IRS Case Selection: Automated Collection System Lacks Key Internal Controls Needed to Ensure the Program Fulfills Its Mission
Published: 2015-09-10T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: IRS's ACS is one of the primary means for pursuing taxpayers who failed to fully pay their taxes or file their tax return in a timely manner. From fiscal years 2012 through 2014, ACS staff has declined 20 percent while the number of unresolved collection cases at year-end has increased 21 percent. Given these trends, IRS must make informed decisions about the collection cases it pursues to ensure the program is meeting its objectives and mission.
GAO was asked to review the ACS process for prioritizing and selecting collection cases. This report (1) describes the ACS process to prioritize and select collection cases and the results of that process for fiscal year 2014, and (2) determines how well the ACS case prioritization and selection process supports the collection program mission and objectives. GAO reviewed IRS guidance, processes, and controls for prioritizing and selecting collection cases, reviewed ACS data, assessed whether IRS's controls followed Standards for Internal Control in the Federal Government , and interviewed IRS officials.
section_title: What GAO Found
paragraphs: The Internal Revenue Service's (IRS) Automated Collection System (ACS) has a multistep, automated process to prioritize and select cases of unpaid taxes and unfiled tax returns to pursue. ACS assesses cases to determine the order to work cases based on IRS's collection program priorities, the likelihood the case will be resolved, and the type of tax and amount owed. ACS also reviews cases to determine what action to take based on whether a levy source or contact information is known for taxpayers. ACS will then contact taxpayers according to its assigned priority and may issue a levy or lien against the taxpayer.
ACS managers balance cases worked to ensure ACS achieves its case closure and taxpayer service measures. These decisions include how many notification and enforcement actions to take and how many cases to assign to IRS staff so that cases are worked in a timely manner. About half of the cases closed in ACS in fiscal year 2014 were high priority, including such issues as employers not paying federal employment taxes. Of the 3.5 million cases closed or transferred out of ACS in fiscal year 2014, IRS collected almost $6.2 billion. IRS generally had more success in collecting from individual taxpayers than from business taxpayers. However, because IRS has not identified objectives for the collection program and ACS, it is difficult to assess the program's overall effectiveness.
ACS has processes for managing risk and reviewing performance, but has not implemented other key internal controls. This increases the risk that the collection program's mission of fair and equitable application of the tax laws will not be achieved. GAO identified deficiencies in the following internal control areas.
Collection program and ACS objectives, and key term of fairness are not defined: IRS officials responsible for the collection program and ACS were unable to produce documentation of collection program or ACS objectives. Although fairness is specified in the collection mission statement, IRS has not defined or operationalized it in any ACS or collection program documents. In the absence of clearly documented objectives and a clearly communicated definition of fairness, IRS cannot know how well ACS contributes to the collection program mission and ensure the case prioritization and selection process is fair. The lack of clearly articulated objectives undercuts the effectiveness of IRS efforts to assess risks and monitor ACS performance.
ACS case prioritization and selection process is not documented: IRS has little formal documentation that describes the ACS prioritization and selection process. Without adequate documentation, it is difficult for IRS to determine whether the ACS case prioritization and selection process effectively supports the collection program mission.
Effectiveness of ACS process is not periodically evaluated: IRS has no procedures for periodically evaluating the ACS case prioritization and selection process and has not acted on implementing recommendations from a recent ad hoc study. Given that key components of the ACS process have remained relatively unchanged since its creation, IRS may be missing opportunities to better prioritize its workload, which could improve collection results.
section_title: What GAO Recommends
paragraphs: GAO recommends that IRS take four actions to help ensure the collection program meets its mission, such as establishing, documenting, and implementing objectives for the collection program and ACS, and establishing, documenting, and implementing procedures to complete periodic evaluations of the ACS case prioritization and selection process. In commenting on a draft of this report, IRS said it generally agreed with all of GAO's recommendations.

section_title: Letter
paragraphs: The Internal Revenue Service (IRS) pursues taxpayers with unpaid tax  debts and delinquent returns to help ensure compliance and confidence  in the tax system. This helps to address the tax gap—the estimated  difference between the amount of taxes that taxpayers pay voluntarily and  on time and those they owe. IRS estimated that for tax year 2006, the  $450 billion gross tax gap included $46 billion due in delinquent tax  liabilities and $28 billion due in unfiled tax returns.
One of the primary means by which IRS pursues delinquent taxpayers is  through the Automated Collection System (ACS). In fiscal year 2014,  ACS collected almost $6.2 billion in delinquent federal revenue. ACS is  largely a call center operation that uses automated calls and letters to  remind taxpayers of their tax delinquency. ACS also handles incoming  calls from taxpayers responding to delinquency notices and enforcement  actions. ACS has experienced significant declines in staffing, with full- time equivalents decreasing by 20 percent (from 3,672 to 2,932) from  fiscal years 2012 through 2014. Over the same period, the number of  unresolved collection cases at the end of each year increased by 21  percent (from 4.2 million to 5.1 million). As workload and staffing move in  opposite directions, IRS must decide which cases to prioritize over others  to ensure ACS carries out the IRS collection program mission through the  fair and equitable application of the tax laws.
In light of these issues, you asked us to review the IRS process for  prioritizing and selecting collection cases to pursue in ACS. This report  (1) describes the ACS process to prioritize and select collection cases  and the results of that process for fiscal year 2014; and (2) determines  how well the ACS case prioritization and selection process supports the  collection program mission and objectives. This report is part of a larger  body of our work on case selection across IRS.
For the first objective, we reviewed IRS documents, to the extent they  were available, that describe the process for ACS case prioritization and  selection. These documents include the Internal Revenue Manual (IRM),  program documents, IRS reports, and presentations prepared by IRS  staff. We visited an ACS call site in Philadelphia twice to review the ACS  process, including how ACS collection cases are managed, and to  observe taxpayer calls with IRS collection representatives. In addition, we  analyzed IRS collection reports on the scope and scale of ACS  operations and performance measures for fiscal years 2012 through  2014. We interviewed IRS officials responsible for overseeing the ACS  case prioritization and selection process, as well as IRS officials  responsible for the overall IRS collection program. Finally, we analyzed  data on collection cases closed in ACS in fiscal year 2014 (the most  recent full fiscal year available). This entailed describing the number of  ACS collection cases by type of taxpayer, type of delinquency, case  priority, type of case closure, and average and median number of days  cases were open in ACS.
For the second objective, we reviewed ACS procedures, IRM sections,  IRS reports, and related internal controls intended to help the IRS  collection program achieve its mission and program objectives. We  reviewed similar documentation to determine whether procedures are in  place to periodically monitor, evaluate, and review the ACS prioritization  process. To determine IRS’s definition of fairness as it applies to  collection activities, we reviewed the ACS procedures and process for  case prioritization and selection. We also interviewed relevant IRS  officials concerning their understanding of the mission, objectives, and  internal controls of the collection program and ACS, and about the extent  to which procedures exist to monitor ACS case prioritization and  selection. We then assessed whether the procedures aligned with  relevant Standards for Internal Control in the Federal Government.
For the purposes of this review, we determined that the data used in our  analysis were reliable. Our data reliability assessment included reviewing  relevant documentation, interviewing knowledgeable IRS officials, and  reviewing the data to identify obvious errors or outliers. For additional  details on our scope and methodology, see appendix I.
We conducted this performance audit from October 2014 to September  2015 in accordance with generally accepted government auditing  standards. Those standards require that we plan and perform the audit to  obtain sufficient, appropriate evidence to provide a reasonable basis for  our findings and conclusions based on our audit objectives. We believe  that the evidence obtained provides a reasonable basis for our findings  and conclusions based on our audit objectives.
subsections: section_title: Background
paragraphs: The mission of IRS’s collection program, as set forth in the fiscal year  2015 collection program letter, is “to collect delinquent taxes and secure  delinquent tax returns through the fair and equitable application of the tax  laws, including the use of enforcement tools when appropriate, provide  education to customers to enable future compliance, and thereby protect  and promote public confidence in the American tax system.”
IRS collects unpaid tax debts through a complex, three-phase process:  (1) a notice phase, (2) a telephone phase (ACS), and (3) an in-person  phase (Field collection). While these phases are not necessarily  sequential (for example, a case could go directly from the notice phase to  Field collection), with few exceptions every collection case is required to  go through the notice phase.
Of cases initiated in fiscal year 2014, more than two-thirds were resolved  in the notice phase. If a case is not resolved during the notice phase, it is  sent to the automated Inventory Delivery System (IDS), where the next  step is determined. IDS will (1) identify and filter out uncollectible cases  (i.e., removed from active collection status through a process known as  shelving), (2) categorize some cases as high risk, and (3) determine  whether cases should be routed to either ACS or Field collection to  potentially be worked. See figure 1.
To make these determinations, IDS considers hundreds of factors about a  case while carrying out two activities that facilitate closures, prioritization,  and routing:
Modeling is a statistical process that analyzes the results of  previously closed cases to predict likely case outcomes. In IDS, this  process helps determine if a case should be shelved if a model  predicts it would not be collectible.
Risking determines whether a case is high risk and influences case  routing and shelving decisions. For example, cases where a taxpayer  owes a large amount of money would be considered high risk and  would be a priority for selection.
The outputs from the modeling and risking activities are used in  conjunction with hundreds of business rules to determine where to route  cases for further collection actions. For cases routed to ACS and Field  collection, the predictive modeling results from IDS are transmitted and  used again to further prioritize cases. Cases are sent to ACS for several  reasons, the two most common of which, based upon IRS data, are:
Taxpayer case already established in ACS: Taxpayer already has  one or more delinquency issues that are being pursued in ACS.
Default routing rules: No other IDS rule for routing cases to Field  collection or for shelving cases proves applicable, and therefore by  default the module is sent to ACS.
Once a collection case is sent to ACS, it is either established as a new  case or added to an existing case on a taxpayer. IRS pursues ACS  collection cases by taking one or more actions, including reminding  taxpayers of their tax delinquency through automated outgoing calls and  letters, as well as placing liens on property or levying wages or assets.  These actions may prompt taxpayers to call ACS to attempt to resolve  their cases. If collection cases in ACS do not contain up-to-date contact  information for the taxpayer, or information about sources that IRS could  levy, IRS collection representatives will search for such information. If  they find it, the case enters the pool of cases on which a potential action  could be taken.
ACS attempts to resolve two types of collection delinquencies: (1)  balance due cases, in which a taxpayer has a tax liability to IRS, and (2)  nonfiler cases, in which a taxpayer has an unfiled return. One case may  include both types of delinquencies.
Balance due cases can be resolved by the taxpayer paying the  outstanding tax debt in full, or arranging with IRS to pay the full or partial  outstanding tax debt over time (known as an installment agreement).  However, these cases could also be closed as currently not collectible if  ACS collection representatives are unable to locate or contact the  taxpayer, or if the taxpayer is facing economic hardship or unable to pay,  among other reasons. Some cases closed as currently not collectible  may reenter the collection inventory if IRS determines that in the future,  the taxpayer will be able to pay some of the tax debt.
Unfiled return cases may be resolved if the taxpayer files the delinquent  return, or if the taxpayer is no longer liable for the unpaid taxes during the  period in question, among other reasons. If the collection case is  unresolved by ACS, it may move to Field collection to be pursued further,  or it could be shelved.
In November 2014, IRS began realigning collection operations across its  Wage & Investment (W&I) and Small Business/Self-Employed (SB/SE)  business operating divisions. According to IRS, the realignment will  increase efficiency, reduce redundancies, and position IRS to improve  identification of emerging compliance issues. Previously, ACS operations  were split with W&I handling collections against individual taxpayers, and  SB/SE handling individuals with business income and losses as well as  all business entity taxpayers. As part of the realignment, IRS is  consolidating all ACS call and support sites within SB/SE. At least  through fiscal year 2015, ACS will operate separate phone numbers for  W&I and SB/SE, and all sites will continue to handle the same type of  taxpayers as they did prior to the realignment. IRS officials said that  they plan to consolidate the management of its telephones by fiscal year  2016 to align with the new organizational structure.
section_title: Case Selection Is Mostly Automated, and Priority Cases Accounted for Half of ACS’s Closed Cases in Fiscal Year 2014
subsections: section_title: ACS Uses Case Characteristics and Predictive Models to Prioritize Cases for Selection through a Multistep Process
paragraphs: The ACS prioritization and selection process consists of three steps, as  shown in figure 2. These steps are automated—that is, they do not  involve manual intervention—and occur within seconds of each other. IRS  managers responsible for ACS case prioritization and selection cannot  change these steps without guidance from IRS collection program  executives and input from IRS’s information technology staff. Overall, the  ACS prioritization and selection process is set up so that high-priority  cases are worked first. These include IRS program collection priorities  and cases that have a greater potential to result in full payment or an  installment agreement based on IRS’s predictive models discussed  above. Documentation of the process is limited (an issue we discuss later  in this report); therefore we based our description below largely on our  reviews of the documentation that does exist, on multiple interviews with  IRS officials, and on our observations during two visits to the ACS call site  in Philadelphia.
The first step in the ACS prioritization and selection process is to assign a  case to one of three inventory groups: (1) special inventories, (2) model  priority inventories, and (3) the general population inventory.
During this step, ACS first assesses cases to determine whether they fall  within one of ACS’s five special inventories, four of which align with IRS’s  collection program priorities. ACS will look at the case characteristics,  such as from which IRS division the case originated, to assign it to a  special inventory. ACS works all but one of the special inventories at  specific call sites where staff possess the expertise to work the cases.  See table 1.
Next, ACS assesses the remaining cases to determine whether they  qualify for assignment to one of the business model priority inventories.  These inventories contain cases that IRS predicts as having a probability  of resulting in full payment or installment agreements, among other  outcomes. To make this determination, ACS uses the predictive model  scores generated by IDS. If the model score on the case is above a  specified threshold, ACS will assign the case to the corresponding model  priority inventory. ACS assigns any remaining cases not placed into one  of the special inventories or model priority inventories to the general  population inventory.
Simultaneously with these actions, ACS assigns each case a risk  category of high, medium, or low. ACS bases this assignment on the  case’s characteristics, such as its age, the dollar value of the outstanding  balance, and the type of return the taxpayer filed or failed to file, among  others. According to IRS officials, the risk categories have remained  largely unchanged since their inception in 2000. Many of the risk  categories contain dollar thresholds, which have also remained  unchanged; for example, if a taxpayer has a delinquent balance due that  is within or above a specified amount, ACS will assign it to the  corresponding risk category. In addition, ACS uses risk categories to  determine how long to retain cases in ACS before sending them to the  queue or shelving them. ACS sends high- and medium-risk cases to the  queue after 26 weeks. Low-risk cases are not sent to the queue but are  shelved after 104 weeks. IRS officials said that ACS retains low-risk  cases for longer because ACS staff have to work through high- and  medium-risk cases before they can get to low-risk cases. These officials  added that if low-risk cases are not resolved in ACS and subsequently  sent to the queue, it is unlikely that they would get worked by revenue  officers in Field collection.
After ACS assigns a case to an inventory and a risk category, the case  receives a priority level, which determines the order in which ACS works  the case within each inventory. ACS uses the assigned inventory, risk  category, and the predictive model scores unique to each case to assign  it a priority level. Figure 3 illustrates how ACS sets the priority level for  business taxpayers. The ACS process for setting the priority level for  individual taxpayers is similar except that it prioritizes high-income  nonfiler and FERDI cases, among others, first. Following the IRS  realignment, which is consolidating all ACS call sites within SB/SE, IRS  officials said that their goal is to integrate the case prioritization and  selection processes used for SB/SE and W&I into one approach during  fiscal year 2016.
IRS collection program officials said that they would like to continue to  expand IRS’s use of the IDS model scores to prioritize cases within ACS.  For example, ACS prioritizes cases into priority levels of 0 to 5, but does  not prioritize the cases within each level. According to IRS collection  program officials, using the model scores more robustly would allow IRS  to better select among cases that have the same priority level or follow-up  date. However, collection program officials have no plans to use the  predictive model scores as the sole factor to prioritize cases as this would  ignore the collection program priorities discussed above.
In the third step, ACS assigns each case to a function unit. Function units  are holding bins for cases while they wait for action by either ACS  collection representatives or the system itself (which acts automatically).  Generally, these actions include contacting taxpayers, taking enforcement  actions, such as liens and levies, or investigating cases for contact  information. After segregating cases by inventory and function unit, ACS  works cases in a specific order, beginning with priority level, then by  follow-up date, and finally by taxpayer identification number in ascending  order.
section_title: ACS Managers Aim to Balance Workload to Achieve Case Closure and Taxpayer Service Measures
paragraphs: Although the ACS prioritization process is largely automated, IRS  managers responsible for case prioritization and selection have some  discretion in choosing the number and type of cases worked to ensure  that ACS meets two key performance measures: (1) the number of  balance due and nonfiler case closures and (2) the level of service, which  measures the quality of collection representatives’ interactions with  taxpayers who call into ACS. To ensure ACS meets these measures,  ACS managers consider: (1) how collection representatives’ time is spent;  (2) how many notification and enforcement actions to initiate; and (3) how  many and which cases to load for collection representatives to work.
subsections: section_title: How Collection Representatives’ Time Is Spent
paragraphs: ACS managers first balance the time collection representatives spend  researching cases with the time they spend answering phone calls from  taxpayers. In fiscal years 2013 and 2014, collection representatives spent  77 percent of their time answering phone calls, up from 66 percent in  fiscal year 2012, and thus spent less time researching cases, including  those that may be of higher priority. Representatives spent more time  answering phones primarily because in fiscal year 2014 there were 20  percent fewer collection representatives (in terms of full-time equivalents)  in ACS than in fiscal year 2012.
section_title: How Many Notification and Enforcement Actions to Initiate
paragraphs: ACS managers also balance the number of notification and enforcement  actions—such as outgoing calls, letters, liens, and levies—with the  expected number of taxpayers who will call in response. ACS managers  target an expected call volume that allows collection representatives to  answer taxpayers’ calls in a timely manner. This helps ensure that ACS  meets targets for level of service. Over the previous 3 fiscal years, ACS  issued fewer notification and enforcement actions because of the  declining number of collection representatives spending an increasing  share of their time answering calls. For example, IRS issued 37 percent  fewer levies and 31 percent fewer letters between fiscal year 2012 and  2014.
section_title: How Many and Which Cases to Load for Collection Representatives to Work
paragraphs: Finally, ACS managers assess how many cases to upload for collection  representatives to work. Managers track the number of cases and how  long cases are residing in function units to ensure that older cases are  worked by collection representatives in a timely manner. If the  managers determine cases are residing in function units too long, they  upload a block of cases from those function units to ACS’s inventory  management tool. Each collection representative accesses the inventory  management tool and works the next case available based on the priority  level and oldest follow-up date. This process thus precludes collection  representatives from selecting individual cases.
section_title: Priority Cases Accounted For Half of Case Closures in Fiscal Year 2014, and IRS Performed Better at Closing Priority Individual Cases Than Priority Business Cases
paragraphs: In fiscal year 2014, almost half of the 3.5 million cases closed or  transferred out of ACS were high-priority cases, such as high-income  nonfiler and trust fund cases. See figure 4. Furthermore, three-quarters of  cases closed in ACS in fiscal year 2014 were for taxpayers who had a  balance due outstanding with IRS (discussed further below). See  appendix III for data on nonfiler cases for taxpayers who failed to file tax  returns.
Table 2 shows the mix of closed cases by inventory type. About nine  percent were in one of ACS’s five special inventories, which align with  IRS collection program priorities. About one-third of cases were from the  model priority inventories, in which IRS predicts the case has a certain  potential to result in full payment or an installment agreement, among  others, and the remaining cases were in ACS’s general inventory.
Broken out by type of taxpayer, about 60 percent of the balance due and  nonfiler cases ACS closed in fiscal year 2014 were business taxpayers.  These taxpayers included (1) business entities, such as corporations; (2)  businesses which failed to file or remit fully their employment taxes; and  (3) individuals with business income or losses.
Of the 3.52 million cases closed in or transferred out of ACS in fiscal year  2014, about 1.76 million cases (50 percent) were either resolved by IRS  when the taxpayer paid the tax liability in full, or established an  installment agreement to pay the liability partially or in full, or when IRS  secured the delinquent return. IRS collected almost $6.2 billion in  delinquent revenue for the federal government from those cases closed in  fiscal year 2014. Another 1 million cases (29 percent) were transferred  out of ACS to another location in the IRS collection program. Finally,  about 373,000 cases (11 percent) were closed as currently not collectible  or shelved, and the remaining 380,000 cases (11 percent) were closed for  other reasons, such as being sent to IRS exam to potentially audit the  taxpayer’s return.
In fiscal year 2014, IRS generally performed better at closing high-priority  individual balance due cases than it did at closing these types of business  cases. Figure 5 shows the outcome of these types of closed cases.
Of cases closed in ACS in fiscal year 2014, the median number of days  high-priority individual and business balance due cases were open was  259 and 196 days, respectively. Of cases closed in fiscal year 2014,  IRS closed 85 percent of business high-priority balance due cases within  the first year they were open, whereas 61 percent of individual high- priority cases were closed within the first year.
section_title: ACS Objectives Are Unclear, and IRS Lacks Key Documentation of and Procedures for Evaluating Case Prioritization and Selection
paragraphs: An effective internal control system can help federal agencies achieve  their missions and objectives and improve accountability. As set forth in  Standards for Internal Control in the Federal Government, also known as  the Green Book, internal controls comprise the plans, methods, and  procedures used to meet an entity’s mission, goals, and objectives, which  support performance-based management. Internal controls help agency  program managers achieve desired results and provide reasonable  assurance that program objectives are being achieved through, among  other things, effective and efficient use of agency resources. Internal  control is not one event, but rather an ongoing series of actions and  activities that occur throughout an entity’s operations. Two examples of  internal control standards are the establishment of clear, consistent  objectives and a commitment to documenting significant events.
Internal control standards can serve as tools to help IRS management  ensure that ACS contributes to the collection program’s mission of  collecting delinquent taxes and securing delinquent tax returns through  the fair and equitable application of the tax laws. However, when we  compared IRS’s processes to these standards, we found that they were  deficient in some areas, thereby increasing the risk that ACS activities  may not fully contribute to the collection program’s mission.
subsections: section_title: The Collection Program and ACS Lack Clearly Documented Objectives, and the Key Term of Fairness Is Undefined
paragraphs: According to internal control standards, having clearly documented and  communicated program objectives is a precondition of any further internal  control activity, such as risk assessment, and is key to helping entities  meet their mission, objectives, and goals. IRS officials responsible for  the collection program and ACS were unable to produce documentation  regarding collection program or ACS objectives. While during an interview  with us, collection program executives described the objectives of  ensuring adequate coverage of different types of collection cases and  maximizing the revenue collected by IRS, neither of these concepts were  clearly documented and communicated to IRS staff. We found elements  of what could be developed into program objectives in various program  documents—such as the collection program letter, which includes the  collection mission, and collection policy statements. However, none of  these documents were identified by IRS officials as establishing program  objectives. IRS officials also pointed to a variety of established   performance goals and measures used within the collection program as  objectives. However, according to internal control standards and the  GPRA Modernization Act of 2010 (GPRAMA), performance goals and  measures are not objectives, but rather should be used to assess  whether an entity is achieving its objectives, and are ultimately derived  from those objectives.
The concept of fairness is of central importance to the collection program,  as reflected in IRS’s and the collection program’s mission statement.  However, the term “fairness” was not defined or operationalized in any  ACS or collection program documents as it relates to case selection. IRS  officials did share a number of viewpoints of how fairness could be  defined. While these informal views on fairness may have meaning to  some, they do not constitute an institutional definition of fairness, nor are  they substitutes for documented objectives that are accessible and can  be communicated to staff. One IRS official responsible for collection  case selection processes offered a definition of fairness as “treating like  taxpayers alike”—that is, that taxpayers with similar characteristics face  an equal likelihood of being selected for collection. Another IRS official  said ACS is fair because it is a “next case” system—that is, cases are  automatically prioritized and selected for ACS staff to work, without IRS  staff having any role in selecting them. According to this IRS official,  fairness is “built into the system.” Another IRS official added that while  IRS does not define and document fairness in the IRS collection program  letter, IRS details the procedures and processes in the Internal Revenue  Manual for how IRS staff are supposed to deal with taxpayers calling into  ACS. He said that consistently following these procedures constitutes  treating taxpayers fairly.
The absence of clearly documented objectives and a clearly  communicated definition of fairness present a number of challenges for  IRS. First, without clearly formulated and communicated program  objectives, IRS cannot know how well ACS contributes to the collection  program mission and is not able to effectively assess the risks ACS may  face or its overall effectiveness. Further, without documentation, a key  concept like fairness may be open to multiple interpretations by ACS  management and staff, as well as by the public. Ensuring that the  multistep ACS prioritization and selection process is documented will  allow IRS to communicate the concept of fairness consistently and reduce  the risk that the case selection and prioritization process is perceived as  unfair.
section_title: ACS Has Processes for Assessing Risk and Monitoring Performance, but the Lack of Objectives Undercuts Their Effectiveness
paragraphs: Internal control standards state that management needs to identify and  analyze relevant risks associated with achieving the objectives. In  addition, management needs to decide how to manage those risks and  what actions should be taken in response. IRS officials draw on a mix of  daily, weekly, monthly, and ad hoc meetings as their means of identifying  and managing operational risks, which could affect the functioning of  ACS.
An IRS official illustrated one example of risk identification in which the  agency’s process identified that some levy notices contained incorrect tax  liability information. This error presented a risk that ACS might  systematically supply taxpayers or third parties with incorrect information.  She also described the steps IRS took to address this risk. These  included working with IRS information technology staff to move the  affected cases out of function units that issue letters and levies, as well as  issuing an alert to inform relevant ACS staff of what was going on, in case  they received questions from taxpayers.
ACS managers responsible for case prioritization and selection also have  quality reviews and other processes to review ACS operations. For  example, program reviews, among other things, ensure ACS collection  representatives work cases according to IRM procedures. In fiscal year  2014, each of the seven program reviews completed at SB/SE call sites  identified areas for improvement in case processing and outlined  corrective actions each call site should take in response. These reviews  check compliance with current procedures but do not assess the ACS  case prioritization and selection process, according to IRS officials. IRS  managers, including those in ACS, are to complete annual assessments  of the effectiveness of controls within their own areas of responsibility,  which include identifying and reporting risks.
Additionally, IRS is implementing an Enterprise Risk Management (ERM)  program, which will consider risks more systematically across IRS. The  SB/SE Commissioner chartered a risk committee for SB/SE, which  provides input into the overall IRS ERM process. The collection program  also has a risk council, which provides input to the SB/SE Risk  Committee. ACS is represented on this council by the Director of Campus  Collections, who oversees the various ACS call sites that are spread  across the country. As of April 2015, SB/SE’s preliminary risk register  listed 31 distinct risks, including some collection-related risks. IRS plans  to periodically update the risk register and monitor the risks included on  the register. IRS is also to develop and take actions in response to the  risks listed on the register. In addition to these actions, ERM has  procedures whereby ACS staff and management can elevate risks for  management and executives to consider. The implementation of the ERM  process in SB/SE is still in its initial stages with the preliminary risk  register created in April 2015 and the first risk collection council meeting  held that same month. As a result, it is too early to determine the  effectiveness of the ERM in identifying and managing risk.
As noted above, ACS managers responsible for case prioritization and  selection track performance measures, such as the number of balance  due and nonfiler case closures as well as level of service. IRS officials  responsible for ACS review these measures in daily, weekly, and monthly  meetings, which provide information on how ACS is functioning and on  whether it is meeting the targets established for its key measures. Internal  control standards require management to establish activities to review  performance measures and indicators, as well as to compare actual  performance to planned or expected results. ACS managers responsible  for case prioritization and selection monitor and review a range of reports.  These reports provide data on staffing, total ACS dollars collected,  enforcement activities (e.g., liens and levies), and customer satisfaction,  among other measures. Collection program executives review similar  ACS measures, as well as information on enterprise collection priorities,  some of which ACS pursues.
IRS has established a management infrastructure for both assessing risk  and monitoring performance. However, the lack of clearly documented  collection program and ACS objectives undercuts its effectiveness.  Without clearly documented program objectives, IRS cannot ensure that  its risk assessment processes effectively identify and analyze relevant  risks associated with achieving objectives. ERM’s training for managers  reinforces the importance of understanding objectives at various levels  across IRS and establishing a risk management process to minimize the  effects of risk to the accomplishment of those objectives. Similarly, IRS  cannot know the extent to which ACS performance measures align with  or contribute to the collection program mission without deriving measures  from established objectives.
section_title: The ACS Prioritization and Selection Process Is Not Clearly Documented
paragraphs: Internal control standards state that such controls need to be clearly  documented and that documentation should be readily available for  examination. However, IRS has incomplete documentation to describe  ACS’s process for assigning a case to an inventory and risk category,  priority level, and function unit. The information we used to outline the  ACS case prioritization and selection process discussed above was  mostly told to us by IRS officials over a series of discussions, rather than  by clear and comprehensive documentation. IRS was able to provide  documentation on the case characteristics that apply to each risk  category and the IRM section that explains ACS operations, including  information about how cases are assigned to function units. However, this  documentation does not provide an overview of the multistep ACS case  prioritization and selection process.
Using screen shots from their computer system, IRS officials were able to  demonstrate how ACS assigns a case to an inventory and a priority level.  However, the screen shots did not stand alone without explanation and  input from IRS officials. IRS was able to provide documentation about  how the process has changed overtime, such as information technology  requests to implement the use of the predictive model scores and alter  the model priority inventories in ACS.
IRS officials acknowledged that they have little formal documentation  along these lines to comprehensively describe the ACS process. In lieu of  documentation, IRS has to rely on the institutional knowledge of  management and staff to be able to describe the process. For example,  key IRS staff have been employed in ACS since at least 2000, when ACS  began using the risk categories. The officials also acknowledged that the  process needs to be written out to affect a smooth transition to future staff  and management. Indeed, IRS officials told us that some ACS staff will  soon be eligible for retirement, which highlights the importance for IRS to  document the multistep ACS process.
Without adequate documentation, it is also difficult to determine whether  the ACS case prioritization and selection process effectively supports  collection program and ACS missions and objectives. Furthermore, as  IRS realigns ACS collection operations within SB/SE, having baseline  documentation of the process as structured would assist IRS in  communicating the process to staff and in making decisions about how  best to consolidate ACS. Finally, the absence of a fully documented  prioritization process may make it difficult for IRS to defend against  accusations that it is not following its collections procedures, since these  procedures are not documented and cannot be communicated to parties  inside and outside of IRS.
section_title: IRS Lacks Procedures for Periodically Evaluating the ACS Process and Has Not Taken Corrective Action from Ad Hoc Evaluation
paragraphs: According to internal control standards, separate evaluations of controls  can be useful by focusing directly on the controls’ effectiveness at a  specific time. The scope and frequency of separate evaluations should  depend primarily on the assessment of risks and the effectiveness of  ongoing monitoring procedures. ACS has no procedures or structure for  regularly completing periodic evaluations of the ACS case prioritization  and selection process, including its use of the special inventories, risk  categories, predictive models, and priority levels. For example, according  to IRS officials, the ACS risk categories have been relatively static since  their creation in 2000, and dollar values within those risk categories have  not been adjusted for inflation. While some changes have been made to  the ACS case prioritization and selection process, these changes were  based on ad hoc studies or recommended by management based on  changes in priorities, rather than the result of regular and periodic  evaluations of the ACS case prioritization process. For example, as a  result of the IRS Collection Process Study completed in 2010, IRS  decided to retain high-risk cases longer in ACS to ensure those cases get  worked. IRS officials said that while they have no procedures to  regularly or periodically evaluate ACS case prioritization, such  evaluations could provide useful information for consolidating ACS  operations in SB/SE, in light of the IRS realignment. In addition, according  to IRS officials, the realignment is serving as a catalyst to review and  enhance the ACS process in SB/SE, such as reviewing and enhancing  the use of the risk categories and revisiting the amount of time cases are  retained in ACS.
IRS’s December 2014 Collection Workload Optimization Project (CWOP)  produced a number of findings and recommendations for how ACS could  better manage and prioritize cases. For example, CWOP recommended  that ACS stop prioritizing cases by follow-up date because selecting  cases by the oldest follow-up date may result in ACS selecting cases with  less collection potential. In our discussions about the status of the CWOP  recommendations, IRS officials said that while CWOP remains an  ongoing effort, they do not have a plan or time frame in place for next  steps and corrective actions in response to the report. IRS officials stated  that they have been unable to take action with regard to certain CWOP  recommendations due to scarce resources and competing priorities for  IRS’s information technology services.
Internal control standards note that managers are to (1) promptly evaluate  findings from audits and other reviews, including those showing  deficiencies and recommendations reported by auditors and others who  evaluate agencies’ operations, (2) determine proper actions in response  to findings and recommendations from audits and reviews, and (3)  complete, within established time frames, all actions that correct or  otherwise resolve the matters brought to management’s attention.
Without periodically reviewing and evaluating the ACS case prioritization  and selection process and ensuring that findings from evaluations, such  as CWOP, are addressed and corrective action is taken where  necessary, ACS may be missing opportunities to better prioritize its  workload and improve collection results. For example, CWOP  recommends that ACS prioritize collection cases in each of its inventories  by the model scores rather than by the priority level codes. According to  IRS, this would help ACS select the cases with the greatest collection  potential. Without such evaluations, IRS may also not be able to ensure  that ACS case prioritization is working as intended and may be missing  opportunities to more effectively align the ACS case prioritization process  with IRS’s strategic objectives and with collection program and ACS  objectives, once developed. In addition, if the prioritization and selection  process is not periodically evaluated over time, it could lose its value and  usefulness. For example, IRS does not know how the static dollar  thresholds for the ACS risk categories affect the composition of cases  assigned certain priorities and risks over time. Outdated dollar thresholds  may no longer be serving their intended purpose of identifying high-risk or  priority cases as they have remained static while taxpayer incomes have  increased over time, potentially changing ACS’s composition of cases.
section_title: Conclusions
paragraphs: ACS is one of IRS’s primary enforcement tools for compelling  noncompliant taxpayers to file their tax returns and pay their taxes. ACS  ensures millions of taxpayers do just that, which results in billions of  dollars being collected annually for the federal government, thereby  helping to address the tax gap and encouraging future voluntary  compliance. ACS’s process for prioritizing and selecting cases helps to  ensure that high-priority taxpayers, including federal employees and  retirees, high-income nonfilers, and large corporations, as well as  taxpayers who have a higher probability of paying their taxes in full,  comply with the tax laws. But the absence of key management controls— objectives, documentation, and procedures to complete periodic  evaluations—creates multiple challenges for IRS. Without clearly  documented objectives, IRS cannot know if ACS is meeting its mission  and the agency will not be able to manage risk or monitor performance as  well as it otherwise could.
The lack of clear and comprehensive documentation on ACS’s multistep  case prioritization and selection process risks that it will not be  communicated consistently to parties inside and outside of IRS. IRS has  relied on institutional knowledge from experienced staff, some of whom  are now retirement eligible. However, the risk of inconsistently  communicating the ACS process increases as subsequent IRS  employees work within ACS. By not periodically evaluating how the ACS  process is structured (or acting on the findings of the ad hoc evaluation  that was conducted), IRS is missing opportunities to enhance ACS’s  effectiveness. Moreover, the absence of these controls could affect IRS’s  ability to successfully consolidate W&I and SB/SE ACS call sites as part  of the ongoing IRS realignment. Lastly, IRS risks the appearance that the  ACS prioritization and selection process is unfair to taxpayers because  IRS is unable to communicate key pieces of information, such as its  definition of fairness, to the public.
section_title: Recommendations for Executive Action
paragraphs: To help ensure the IRS collection program meets its mission and selects  cases fairly, we recommend that the Commissioner of Internal Revenue  take the following four actions related to ACS:  1.  Establish, document, and implement objectives for the collection  program and ACS, and define the key term of “fairness” as it applies  to collection activities, which can be communicated to IRS staff.  2.  Establish and implement clear guidance and documentation for the  ACS case prioritization and selection process, including inventory,  risk, and priority designations, as well as changes to those  designations over time, and communicate them to appropriate IRS  staff.  3.  Establish, document, and implement procedures to complete periodic  evaluations of the ACS case prioritization and selection process and  structure. The evaluation should cover the composition of the risk  categories, model thresholds, and dollar thresholds used to prioritize  cases.  4.  Establish, document, and implement a plan and time frame to ensure  follow-up for ad hoc evaluations of the ACS case prioritization and  selection process.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided a draft of this report to the Commissioner of Internal  Revenue for review and comment. The Deputy Commissioner for  Services and Enforcement provided written comments dated August 18,  2015, which are reprinted in appendix V.
IRS stated that it agrees with the importance of sound internal controls  and is committed to their improvement, especially in the areas we  recommended. To that end, IRS noted actions that it has taken to  improve collection performance in fiscal years 2014 and 2015, including  updates of analytical models and the realignment of the collection  program to be entirely within SB/SE. IRS acknowledged that its  documentation has not kept pace and affirmed its commitment to bringing  the policies and procedures up to date. However, IRS did not believe that  the level of current documentation has undercut the effectiveness of ACS.
In response to our recommendation to establish, document, and  implement objectives for the collection program and ACS, IRS said it will  review its current objectives for both, which it identifies as the collection  program priorities, to identify and implement any additional objectives.  IRS also said it plans to define key terms such as "fairness" as it applies  to collection activities in a data dictionary, which is communicated to IRS  staff. As we noted above, ensuring clearly documented and  communicated objectives exist will allow IRS to use the management  infrastructure in ACS for both assessing risk and monitoring performance  to their full potential. In addition, communicating a key concept like  fairness to IRS staff will help reduce the risk that it is open to multiple  interpretations.
In response to our recommendation on establishing and implementing  clear documentation, IRS said that it will review and implement clear  guidance and documentation that can be communicated to IRS staff. As  we discussed, having adequate documentation for the ACS case  prioritization and selection process will assist IRS in communicating the  process to staff, and in making decisions about the best way to  consolidate ACS under the recent realignment of collection operations.
In response to our recommendation to periodically evaluate the ACS case  prioritization and selection process, and follow up on prior ad hoc  evaluations, IRS said it will review and, if needed, update its internal  management documents and ensure follow up for ad hoc evaluations.  IRS also noted that any evaluation of the ACS case prioritization and  selection process completed will be based on a risk assessment at that  time. Given that components of the ACS case prioritization and selection  process have been in place since at least 2000 without being evaluated,  ACS may be missing opportunities to better prioritize its workload and  improve collection results through periodic evaluations, and ensuring  follow up for ad hoc evaluations.
Lastly, IRS noted that our report did not identify any instances where the  selection of a case was considered inappropriate or unfair. However, as  described in our scope and methodology, we did not design our study to  look for cases of inappropriate selection, but rather to assess the internal  controls that help safeguard the fairness of the case selection process. By  evaluating ACS’s internal control framework for selection, we were able to  determine whether IRS had processes in place that help provide  reasonable assurance of fair selection not just of cases selected in the  past but also on an ongoing basis.
We are sending copies of this report to the Chairmen and Ranking  Members of other Senate and House committees and subcommittees that  have appropriation, authorization, and oversight responsibilities for IRS.  We will also send copies of the report to the Secretary of the Treasury,  Commissioner of Internal Revenue, and other interested parties. In  addition, this report is available at no charge on the GAO website at  http://www.gao.gov.
If you or your staff have any questions or wish to discuss the material in  this report further, please contact me at (202) 512-9110 or  mctiguej@gao.gov. Contact points for our Offices of Congressional   Relations and Public Affairs may be found on the last page of this report.  Key contributors to this report are listed in appendix VI.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: Our objectives were to (1) describe the Automated Collection System  (ACS) process to prioritize and select collection cases and the results of  that process for fiscal year 2014, and (2) determine how well the ACS  case prioritization and selection process supports the collection program  mission and objectives.
To describe ACS’s process to prioritize and select collection cases, we  obtained and reviewed, to the extent they were available, IRS documents  on how cases are prioritized and selected once they are received within  ACS. The documents reviewed include sections of the Internal Revenue  Manual (IRM), program documents, IRS reports, and presentations  prepared by IRS staff. To better understand background and context for  ACS, we reviewed information on the Inventory Delivery System process,  which routes cases to ACS, and interviewed IRS officials responsible for  the IRS collection program. We also twice visited an ACS call site in  Philadelphia. We interviewed IRS managers in the offices of  Headquarters Collection and Campus Collection, including IRS managers  responsible for managing case inventory in ACS, on how collection cases  are received in and flow through the ACS process. We also interviewed  IRS officials regarding the various factors that the officials take into  consideration in deciding how to work certain cases to meet ACS  performance measures and how IRS’s recent realignment will affect  ACS’s process. In addition, we observed ACS staff working cases and  taking telephone calls from taxpayers. To better understand the scale of  operations for ACS and performance measures, we reviewed data from a  number of prepared reports and other data provided by IRS covering  fiscal years 2012 through 2014. The data we received included the  number of notification and enforcement actions taken in ACS. We derived  most of the data from IRS Collection Activity Reports (CAR). We  previously used CAR data to report on the IRS notice phase process in  2009. At that time, we interviewed IRS officials with knowledge of CAR  data about the steps taken to ensure data accuracy. We determined that  the CAR data were sufficiently reliable for our purposes.
To describe the results of the ACS case prioritization and selection  process for fiscal year 2014 (the most recent full year available), we  obtained data from ACS on collection taxpayer cases that had been  closed in fiscal year 2014 and partially from fiscal year 2015. We  analyzed and reported closed ACS collection cases by the type of  taxpayer (individual or business), case priority, type of delinquency, type  of closure, and the average and median number of days cases were open  in ACS. For purposes of our analysis of taxpayer type, individual  taxpayers reflect cases handled by ACS call sites in the Wage &  Investment division. We defined business taxpayers as those cases that  were prioritized and worked within the Small Business and Self Employed  division. These include the following types of taxpayers:  Individual taxpayers who report business income, such as (1) nonfarm  sole proprietorships that file Form 1040, Schedule C, are  unincorporated and owned by a single individual in which net  business income or loss is included in the owner’s individual adjusted  gross income; (2) landlords, who file a Form 1040 and Schedule E- Part I and are individuals who report rental real estate activity on Part  I of Schedule E; or (3) farmers, who file a Form 1040 and Schedule F  or Form 4835 and are individuals who report farm income or  landowners who report farm rental income;
Businesses which failed to file or remit fully their employment taxes; or
Business entity taxpayers, such as corporations.
For the purposes of our analysis, we treated taxpayers who had both a  balance due and nonfiler account on their case, known as a combination  case, as a balance due case, consistent with how IRS reports ACS data.  For the purposes of this review, we determined that the ACS data used in  our analysis were reliable. Our data reliability assessment included  reviewing relevant documentation, interviewing knowledgeable IRS  officials, and reviewing the data to identify obvious errors or outliers.
To assess how well the processes for case selection support collection  program objectives and mission, we compared documentation for the  processes identified above to selected standards in the Standards for  Internal Control in the Federal Government (GAO/AIMD-00-21.3.1,  November 1999). We also reviewed IRS and collection program  guidance in which objectives could potentially be stated or implied,  including the IRM, the mission statements of various collection program  subunits and policy statements on collections, annual collection program  letters for fiscal years 2013 through 2015, and potentially collection  program-related objectives in IRS Publication 3744, Internal Revenue  Service Strategic Plan FY2014-2017. We then assessed whether ACS’s  procedures, IRM sections, IRS reports, and related internal controls  conformed to the relevant standards for internal control in the federal  government. To determine which internal control standards were most  relevant, we utilized our Internal Control Management and Evaluation  Tool, in conjunction with observations based on our preliminary audit  work, to select the standards that most closely related to ACS activities.  We then focused our assessment of ACS internal controls around our  selected standards by interviewing IRS officials and reviewing available  documentation. To determine IRS’s definition of fairness as it applies to  collection activities, we reviewed the ACS procedures and process for  case prioritization and selection. Furthermore, we surveyed relevant  industry and institutional sources, and determined that there is no  standard definition of fairness in the context of tax collection specifically— or even tax administration more generally—to which IRS could appeal in  lieu of having its own internally-generated definition of fairness within the  collection program. To determine whether there are procedures in place  to monitor, evaluate, and review the ACS prioritization process  periodically, we reviewed similar documentation mentioned above. We  also interviewed relevant IRS officials concerning their understanding of  the mission, objectives, and internal controls of the collection program  and ACS, and about the extent to which procedures exist to monitor ACS  case prioritization and selection.
We conducted this performance audit from October 2014 to September  2015 in accordance with generally accepted government auditing  standards. Those standards require that we plan and perform the audit to  obtain sufficient, appropriate evidence to provide a reasonable basis for  our findings and conclusions based on our audit objectives. We believe  that the evidence obtained provides a reasonable basis for our findings  and conclusions based on our audit objectives.
section_title: Appendix II: Automated Collection System (ACS) Overview
subsections: section_title: Overview of ACS Process
paragraphs: Once a case arrives, ACS assigns it to an inventory and priority level, as  well as to a function unit. Depending on the function unit, ACS may take a  number of actions, such as searching for contact information and a levy  source, contacting taxpayers, or issuing levies or liens as appropriate.  See figure 6, which depicts the ACS process.
Also, the ACS process for setting the priority level for individual taxpayers  is similar to the process used for business taxpayers. The main  difference is that, within the Wage & Investment (W&I) process, high- income nonfiler and Federal Employee/Retiree Delinquency Initiative  cases, among others, are prioritized first, as, unlike those of the Small  Business/Self Employed (SB/SE) process, the W&I call sites do not have  responsibility to pursue trust fund cases. The W&I prioritization process  proceeds similarly to the SB/SE process thereafter. See figure 7.
Finally, after segregating cases by inventory and function unit, ACS works  cases in a specific order, beginning with priority level, then by follow-up  date, and finally by taxpayer identification number in ascending order.  See figure 8 for how ACS sorts cases by priority and inventory within a  function unit.
section_title: ACS Call Site Locations
paragraphs: In November 2014, IRS realigned compliance operations across its W&I  and SB/SE business operating divisions. Prior to the realignment, ACS  operations were split with W&I handling individual taxpayers and SB/SE  handling business taxpayers. As part of the realignment, IRS  consolidated all ACS collection operations within SB/SE under the  authority of a single IRS collection director. Figure 9 shows the various  ACS call and support sites, which receive taxpayer calls and research  collection cases. Through the end of fiscal year 2015, the eight former  W&I call sites will continue to handle and answer phone calls from  individual taxpayers, while the seven former SB/SE call sites will do the  same for business taxpayers.
section_title: ACS Notification and Enforcement Actions
paragraphs: Table 3 shows how notifications and enforcement actions have fallen  significantly between fiscal years 2012 and 2014.
section_title: Appendix III: Automated Collection System (ACS) Data on Nonfiler Closed Cases, Fiscal Year 2014
paragraphs: This appendix shows the results of nonfiler cases closed in ACS in fiscal  year 2014.
section_title: Appendix IV: Automated Collection System (ACS) Data on Balance Due and Nonfiler Case Closures, Partial Fiscal Year 2015
paragraphs: This appendix shows the results of balance due and nonfiler cases closed  in ACS from October 1, 2014, to February 28, 2015.
section_title: Appendix V: Comments from the Internal Revenue Service
section_title: Appendix VI: GAO Contact and Staff Acknowledgments
subsections: section_title: Contact
section_title: Staff Acknowledgments
paragraphs: In addition to the contact named above, MaryLynn Sergent, Assistant  Director, Vaughn Baltzly, Jehan Chase, David Dornisch, Steven Flint,  Robert Gebhart, Ted Hu, Robert Robinson, Alan Rozzi, John Sawyer,  Albert Sim, and Jason Vassilicos contributed to this report.