IRS’s notice process,

especially the voluntary tax collections resulting from the first notice. In 

fact, those tax debtors who would typically pay their debt upon receipt of 

the initial notice would be unaffected by the action we are recommending. 

Although implementing our recommendation would allow IRS to begin 

levy procedures during the notice phase, in practice, the tax debt generally 

would not be levied before IRS completes the notice phase. As we discuss 

in our report, tax debt could be included in the FPLP about three months 

Page 35 GAO-07-26 Enhancing IRS Collection Procedures
after IRS notifies the tax debtor of the tax liability, giving the tax debtor 

sufficient time to respond to both the first and second notices before the 

levy process would actually commence. Additionally, once the levy

process begins, IRS must still send the tax debtor a Collection Due 

Process notice and wait about two and one-half months before levying a 

payment through the FPLP. Consequently, tax debt would not generally be 

levied before the notice phase is completed. However, by starting the levy 

process during the notice phase, IRS would be able to begin levying

payments earlier than would otherwise be the case if the tax debtor does 

not voluntarily fully pay or otherwise resolve the tax debt during the 

notice phase because IRS would not have to continue to delay levy action

while it issues the Collection Due Process notice and waits for the tax 

debtor to respond. 

IRS also disagreed with our recommendation that it modify its FPLP 

exclusion policy to allow tax debt in two subcategories of its ACS to be 

eligible for the FPLP, citing concern that this could result in duplicate 

levies and thereby create unanticipated hardships for taxpayers. IRS also 

noted that it attempts to issue levies on cases within these ACS 

subcategories that could generate more in collections than would be 

collected through the FPLP due to the program’s limit of 15 percent of 

each federal payment made to the tax debtor. We do not believe these 

concerns have merit. We believe that IRS’s current process for manually 

blocking tax debt from the FPLP would provide a sufficient safeguard 

against duplicate levies while at the same time preserving adequate 

flexibility for other collection actions. As we discuss in our report, IRS has 

the ability to block, and, on a case by case basis, does block individual tax 

debt accounts from levy through the FPLP. IRS could apply this same 

approach to these two ACS subcategories. To manually block tax debt 

from the FPLP, IRS can place a transaction code in the tax debtor’s 

account that blocks the FPLP from automatically levying the tax debt. The 

same transaction code can be placed in the tax record if IRS wants to levy 

more than the 15 percent allowable under the FPLP. This process would 

allow IRS to increase the effectiveness of the FPLP while preserving its 

ability to use paper levies when appropriate and minimizing the risk of 

duplicate levies. 

With respect to the six recommendations we made to help ensure that 

IRS’s financial hardship FPLP exclusions are appropriate, IRS agreed with

four recommendations, partially agreed with one recommendation, and

disagreed with the remaining recommendation. Specifically, IRS agreed 

with our recommendations to (1) reevaluate whether the dollar ranges for 

existing financial hardship income thresholds are appropriate and 

Page 36 GAO-07-26 Enhancing IRS Collection Procedures
reasonable; (2) establish a policy that when future financial hardship 

thresholds are changed, tax debtors’ hardship closing codes are changed 

to ones that maintain the tax debtor’s original income ceiling; (3) evaluate

the ongoing validity of financial hardship designations whenever tax 

debtors fail to file their annual tax returns; and (4) refer tax debtors with a 

financial hardship designation to IRS’s withholding compliance program 

for special attention if those tax debtors do not pay their current income 

tax obligations. Although IRS agreed to reevaluate whether the dollar 

ranges for existing financial hardship income thresholds are appropriate 

and reasonable, it raised concerns that imposing a rigid national median 

amount would disregard circumstances such as family size, medical needs,

and geographic variations in average income. It is important to note that 

our recommendation does not advocate imposing the national median 

amount as a rigid maximum threshold limit. We recognize that IRS 

attempts to accommodate the needs of tax debtors with varying family 

sizes, geographical locations, and various other circumstances. However, 

as our report discusses, between 1992 and 2004, IRS raised its top financial 

hardship income threshold ceiling from an amount equal to the median 

national household income to an amount almost twice the median income 

without any detailed analysis supporting either the large increases or the 

deviation in the relationship of these thresholds from the national median

income. 

While IRS disagreed with our recommendation that it establish a policy to

review tax debtors’ financial condition every 3 years to verify the 

continued validity of the financial hardship designation, IRS did agree to 

consider including a time factor. Specifically, IRS noted that as part of its 

initiatives to improve its program for taxpayer accounts classified as 

currently not collectible, of which financial hardship is a significant 

aspect, it will consider including a time factor. Accordingly, we have 

modified our recommendation, replacing “every 3 years” with 

“periodically” to reflect IRS’s willingness to consider including a time 

factor for reviewing a tax debtor’s financial condition. However, in 

deciding upon the time factor to use, we believe that IRS should take into 

account that tax debt is typically only legally available for collection for 10 

years. Thus, implementing a time period of greater than 3 years could 

result in IRS affording itself only one opportunity to reconsider the validity 

of the financial hardship designation.

Finally, IRS stated that it could not agree with our recommendation that it

consider changing the financial hardship closing codes for tax debtors 

designated as being in financial hardship prior to the 2004 increases it 

implemented in the income thresholds until it has determined how many 

Page 37 GAO-07-26 Enhancing IRS Collection Procedures
tax debt accounts would be affected by the recommendation. IRS said that 

implementing the recommendation to change existing closing codes would 

require significant computer programming and system changes that it may 

not be able to implement, and which may not be cost effective. Our 

recommendation is for IRS to consider changing the hardship closing 

codes for the affected accounts; we are not recommending that IRS must 

do so. Implicit in our use of the word “consider” in our recommendation is 

a cost-benefit determination. In considering whether to change the 

hardship closing codes, IRS should take into account the work and cost 

involved in making this change as well as the potential for increased 

collections in determining the cost effectiveness of any modifications. 

However, we do believe that IRS erred in not changing the financial 

hardship closing codes for existing cases when it implemented the 2004 

increases in the income thresholds. As discussed in our report, by not 

changing the closing codes, IRS allowed tax debtors who it previously 

believed could begin paying off their tax debt at a certain income 

threshold to immediately begin earning up to, on average, 77 percent more 

before IRS would hold them liable for their tax obligations. This created

the potential for inequitable treatment between taxpayers in these same 

income brackets who pay their taxes and tax debtors who do not, 

especially when some of those tax debtors, on the day IRS changed the 

thresholds, were thereafter allowed to earn up to $34,000 more income 

without IRS considering whether they continued to warrant the hardship 

designation. Consequently, in considering whether or not it is cost 

effective to implement a change in the closing codes of the effected 

accounts, IRS should also consider the issue of fairness with respect to the 

taxpayer population as a whole. 

We are sending copies of this report to the congressional committees with 

jurisdiction over IRS and its activities, the Secretary of the Treasury, the 

Commissioner of Internal Revenue, and interested congressional 

committees and members. We will also make copies available to others 

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

GAO Web site at http://www.gao.gov. 

Page 38 GAO-07-26 Enhancing IRS Collection Procedures
If you have any questions about this report, please contact me at (202) 512-

3406 or sebastians@gao.gov. Key contributors to this report are listed in 

appendix III. Contact points for our Offices of Congressional Relations and 

Public Affairs may be found on the last page of this report. 

Steven J. Sebastian 

Director 

Financial Management and Assurance 

Page 39 GAO-07-26 Enhancing IRS Collection Procedures
Appendix I: Scope and Methodology Appendix I: Scope and Methodology 

To determine whether and to what extent Internal Revenue Service (IRS) 

tax records contain inaccurate or out-of-date status or transaction codes 

that exclude them from the Federal Payment Levy Program (FPLP), we 

used IRS’s unpaid assessments database as of September 30, 2005, to 

select two statistical samples. We used IRS’s criteria for the statutory and 

policy exclusions from the FPLP to segment the tax records in the unpaid

assessments database into the two categories. The population of statutory 

exclusions consisted of 9,068,508 tax records that contained tax debt of 

$72,167,432,455. The population of policy exclusions consisted of 7,183,880

tax records that contained tax debt of $81,492,531,369. We selected a 

statistical sample of 100 tax debts that were excluded from the levy

program based on IRS’s designation of their tax record as being excluded 

because of a legal—statutory—requirement of the Internal Revenue Code.

We also selected a statistical sample of 100 tax debts that were excluded 

from the levy program based on IRS’s policy determinations. 

We randomly selected probability samples from the populations of tax 

debt accounts excluded from the FPLP for statutory reasons and policy 

reasons. With these probability samples, each tax account in each of the 

populations had a nonzero probability of being included and that 

probability could be computed for any account. Each sample tax account 

selected was subsequently weighted in the analysis to account statistically 

for all the tax accounts of its respective population. The sample we 

selected from each population was only one of a large number of samples 

that we might have drawn because for each sample we followed a 

probability procedure based on random selections. Since each sample 

could have provided different estimates, we express our confidence in the 

precision of each sample’s result as 95 percent confidence intervals, which 

are intervals that would contain the actual population value for 95 percent 

of the samples we could have drawn. As a result, we are 95 percent 

confident that the confidence intervals presented in this report will 

include the true values in the respective study populations. For the 

statistical error rate projection, we used a point estimate with a 95 percent 

confidence interval. The projected point estimate combined with the 

confidence interval surrounding the point estimate means that although 

we estimate the error rate to be at the point, we are 95 percent confident 

that the true error rate is somewhere between the interval’s lower and 

upper limits. 

For each sampled tax period, we obtained and reviewed IRS records on 

the status and history of tax collection action with particular emphasis on 

actions that affected the FPLP status of the tax debt. We performed 

additional searches of criminal, financial, and public records. We 

Page 40 GAO-07-26 Enhancing IRS Collection Procedures
Appendix I: Scope and Methodology 

compared each sampled tax debt to IRS’s FPLP exclusion and inclusion 

criteria and determined the accuracy of the status or transaction code that 

excluded the tax debt from the FPLP. We categorized a sample tax debt as 

an error if the tax period did not meet at least one exclusion criterion or 

had exceeded IRS’s time frame for ending an exclusion, such as the time 

frame for terminating an installment agreement. In some cases, the time 

frame for terminating an installment agreement was exceeded at the time 

IRS provided us records to review rather than at the September 30, 2005, 

date of the unpaid assessments database. 

To determine whether IRS’s policies, procedures, and practices could be 

strengthened to ensure the accuracy and timeliness of its status and 

transaction codes, we reviewed IRS’s Internal Revenue Manual and 

interviewed IRS officials to obtain criteria, guidance, and internal controls 

on (1) coding cases for inclusion and exclusion from the FPLP 

(2) processing cases in the notice phase; and (3) processing and 

terminating cases in installment agreements, offers in compromise, and 

financial hardship. 

To determine whether opportunities exist to increase the amount of tax 

debt included in the FPLP, we analyzed the effect of IRS’s exclusion 

criteria as well as the potential effect of changes in the exclusion criteria 

on the amount of tax debt included in the FPLP. In assessing the effect of 

potential changes in the statutory exclusions, we compared the potential

for modifying IRS’s existing FPLP exclusion criteria within the exclusion’s 

legal framework, and we discussed the potential changes with cognizant 

IRS officials. 

Data Reliability 

Assessment 

For the IRS database we used, we relied on the work we perform during 

our annual audit of IRS’s financial statements. While our financial 

statement audits have identified some data reliability problems associated 

with the coding of some of the fields in IRS’s tax records, including errors 

and delays in recording taxpayer information and payments, we 

determined that the data were sufficiently reliable to address this report’s 

objectives. Our financial audit procedures, including the reconciliation of 

the value of unpaid taxes recorded in IRS’s master file to IRS’s general 

ledger, identified no material differences. 

Page 41 GAO-07-26 Enhancing IRS Collection Procedures
Appendix II: Comments from the Internal Revenue Service Appendix II: Comments from the Internal 

Revenue Service 

Note: Subsequent to 

providing the draft report 

to IRS, numbered GAO06-743, we renumbered 

the report to GAO-07-26. 

Page 42 GAO-07-26 Enhancing IRS Collection Procedures
Appendix II: Comments from the Internal Revenue Service 

Page 43 GAO-07-26 Enhancing IRS Collection Procedures
Appendix II: Comments from the Internal Revenue Service 

Page 44 GAO-07-26 Enhancing IRS Collection Procedures
Appendix II: Comments from the Internal Revenue Service 

Page 45 GAO-07-26 Enhancing IRS Collection Procedures
Appendix II: Comments from the Internal Revenue Service 

Page 46 GAO-07-26 Enhancing IRS Collection Procedures
Appendix II: Comments from the Internal Revenue Service 

Page 47 GAO-07-26 Enhancing IRS Collection Procedures
Appendix III: GAO Contact and Staff Acknowledgments 

Page 48 GAO-07-26 

Appendix III: GAO Contact and Staff 

Acknowledgments 

Steven J. Sebastian, (202) 512-3406 or sebastians@gao.gov

The following individuals made major contributions to this report: William 

J. Cordrey, Amy Bowser, Ray Bush, Kenneth Hill, Inna Livits, Dave 

Shoemaker, Sidney Schwartz, and Mark Yoder. 

Enhancing IRS Collection Procedures

GAO Contact 

Acknowledgements 

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