United States General Accounting Office

GAO Report to the Subcommittee on

Government Management, Information

and Technology, Committee on

Government Reform and Oversight,

House of Representatives

October 1998 INTERNAL REVENUE

SERVICE

Composition and

Collectibility of Unpaid

Assessments

GAO/AIMD-99-12

GAO United States

General Accounting Office

Washington, D.C. 20548

Accounting and Information

Management Division

B-280501 

October 29, 1998

The Honorable Stephen Horn

Chairman

The Honorable Dennis J. Kucinich

Ranking Minority Member

Subcommittee on Government Management, Information

 and Technology

Committee on Government Reform and Oversight

House of Representatives

This report responds to your June 4, 1998, request for information on our

analysis of the composition and collectibility of the Internal Revenue

Service’s (IRS) September 30, 1997, balance of unpaid assessments. The

analysis is based on work performed as part of our audit of the IRS’ fiscal

year 1997 Custodial Financial Statements.1

 Our opinion was separately

reported in February 1998,2

 and the results shared with your

Subcommittee in a hearing on IRS financial management issues on April 15,

1998.3

As part of our fiscal year 1997 financial statement audit, we examined IRS’

taxes receivable and other unpaid assessments. Our tests and analysis

during the course of the audit provided us with detailed information on the

composition of IRS’ total unpaid assessments, and the key factors that

contributed to the estimate of the collectibility of these unpaid

assessments as reported in the financial statements. As requested, this

letter provides details about the composition and collectibility of IRS’

unpaid assessments as of September 30, 1997.

On July 22, 1998, the President signed into law the IRS Restructuring and

Reform Act of 1998. The act requires changes in the structure and

management of IRS, the creation of an oversight board for the agency, and

expansion of taxpayer rights, including providing additional protections

for taxpayers in dealings with IRS. This letter does not specifically address

the impact that provisions of the act may have on the future composition

and collectibility of IRS’ unpaid assessments. However, it is important to

1

The Custodial Financial Statements report assets, liabilities, and results of activities related solely to

IRS’ custodial responsibilities for implementing federal tax legislation, including collecting federal tax

revenues, refunding overpayments of taxes, and pursuing collections of amounts owed.

2

Financial Audit: Examination of IRS’ Fiscal Year 1997 Custodial Financial Statements

(GAO/AIMD-98-77, February 26, 1998).

3

Internal Revenue Service: Remaining Challenges to Achieve Lasting Financial Management

Improvements (GAO/T-AIMD/GGD-98-139, April 15, 1998).

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note that certain provisions of the act, such as limitations on IRS’ assessing

of certain penalty and interest charges on delinquent tax debts and the

application of tax deposits to tax liabilities, could affect the future

composition of IRS’ unpaid assessments.

Results in Brief Most of IRS’ $214 billion in unpaid assessments as of September 30, 1997,

are not taxes receivable and are not collectible. Of this balance,

$76 billion, or 36 percent, consists of write-offs, which are typically over 6

years old and have no potential for collection. Write-offs consist primarily

of corporate income and payroll taxes owed by bankrupt or defunct

businesses, including failed financial institutions resolved by the Federal

Deposit Insurance Corporation (FDIC) and former Resolution Trust

Corporation (RTC) during the savings and loan and banking crises of the

1980s and early 1990s. Another $48 billion, or 22 percent, of the unpaid

assessments represents compliance assessments, which are amounts IRS

has identified as owed to the federal government, but which have not been

agreed to by taxpayers or a court. Many of these unagreed assessments

result from IRS’ various compliance efforts, such as examinations and

audits. The lack of acknowledgement by the taxpayer or courts of the

amounts owed, and evidence of little or no payment activity on

compliance assessments, diminish prospects for their collection. We noted

less than $75,000 in collections since 1995 on $2.6 billion of unpaid

compliance assessments.

Only $90 billion, or 42 percent of the September 30, 1997, balance of

unpaid assessments, represents taxes receivable under federal accounting

standards. These are distinguished from compliance assessments in that

they are amounts that either taxpayers or courts have agreed are owed to

the federal government. However, of this amount, only an estimated

$28 billion, or 13 percent of the total balance of unpaid assessments, will

likely be collected. The accounts comprising this $28 billion balance show

evidence of both willingness and ability on the part of the taxpayers to pay

their tax liability. For example, a substantial amount of this estimated

collectibility was based on evidence of regular payments made under

installment agreements by individuals and estates. Also, most of the cases

making up this $28 billion balance are from the last 4 tax years. The

remaining $62 billion, or 29 percent of the unpaid assessments balance,

represents taxes receivable that are estimated to be uncollectible and will

likely eventually be written off. These cases consist of amounts owed by

individuals or businesses experiencing serious financial difficulties, in

some cases those in the midst of bankruptcy proceedings, or with a history

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of delinquent taxes and no viable means of repaying the amounts owed.

We found little or no evidence of payments made on these uncollectible

taxes receivable. These cases are older debts, with most predating the

1990 tax year.

Growth in the overall unpaid assessments balance reported by IRS in the

last several years is largely due to the accrual of interest and penalties.

Regardless of collection potential, IRS accrues interest through the

statutory collection period of the delinquent tax debt, which can last 10

years or more. For example, IRS continues to accrue interest and penalties

on hundreds of failed financial institutions resolved by the FDIC and the RTC

despite the fact that these delinquent taxes will not likely ever be paid. As

of September 30, 1997, $136 billion, or 64 percent, of IRS’ balance of unpaid

assessments represented interest and penalties. Most of these amounts

will not likely be collected.

Background Each year, the federal government, through the Internal Revenue Service,

collects tax revenue to fund government operations. The federal

government relies on IRS to collect the proper amount of tax revenue at the

least cost to the public. In fiscal year 1997, IRS collected over $1.6 trillion

used to finance various government programs and activities. These

receipts represent payments by individuals, businesses, corporations,

estates, and other types of taxpayers primarily for amounts owed as a

result of wages, income, employment, sales, and consumption. To a large

extent, the annual receipts collected by IRS represent the amounts

taxpayers owe for the given period.

However, not all taxpayers pay the amounts they owe the federal

government. Some simply do not provide payments on their tax liability

when they file their tax returns. Others underreport, either mistakenly or

deliberately, the amounts they owe the government. Still others do not

report the amounts they owe. While some taxpayers eventually pay some

or all of the amounts due, others do not. Also, those that do pay may pay

over an extended period. This has resulted in a significant build-up in the

amount of unpaid taxes due the federal government because, in addition

to taxes owed, taxpayers also become liable for penalty and interest

charges that continue to accrue over time until the tax, plus accrued

penalty and interest charges, have either been paid in full or the statutory

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period of collection has expired.4 As of September 30, 1997, information

accompanying IRS’ fiscal year 1997 financial statements reflected a total

balance of $214 billion in unpaid taxes, penalties, and interest. These

amounts are referred to as unpaid assessments.

IRS identifies unpaid assessments through a number of means. Most are

identified through the filing of tax returns by the taxpayer. In cases where

the taxpayer files a return that reflects an amount or tax liability owed the

federal government but does not provide payment or provides only partial

payment, the unpaid assessment represents the difference between the tax

liability as reflected on the return and the amount actually paid by the

taxpayer. IRS refers to these as self-assessments because the amount of the

delinquent tax is identified solely through information provided by the

taxpayer.

IRS also identifies unpaid assessments through its enforcement programs.

Such programs include IRS’ underreporter program, where information

such as wages, interest, and dividends contained on the tax return is

compared to other third party-supplied information, such as wage and

earnings statements and annual interest statements. Any differences

identified through this process can result in the identification of additional

tax liabilities or assessments owed by the taxpayer. Also, IRS tax

examinations and audits can identify additional taxes owed the

government. IRS’ substitute for return program, where IRS constructs tax

returns through the use of third party information and prior taxpayer

history for taxpayers who have filed returns in the past but have not filed

for the given period, is another tool used by IRS to attempt to identify

amounts that are owed the government.

Through these various enforcement programs, IRS attempts to close what

is referred to as the tax gap, which is the difference between taxes actually

collected and the amount that is legally due under the Internal Revenue

Code. The tax gap can be further subdivided into the “compliance gap” and

the “collection gap.” The compliance gap, which is outside the scope of

this report, represents the difference between taxes that should actually

be due and those that have been identified by IRS, either through

self-assessments or through assessments resulting from IRS enforcement

programs. It is this compliance gap that IRS’ enforcement programs

4

The Internal Revenue Code allows IRS up to 10 years to collect any unpaid assessments. The

collection statute period starts when the tax assessment is recorded and is suspended only in certain

circumstances such as litigation, offers in compromise and bankruptcy proceedings, or when there is

an agreement between IRS and the taxpayer to extend the collection period. The unpaid assessment

balance is removed from IRS’ records upon expiration of the statutory collection period.

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attempt to close, although considerable amounts of taxes due on legal and

illegal income remain unassessed or underassessed each year.

The collection gap represents the difference between the amounts that

have been identified as being due through assessments and the amounts

that will ultimately be collected on these assessments. This collection gap,

which is the subject of this report, represents the amount of IRS’ unpaid

assessments that is not collectible. Like a commercial lender’s loan

portfolio, IRS’ ability to collect amounts owed is constrained to a great

extent by the financial condition of the taxpayer. However, unlike a

commercial lender, who can review the financial condition and viability of

a prospective borrower prior to extending a loan, IRS does not choose who

owes the government taxes. Taxpayers who owe delinquent taxes

generally do not have good credit, reliable incomes, or significant assets

and in many instances are corporations that have gone out of business.

Consequently, IRS cannot manage risk in a manner similar to commercial

lenders. This makes closing the collection gap significantly more

problematic for IRS than for a commercial lender.

The balance of unpaid assessments as of September 30, 1997, consists of

the types of taxes that IRS collects, the majority of which result from

individual income taxes, Social Security and Hospital Insurance taxes, and

corporate income taxes. Payments for these taxes may be made on a

periodic basis, or for individuals by their employers via withholdings from

their wages. The major types of taxes in IRS’ unpaid assessments balance

are:

• individual income taxes and self-employment taxes,5

• payroll taxes,6 and

• corporate income taxes, which are generally taxes on business profits.

Other types of taxes in IRS’ balance of unpaid assessments include

(1) unemployment taxes, (2) excise taxes, such as fuel, communications,

air transportation, sporting goods, alcohol, and environmental taxes, and

(3) estate taxes.

5

Self-employment taxes are Social Security taxes and Hospital Insurance taxes for self-employed

individuals.

6

Payroll taxes consist of (1) individual federal income tax withholdings and (2) employer contributions

and employee withholdings under the Federal Insurance Contribution Act, which include Social

Security and Hospital Insurance taxes.

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Not all unpaid assessments are considered accounts or taxes receivable.

Federal accounting standards provide criteria for distinguishing which

unpaid assessments constitute taxes receivable.7 IRS has had considerable

difficulty properly distinguishing and reporting taxes receivable in its

financial statements because its systems were not designed to generate

information for use in preparing financial statements in accordance with

these standards. Fiscal year 1997 was the first time IRS was able to

successfully prepare reliable financial statements covering its tax

collection activities. However, this required the use of special

programming to extract information from IRS’ master files—its only

detailed database of taxpayer information—for use in preparing the

financial statements as its systems cannot readily produce this

information. Also, this approach still required significant manual

intervention and, in the end, adjustments totaling tens of billions of

dollars, principally to correct significant misclassifications and duplication

of unpaid assessments.8

Objectives, Scope,

and Methodology

As part of our audit of IRS’ fiscal year 1997 Custodial Financial Statements,

we reviewed IRS’ unpaid assessments using statistical sampling techniques.

Our objectives for the unpaid assessments segment of that audit were to

determine (1) whether IRS had properly classified its balance of unpaid

assessments between taxes receivable, compliance assessments, and

write-offs, (2) whether the balances for taxes receivable, compliance

assessments, and write-offs were accurate, and (3) in conjunction with IRS,

an estimate of the amount IRS could reasonably expect to collect on its

balance of taxes receivable. See appendix I for the scope and methodology

used to accomplish these objectives.

The objective of this report is to provide detailed information on the

composition and collectibility of IRS’ September 30, 1997, balance of

unpaid assessments based on the work we performed as part of our audit

of IRS’ fiscal year 1997 custodial financial statements.

It is important to note that, in performing our work, we did not assess the

effectiveness of IRS’ enforcement and collection programs, nor did we

attempt to address the compliance gap component of the tax gap. Also, we

7

Statement of Federal Financial Accounting Standards (SFFAS) No. 7, Accounting for Revenue and

Other Financing Sources and Concepts for Reconciling Budgetary and Financial Accounting, provides

this criteria.

8

See Financial Audit: Examination of IRS’ Fiscal Year 1997 Custodial Financial Statements

(GAO/AIMD-98-77, February 26, 1998). This issue will be discussed further in a subsequent report on

internal controls identified in our fiscal year 1997 financial audit.

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did not specifically analyze the impact provisions of the IRS Restructuring

and Reform Act of 1998 may have on the future composition and

collectibility of IRS’ unpaid assessments. We conducted our work from

August 1997 through February 1998 in accordance with generally accepted

government auditing standards.

In commenting on a draft of this report, IRS provided preliminary oral

comments, which we have incorporated where appropriate. We requested

written comments on a draft of this report from the Commissioner of

Internal Revenue. The Deputy Commissioner provided us with written

comments, which are discussed in the “Agency Comments” section and

are reprinted in appendix II.

Not All IRS Unpaid

Assessments Are

Taxes Receivable

Taxes receivable are one category of unpaid assessments, and they

comprised less than half the balance of IRS’ unpaid assessments as of

September 30, 1997. Under federal accounting standards, unpaid

assessments fall into three categories: taxes receivable, compliance

assessments, and write-offs.

Taxes receivable are taxes and associated penalties and interest due for

which IRS can support the existence of a receivable through taxpayer

agreement, such as the filing of a tax return without sufficient payment, or

a court ruling favorable to IRS. The key distinction between taxes

receivable and compliance assessments is the acknowledgement by the

taxpayer or a court that the taxpayer owes money to the federal

government.

Compliance assessments are unpaid assessments in which neither the

taxpayer nor a court has affirmed that the taxpayer owes money to the

federal government. For example, an assessment resulting from an IRS

audit or examination in which the taxpayer does not agree with the results

of the audit or examination is a compliance assessment but is not

considered a receivable under federal accounting standards.

Write-offs are unpaid assessments for which IRS does not expect further

collections due to factors such as the taxpayer’s bankruptcy, insolvency,

or death. Write-offs may at one time have been taxes receivable, but the

absence of any future collection potential prevents them from being

considered receivables under federal accounting standards.

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Although compliance assessments and write-offs are not considered

receivables under federal accounting standards, they represent legally

enforceable claims of IRS—acting on behalf of the federal

government—against taxpayers. There is, however, a clear distinction

between these categories from the standpoint of assessing what they

represent with respect to future cash flow to the federal government. Our

review of these categories of unpaid assessments as part of our fiscal year

1997 Custodial Financial Statement audit confirmed that there are

significant differences in their collection potential, which clearly supports

the usefulness of the distinctions between unpaid assessments required

under federal accounting standards.

Fiscal Year 1997 Financial

Statements Presented First

Reliable Reporting of

Unpaid Assessments

IRS’ fiscal year 1997 Custodial Financial Statements for the first time

presented reliable information on the components of IRS’ balance of

unpaid assessments. The Statement of Custodial Assets and Liabilities

appropriately reflected that portion of IRS’ unpaid assessments that

represented taxes receivable that were estimated to be collectible. In

information accompanying the financial statements, IRS separated the

September 30, 1997, balance of unpaid assessments into the three

categories. This categorization, along with an understanding of what these

categories represent, allows the users of the financial statements to gain a

useful perspective on the portion of the unpaid assessments balance that

represent viable future cash flow for the federal government. Figure 1

presents this categorization.

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Figure 1: Components of IRS’ $214

Billion of Unpaid Assessments (Dollars

in Billions)

13% • Taxes Receivable - Collectible

($28)

29% • Taxes Receivable - Uncollectible

($62)

22%•

Compliance Assessments ($48)

•36%

Write-offs ($76)

Source: IRS’ fiscal year 1997 custodial financial statements.

As reflected in figure 1 and as reported in the accompanying supplemental

information to IRS’ fiscal year 1997 Custodial Financial Statements, IRS’

balance of unpaid assessments as of September 30, 1997, totaled about

$214 billion. It is important to note that IRS’ systems reflected unpaid

assessments totaling about $236 billion, which is $22 billion more than the

final reported balance. During our audit, we found that most of this

$22 billion represented amounts recorded as assessments multiple times in

IRS’ systems. These amounts primarily represented “trust fund recovery

penalties.”

Such penalties can result when a business does not forward payroll taxes

to the government. Each officer and director is individually liable for the

amounts withheld from employees, provided the officers or directors were

found willful and responsible for the nonpayment of these taxes.

Consequently, IRS may record assessments against several individuals,

each for the total amount withheld from employees in an effort to collect

the total payroll tax liability of the business. Such recording of these

multiple assessments is necessary for enforcement tracking purposes.

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However, IRS cannot collect from these multiple individuals and the

business more than the total payroll tax liability owed. Consequently, by

counting each of the individual and business assessments owed, IRS

systems distort the balance of amounts that IRS has authority to collect.

Also, systems limitations lead to frequent erroneous balances, and have

led to collection of trust fund recovery penalties that had already been

paid. This issue will be discussed further in a subsequent report on

internal control issues identified in our fiscal year 1997 financial audit.

It is also important to note that these systems limitations result in IRS

having to resort to unconventional means to obtain information for use in

preparing its financial statements. In particular, the lack of an adequate

general ledger and a subsidiary ledger for taxes receivable results in IRS

running special computer programs against the detailed taxpayer accounts

in its master files to extract information on unpaid assessments and

attempt to classify this information into the three unpaid assessment

categories defined by federal accounting standards. The use of this

process led to significant misclassifications of unpaid assessment amounts

within these three categories. The following table shows the extent of

misclassified items we found, by category of unpaid assessments, in our

statistical sample of 730 items.

Table 1: Initial and Final Classification

of Unpaid Assessment Sample Items Category Original classification Final classification

Taxes Receivable 626 465

Compliance Assessments 74 90

Write-offs 30 197

Total 730 752a

aThe final count of items does not agree with the original number of sample items because of a

number of items that we and IRS concluded needed to be eliminated or partially reclassified from

their original unpaid assessment classification. These included portions of taxes receivable items

being reclassified as write-offs, taxes receivable items being reclassified as both compliance

assessments and write-offs, and compliance assessments being reclassified as both taxes

receivable and write-offs.

In total, the effect of these misclassifications was significant and resulted

in reclassification of tens of billions of dollars between the three

categories of unpaid assessments to arrive at reliable fiscal year-end

balances. This issue is discussed more fully in our report on internal

control issues identified in our fiscal year 1997 financial audit.

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A Significant Portion of

Unpaid Assessments

Consist of Write-Offs

Of IRS’ $214 billion in unpaid assessments as of September 30, 1997,

$76 billion were write-offs. Consequently, 36 percent of IRS’ balance of

unpaid assessments consisted of amounts for which there is virtually no

hope of collection. Write-offs are comprised largely of amounts owed for

corporate income taxes and payroll taxes by businesses or corporations

that have subsequently become bankrupt or defunct. For example, over

$24 billion of unpaid assessments classified as write-offs, or 32 percent,

related to corporate income taxes due from failed financial institutions

resolved by the FDIC and the former RTC.

In our statistical sample of 730 unpaid assessments, 197 were deemed

wholly or partially write-offs. Of these 197 write-offs, 123 (62 percent)

consisted of amounts owed from defunct corporations such as failed

financial institutions, and another 41 (21 percent) consisted of amounts

owed by other bankrupt corporations or businesses.9

 Most of the

remaining 33 write-off cases (17 percent) included amounts due from

taxpayers who were deceased, whom IRS was unable to locate, or who had

no identifiable assets or other means of repaying the amounts owed.

Write-offs also consist primarily of older amounts owed. Of the 197 items

in our sample that were ultimately determined to be wholly or partially

write-offs, about 90 percent of the total amounts owed were over 6 years

old. As we discuss later in this report, age is an indicator of the extent to

which unpaid taxes are likely to be collected.

Also, a significant portion of the total amounts classified as write-offs were

comprised of penalties and interest that have and continue to accrue on

the delinquent tax assessment balance. Of the 197 items in our sample that

were ultimately classified wholly or partially as write-offs, 19 percent of

the total outstanding amounts owed were comprised of penalties and

45 percent of the total amounts owed consisted of interest.

IRS is required to maintain unpaid assessment accounts on its records until

the statutory period for collecting taxes, 10 years, has expired.10 During

this period, IRS must continue to accrue interest and penalties on the

9

A defunct corporation has discontinued its business operations. A bankrupt corporation has been

declared insolvent by a court. In bankruptcy, the court decides how the corporation’s remaining assets

will be distributed to its creditors.

10Note that the requirement that IRS maintain delinquent tax accounts in its records for the required

statutory period does not mean that these amounts are to be reflected on IRS’ principal financial

statements. Only those unpaid assessments meeting the definition of taxes receivable are reported on

the principal financial statements. Compliance assessments and write-offs are reported as

supplementary financial information.

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outstanding amounts owed regardless of whether IRS concludes that the

delinquent taxes owed will ever be collected. For example, IRS continues

to accrue interest and penalties on hundreds of failed financial institutions

resolved by FDIC and the former RTC, despite the fact that these were

insolvent institutions with no viable means of repaying their delinquent

taxes. In one case, over 60 percent of the $1 billion balance of amounts

owed by the failed financial institution consisted solely of accrued interest

and penalties. Consequently, with respect to write-offs, interest and

penalties continue to be accrued against the delinquent taxes owed and

thus continue to increase the total outstanding balance, despite the fact

that there is virtually no prospect for collection.

Compliance Assessments

Also Comprise a

Significant Portion of IRS’

Unpaid Assessments

Forty-eight billion dollars of IRS’ $214 billion balance of unpaid

assessments as of September 30, 1997, about 22 percent, consisted of

compliance assessments. As discussed previously, the key distinction

between unpaid assessments classified as compliance assessments and

those considered taxes receivable is the lack of acknowledgement either

by the taxpayer or by a court that delinquent taxes are owed. Many of

these unagreed assessments resulted from IRS’ various compliance efforts,

such as its examinations or audits and its various computer matching

programs, in which IRS uses third-party information to identify potential

underreporting of tax liabilities.

Compliance assessments are generally comprised of individual and

business income tax liabilities and payroll tax liabilities. In our sample of

730 unpaid assessments, 90 were ultimately classified wholly or partially

as compliance assessments. Of these 90 compliance assessments, 60

(67 percent) consisted of amounts owed for individual income taxes, 25

(28 percent) consisted of amounts owed for business income taxes and

payroll taxes, and 5 (5 percent) consisted of other tax types, such as estate

taxes, taxes on transferor of property to a foreign entity, and other

miscellaneous taxes.

While compliance assessments have some future collection potential, the

lack of taxpayer or court agreement as to the amounts identified by IRS as

owed reduces the likelihood of IRS collecting these amounts. As a category

of unpaid assessments, compliance assessments have significantly less

likelihood of collection than those unpaid assessments classified as taxes

receivable. Based on our sample, we found that taxpayers who do not

agree that they owe IRS usually do not make payments. Specifically, we

noted less than $75,000 in collections since 1995 on the $2.6 billion balance

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of amounts owed for the 90 unpaid assessment sample items that were

ultimately wholly or partially classified as compliance assessments. It

should be noted that, although compliance assessments are not likely to

generate significant revenue, IRS will generally pursue collection on them

(and on unpaid assessments classified as uncollectible taxes receivable,

discussed later in this report) to encourage compliant taxpayers to

continue to be compliant, and noncompliant taxpayers to become

compliant, with respect to reporting and paying their tax liabilities.

Like write-offs, a significant portion of the total amounts classified as

compliance assessments is comprised of penalties and interest. Of the 90

items in our sample that were ultimately classified wholly or partially as

compliance assessments, about 10 percent of the total outstanding

amounts owed were comprised of penalties, and about 72 percent of the

total amounts owed consisted of interest. As noted in the discussion of

write-offs, IRS’ requirement to continue to accrue penalties and interest

through the statutory collection period contributes to the higher and

increasing percentage of penalties and interest to the total outstanding

amounts owed. It also contributes to an increasing balance that is unlikely

to generate significant revenues for the federal government.

Taxes Receivable

Comprise Only a

Portion of IRS’ Unpaid

Assessments

Collectively, write-offs and compliance assessments totaled $124 billion,

which was 58 percent of IRS’ balance of unpaid assessments as of

September 30, 1997. This represents a significant portion of IRS’ unpaid

assessments balance for which collection, based on our audit work and

IRS’ financial statements, is highly unlikely.

The remaining balance of IRS’ unpaid assessments as of September 30,

1997, $90 billion (42 percent) represent amounts that are considered to be

taxes receivable under federal accounting standards. These amounts meet

the definition of taxes receivable because they represent amounts for

which IRS has obtained concurrence, either by the taxpayer or a court, that

the amounts are in fact owed to the federal government. These unpaid

assessments thus constitute the most probable category of unpaid

assessments from which there is potential for collection of tax revenues.

Of the 730 items in our statistical sample, 465 items were ultimately

classified wholly or partially as taxes receivable. Of these items, only 193

were determined by IRS and us to be fully or partially collectible. The other

272 items were determined by IRS and us to be uncollectible as of

September 30, 1997. Based on a projection of these items to the total

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population, only $28 billion, about 31 percent of the balance of unpaid

assessments classified as taxes receivable, was estimated to be collectible.

In contrast, $62 billion, 69 percent of the balance of taxes receivable, was

estimated to be uncollectible. Consequently, of the $214 billion balance of

IRS’ total unpaid assessments at September 30, 1997, only 13 percent was

estimated to be collectible.11

Profile of Taxes Receivable

Sample Items Determined

to Have Some Collectibility

As noted above, 193 sample items that were ultimately determined to be

taxes receivable had at least some future collection potential based on

available information. In general, these items consisted of taxes owed

where IRS was receiving at least some payments from the taxpayer, where

the taxpayer had entered into agreements with IRS to repay all or some of

the amounts owed and appeared to have the resources to comply with

these agreements, or where IRS had identified other means of obtaining full

or partial payment. Figure 2 shows the composition of the 193 items that

we determined were fully or partially collectible.

11Note that because of a lack of historical information, the amount of compliance assessments that will

ultimately be collected is not reasonably estimable; however, we believe that any collectible amounts

would not be significant.

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Figure 2: Profile of Taxes Receivable

Sample Items Determined to Have

Some Collectibility

32% • Installment agreements -

individuals/corporations (61)

19% • Subsequent taxpayer payments

(36)

14%•

Taxpayers with history of

compliance (28)

•

9%

Installment agreements - estates

(18)

•

9%

Refund offsets (17)

•17%

Others (33)

Source: 193 taxes receivable sample items with some estimated collectibility.

The following paragraphs detail each of these categories, discussing the

primary consideration for determining that all or some portion of each

item’s balance was collectible:

• Sixty-one items consisted of amounts owed where individuals or

businesses had entered into installment agreements to repay some or all of

the delinquent taxes and associated penalties and interest. It is important

to note that the existence of an installment agreement alone was not a

sufficient basis from which to conclude that some or all of the outstanding

balance of a given item was collectible. We and IRS accepted installment

agreements as the basis for collectibility only if they were supported by

evidence of a regular stream of payments. On the other hand, if IRS was not

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receiving payments in accordance with the terms of the installment

agreement, we and IRS generally considered the installment agreement to

be in default and thus did not use it as a basis for determining

collectibility.

• Thirty-six items were determined to have full or partial collectibility based

on payments IRS received subsequent to the sample selection. In some

instances, these payments were sufficient to fully pay the outstanding

balance owed. In these cases, because of the certainty of the payment, the

item was classified as fully collectible.

• Twenty-eight items involved amounts owed by taxpayers with a history of

compliance, including 10 large established corporations.

• Eighteen items involved installment agreements between IRS and taxpayer

estates. These estate cases are distinguishable from the other installment

agreement cases involving individuals in that these items are not

considered delinquent and are generally fully collectible due to the

executors’ fiduciary responsibility to manage the affairs of the estate and

evidence of estate assets sufficient to satisfy the tax liability. Specifically,

in certain cases the Internal Revenue code allows estates to enter into

15-year installment agreements to pay their taxes. These agreements are

allowed so that estates do not have to sell family businesses or other

nonliquid assets to satisfy tax liabilities.

• Seventeen items involved amounts owed by taxpayers with a history of

allowing IRS to keep overpayments from other tax periods to pay off some

or all of the amounts owed. The IRS refers to such cases as refund offsets,

where refunds that would normally be paid to the taxpayer are instead

kept by IRS and used to reduce the taxpayer’s liability from another tax

period.

• Twelve items involved taxpayers who were in the process of entering into

either an installment agreement or an offer-in-compromise to pay off some

or all of the outstanding amounts owed, and where there was evidence,

either through good faith payments or other financial resources, that the

taxpayer would be able to comply with the agreement or offer.

• Eight items involved situations in which IRS was in the process of levying

taxpayer assets for amounts owed.

• Seven items involved taxpayers in bankruptcy. Estimates of collectibility

were based on anticipated payments from the bankruptcy proceedings and

evidence that assets available were sufficient to make payments.

• Five items involved taxpayers who had submitted, and IRS had accepted,

offers-in-compromise to satisfy the outstanding amounts owed. In these

cases, the payments had not yet been made but the taxpayer had the

financial resources to pay off the compromised amount owed.

Page 16 GAO/AIMD-99-12 IRS Unpaid Assessments
B-280501 

• One item involved IRS seizing certain assets of the taxpayer to satisfy the

outstanding amounts owed, but IRS had not yet liquidated the assets.

Most of the items where we identified the likelihood of full or partial

collection of the outstanding amounts owed tended to be more recent

balances and were typically amounts owed within the last 4 tax years. The

more recent age of the items limited the extent to which the original tax

assessment owed was compounded by accruals of interest and penalties,

in contrast to write-offs and compliance assessments, as discussed earlier.

Profile of Taxes Receivable

Sample Items Determined

to Be Uncollectible

As discussed earlier, 272 items in our sample that were ultimately

classified wholly or partially as taxes receivable were assessed by IRS and

us as being uncollectible based on available information. These items

consisted of taxes owed where the taxpayer, for a variety of reasons, was

deemed unwilling or unable to pay the amounts owed. Figure 3 shows the

composition of the 272 items that we determined were uncollectible.

Page 17 GAO/AIMD-99-12 IRS Unpaid Assessments
B-280501 

Figure 3: Profile of Taxes Receivable

Sample Items Determined to Be

Uncollectible

25% • IRS determined hardship cases

(67)

16% • Bankrupt or defunct corporations

(44)

14% • Taxpayers in bankruptcy (39)

11%•

Taxpayers do not have adequate

resources (31)

•

9%

Defaulted installment agreements /

offers-in-compromise (23)

•25%

Others (68)

Source: 272 taxes receivable sample items with no estimated collectibility.

A discussion of each of these categories and the primary consideration for

determining that all or some portion of each item’s balance was not

collectible follows:

• Sixty-seven items involved hardship cases, in which IRS determined that

the taxpayer was unable to pay due to insufficient income and assets. IRS

will follow up if the taxpayer subsequently reports a certain level of

income.

• Forty-four items involved the portion of unpaid payroll taxes due from

defunct or bankrupt businesses that were assessed as trust fund recovery

penalties against the businesses’ officers or directors who were found

willful and responsible for the nonpayment of withheld payroll taxes. In

these cases, we saw no evidence of an ability or willingness on the part of

these officers or directors to pay some or all of the amounts owed.

Page 18 GAO/AIMD-99-12 IRS Unpaid Assessments
B-280501 

• Thirty-nine items involved taxpayers in bankruptcy proceedings (the court

had not yet determined whether any amount would be paid to IRS for

delinquent taxes) or other defunct corporations. In these cases, we found

no evidence of either ability or willingness on the part of the taxpayers to

pay some or all of the amounts owed.

• Thirty-one items involved cases where IRS’ collection source (levy,

installment, etc.) would be applied to prior outstanding tax periods and

was not sufficient to cover the taxes owed for our sample items.

• Twenty-three items involved cases where the taxpayer defaulted on an

installment agreement or offer-in-compromise and IRS records did not

identify alternative collection sources.

• Eighteen items involved cases where individuals or businesses had

amounts due from multiple tax periods and in recent tax periods had

stopped filing tax returns.

• Sixteen items involved assessments that resulted from the discovery of

illegal acts, including drug trafficking, embezzlement, prostitution,

international arms dealing, and real estate fraud. These were generally

high-dollar cases related to criminal prosecutions. In all cases, we saw

little or no evidence of assets to satisfy the assessments. Income from

illegal acts is taxable and multiple penalties generally apply.

• Twelve items related to taxpayers who had no payment history (no

voluntary payments, levies, refund offsets, etc.).

• Eight items involved amounts owed by individuals who we determined,

through a review of IRS records and discussions, IRS was unable to locate

or contact.

• Eight items involved cases where IRS could not provide sufficient

documentation to support the existence of collection sources identified in

the collection files.

• Four items related to unemployed taxpayers. In these cases, IRS records

did not identify any potential sources of collection.

• Two items related to taxpayers involved in litigation with IRS, cases in

which IRS expects no recovery.

The age of the items is also an indicator of the extent to which the

outstanding amounts owed are not likely to be collected. In contrast to

those taxes receivable sample items where we identified the likelihood of

full or partial collection, the items where we identified no reasonable

expected collection typically were older items, with the majority of these

cases predating the 1990 tax year. In fact, as illustrated in figure 4, for the

465 items in our sample that were ultimately classified wholly or partially

as taxes receivable, the percentage of items where we identified the

Page 19 GAO/AIMD-99-12 IRS Unpaid Assessments
B-280501 

likelihood of full or partial collection declined dramatically as the age of

the items increased.

Figure 4: Age and Collectibility of

Taxes Receivable Sample Items Percentage of items with some collectibility

0

20

40

60

80

100

1997

1995-1996

1992-1994

Before 1992

Year of assessment

81

45

28

23

Source: 465 sample items ultimately classified as taxes receivable.

The inability or unwillingness of taxpayers to pay the delinquent taxes

they owe results in the overall balance of IRS’ unpaid assessments

continuing to age and also results in the continued accrual of significant

amounts of interest and penalties. This contributes to the high loss rate

reflected in IRS’ allowance for doubtful accounts pertaining to its taxes

receivable, as reported in its fiscal year 1997 custodial financial

statements.

Another factor that presents difficulties for IRS in its effort to collect

amounts owed is the degree to which some taxpayers repeatedly fail to

pay taxes year after year. For the majority of the 730 items we reviewed,

the taxpayers actually owed more than just the unpaid assessment we

Page 20 GAO/AIMD-99-12 IRS Unpaid Assessments
B-280501 

examined. This was particularly applicable for officers and directors

against whom trust fund recovery penalties were assessed. Of the 730

unpaid assessment sample items, 83 were unpaid corporate payroll tax

assessments related to trust fund recovery penalties assessed against

officers and directors of businesses who were found willful and

responsible for the nonpayment of withheld payroll taxes. In many of

these 83 items, the same officer was responsible for the nonpayment of

withheld taxes over multiple years. Additionally, for 17 of these 83 items,

the same individual was responsible for nonpayment of withheld taxes at

more than one company. In one of these instances, the same individual

was responsible for the nonpayment of eight tax periods for taxes

withheld from his employees at three different businesses, and in another

case, one individual was responsible for nonpayment of withheld payroll

taxes at five separate businesses. In only 9 of the 83 unpaid payroll tax

assessment items in our sample related to trust fund recovery penalties

did IRS and we determine that recovery of at least some of the amounts

owed was likely. The remainder of these items was determined to be

uncollectible. We will be examining issues associated with trust fund

recovery penalties further in conjunction with our audit of IRS’ fiscal year

1998 financial statements.

Growth in Unpaid

Assessments Balance

Largely a Result of

Continued Accrual of

Penalties and Interest

Because IRS continues to accrue penalties and interest through the

statutory collection period of a delinquent tax assessment, regardless of

the likelihood of collecting on even the original tax assessment owed, this

has, over time, contributed substantially to the buildup of IRS’ balance of

unpaid assessments. According to IRS records, $136 billion, over 60 percent

of IRS’ $214 billion balance of unpaid assessments as of September 30,

1997, consisted of interest and penalties. Figure 5 breaks down the balance

of unpaid assessments between the original tax assessment and the

accrued interest and penalties.

Page 21 GAO/AIMD-99-12 IRS Unpaid Assessments
B-280501 

Figure 5: Unpaid Taxes Compared to

Interest and Penalties Comprising the

$214 Billion in Unpaid Assessments

(Dollars in Billions)

36% • Taxes ($78)

64%•

Interest and penalties ($136)

Source: IRS’ fiscal year 1997 custodial financial statements and masterfile data.

While IRS records show that it accrued tens of billions of dollars in interest

and penalties on its unpaid assessments during fiscal year 1997, according

to IRS it collected less than $13 billion in interest and penalties during the

year. The large interest and penalty amounts are a consequence of the age

of IRS’ unpaid assessments. According to IRS records and as reflected in

figure 6, about 75 percent of its September 30, 1997, balance of unpaid

assessments is over 2 years old, and about 34 percent is in excess of 6

years old.

Page 22 GAO/AIMD-99-12 IRS Unpaid Assessments
B-280501 

Figure 6: Age of Unpaid Assessments

34% • Over 6 years

• 7%

0-4 months

18% • 4 months—2 years

•41%

2 years—6 years

Source: Unaudited IRS masterfile data.

The age of IRS’ unpaid assessments leads to large and increasing amounts

of accrued interest and penalties. IRS is required to continue to accrue

interest and penalties on all unpaid assessments, regardless of their

collection potential, until the statutory period for collecting taxes has

expired. In contrast, major financial institutions in the private sector place

older nonperforming loans in a nonaccrual status to stop interest and

penalties from continually increasing the outstanding loan balances.

The statutory period for collecting taxes is generally 10 years from the

date of the tax assessment. However, this period can be extended under a

variety of circumstances, and such extensions, we noted, do occur. For

example, of the 730 unpaid assessment items in our sample, 16 (2 percent)

related to tax years prior to 1979. In total, 290 sample items (40 percent)

related to tax years prior to 1989, and many of these items had extensions

to their collection periods.

In our sample items, we noted that a major reason for extending the

collection period was ongoing litigation, such as bankruptcy, appeal, or

tax court. These actions result in the suspension of the 10-year collection

period until they have been resolved. Also, offers submitted by taxpayers

Page 23 GAO/AIMD-99-12 IRS Unpaid Assessments
B-280501 

for less than the amount owed, known as “offers-in-compromise,” also

result in a suspension of the 10-year period while IRS considers the offer.

Also, taxpayers often sign waiver agreements that extend the collection

period beyond the initial 10 years. Waivers are frequently used in

conjunction with installment agreements. IRS has recently determined that

the use of waiver agreements in certain instances is inappropriate;12

however, we would not expect this to have a significant impact on IRS’

unpaid assessments.

To illustrate how an older tax assessment can remain on IRS’ records for

decades, an individual could file a 1979 tax return in 1980. IRS, based on its

various enforcement programs, could identify and assess additional taxes

in 1983. The taxpayer could bring the matter to litigation. Assume for the

purpose of this illustration that this litigation takes 6 years to resolve, at

the end of which the court could decide in favor of IRS. The taxpayer could

then enter into an installment agreement in 1989 with repayment terms

extending out through the year 1999.

IRS must accrue interest and penalties through the statutory collection

period, regardless of whether an unpaid assessment meets the criteria for

financial statement recognition or has any collection potential. For

example, interest and penalties continue to accrue on write-offs, such as

the FDIC and RTC cases, as well as on exam assessments where taxpayers

have not agreed to the validity of the assessments. In fact, per IRS records,

the balances for the RTC cases alone will increase from about $22 billion

(which was already mostly interest and penalties) in 1997 to an estimated

$40 billion by the year 2003, under current interest rates.

According to IRS records, the overall growth in unpaid assessments during

fiscal year 1997 was wholly attributable to the accrual of interest and

penalties. In fact, most of the year-to-year growth in unpaid assessments

during the past 5 years is attributable to increases in interest and penalties,

as noted in figure 7.

12This determination was made on the basis of the fact that the waivers obtained by IRS in these cases

were subsequent to, and not in conjunction with, the taxpayer entering into the installment agreement.

Page 24 GAO/AIMD-99-12 IRS Unpaid Assessments
B-280501 

Figure 7: Growth in Unpaid Taxes and

Overall Unpaid Assessments (Dollars in

Billions)

0

50

100

150

200

250

300

350

1993 1994 1995 1996 1997

Unpaid interest and penalties

Unpaid taxes

Note: Includes duplicative assessments, such as trust fund recovery penalties, which amounted

to $15 billion for 1997.

Source: Unaudited IRS masterfile data.

Because much of IRS’ inventory of unpaid assessments consists of

(1) write-offs, which have no future collection potential, (2) compliance

assessments, which have little likelihood of being collected, and (3) taxes

receivable with no estimated collectibility, and because these items are

mostly penalties and interest, a substantial portion of the $136 billion in

accumulated interest and penalties is not collectible.

It is important to note that the IRS Restructuring and Reform Act of 1998

contains several provisions that affect the manner in which IRS will assess

interest and penalties on future delinquent tax debts. For example, IRS will

not be allowed to assess interest and certain penalties for individual

taxpayers if IRS does not send a notice to the taxpayer of any tax

deficiency within the statutory time frame after the taxpayer files a return

or the due date of the tax return, whichever is later. In addition, the

Page 25 GAO/AIMD-99-12 IRS Unpaid Assessments
B-280501 

penalty IRS assesses taxpayers for failing to pay their original tax

assessment is reduced by half for taxpayers with active installment

agreements with IRS. Also, IRS’ application of tax deposits to taxpayers’ tax

liabilities will no longer be based on a first in/first out principle, but will

instead be based on taxpayer designation. This could result in a reduction

in IRS’ assessed penalty for the failure to make tax deposits.

Conclusions Less than half of IRS’ balance of unpaid assessments as of September 30,

1997, was considered taxes receivable, and only about one-third of the

taxes receivable, about 13 percent of the $214 billion total unpaid

assessments balance, was estimated to be collectible. The composition of

the unpaid assessments balance consisted largely of amounts owed by

businesses that no longer existed, deceased individuals, taxpayers who

cannot be located, or taxpayers who do not have the financial ability or

willingness to pay the amounts they owe the federal government. As a

result, despite the fact that many of these delinquent taxes will never be

paid, many of these balances remain on IRS’ records through the statutory

collection period and continue to grow due to the accruing of penalties

and interest. Unlike commercial lenders, IRS does not choose who owes

the government taxes, and much of what exists in IRS’ balance of unpaid

assessments is more analogous to a commercial lender’s list of troubled

loans or loans that have been written off than to a lender’s entire loans

receivable portfolio.

Given the serious financial problems of taxpayers who owe these

delinquent taxes, the fact that over one-third of the delinquent taxes are

over 6 years old, and the fact that nearly two-thirds of the unpaid

assessments balance at September 30, 1997, consisted of penalties and

interest, it is likely that IRS will collect only an estimated 13 cents of every

dollar of unpaid assessments.

Agency Comments IRS stated that it was pleased with this report and appreciated our efforts

in better explaining the composition and collectibility of IRS’ unpaid

assessments.

As agreed with your office, unless you publicly announce the contents of

this report earlier, we plan no further distribution until 30 days from the

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

Commissioner of Internal Revenue; the Director of the Office of

Page 26 GAO/AIMD-99-12 IRS Unpaid Assessments
B-280501 

Management and Budget; the Secretary of the Treasury; and the Chairmen

and Ranking Minority Members of the Senate Committee on

Appropriations, Subcommittee on Treasury and General Government,

Senate Committee on Finance, Subcommittee on Taxation and IRS

Oversight, Senate Committee on Governmental Affairs, Senate Committee

on the Budget, House Committee on Appropriations and its Subcommittee

on Treasury, Postal Service, and General Government, House Committee

on Ways and Means, House Committee on Government Reform and

Oversight, House Committee on the Budget, and other interested

congressional committees. Copies will be made available to others upon

request.

Please contact me at (202) 512-9505 or Steven J. Sebastian, Assistant

Director, Governmentwide Accounting and Financial Management Issues,

at (202) 512-9521 if you or your staff have any questions concerning this

report. Other major contributors are listed in appendix III.

Gregory D. Kutz

Associate Director

Governmentwide Accounting and

Financial Management Issues

Page 27 GAO/AIMD-99-12 IRS Unpaid Assessments
Contents

Letter 1

Appendix I 

Objectives, Scope,

and Methodology

30

Appendix II 

Comments From the

Internal Revenue

Service

34

Appendix III 

Major Contributors to

This Report

35

Tables Table 1: Initial and Final Classification of Unpaid Assessment

Sample Items

10

Table I.1: Summary of Unpaid Assessments Sample Items by

Type of Tax

32

Figures Figure 1: Components of IRS’ $214 Billion of Unpaid Assessments 9

Figure 2: Profile of Taxes Receivable Sample Items Determined

to Have Some Collectibility

15

Figure 3: Profile of Taxes Receivable Sample Items Determined

to Be Uncollectible

18

Figure 4: Age and Collectibility of Taxes Receivable Sample Items 20

Figure 5: Unpaid Taxes Compared to Interest and Penalties

Comprising the $214 Billion in Unpaid Assessments

22

Figure 6: Age of Unpaid Assessments 23

Figure 7: Growth in Unpaid Taxes and Overall Unpaid

Assessments

25

Abbreviations

FDIC Federal Deposit Insurance Corporation

IRACS Interim Revenue Accounting Control System

IRS Internal Revenue Service

RTC Resolution Trust Corporation

SFFAS Statement of Federal Financial Accounting Standards

Page 28 GAO/AIMD-99-12 IRS Unpaid Assessments
Page 29 GAO/AIMD-99-12 IRS Unpaid Assessments
Appendix I 

Objectives, Scope, and Methodology

As part of our audit of IRS’ fiscal year 1997 Custodial Financial Statements,

we reviewed IRS’ unpaid assessments using statistical sampling techniques.

Our objectives in the unpaid assessment segment of the audit were to

determine (1) whether IRS had properly classified its balance of unpaid

assessments between taxes receivable, compliance assessments, and

write-offs, (2) whether the balances for taxes receivable, compliance

assessments, and write-offs were accurate, and (3) in conjunction with IRS,

an estimate of the amount IRS could reasonably expect to collect on its

balance of taxes receivable.

To achieve these objectives, we requested that IRS run its computer

program against the master files to initially classify the population of

unpaid assessments into taxes receivable, compliance assessments, and

write-offs. IRS’ general ledger—the Interim Revenue Accounting Control

System (IRACS)—does not maintain detail transaction information, nor

does it classify unpaid assessments into the three classifications, so it

could not be used to develop the three separate populations of unpaid

assessments for testing purposes. However, it does contain overall

summarized assessment data, so it could be used to verify the

completeness of the populations of unpaid assessments obtained from the

master files. To gain assurance that IRS provided us with a complete

population of unpaid assessments from which to draw our samples, we

reviewed and recalculated IRS’ reconciliations of its unpaid assessments

recorded in its master files and compared them to the assessment

information recorded in IRACS.

The populations were obtained from information contained in the master

files as of July 17, 1997. We selected this interim date for our detailed test

work instead of September 30, 1997, because (1) detailed testing of

statistical samples of unpaid assessments as of September 30, 1997, could

not have been completed in time to facilitate meeting our statutory audit

report date of March 1, 1998, and (2) we expected little change in the

balance of unpaid assessments between July 17, 1997, and September 30,

1997. We performed additional audit procedures of an analytical nature to

ensure that, in fact, no significant changes in either the overall unpaid

assessments balance or between the three categories of unpaid

assessments occurred between July 17, 1997, and the fiscal year-end.

From the three separate populations of unpaid assessments, we selected

statistical samples of items on which to conduct detail testing. For the

population of unpaid assessments initially classified as taxes receivable,

we employed a classical variable sampling approach. In addition to testing

Page 30 GAO/AIMD-99-12 IRS Unpaid Assessments
Appendix I 

Objectives, Scope, and Methodology

for the proper classification and recorded amount, use of classical variable

sampling allowed us, in conjunction with IRS, to project a statistically valid

estimate of the amount of taxes receivable that IRS could reasonably

expect to collect. We stratified the population into 20 dollar ranges to

(1) decrease the effects of variances in the total unpaid assessment

population, (2) gain assurance that the sample amounts were

representative of the population, and (3) obtain assurance that the

resulting net tax receivable amount is a reliable estimate of the amount IRS

can reasonably expect to collect. Separate random samples were then

selected for 19 of the 20 strata. For the remaining strata, which consisted

of all tax receivable items in excess of $30 million individually, all items

were selected for testing. We used $5 billion as our materiality level, a 95

percent confidence level, and a planned precision level of plus or minus

$2.5 billion. This approach resulted in a total sample size of 626 tax

receivable items, totaling $5.9 billion, which is 4.6 percent of the

$127.8 billion in unpaid assessments initially classified as taxes receivable

by IRS.

For the populations of unpaid assessments initially classified by IRS as

compliance assessments and write-offs, we employed dollar unit sampling

techniques to test their proper classification and amount and to evaluate

the significance of any misclassifications. We used $5 billion as our

materiality level, a 95 percent confidence level, and an expected aggregate

error rate of $1.29 billion. This resulted in a sample size of 74 compliance

assessment items totaling $3.7 billion, which is 5.1 percent of the

$72.3 billion in unpaid assessments initially classified as compliance

assessments by IRS, and a sample size of 30 write-off items totaling

$8.4 billion, which is 27.5 percent of the $30.6 billion in unpaid

assessments initially classified as write-offs by IRS.

In total, we selected for testing 730 items totaling about $18 billion,

7.8 percent of the unadjusted unpaid assessments balance as of July 17,

1997. These items covered various tax types. A summary of the 730 sample

items, broken down by major tax type, is presented in table I.1.

Page 31 GAO/AIMD-99-12 IRS Unpaid Assessments
Appendix I 

Objectives, Scope, and Methodology

Table I.1: Summary of Unpaid

Assessments Sample Items by Type of

Tax

Type of tax

Sample

items

Unadjusted book

value (dollars in

billions)

Individual income and self-employment taxes 373 $ 1.3

Corporate payroll tax (includes individual withholdings

and FICA) 185 0.4

Corporate income tax 97 13.3

Estate tax 24 0.5

Miscellaneous penalty 

(trust fund recovery penalties) 22 0.0a

Employer’s annual unemployment tax 11 0.0a

Other taxes 18 2.5

Totals 730 $18.0

aBook value of these sample items rounds to zero.

To determine whether the taxes receivable sample items were properly

classified and recorded for the appropriate amounts, we examined

taxpayers’ case files to determine whether IRS had sufficient and reliable

information to document (1) taxpayers’ agreement to the assessment or

(2) evidence of court rulings favorable to IRS. We also analyzed detailed

masterfile transcripts of the taxpayers’ accounts, reviewed

correspondence between IRS and taxpayers, and examined IRS internal

documents to verify that the items were recorded at the correct amounts.

To determine if and to what extent IRS could reasonably expect to collect

the outstanding taxes receivable balance for each sample item we

concluded was properly classified as taxes receivable, we examined

detailed masterfile transcripts of the taxpayers’ account and IRS collection

case files, which could include documentation of taxpayers’ income and

assets, earnings potential, other outstanding unpaid assessments, payment

history, and other relevant collection information that affected the

taxpayers’ ability to pay. We also considered the extent and results of IRS’

documented efforts to collect the assessment amount.

To determine whether the compliance assessments and write-off sample

items were properly classified and recorded for the appropriate amounts,

we examined taxpayers’ case files, reviewed taxpayers’ transcripts,

reviewed correspondence between IRS and taxpayers, and examined IRS

internal documents to verify that the items were recorded at the correct

amounts.

Page 32 GAO/AIMD-99-12 IRS Unpaid Assessments
Appendix I 

Objectives, Scope, and Methodology

In testing these sample items, we identified numerous instances where

unpaid assessments were incorrectly classified between the three

categories of unpaid assessments. We projected the impact of these

misclassified sample items to the three populations and proposed

adjustments based on these projections. Additionally, we identified unpaid

assessment balances counted multiple times. We proposed adjustments to

remove the associated amounts from the unpaid assessments balance. IRS

reviewed all of these items, agreed with our conclusions, and agreed with

the proposed adjustments. We projected the results of our collectibility

assessment to the population of taxes receivable. We then employed

analytical procedures to adjust September 30, 1997, balances for the

results of our detail testing of July 17, 1997, unpaid assessments data. IRS

reviewed our estimates of amounts that were reasonably expected to be

collectible, our collectibility projection to the entire population, and the

adjustments from our analytical procedures and agreed with the results.

In conducting our work, we did not assess the effectiveness of IRS’

enforcement and collection programs, nor did we address issues

associated with the compliance gap component of the tax gap. In addition,

we did not specifically analyze the impact provisions of the IRS

Restructuring and Reform Act of 1998 may have on the future composition

and collectibility of IRS’ unpaid assessments.

We conducted our work at IRS’ National Office in Washington, D.C., and at

the IRS Kansas City Service Center from August 1997 through

February 1998. We conducted our work in accordance with generally

accepted government auditing standards.

Page 33 GAO/AIMD-99-12 IRS Unpaid Assessments
Appendix II 

Comments From the Internal Revenue

Service

Page 34 GAO/AIMD-99-12 IRS Unpaid Assessments
Appendix III 

Major Contributors to This Report

Accounting and

Information

Management Division,

Washington, D.C.

Steven J. Sebastian, Assistant Director

West Coile, Assignment Manager

Helen Branch, Evaluator

Atlanta Field Office Fannie Bivins, Senior Auditor

James Douglas, Senior Auditor

Alva Archie, Auditor

Veronica Mayhand, Auditor

Angel Sharma, Auditor

Los Angeles Field

Office

David Elder, Auditor

Gary Wiggins, Auditor

San Francisco Field

Office

Laurie King, Evaluator

Seattle Field Office Alvin Finegold, Senior Evaluator

Pat Seaton, Senior Evaluator

Quan Thai, Senior Evaluator

Catherine Arnold, Evaluator

Office of General

Counsel

Thomas Armstrong, Assistant General Counsel

Andrea Levine, Attorney

(919183) Page 35 GAO/AIMD-99-12 IRS Unpaid Assessments
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