Tax Debt Collection: IRS Needs to Complete Steps to Help Ensure Contracting Out Achieves Desired Results and Best Use of Federal Resources
Published: 2006-09-29T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: In 2005, the inventory of tax debt with collection potential had grown to $132 billion. The Internal Revenue Service (IRS) has not pursued some tax debt because of limited resources and higher priorities. Congress has authorized IRS to contract with private collection agencies (PCA) to help collect tax debts. IRS has developed a Private Debt Collection (PDC) program to start with a limited implementation in September 2006 and fuller implementation in January 2008. As requested, GAO is reporting whether (1) IRS addressed critical success factors before limited implementation, (2) IRS will assess lessons learned before fuller implementation, and (3) IRS's planned study will help determine if using PCAs is the best use of federal funds.
section_title: What GAO Found
paragraphs: IRS made major progress in addressing the 5 critical success factors and 17 related subfactors for the PDC program before sending cases to PCAs. GAO reviewed program documents and interviewed officials to identify IRS's approaches and steps taken to address the factors. Taken together, IRS's actions were intended to ensure that the PCAs will be able to do the job and work the range of cases assigned, IRS will have the necessary resources and caseload ready, and taxpayer rights and data will be protected. Even with this progress, IRS has not completed work for three subfactors--setting results-oriented goals and measures, determining all PDC program costs, and evaluating the program based on the results-oriented goals and measures, once they are established. As a result, IRS risks not providing complete information that decision makers would find useful. Finishing work on the factors could help achieve but cannot guarantee program success, which also depends, in part, on how IRS addresses the factors and identifies and resolves any problems in the limited implementation phase. Although IRS officials indicated that a purpose of the limited implementation phase is to assure readiness for full implementation to up to 12 PCAs, IRS has not yet documented how it will identify and use the lessons learned to ensure that each critical success factor is addressed before expanding the program starting in January 2008. Because program success will be affected by how well IRS makes adjustments, assessing the lessons learned in limited implementation is critical. Also, IRS has not documented criteria that it will use to determine whether the limited implementation performance warrants program expansion. IRS officials indicated that they are considering criteria that could trigger a go/no go decision, such as the amount of taxes collected and indications of PCAs abusing taxpayers or misusing taxpayer data. IRS has not decided on whether these targets will include comparing the taxes collected to program costs, which was a key reason for canceling a 1996 PCA pilot program. Finally, IRS will have a little more than a half year to identify the lessons learned before incorporating them into the next contract solicitation, which IRS intends to release in March 2007. Related to such decisions on expansion is IRS's planned comparative study of using PCAs. That study is to compare using PCAs to investing IRS's PDC-related operating costs into having IRS staff work IRS's "next best" collection cases. Under the documented study design, IRS would exclude the fees paid to PCAs from the costs and subtract those fees from the tax debts collected by PCAs. While such a study might produce useful information, it will not compare the results of using PCAs with the results IRS could get if given the same amount of resources, including the fees to be paid to PCAs, to use in what IRS officials would judge to be the best way to meet tax collection goals. Adequately designing and implementing the study is important to ensure policymakers are aware of the true costs of contracting with PCAs and know whether PCAs offer the best use of federal funds.

section_title: Letter
paragraphs: Each year, the federal government does not collect billions of dollars of  delinquent taxes. At the end of fiscal year 2005, the Internal Revenue  Service’s (IRS) inventory of delinquent tax debt with some collection  potential was $132 billion (up from $122 billion in the previous year).  Because of inadequate resources to deal with the workload and the need  to work higher priority cases, IRS has shelved or delayed collection on  billons of dollars of delinquent taxes due since 1999. In addition, voluntary  compliance may be undermined to the extent taxpayers become aware  that IRS is unable to collect taxes due.
Because of concerns about, and congressional consideration of, proposals  that IRS use private collection agencies (PCA) to help collect more of the  growing tax debt inventory, in May 2004 we issued a report on IRS’s efforts  to plan for a Private Debt Collection (PDC) program. We identified 5  critical success factors and 17 related subfactors that should be addressed  to help ensure that a PDC program achieves desired results and  recommended that after gaining some experience with PCAs, IRS do a  study to compare the use of PCAs to another collection strategy that IRS  officials determine to be the most effective and efficient overall way of  achieving collection goals.
In October 2004, Congress authorized PDC contracting authority in the  American Jobs Creation Act of 2004. Based on that authority, IRS has  contracted with 3 PCAs as part of a planned limited implementation phase  that started with delinquent tax cases being turned over to the PCAs on  September 7, 2006, and has plans to expand the program, beginning in  January 2008, eventually to up to 12 PCAs. However, members of  Congress, the National Treasury Employees Union, the National Taxpayer  Advocate, and others continue to raise concerns about IRS using PCAs,  such as the potential for misuse of taxpayer data, taxpayer mistreatment,  or higher costs and lower effectiveness when compared to hiring more IRS  employees.
Given our 2004 report and these concerns, you asked that we answer these  questions:    To what extent will IRS have addressed the critical success factors before  turning over collection cases to PCAs for the limited implementation  phase?
How will IRS use the lessons learned from the limited implementation  phase to assess critical success factors and program performance before  full program implementation?  Is the design of IRS’s planned study of using PCAs adequate to provide  useful information to help determine whether contracting is the best use  of federal funds for achieving tax collection goals?
To answer these questions, we reviewed available IRS documents and  interviewed responsible IRS officials to identify the steps taken. For  example, to determine the extent to which IRS has addressed the critical  success factors before sending cases for the limited implementation phase,  we sought documentation on IRS’s steps taken to address each of the 17  subfactors. For areas such as the contracting process, information  systems, and cost tracking, we used generally accepted criteria. We  focused on whether IRS would complete the steps to address each  subfactor. We did not test or otherwise evaluate how well IRS’s actions  would work or address the factors. Appendix I summarizes the results of  our work for each of the subfactors as well as the results of our work on  the other two questions through a series of briefing slides. Appendix II  offers more details on our scope and methodology overall. We did our  work from August 2005 to September 2006 in accordance with generally  accepted government auditing standards.
subsections: section_title: Background
paragraphs: IRS has two major programs to collect tax debts. First, IRS staff in the  telephone function may attempt collection over the phone or in writing.  Second, if more in-depth collection action is required, field collection staff  may visit delinquent taxpayers at their homes or businesses as well as  contact them by telephone and mail. Under certain circumstances, IRS  staff can initiate enforced collection action, such as recording liens on  taxpayer property and sending notices to levy taxpayer wages, bank  accounts, and other financial assets held by third parties. Field collection  staff also can be authorized to seize other taxpayer assets to satisfy the tax  debt. However, as we have previously reported, IRS has deferred  collection action on billions of dollars of delinquent tax debt and, until  recently, IRS collection program performance indicators have declined, in  part because of higher workload in other priority areas and unbudgeted  cost increases (such as for rent or pay). Although IRS data indicate that  trends in collections have shown some improvements, the enforcement of  the tax laws—including the collection of unpaid taxes—remains one of  GAO’s “high-risk” areas of government.
To help address the growing tax debt inventory and declines in IRS’s tax  collection efforts, the Department of the Treasury proposed that Congress  authorize IRS to use PCAs to help collect tax debts for simpler types of  cases, paying them out of a revolving fund of tax revenues that they  collect. IRS officials said that this proposal arose, in part, because of the  belief that Congress was not likely to provide the increased budget to hire  enough IRS staff to work the inventory of collection cases.
In 2004, Congress authorized IRS to use PCAs to take certain defined steps  to collect tax debts—including locating taxpayers, requesting full payment  of the tax debt or offering taxpayers installment agreements if full  payment cannot be made, and obtaining financial information from  taxpayers. PCAs are to have limited authorities and are not to adjust the  amount of tax debts or to use enforcement powers to collect the debts,  which are inherently governmental functions that are to be performed by  IRS employees. IRS is authorized to pay PCAs up to 25 percent of the  amount of tax debts collected and retain another 25 percent of taxes  collected to fund IRS collection enforcement activities.
IRS initially envisions using PCAs on simpler cases that have no need for  IRS enforcement action and that involve individual taxpayers that (1) filed  tax returns showing taxes due but did not pay all those taxes and (2) made  three or more voluntary payments to satisfy an additional tax assessed by  IRS but have stopped the payments. To start, IRS plans to send cases to  PCAs that have not recently been worked by IRS because of their lower  priority, such as cases set aside because of inadequate IRS resources to  work them or those in the queue to be worked but not yet assigned to IRS  staff. After gaining some experience, IRS plans to expand the types of  cases to be sent to PCAs to include those unassigned cases that IRS staff  now may work, including those in which IRS attempts to find taxpayers  that appeared to not file required tax returns, according to IRS officials.
IRS first attempted to contract collections with a pilot test in 1996 but  abandoned the effort, in part, because the $3.1 million collected fell below  the $4.1 million in direct costs plus the $17 million in lost revenues from  using IRS staff to work on the pilot test rather than collect taxes. Also,  limitations in IRS’s computer systems and ability to transfer data  hampered efforts to send appropriate cases to PCAs.
The current PDC program differs from the 1996 pilot because IRS will  require PCAs to try to resolve collection cases within guidelines rather  than just remind taxpayers of their debt, will pay PCAs a percentage of  dollars they collect rather than a fixed fee, and will electronically send and  protect taxpayer data rather than send the cases manually. Appendix III  provides some data and information about the PDC program in terms of  costs, projected tax revenue to be collected, staffing, and cases to be sent  to PCAs.
Our 2004 report identified and validated five critical success factors for  contracting with PCAs to collect tax debt. Table 1 describes the critical  success factors and their related subfactors.
To identify the critical success factors, we reviewed reports on contracting  and interviewed parties with experience in contracting for debt collection,  such as officials from 11 states, the Department of the Treasury’s Financial  Management Service, the Department of Education, and three PCA firms  that IRS selected as subject matter experts for the program. To  corroborate the factors, we interviewed officials from IRS who were  developing the PDC program, the IRS Office of Taxpayer Advocate, and  the National Treasury Employees Union, which represents IRS employees.  As a validation tool, we asked for comments on our draft list of factors  from those whom we consulted to identify the factors as well as from  officials at four additional PCA firms. We made changes based on their  comments where appropriate.
After receiving authority to use PCAs in 2004, IRS had planned to issue  task orders to three PCAs in January 2006 as part of a limited  implementation phase running through December 2007. However, IRS was  delayed by a lawsuit and bid protest filed by certain PCAs to challenge  IRS’s request for and evaluation of bids from PCAs. Specifically:  IRS issued a Request for Quotations (RFQ) to solicit debt collection  services for the PDC program on April 25, 2005, under which IRS would  start sending cases to three PCAs in January 2006. Because of a lawsuit  filed in June 2005, IRS revised and reissued the RFQ on October 14, 2005,  with plans to send cases to the PCAs in July 2006.  IRS selected the three PCAs on March 9, 2006. Because one of the PCAs  that were not selected filed a bid protest later in March 2006, IRS stopped  working with the three selected PCAs and pushed back the date to send  cases to those PCAs to the August-September 2006 time frame.  IRS prevailed in the bid protest in a decision issued on June 14, 2006,  allowing it to resume its work with the selected PCAs. IRS sent cases to  the three PCAs on September 7, 2006.
In addition to contracting with PCAs, the PDC program includes IRS’s  acquisition and deployment of an information system for automating case  selection and managing the case workload. IRS plans to eventually also  use this system to select and manage the caseloads for its telephone and  field collection functions. IRS had originally planned to deploy the system  with two limited-functionality subreleases concurrent with the limited  implementation phase (in which IRS is contracting with three PCAs  through December 2007) and begin ramping up the number of contractors  (eventually to up to 12) with the third, fully functional information system  subrelease in January 2008. However, IRS officials said that information  systems budget constraints require IRS to change its information system  plan. Although IRS has not yet finalized decisions on ramping up the  number of PCAs and implementing the information system, the proposed  plan IRS officials are considering is to begin increasing the number PCAs  and deploy an interim subrelease with some enhancements in January  2008, but delay the full-function subrelease indefinitely.
section_title: Results
paragraphs: As shown in table 2, in preparation for turning over collection cases to  PCAs, as of September 15, 2006, IRS has made major progress in  addressing the 5 critical success factors and 17 related subfactors for  contracting for tax debt collection, but nevertheless has more to do.
IRS has completed steps to address 14 of the 17 subfactors. Although IRS  has taken steps on the remaining 3 subfactors, IRS still has work to do to  complete addressing them. For example, IRS had not yet documented all  of its specific goals and related measures to orient and evaluate the PDC  program in terms of achieving desired results, such as goals and measures  for improving the productivity of IRS staff. Also, IRS had not determined  all historical program costs, that is, how much IRS has invested to date to  develop and implement the PDC program. Finishing work to address the  critical success factors could help achieve desired results—such as  collecting tax debts—but cannot guarantee success, which depends, in  part, on how well IRS addresses the factors, identifies problems, and  resolves problems in the limited implementation phase.
Although IRS officials indicated that a purpose of the limited  implementation phase is to assure readiness for full implementation, IRS  has not yet documented how it will identify and use the lessons learned to  ensure that each critical success factor is adequately addressed before  expanding the program. Because program success will be affected by how  well IRS identifies and makes needed adjustments to resolve problems,  tracking the lessons learned in the limited implementation phase is  critical. According to IRS officials, during the limited implementation  phase, they plan to collect information to provide baselines, trends, and a  basis for making any necessary changes. However, officials did not have  specifics on how IRS would ensure all factors had been adequately  addressed before moving to full implementation in January 2008. Also, IRS  has not documented criteria that it will use to determine whether limited  implementation phase performance was sufficient to warrant program  expansion. IRS officials indicated that they plan to further discuss  performance criteria that could trigger a go/no go decision, and might  consider criteria such as the amount of taxes collected and indications of  PCAs abusing taxpayers or misusing taxpayer data. IRS has not decided on  whether these targets will include the amounts of collected taxes  compared to program costs, which was a key reason for canceling the  1996 PCA pilot program. Finally, IRS will have a little more than a half year  to identify the lessons learned before incorporating them into the  solicitation for the next contract, which IRS intends to release in March  2007 in order to begin expanding the number of PCAs in January 2008.
IRS has begun work to design a study intended to respond to a  recommendation in our May 2004 report. IRS plans to compare the net  dollars collected through the PDC program (dollars paid by taxpayers less  fees paid to PCAs) to the dollars IRS could expect to collect if it invested  its PDC-related operating costs into having IRS staff work the “next best”  cases under IRS’s collection system. IRS is planning to define the cases it  considers to be “next best;” gather data on PCA cases for 6-12 months; and  do two iterations of the study, one in September 2006 and one in March  2007. In the documented study design, IRS would exclude the fees paid to  PCAs from the costs and subtract those fees from the tax debts collected  by PCAs. While such a study might produce useful information, it will not  meet the intent of our recommendation. The study would not compare the  results of using PCAs with the results IRS could get if given the same  amount of resources, including the fees to be paid to PCAs (which are to  be paid from federal tax receipts), to use in whatever fashion that officials  determine would best meet tax collection goals.
Appendix I includes more information on the status of IRS’s  implementation of the PDC program.
As discussed in more detail below, we are recommending that IRS  complete establishing for the PDC program results-oriented goals and  measures; information on costs; plans for evaluations; and criteria and  process for assessing the critical success factors and program  performance. We also are recommending that IRS ensure that its planned  comparative study of using PCAs informs decision makers of all the  program costs and the best use of those federal funds. In providing written  comments on a draft this report (see app. V) the Commissioner of Internal  Revenue agreed with our recommendations and outlined some actions IRS  has initiated to respond to some of them.
section_title: Conclusions
paragraphs: Although IRS’s actions do not guarantee PDC program success, IRS made  significant progress in addressing the 5 critical success factors and 17  related subfactors before sending cases to PCAs for the limited  implementation phase. Taken together, these actions were intended to  achieve such important ends as ensuring that the selected PCAs will be  able to do the job and work the range of cases assigned, that IRS will have  the necessary resources and caseload ready to do its part, and that  taxpayers’ rights and data will be protected. Even with this progress, IRS  has not yet completed the related steps that it must take for 3 subfactors  on setting goals and measures, determining all program costs, and  evaluating the program. Having information on whether the program met  its goals and desired results given the program costs would be critical for  policymakers. In addition, IRS lacks clear criteria and processes for  assessing how well it addressed the critical success factors and whether  the program performance warrants expanding the number of PCAs and  turning over more cases to them.
It is understandable that IRS officials have focused on rolling out this new  program and dealing with many pressing concerns such as making sure  that the PCAs are ready and that IRS can do its part, while delaying work  on these three subfactors and on the criteria and processes for deciding on  future program expansion. However, if it waits too long, IRS risks not  having critical information in a timely and cost-effective manner in order  to answer important questions about whether the PDC program is  producing desired results at acceptable costs and whether the program  should be expanded. Having plans to answer these questions is especially  critical now that lawsuit and bid protest delays have reduced the time that  IRS has to collect and analyze performance data before having to make  decisions about expanding the PDC program. Therefore, it is all the more  important that IRS determine program costs and make decisions about its  goals and measures, evaluation plans, approach to assessing critical  success factors, and program expansion decision criteria as soon as  possible.
Related to such decisions on expansion is IRS’s planned comparative  study of using PCAs. If this study is not adequately designed and  implemented, policymakers may not be aware of the true costs of  contracting with PCAs—including the fees paid to PCAs. They also would  not be aware of the potential impact of increasing IRS funding, and  thereby miss the opportunity to know whether contracting with PCAs is  the best use of federal funds for meeting tax collection goals.
section_title: Recommendations for Executive Action
paragraphs: To ensure that IRS decision makers will timely have the information  needed to make informed, data-based decisions about the private debt  collection program, we recommend that, as soon as possible, and certainly  before any expansion of the PDC program beyond the initial round of  cases sent to PCAs, the Commissioner of Internal Revenue complete  establishing:  results-oriented goals and measures for the program based on the best  available information;  reliable, verifiable information on all the costs of the program, to the  extent possible;    plans for evaluating the results of the program in terms of expected costs,  goals, and desired results; and    clear criteria and processes for assessing how IRS addressed the critical  success factors in the limited implementation phase and whether PDC  program performance warrants program expansion.
We also recommend that, as IRS continues planning its comparative study  of using PCAs, the Commissioner of Internal Revenue ensure that the  study methodology and the IRS reports on the study results will inform  decision makers of the full costs of the PDC program, including the fees  paid to PCAs and the best use of those federal funds.
section_title: Agency Comments and Our Evaluation
paragraphs: The Commissioner of Internal Revenue provided written comments on a  draft of this report in letter dated September 20, 2006 (which is reprinted  with its enclosures in app. V). The Commissioner noted that he was  pleased that our report acknowledges IRS’s accomplishments and steps to  protect taxpayer data and rights. The Commissioner also noted that IRS  agreed with our recommendations and had initiated efforts to address  them, as discussed below.
subsections: section_title: Recommendation 1: Establish Results-Oriented Goals and Measures for the Program Based on the Best Available Information
paragraphs: IRS agreed with the recommendation. In discussing our draft report with  IRS officials, we clarified that the goals and measures should be logically  linked to IRS’s five desired results and that IRS should document any  indirect links and why more direct linkages were not made. In turn, IRS’s  letter provided information on such linkages, including the indirect linkage  for the desired result involving increased public confidence, and provided  a revised version of our appendix IV (which we reprint with the  Commissioner’s letter in app. V) with columns added to show the linkages  between the desired results and the proposed goals and measures as they  appeared in our draft report.  Although we did not have time to fully  review IRS’s information, we are gratified to see that IRS has established  some program goals and measures and has made progress in developing  the linkages. We look forward to IRS developing the related measures and  data, such as for reducing the penalties and interest paid, better utilizing  IRS staff, freeing up IRS staff to work more complex cases, and  significantly reducing case backlogs. We also look forward to IRS  identifying specific goals—referred to as “targets” in IRS’s comments— that IRS will strive to achieve beyond those listed in appendix IV.
section_title: Recommendation 2: Establish a System for Tracking All Costs of the Private Debt Collection Program
paragraphs: IRS agreed with our recommendation. In response to our draft report, IRS  provided us documentation that it had implemented a system to track PDC  program costs going forward from July 2006. In discussing our draft report  with IRS officials, they said that IRS will face difficulties in estimating  some of the of the PDC program costs incurred before the tracking system  was established. Based on this new information, we revised our  recommendation to state that IRS should complete establishing verifiable,  reliable information on all the costs of the program, to the extent possible.  IRS’s comments state that it will furnish reconstructed historical costs as  soon as they are compiled. Although we look forward to receiving such  cost information, we encourage IRS to use the cost information to manage  and evaluate the PDC program and inform policymakers.
section_title: Recommendation 3: Establish Plans for Evaluating the Results of the Program in Terms of Expected Costs, Goals, and Desired Results
paragraphs: IRS provided a combined response on this and the last recommendation  dealing with the comparative study (which is discussed below). IRS agreed  with our recommendation to evaluate the program, but did not provide  any additional information on how it plans to do so. We look forward to  IRS establishing and documenting specific plans for evaluating the  program over time and reporting the evaluation results.
section_title: Recommendation 4: Establish Clear Criteria and Processes for Assessing How IRS Addressed the Critical Success Factors in the Limited Implementation Phase and Whether PDC Program Performance Warrants Program Expansion
paragraphs: IRS agreed with this recommendation and noted that its decision on  whether to expand the PCA program will be driven by several factors,  such as the composition of the inventory and cases to be worked by PCAs,  IRS resource capacity, and PCA performance. We look forward to IRS  finalizing and documenting the criteria and processes, which could  consider factors listed in this report, such as PCAs’ treatment of taxpayers  and taxpayer data, the tax amounts collected, and the cost of collecting  the taxes. We also look forward to IRS documenting its criteria and  processes for assessing the critical success factors.
section_title: Recommendation 5: Ensure the Comparative Study Informs Decision Makers of All PDC Costs, Including PCA Fees
paragraphs: In agreeing with this recommendation, IRS noted that it has structured the  study so that data can be analyzed with and without the PCA fees. In  discussing the draft report with IRS officials, the officials said that the  study will include an analysis of the PCA fees as costs, not as a reduction  of gross revenue, and the study will project what IRS would have collected  had those costs been used to fund IRS’s collection program. We look  forward to receiving more information on IRS’s study approach and the  study results as IRS begins the first study iteration in September 2006.
As agreed with your offices, unless you publicly announce its contents  earlier, we plan no further distribution of this report until 30 days from its  date. At that time, we will send copies to the Chairman and Ranking  Minority Member, House Committee on Ways and Means; the Secretary of  the Treasury; the Commissioner of Internal Revenue; and other interested  parties. Copies will be made available to others upon request. This report  will also be available at no charge on GAO’s Web site at  http://www.gao.gov.
If you or your staff have any questions, please contact me at (202) 512-9110  or brostekm@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: Briefing on the IRS Private Debt Collection Program
paragraphs: To what extent will the Internal Revenue Service (IRS) have addressed the  critical success factors before turning over collection cases to private collection  agencies (PCA) for the limited implementation phase?
How will IRS use the lessons learned from the limited implementation phase to  assess critical success factors and program performance before full program  implementation?
Is the design of IRS’s planned study of using PCAs adequate to provide useful  information to help determine whether contracting is the best use of federal  funds for achieving tax collection goals?
subsections: section_title: In preparation for turning over cases to PCAs for the limited implementation phase, IRS made major progress in addressing the five critical success factors. For example, IRS has addressed
paragraphs: results orientation issues by establishing expected costs and desired results for the  program;   agency resources issues by estimating and funding IRS staffing needs to administer  the program in the limited implementation phase;  workload issues by selecting and analyzing cases to identify the types that should not  be sent to PCAs and make needed changes to case selection programming before  sending the cases;  taxpayer issues by taking steps to obtain feedback on PCA employees’ treatment of  taxpayers, provide taxpayers information on how to contact the National Taxpayer  Advocate, and monitor PCAs’ phone calls with taxpayers; and    evaluation issues by planning various ways to monitor PCAs, such as site reviews of  training records and information systems records to ensure PCAs comply with related  requirements.
The extent to which IRS has addressed the critical success factors and the 17 related  subfactors before turning over the cases is summarized in table 1.
Objective 1: The Extent to Which IRS Will Have  Addressed the Critical Success Factors and  Subfactors Before Turning Over Cases to PCAs  (cont’d)
Objective 1: The Extent to Which IRS Will Have  Addressed the Critical Success Factors and  Subfactors Before Turning Over Cases to PCAs  (cont’d)
Objective 1: The Extent to Which IRS Will Have  Addressed the Critical Success Factors and  Subfactors Before Turning Over Cases to PCAs  (cont’d)
section_title: As table 1 shows, IRS has taken steps to address all subfactors but has more to do, as of September 15, 2006. Of the 17 subfactors, IRS has completed steps to address 14. Although IRS has taken steps to address the remaining 3 subfactors, IRS still has more work to do to complete addressing them.
paragraphs: Objective 1: The Extent to Which IRS Will Have  Addressed the Critical Success Factors and  Subfactors Before Turning Over Cases to PCAs  (cont’d)
section_title: For the three subfactors for which IRS has remaining work, IRS has made
paragraphs: progress but did not yet have results-oriented performance goals and measures for the results IRS has  said will come from the program; reliable, verifiable information on all PCA-related costs; and  details on when and how evaluations would be done to determine whether  the program met goals and expectations, in part because of a lack of  complete results-oriented program goals and related performance  measures.
The following slides discuss IRS’s actions to address each of the 17 subfactors.
Objective 1: Results Orientation Subfactor:  Determine Expected Program Goals, Costs, and  Overall Results IRS has completed steps to establish expected costs (see app. III) and desired results for  contracting with PCAs.
IRS officials said they had established private debt collection (PDC) program goals and  related measures but were unable to document a complete list of goals and measures and  their approval. Based on our feedback since March 2006, IRS has been revising these  goals and measures and provided an updated revision in July 2006. Because of their draft  status and late development, we have not fully analyzed them (app. IV lists the proposed  goals and measures) but observed that not all these proposed measures have goals.  Some goals are to be established based on actual PDC program performance in 2007.  IRS officials said they need to work with the PCAs to establish a PCA employee  satisfaction goal.
We also observed that the proposed measures are not fully linked to the five desired  results for the PDC program (as identified in IRS documents and officials’ statements).  Because of the difficulty in directly making such linkages, using intermediate proxy  measures is acceptable. IRS provided information in August 2006 on which measures  were linked to the desired results but, as of September 15, 2006, had not yet documented  the logic behind the linkages or whether more direct linkages could be made. Table 2  shows our preliminary observations on the extent to which the proposed measures link to  the desired results.
Objective 1: Results Orientation Subfactor:  Determine Expected Program Goals, Costs, and  Overall Results (cont’d)
Objective 1: Results Orientation Subfactor:  Determine Expected Program Goals, Costs, and  Overall Results (cont’d)
section_title: Our previous work on high-performing organizations has shown that results-
paragraphs: oriented measures are important for allowing organizations to track the progress  they are making toward their goals and give managers crucial information on  which to base their organizational and management decisions.
Leading organizations recognize that performance measures can create  powerful incentives to influence organizational and individual behavior and  reinforce the connection between the goals outlined in strategic plans and the  day-to-day activities of their managers and staff.
Linking program performance to higher-level goals can provide a clear, direct  understanding of how the achievement of the program’s goals will lead to the  achievement of the agency's strategic goals.
We look forward to receiving more information from IRS officials as they work  toward documenting the final, approved PDC program goals and related  performance measures and the measures’ linkages to the desired results.
IRS has completed the tasks to establish contract provisions, performance  standards, operational expectations, and rewards and disincentives.
The Request for Quotations  (RFQ, or contract solicitation) contains key contract  elements of evaluation criteria, performance measurement, and compensation  arrangements.
IRS’s review and approval of PCAs’ operational plans, IRS meetings with PCAs  in July 2006 and August 2006, and follow-up actions resulting from these  meetings were to help clarify expectations.
section_title: IRS has completed tasks intended to ensure PCAs have sufficient freedom to achieve performance goals. For example, IRS had meetings with the selected PCAs in July 2006 and August 2006 in part, to go over program administration and expectations. IRS officials said that the meetings allowed PCAs an opportunity to point out any restrictions that would adversely affect their performance.
paragraphs: During development of the program, IRS officials consulted with selected PCAs  and state and federal agencies that had contracted for debt collection, in part, to  ensure IRS’s program would be designed to provide PCAs adequate latitude to  achieve goals. For example, IRS’s contract will allow PCAs to vary in their  practices, such as the frequency of attempted contacts with taxpayers, with the  intent of enabling each PCA to utilize its competitive advantage.
Also, IRS provided potential bidders for the PCA contract an opportunity to  review and comment on any restrictions in the draft PCA procedural  requirements. The PCAs provided no comments on the requirements.
IRS has completed contracting process tasks designed to ensure that the  selected PCAs are able to meet operational and performance expectations.
IRS sought proposals from preapproved vendors listed in the General Service  Administration’s (GSA) Federal Supply Schedule contract for tax collection  services. GSA had already determined that listed vendors were capable of  performing the work. The solicitation contained a detailed statement of work and  required vendors to provide technical, past performance, and pricing information.
IRS received 33 responsive proposals and evaluated all proposals using the  three criteria specified in the solicitation: (1) relevant experience and past  performance, (2) technical approach, and (3) management plan. These criteria  are commonly used in government contracting.
IRS selected three vendors to receive PCA contracts. The ninth-ranked vendor  protested the evaluation, but GAO issued a decision on June 14, 2006, denying  the protest and upholding the evaluation conducted by IRS.
section_title: IRS determined its estimated staffing needs based on what it identified as key workload drivers for similar functions. For example, IRS considered the workload drivers for the Oversight Unit to be the number of PCAs, number of teams and locations needed, and span of control (the number of employees to be supervised).
section_title: IRS has completed steps to ensure management commitment. IRS has three executive-level committees that meet regularly to oversee, coordinate, and provide guidance for program management, including the Filing and Payment Compliance Advisory Council and Taxpayer Relationship Management Executive Steering Committee. The program office also briefs the IRS Commissioner monthly.
paragraphs: According to IRS officials, these committees serve as a means to inform IRS  executives, including the Commissioner, and provide adequate assurance and  opportunity for feedback on management’s commitment to the PDC program.
IRS officials said the executive briefings would continue throughout the limited  implementation phase.
section_title: IRS has completed tasks to help ensure appropriate PCA employee training. For example, IRS developed the training curriculum that identifies the information that PCAs should use in developing training for their employees who will handle taxpayers’ information.
paragraphs: The RFQ task order requires PCAs to train all their employees before they begin  any taxpayer collection activity, including training on taxpayer rights and privacy  awareness.
The RFQ requires the PCA employees to sign a form certifying that they  completed the required training. The PCA must maintain these forms for review  by IRS upon request.
In response to our preliminary observations, IRS informed the PCAs that their  employees must receive a proficiency score of 70 percent or better after training  before being allowed to work on cases (as do IRS telephone collection  employees) and plans to contractually require this test score threshold in future  RFQs.
Objective 1: Agency Resources Subfactor: Ensure  Appropriate PCA Employee Training (cont’d)
IRS plans to monitor PCAs’ performance through quality review assessments to  identify trends and gauge training effectiveness. IRS will use the same quality  review process for PCA cases that it uses for cases worked by its own  employees.
Prior to turning over cases to the PCAs, IRS officials did site visits to monitor  initial PCA training sessions to ensure the content and delivery of training  followed PCAs’ approved training plans. IRS officials developed a checklist for  monitoring the PCA training.
IRS has completed the tasks for computer systems data exchange, payment  tracking, and account updating.
IRS’s system for tracking payments and updating taxpayer accounts is the same  as that used for other tax payments.
In developing the management information system for handling PCA cases, IRS  completed its system requirements, design, development, and testing activities  in accordance with its approved methodology for acquisition of information  systems.
IRS began its “partial production phase” (a simulated version of the limited  implementation phase using IRS staff rather than PCAs) in January 2006 to help  test processes and procedures.
Before turning cases over to PCAs, IRS tested its capability to electronically  transfer encrypted case files to them.
IRS has begun, but not completed, work to determine all the costs of the PDC  program.
Beginning July 2006, IRS has an accounting system that can be used to track  program costs and established codes and procedures to track private debt  collection program costs.  However, since prior costs were not systematically  tracked, IRS would have to use available historical cost data to determine the  costs that were incurred prior to systematic tracking, including such costs as  those of planning the program beginning as far back as October 2001.
IRS officials said they are working to use available data to determine the  historical costs.  IRS provided us documentation on some of the these costs, but  without supporting information, it was not possible for us to assess whether it  captured all costs or if the costs provided were reliable.
section_title: IRS completed work to identify the appropriate type and volume of PCA cases for the limited implementation phase. IRS identified criteria intended to avoid sending cases that PCAs should not handle and used its information system to test the criteria for case selection. Beginning in January 2006, IRS officials tracked and analyzed the selected cases to ensure that they were appropriate for PCAs and to make any necessary changes to case selection programming.
paragraphs: For the limited implementation phase, IRS will turn over to PCAs only cases that  IRS currently is not working, including those “shelved” because of IRS’s  inadequate resources to work them and those in the queue to be worked by IRS  employees but not yet assigned. However, in full implementation, IRS officials  said they may assign PCAs unassigned cases from the various types of cases  that IRS employees might work.
To reach case placement and collection goals for the limited implementation  phase, IRS is increasing case age thresholds to 2 years since the case was put  into its current status. IRS officials said they are planning more changes in the  limited implementation phase, including further increasing case age and dollar  thresholds.
Objective 1: Workload Subfactor: Select  Appropriate Type and Volume of Cases for PCAs to  Work (cont’d)
section_title: The impact of the changes in the age of cases on realizing revenue collection
paragraphs: goals is uncertain. Some evidence suggests that PCAs are generally less  successful as the age of debt increases. However, IRS officials said that the  Financial Management Service within the Department of Treasury has been  successful in using PCAs to collect debt in this age range.
IRS has completed work on this factor with the following procedures: the RFQ requires PCAs to mail a letter to each taxpayer within 10 days of  receiving a case for cases for which IRS provides a valid address;  target PCA reimbursement rates reflect higher compensation for lower- dollar cases;  the PCA Policy and Procedures Guide clarifies that PCAs are to perform  searches to locate all taxpayers that do not respond to initial contacts;  IRS’s quality review procedures include a check that cases are being  worked actively; according to IRS officials, IRS plans to analyze these quality review data  and other data reports to identify trends in working different types of  cases; and  PCAs are allowed to return accounts after 6 months, and IRS officials said  that before approving returns, they will check whether PCAs had taken the  appropriate collection actions.
section_title: IRS has completed the necessary tasks for this subfactor. According to IRS officials, the taxpayer and account information to be provided to PCAs will be the authoritative data from IRS’s own records—the most accurate available to IRS— and the data will be updated four times a week to ensure accuracy.
paragraphs: IRS has completed the steps intended to ensure that taxpayers are treated  properly.
IRS has developed procedures to protect taxpayers and to ensure taxpayers are  treated properly, including the following:  IRS will continue to require all new PCA employees to have background  investigations, photo identifications, and training on taxpayer rights  before they have access to taxpayer information;   IRS will conduct taxpayer satisfaction surveys;  IRS will monitor PCAs’ compliance through quality reviews of PCAs’  telephone calls and case documents; and   IRS developed a formal complaint process for taxpayers to use based  on input and comment from the National Taxpayer Advocate.
IRS completed background investigations and monitoring of PCA employees’  training before turning over cases to PCAs.
IRS has completed the steps intended to ensure the security of taxpayer  information. For example, IRS completed site visits of the PCAs and performed  its safeguard computer security evaluations.
The PCA contract statement of work addresses security requirements by  referring to compliance with information security guidance and by requiring  minimum system capabilities, such as end-to-end encryption.
section_title: As pointed out in our earlier discussion of training, IRS completed steps to
paragraphs: perform the one type of performance monitoring that was to be done before  turning over cases to PCAs: monitoring PCAs’ training of their own employees.
As also discussed earlier, IRS has taken steps to implement various methods to  monitor PCAs’ performance in working cases, including telephone monitoring and case quality reviews, and taxpayer satisfaction surveys.
section_title: IRS’s tasks are complete on this subfactor in preparation for turning cases over to PCAs. As noted earlier, the RFQ (contract solicitation) contains key contract elements of performance measurement and compensation arrangements.
section_title: IRS must complete work on program goals and related results-oriented measures to enable it to evaluate program results. As noted earlier, IRS officials provided us proposed PDC program goals and related measures but were unable to document a complete list of goals and measures and their approval. Also, the proposed goals and measures IRS provided us were not linked to all the desired results for the PDC program.
paragraphs: Our previous work has shown that evaluations are critical to ensuring that  programs achieve desired results, government funds are well spent, and the  agencies are held accountable for the performance and effectiveness of the  programs they administer.
As discussed on the next slides, IRS did not have specifics on how it will assess  how critical success subfactors were addressed in the limited implementation  phase. Without such assessments, IRS may lack information with which to better  understand why goals (once they are established) were or were not achieved  and to identify any needed adjustments.
subsections: section_title: Although IRS officials said that a purpose of the limited implementation phase is to ensure
paragraphs: readiness for full implementation of the program, it is not clear when IRS will decide, in  terms of addressing critical success factors, if it is ready to proceed with full  implementation. IRS officials said that they intend to establish a date and performance  criteria that would trigger a go/no go decision, but have delayed such work until after  limited implementation starts in order to finish the tasks that must be done to turn over  cases to the PCAs.
Generally, IRS officials said they will collect information during the limited implementation  phase to establish baselines, identify trends, and provide a basis for making changes, if  needed, to the program. However, IRS officials could not cite specific circumstances that  would cause IRS to discontinue or delay full implementation of the program. Officials said  that before expanding the program, they would consider a variety of data or criteria, such  as the amounts of collected taxes and indications of PCAs mistreating taxpayers or  misusing tax data. IRS has not decided whether these targets would include the amounts  of collected taxes compared to program costs, which was a reason for canceling the 1996  PCA program pilot.
IRS did not have specifics on how and when collected information would be reviewed to  identify and use the lessons learned from the limited implementation phase to ensure that  the critical success factors have been addressed before IRS expands to full  implementation.
Objective 2: How IRS Will Use Limited Implementation  Lessons Learned to Assess Critical Success Factors and  Performance Before Full Implementation (cont’d)
section_title: IRS’s management guidance requires IRS managers to “get behind the numbers” to determine the reasons for program performance levels. Since critical success factors may be key to why desired results were or were not achieved, assessments of critical success factors could provide information with which IRS can take action to make adjustments to improve performance.
paragraphs: Specific plans for how and when IRS will make decisions about readiness on critical  success factors and program expansion can help ensure that IRS has the data it will need  in time to make those decisions. Because of implementation delays caused by a contract  award lawsuit and bid protest, IRS will have 16 instead of 24 months to identify any  needed adjustments and make decisions on expanding the program. For limited  implementation, IRS will have 7 months experience—from September 2006 to March  2007—before issuing its next contract solicitation under its plans to have more PCAs  working more cases by January 2008. As originally planned, IRS would have rolled out  cases in January 2006.
Our previous work has shown that data-based decision making is important for improving  government operations and programs. Collecting and reviewing data, whether qualitative  or quantitative, to help make decisions about expanding the PDC program will require  resources as well as consideration of how to balance the costs and benefits of the data  collection and review, including the risks of not ensuring that the critical success factors  are adequately addressed or of ill-advised or premature expansion of the PDC program.
section_title: IRS is planning to define the cases it considers to be “next best” and plans to gather data on PCA cases for 6 to 12 months. IRS plans to do two iterations of the study, one in September 2006 and one in March 2007.
paragraphs: The study design indicates that IRS will not count the fees paid to PCAs as  program costs. IRS will subtract these fees from the tax debts collected and  report the net dollars collected by PCAs.
For example, if the study found that IRS's PDC program administration costs  were $6 million, PCAs collected $100 million in tax debt, and PCAs were paid  $24 million in fees, the study would compare only the net $76 million dollars that  PCAs collected to all the dollars IRS could be expected to collect if the $6 million  were spent on IRS’s collection program.
Objective 3: IRS’s Planned Study of Using  PCAs (cont’d)
Although IRS officials said that data on fees to PCAs—$24 million as shown in the above  hypothetical results—could be made available to decision makers in the study results, the  study plan document is not clear on that point or whether the total costs of the program, to  include the PCAs’ fees, will be made apparent in the study.
While the study may produce useful information, it will not compare the results of using  PCAs with the results IRS could get if it was given the same amount of resources,  including the fees to be paid by the government to the PCAs. As a result, the IRS study  will not meet the intent of our recommendation. Our previous work has shown that for  informed decision making, agency managers and other stakeholders need reliable, valid  data on the costs of government programs. Economic principles and government cost  analysis criteria suggest that federal government costs and social costs should be  considered in analyzing programs and policies.
For example, a study that would meet the intent of our recommendation would compare  the dollars collected by PCAs to the dollars that IRS could be expected to collect if the true  costs to the government—such as the $6 million from the  PDC program administration  budget plus the $24 million in PCA fees (which are paid out of federal tax receipts) as  shown in the above hypothetical example—were spent by IRS on working its next best  cases, using the most effective strategy for identifying and working such cases.
Objective 3: IRS’s Planned Study of  Using PCAs (cont’d)
IRS officials said that such a comparison is not realistic because Congress  would not approve such a budget increase. As noted in our 2004 report, IRS  officials said that the proposal that Congress authorize IRS to use PCAs arose,  in part, because of the belief that Congress was not likely to provide the  increased budget to hire enough IRS staff to work on the inventory of collection  cases.
IRS’s proposed study approach—by netting PCA fees from dollars collected by  PCAs—apparently adopts IRS’s assumption about potential funding increases.  However, unless Congress is fully informed on the true costs of the PDC  program, and the potential impact of increasing collections funding, it will lack  key information with which to make decisions on how federal funds can best be  spent to meet tax collection goals, in concert with other information about trade- offs with other government programs.
IRS officials stated that supplemental research efforts are being designed to  identify the best use of PCAs among all cases in the collections inventory. The  status and methodologies of these efforts are not clear because IRS has not yet  provided us documents on them.
section_title: Appendix II: Scope and Methodology
paragraphs: To determine to what extent the Internal Revenue Service (IRS) addressed  the critical success factors before turning over collection cases to the  private collection agencies (PCA) we reviewed program documents and  interviewed IRS officials.   IRS agreed with the critical success factors we  identified.   We identified the approaches/methods IRS intended to use to  address the factors and related subfactors and identified any steps IRS had  remaining to address each factor before turning over cases to PCAs.  We  analyzed interviews and documents to identify any gaps in IRS’s approach,  such as factors for which IRS lacked intended approaches/methods to  address a factor, documented plans for completing steps, or details on  how intended approaches/methods would be implemented. For selected  subfactors related to areas for which we had related expertise and readily  available criteria (government acquisition, information technology  development and security, and financial management), we analyzed IRS’s  program documents and compared IRS’s approach for addressing the  subfactor to the criteria. For example, our information security staff  reviewed IRS’s approach for addressing information security issues in light  of Federal Information Security Management Act and National Institute of  Standards and Technology requirements. We did not attempt to analyze  how well IRS addressed the factors or whether IRS made the right  decisions on issues such as PCA employees’ training or taxpayer  protections.
To determine how IRS will use the lessons learned from the limited  implementation phase to assess the critical success factors and program  performance before full program implementation, we interviewed IRS  officials and reviewed available agency documents and plans.  We focused  on when and how, if at all, IRS would determine whether its  approaches/methods for addressing the factors worked as intended; if  program performance warrants program expansion; and what changes, if  any, should be made before fully implementing the program.
To determine whether IRS’s planned approach to study using PCAs will  provide useful information with which to determine if contracting is the  best use of federal funds for achieving tax collection goals, we reviewed  program documents and interviewed officials from IRS supported by  contractor staff assisting them in developing the study.
We used data only as background for reporting and did not formally assess  their reliability. To the extent possible, we corroborated information from  interviews with documentation and, where not possible, we report the  information as attributed to IRS officials. Although we obtained  documentation that IRS had completed steps to address the critical  success subfactors, we did not do detailed verification of the documents,  in part due to the limited time we had between IRS completing and  documenting some steps taken in preparation for turning the cases over to  PCAs on September 7, 2006, and the due date of this report.
We did our work from August 2005 to September 2006 in accordance with  generally accepted government auditing standards.
section_title: Appendix III: Selected Data Related to IRS’s Expectations for Elements of the Private Debt Collection Program
paragraphs: In full program implementation  (inclusive of limited  implementation phase)
section_title: Appendix IV: Proposed Private Debt Collection Program Performance Measures and Goals for Fiscal Year 2007
paragraphs: Proposed private debt collection program  performance measure  Number of cases placed with PCAs in first 12 months  Percentage of cases placed with PCAs that are  resolved  Number/percentage of PCA cases recalled to IRS  Number/percentage of PCA cases that are deemed  currently not collectible   Number/percentage of cases involving bankruptcies  or decedents  PCA time to close the case  Amount of unpaid tax debts that are placed with PCAs Amount of unpaid tax debts that are collected  Collection percent  Percentage of unpaid tax debts placed with PCAs that  Amount of PCA collections that IRS retains to fund  collection enforcement activities  Cases closed as fully paid   Cases closed with an agreement to satisfy the  taxpayer’s unpaid tax debt in 3 to 5 years  Cases closed with an agreement to satisfy the  taxpayer’s unpaid tax debt in more than 5 years  Percentage of surveyed taxpayers responding that   they were satisfied   Satisfaction score for IRS employees in PDC program  Satisfaction score for PCA employees working cases   Accuracy score for PCA cases  Timeliness score for PCA cases  Professionalism score in PCA cases  Verified major complaints against PCA employeesOverall percentage quality score for cases worked by  PCAs  Goals will be determined using experiences with PCA cases over the first year.
Goals will be developed using IRS’s revenue projection model.
Goals will be based on those used in the IRS telephone collection function.
section_title: Appendix V: Comments from the Internal Revenue Service
section_title: Appendix VI: GAO Contact and Staff Acknowledgments
subsections: section_title: Acknowledgments
paragraphs: In addition to the contact named above, Tom Short, Assistant Director;  John Davis; Charles Fox; Timothy Hopkins; Ronald Jones; Jeffrey Knott;  Veronica Mayhand; Edward Nannenhorn; Cheryl Peterson; and William  Woods made key contributions to this report.