Tax Administration: Little Evidence of Procedural Errors in Collection Due Process Appeal Cases, but Opportunities Exist to Improve the Program
Published: 2006-10-06T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: As a result of the Internal Revenue Service (IRS) Restructuring and Reform Act of 1998, taxpayers facing liens or levies can request a Collection Due Process (CDP) appeal hearing with IRS's Office of Appeals (Appeals). By 2005, CDP cases represented about one-quarter of Appeals' workload. GAO was asked to provide information on (1) whether the IRS Collection function (Collection) erred in processing liens and levies and how often CDP case results changed after the appeal, (2) the arguments raised and the communication between IRS and taxpayers, (3) the characteristics of CDP taxpayers, and (4) potential improvements to the CDP program. To develop this information, GAO analyzed a random sample of 208 CDP cases closed by Appeals during fiscal year 2004.
section_title: What GAO Found
paragraphs: GAO estimates that Appeals found Collection did not follow proper procedures in 2 percent of CDP cases closed during fiscal year 2004. About 27 percent of taxpayers received a different outcome than the lien filing or levy after appealing, including those that negotiated collection alternatives or ended up with no balance due to IRS. For about 60 percent of taxpayers, Appeals upheld the collection action often because taxpayers did not file all the required tax returns necessary to qualify for a collection alternative. GAO's estimates show that nearly 90 percent of CDP taxpayers raised arguments permitted by statute with both Collection and Appeals, such as requesting a collection alternative. An estimated 5 percent of taxpayers raised frivolous arguments--arguments without legal basis per IRS guidance--with either Collection or Appeals. When taxpayers raised the same argument with Collection and Appeals, Appeals reached the same conclusion as Collection in more than 80 percent of cases. In general, the median number of IRS-initiated contacts with taxpayers was twice as high as the median number of taxpayer-initiated contacts with IRS. CDP taxpayer characteristics varied among individual and business filers. Both did not pay taxes for multiple return filing periods. Total tax liability varied considerably, with trust fund recovery penalty and employment tax cases having the highest liabilities. Allowing certain taxpayers like those that offer arguments without a legal basis to use the CDP program may not be consistent with the program's goal of ensuring due process. Also, Appeals resources are not used efficiently when taxpayers request collection alternatives yet have not (1) submitted financial documentation with their CDP requests, (2) worked with specialized Collection units, or (3) filed all required tax returns needed to qualify for a collection alternative. IRS has taken steps to revise the CDP regulations and hearing request form, but has not established responsibility for analyzing program outcome data to determine if these changes will be effective.

section_title: Letter
paragraphs: In fiscal year 2005, the Internal Revenue Service (IRS) issued more than 3  million notices of federal tax liens and levies representing more than   $10 million in delinquent taxes owed to IRS. The Internal Revenue Service  Restructuring and Reform Act of 1998 (Restructuring Act) expanded the  appeal rights available to taxpayers facing the filing of notices of federal  tax liens or levies for the collection of delinquent taxes. With the passage  of the Restructuring Act, Congress authorized the right to Collection Due  Process (CDP) appeals, which provides taxpayers with an independent  review of filed liens and levies by IRS’s Office of Appeals (Appeals) and by  the U.S. Tax Court or U.S. District Court. By 2005, taxpayers requesting  CDP hearings accounted for more than one-quarter of the workload within  Appeals, about 28,000 cases annually. IRS reported that in fiscal year 2004,  Appeals devoted about $8.2 million in salary costs to resolve CDP cases.
Liens and levies arise when taxpayers fail to pay their taxes and IRS takes  action to collect those outstanding tax liabilities. A lien is a legal claim  against a taxpayer’s property as security for the payment of the delinquent  tax. A levy is a legal seizure of a taxpayer’s property to satisfy the tax  liability. Liens and levies identify the amount of tax owed by tax period,  and the period varies by the type of tax. Individuals, for example, file  individual income tax returns on an annual basis, so the period would  equal 1 year. Businesses file certain tax returns, such as employment  taxes, on a quarterly basis, so the period would equal 3 months. When IRS  issues a Notice of Federal Tax Lien, Notice of Intent to Levy, or other  notice related to automated levy programs, taxpayers are also informed of  their due process rights, including the right to request a CDP hearing. IRS  may include multiple delinquent tax periods in one notice. In their CDP  appeals, taxpayers may raise issues related to the existence or amount of  the liability; seek a collection alternative to the lien filing or levy, such as  an installment agreement (IA) or offer-in-compromise (OIC); or both.
Based on your request, this report’s objectives are to provide information  on (1) the extent to which Appeals found the IRS Collection function  (Collection) had made errors in processing liens and levies and how often  CDP case results changed after a taxpayer requested a CDP appeal  hearing; (2) the nature of the arguments presented by taxpayers seeking  relief from liens or levies and the amount of communication between IRS  and taxpayers; (3) the characteristics of the taxpayers that availed  themselves of the CDP appeal process, such as the amount of their total  liabilities; and (4) whether opportunities exist to improve the operations of  the CDP program while protecting taxpayer rights.
To develop the information for these objectives, we analyzed a random  sample of 208 CDP appeal cases, drawn from a population of 32,241 cases  closed by Appeals during fiscal year 2004. For each of the cases in our  sample, we requested the Appeals closed office file and reviewed the  documentation in the files to determine case characteristics, such as the  ultimate outcome of the CDP appeal process. We also requested the  Collection administrative file associated with each of our sample CDP  cases to assess what transpired between the taxpayer and IRS after  Collection issued the notice of a lien filing or levy. We supplemented the  information obtained through documentary case file review with  information from IRS databases. We used the results of our case file  review to make estimates for the entire population of taxpayers whose  CDP appeal cases were closed by Appeals during fiscal year 2004. Since  our estimates are based on a sample, we express our confidence in our  estimates as a 95 percent confidence interval, plus or minus a margin of  error, which is the interval that would contain the actual population value  for 95 percent of the samples we could have selected. Unless otherwise  stated, we express our particular sample’s results as a 95 percent  confidence interval, less than plus or minus 8 percentage points. In some  instances, we report our sample estimates as medians. All medians based  upon the results of our sample have a relative standard error of less than  30 percent unless otherwise stated. In addition, we reviewed IRS program  guidance on the CDP process and interviewed knowledgeable agency  officials. We also interviewed representatives from other external  stakeholder organizations knowledgeable about the CDP appeal process.  We conducted our review from January 2005 through September 2006 in  accordance with generally accepted government auditing standards. (See  app. I for a more detailed description of our scope and methodology.)
subsections: section_title: Background
paragraphs: When Congress passed the Restructuring Act, it created new and  expanded taxpayer rights, including the right to CDP hearings and judicial  review to challenge IRS’s liens and levies. IRS’s Collection Appeals  Program (CAP), established before the Restructuring Act, allows  taxpayers to appeal several IRS collection actions. However, taxpayers  that do not agree with CAP’s determination cannot go to court because  CAP’s decisions are not subject to judicial review. According to a Senate  Finance Committee report, CDP was intended to afford taxpayers with  protection from IRS collection methods similar to the protection they have  in dealing with any other creditor. The report stated that IRS should  provide taxpayers with adequate notice of collection activity and a  meaningful hearing.
IRS issues several different types of collection notices that also inform  taxpayers of their due process rights, including the right to request a CDP  hearing. IRS issues a Notice of Federal Tax Lien (lien notice) to establish  the priority of the tax lien over other liens against the taxpayer’s assets for  the amount of unpaid tax liability. IRS issues a Notice of Intent to Levy  (levy notice) to inform taxpayers that failure to pay their tax liabilities  could result in an IRS levy on the taxpayers’ assets held by financial  institutions or other parties. Lien or levy notices may be issued by IRS’s  Automated Collection System (ACS) or Collection Field Function (Field  Collection). Taxpayers may also request CDP hearings in response to  notices received related to automated levy programs, specifically the State  Income Tax Levy Program (SITLP), the Federal Payment Levy Program  (FPLP), or the Alaska Permanent Fund Dividend (PFD) Program. In  addition, some taxpayers request and receive CDP hearings based on  multiple due process collection notices, such as a combination of lien and  levy notices. Taxpayers are given a CDP hearing after a levy on a state  income tax refund, and a levy is issued when the IRS finds collection of  the tax is in jeopardy.
Any taxpayer that receives a lien or levy notice has the right to dispute the  action by filing a written request for a CDP hearing within 30 days of the  date of the notice. Taxpayers that file for CDP hearings within the 30-day  period are granted hearings with a right to judicial review from the U.S.  Tax Court or U.S. District Court if they do not agree with Appeals’  determination. Taxpayers that file a request for CDP hearings after the 30- day period will be given an equivalent hearing (EH), but have no right to  judicial review. Once IRS receives a CDP hearing request, all tax collection  efforts are generally suspended until Appeals issues its determination to  the taxpayer. Under the EH process, IRS may continue to enforce  collection efforts although IRS’s policy is generally to suspend collection  during an EH. Interest and penalties continue to accrue during the hearing  period for both EH and timely CDP hearings.
By statute, during CDP hearings, taxpayers may raise issues related to   (1) the appropriateness of the lien filing or levy; (2) offers of collection  alternatives, such as IAs, OICs, and posting bonds or substitution of other  assets; (3) appropriate spousal defenses; and (4) challenges to the  existence or amount of the tax, but only in cases where they did not  receive statutory notice of deficiency or did not otherwise have an  opportunity to dispute the tax liability. The Internal Revenue Manual  allows the taxpayer to raise issues related to a hardship determination.  However, a taxpayer may not raise an issue that was raised previously and  considered at a prior administrative or judicial hearing if the taxpayer  participated meaningfully in that hearing or proceeding.
Once IRS receives a CDP request, Collection attempts to work with the  taxpayer for approximately 45 to 90 days to resolve the issue prior to  transferring the case to Appeals. If Collection is successful in resolving the  case with the taxpayer, the taxpayer can formally withdraw from CDP.  When Collection is unsuccessful in resolving the case with the taxpayer, it  forwards the case file to Appeals for its independent review. However, in  certain situations, Collection immediately forwards the taxpayer’s case to  Appeals, such as when collection alternatives have already been explored  and discussions are at an impasse, the taxpayer raises frivolous or  constitutional issues, the taxpayer appears to be using CDP as a delaying  tactic because the taxpayer is not responding to requests for information,  or the taxpayer does not want to work with Collection after requesting the  CDP hearing.
Appeals’ mission is to independently resolve tax disputes prior to litigation  on a basis that is fair and impartial to both the government and the  taxpayer. By statute, when Collection forwards the case to Appeals,  Appeals will (1) verify that the requirements of any applicable law and  administrative procedures have been met, (2) consider any relevant issues  relating to the unpaid tax or the levy, and (3) determine whether any lien  filing or levy balances the need for the efficient collection of taxes with the  legitimate concern of the taxpayer that any collection be no more intrusive  than necessary. Appeals then renders a decision on the case in which it  may either agree that the lien filing or levy is appropriate (that is, “sustain”  or uphold the collection action) or not appropriate (that is, “not sustain”  the collection action). Appeals may also include in its final determination a  description of the terms for any collection alternative negotiated with the  taxpayer, such as an OIC or IA.
As shown in figure 2, the volume of CDP case closures has increased  steadily from the inception of the CDP program from fiscal year 1999  through fiscal year 2004 and then declined in fiscal year 2005. In fiscal year  2005, CDP cases accounted for more than one-quarter of Appeals’ annual  caseload.
section_title: CDP Appeals Identified Few Errors by Collection, but Some Taxpayers Received a Different Outcome
paragraphs: Our case file review indicates that during the CDP review process Appeals  found evidence that Collection had not followed proper procedures in an  estimated 2 percent of the cases closed in fiscal year 2004. For reasons  unrelated to an error by Collection, in an estimated 27 percent of cases,  taxpayers emerged from the CDP hearing process with a different  outcome than the lien filing or levy action. Of these, Appeals agreed to a  collection alternative for an estimated 16 percent of all taxpayers, and  approximately 11 percent of all taxpayers fully paid their tax liabilities or  no longer had balances due to IRS. In addition, an estimated 11 percent of  all taxpayers withdrew from the CDP process. Finally, in about 60 percent  of cases, Appeals upheld the lien filing or levy for a variety of reasons,  including because taxpayers did not file required returns, had not paid  their taxes for certain periods, or both.
subsections: section_title: Appeals Rarely Found Evidence of Procedural Errors by Collection
paragraphs: As previously shown in figure 1, Appeals found evidence that Collection  had not followed proper procedures in an estimated 2 percent of CDP  cases. Although Appeals did not identify any instances in our sample  where “requirements of applicable law and administrative procedure”  were not met, our case file review did identify instances where Appeals  detected other types of procedural errors during the collection phase of a  case. For example, in one case IRS misapplied a payment to the taxpayer’s  ex-spouse. Appeals reapplied the payment to the taxpayer’s account and  did not uphold the lien filing and levy because there was no balance due.  We included these types of cases in our estimation of procedures not  followed as they represented other examples of situations where  taxpayers utilized the CDP appeal process consistent with the provisions  of the Restructuring Act—that is, as an opportunity to correct any errors  made by Collection.
Of approximately 27 percent of CDP cases that resulted in a different  outcome after taxpayers appealed, Appeals negotiated a collection  alternative with taxpayers in about 16 percent of the cases. However,  when Appeals negotiates a collection alternative, it is not necessarily  disagreeing with the lien filing or levy. Appeals may accept a taxpayer’s  collection alternative but sustain the filing of the lien in order to protect  the government’s lien priority in the event of default. In addition,  taxpayers may present Appeals with new information not previously  provided to Collection for consideration. For example, in one of our cases,  the taxpayer requested an IA with both Collection and Appeals. After  submitting requested financial information and a down payment with  Appeals, the taxpayer qualified for an IA. The taxpayer benefited from the  CDP process by negotiating a collection alternative with Appeals. In an  estimated 11 percent of all CDP cases, Collection’s lien filing or the levy  was no longer appropriate because the taxpayer had since fully paid the  liability or had no balance due. In these cases, the lien or levy was no  longer necessary because the taxpayer no longer owed any tax to IRS.  Appeals officials stated that some taxpayers file for CDP to delay  imminent collection action while they find revenue sources to pay off their  unpaid liabilities. For example, one taxpayer in our sample obtained a loan  during the hearing process to fully pay the liabilities owed.
In addition, in about another 11 percent of all CDP cases, taxpayers  withdrew from the CDP process after their cases reached Appeals, so  Appeals neither upheld nor overturned the liens or levies. For example,  one taxpayer continued to work with Collection while the case was  transferred to Appeals. Collection negotiated an IA with the taxpayer, and  then the taxpayer withdrew the CDP request from Appeals. We did not  track the final outcome of cases after taxpayers withdrew from the CDP  hearing process.
Of all CDP cases, approximately 6 percent of taxpayers negotiated a  collection alternative while in Collection but failed to formally withdraw  from the CDP program, resulting in their cases being forwarded to  Appeals. According to Appeals officials, in these situations Appeals will  generally agree with the proposed collection alternatives unless the  taxpayers’ situations change so much that they can no longer comply with  the agreements reached with Collection. Appeals officials also said that  some professional representatives advise clients not to withdraw from  CDP even though they resolved the issue at the Collection level because  they want to preserve their clients’ right to judicial review.
section_title: Appeals Upheld the Majority of Liens and Levies, Often Because of Taxpayer Noncompliance
paragraphs: In an estimated 60 percent of cases where Appeals determined the lien or  levy was appropriate, Appeals upheld the lien filing or levy 46 percent of  the time because Appeals determined that taxpayers did not comply with  filing requirements, did not pay their liabilities for certain tax periods, or  both, as shown in table 1. For example, to be eligible for an OIC, a  business taxpayer must file all required federal tax returns, file and pay  any required employment taxes on time for the two quarters prior to filing  the OIC, be current with deposits for the quarter in which the OIC was  submitted, pay any required estimated tax for the current period, and not  be a debtor in a bankruptcy case. To be eligible for an IA, an individual  taxpayer must file all required tax returns currently due and make all  required estimated tax payments on the current period prior to the  commencement of the IA.
In addition to noncompliant taxpayers, Appeals upheld the lien filing or  levy for a variety of other reasons, including when taxpayers questioned  the amount of the tax liability but Appeals determined the liability to be  correct (an estimated 38 percent) and when taxpayers did not respond to  Appeals (an estimated 30 percent). With respect to nonresponsive  taxpayers, Appeals officials stated that they attempt to communicate with  taxpayers at least twice by correspondence before issuing determination  letters.
About 2 percent of all taxpayers that requested CDP appeal hearings  contested the Appeals determination in the U.S. Tax Court or U.S. District  Court. Officials in IRS’s Office of Chief Counsel said that based on their  experience with docketed cases, Appeals is upheld a majority of the time.  When the courts overturn the Appeals determination, IRS Chief Counsel  officials said that it does not necessarily mean that Appeals erred. Some  taxpayers provide additional or new information considered by the courts  but not presented to Appeals, leading to reversed decisions.
section_title: The Majority of Taxpayers Raised the Same Arguments with Both Collection and Appeals, Received the Same Determination, and Had Multiple Contacts with IRS
paragraphs: During fiscal year 2004, most taxpayers raised arguments permitted by  statute to Appeals, while we estimated that 5 percent of taxpayers raised  arguments considered frivolous under IRS guidance with either Collection  or Appeals. When a taxpayer raised the same argument in both Collection  and Appeals, in an estimated 81 percent of the cases Appeals agreed with  Collection on the merits of the taxpayer’s argument. During the CDP  process, Collection and Appeals initiated multiple communications with  the taxpayer, including letters, telephone discussions, and face-to-face  meetings.
subsections: section_title: Most Taxpayers Raised Permissible Arguments, but Some Presented Frivolous Arguments
paragraphs: Taxpayers raised various arguments permitted by the Restructuring Act in  more than an estimated 90 percent of CDP cases. After their cases were  transferred to Appeals, about 41 percent of taxpayers requested an OIC  and about 37 percent of taxpayers requested an IA. Less than 3 percent of  taxpayers requested innocent spouse relief as permitted under the  Restructuring Act during their CDP hearings in Appeals.
Approximately 38 percent of taxpayers questioned the existence of the tax  liability. Under the Restructuring Act, a taxpayer may challenge the  existence or dollar amount of the tax liability at the CDP hearing if the  taxpayer did not receive a statutory notice of deficiency for the liability or  did not otherwise have an opportunity to dispute the tax liability. Seven  out of the 80 taxpayers in our sample challenging the existence of a  liability claimed they did not receive the statutory notice of deficiency.  The remaining 73 out of the 80 taxpayers raised existence of the liability  for a variety of other reasons, including contesting the amount of the  liability. One Appeals official suggested that some taxpayers without  professional representation (pro se) may not understand the definition of  questioning “the existence or amount of the liability” under the  Restructuring Act. IRS has drafted a revised CDP appeal hearing request  form in an effort to assist taxpayers in determining what types of  collection alternatives are available and what types of arguments are  allowed. The revised hearing request form is intended to more clearly  explain what it means to dispute the existence or amount of the liability  and the taxpayer’s ability to question the liability under CDP.
While their cases were in Appeals, an estimated 38 percent of taxpayers  questioned the appropriateness of the lien filing or levy and presented  hardship arguments. According to guidance issued by IRS Counsel,  taxpayers may argue that a lien or levy is inappropriate because payment  would cause hardship, for example, if the taxpayer has no disposable  income or assets. The primary hardship issue taxpayers cited during the  CDP process was illness (about 11 percent). Other hardship issues  taxpayers reported included bankruptcy, unemployment, and death in the  family.
An estimated 5 percent of taxpayers requesting a CDP appeal presented a  frivolous argument to either Collection or Appeals. According to IRS,  taxpayers raising frivolous issues consume a disproportionately large  amount of time because Appeals personnel must often read lengthy  frivolous submissions in search of any substantive issue that might be  contained within the case file. In addition, according to IRS, delays result  when taxpayers use face-to-face meetings as a venue for frivolous oration  and harassment of Appeals personnel. IRS has proposed changes to the  CDP regulations, which clarify that Appeals will not offer face-to-face  meetings if the taxpayers or their representatives raise only frivolous  arguments. However, representatives from an external stakeholder group  expressed concerns that IRS may misclassify cases as frivolous and deny  face-to-face meetings although the taxpayer is raising arguments permitted  under the Restructuring Act. For example, one stakeholder suggested that  a pro se taxpayer’s argument may be misclassified as frivolous if the  taxpayer uses the word protest on the CDP request form. Prior to the  Restructuring Act IRS could designate certain taxpayers, such as those  using arguments that had been repeatedly rejected by the courts, as “illegal  tax protesters.” As a result, taxpayers using the term protest might be  equated with taxpayers offering frivolous arguments. The act prohibited  IRS from using this or any similar designation.
section_title: In Cases Where Taxpayers Raised the Same Arguments in Appeals as in Collection, Appeals Agreed with Collection the Majority of the Time
paragraphs: Nearly 90 percent of taxpayers raised the same argument permitted by the  Restructuring Act with both Collection and Appeals. IRS encourages  taxpayers to discuss the issues they want to appeal with Collection  because the matter may be resolved without the need for Appeals’  involvement. As shown in table 2, Appeals agreed with Collection that a  taxpayer’s argument lacked merit in more than an estimated 80 percent of  the cases where taxpayers raised the same argument in both Collection  and Appeals. For example, taxpayers argued that they qualified for  collection alternatives but were not in compliance with requirements for  filing tax returns for prior periods, paying taxes for certain periods, or  both.
More than half of the taxpayers that requested an IA (about 61 percent)  or OIC (about 56 percent) in Appeals were not compliant for tax periods  in addition to the period under CDP review. Appeals officials added that  when a taxpayer requests an OIC in Appeals, Appeals staff often spend a  lot of time developing the case by requesting and reviewing  documentation needed to determine the taxpayer’s compliance and  eligibility. Our review of the case files for the estimated 31 percent of  taxpayers that asked both Collection and Appeals for an OIC indicated  that Appeals staff spend time building cases. Appeals requested the OIC  form from an estimated 33 percent of these taxpayers, and an estimated  24 percent provided the form. Appeals also requested supporting  financial documents from an estimated 37 percent of these taxpayers,  and an estimated 24 percent of taxpayers that requested an OIC in both  Collection and Appeals provided the requested information. IRS voiced  concerns that many taxpayers are raising the same issues with Appeals  that were rejected by Collection in what appeared to be efforts to delay  collection of the liabilities.
In an approximately 19 percent of the cases where taxpayers raised  arguments permitted by the Restructuring Act, Appeals reached a different  conclusion than Collection on the merits of the taxpayer’s argument, but  may have upheld the lien filing or levy. For example, in one case Appeals  approved an IA rejected by Collection but upheld the lien to protect the  government’s interests in case the taxpayer defaulted. Appeals differed  from Collection on the merits of the taxpayer’s arguments for a variety of  reasons, including a change in the taxpayer’s circumstances or  information. When Appeals differed from Collection on the merits of the  taxpayer’s argument, in an estimated 20 percent of these cases the  taxpayer provided different information to Appeals than to Collection. In  addition, in an estimated 11 percent of the cases when Appeals reached a  different conclusion than Collection it was because the taxpayer did not  provide requested information to Collection, but provided the information  to Appeals.
section_title: IRS Initiated Communication with CDP Taxpayers Multiple Times, Primarily by Telephone and Letter
paragraphs: After sending the lien or levy notice, IRS (Collection and Appeals)  contacted the taxpayer multiple times using different methods. The range  of communication between IRS and the taxpayers in our sample varied.  For example, the maximum number of phone calls in a single case was 34  and the maximum number of letters was 17. The estimated median number  of letters IRS sent to the taxpayers was 3.6 and the estimated median  number of phone calls was 3.2. As shown in table 3, in general the median  number of IRS-initiated contacts with taxpayers—letters, telephone  conversations, and formal meetings—was twice as high as the median  number of taxpayer-initiated contacts with IRS.
After IRS sent the lien or levy notice, about 28 percent of taxpayers had at  least one face-to-face contact, including meetings and drop-in visits, with  Collection or Appeals. Most external stakeholders we interviewed stated  that face-to-face CDP hearings were preferable, although a few  representatives favored telephone conferences. Members of the National  Association of Enrolled Agents, for example, said they preferred face-to- face meetings because they could review all documents and reach  agreement in writing. In contrast, members of the American Institute of  Certified Public Accountants stated that teleconferences were the most  efficient way to handle CDP hearings.
The September 2005 proposed changes to the CDP regulations describe  specific circumstances under which Appeals will not offer a face-to-face  conference to taxpayers or their representatives because it determines  that a conference will not serve a useful purpose. Under the proposed  changes, a face-to-face conference will not be granted if the taxpayer does  not provide the required information in the written request for a CDP  hearing or if the taxpayer proposes collection alternatives that would not  be available to other taxpayers in similar circumstances. For example,  because IRS does not consider OICs from taxpayers that have not filed  required returns or made certain required deposits of tax, face-to-face  conferences will not be offered to taxpayers that request an OIC but have  not fulfilled those obligations. In addition, a face-to-face conference will  not be held at the location closest to the taxpayer’s residence or principal  place of business if all Appeals officers or employees at that location are  considered to have prior involvement with the taxpayer.
The National Taxpayer Advocate (Advocate) and American Bar  Association (ABA) expressed concern about the potential reduction in  face-to-face hearings that may result from the proposed changes in the  CDP regulations. The Advocate noted that certain taxpayers may need a  face-to-face meeting with an Appeals officer who is familiar with local  economic conditions, such as a business’s payroll provider that went  bankrupt. In our sample, an estimated 2 percent of taxpayers requested  that Appeals transfer the CDP hearing to another location and Appeals  accommodated all of these requests. However, we did not collect data on  whether the relocation was to accommodate a face-to-face hearing. The  Advocate also expressed concern that the centralization of Appeals  activities to IRS campuses will result in only certain taxpayers receiving  face-to-face hearings, such as those with representation. ABA  representatives stated that the proposed regulations will grant Appeals  more ability to deny face-to-face hearings, which would adversely affect  pro se CDP taxpayers. They also said that Appeals cases can be more  quickly resolved in person than through correspondence and phone  hearings.
section_title: Both Individuals and Businesses Used CDP, but Case Characteristics Varied
paragraphs: Individuals constituted the majority of taxpayers that requested a CDP  appeal hearing, although business entities also exercised their right to  request an appeal hearing. When compared to individual taxpayers with  income tax liabilities, businesses with employment taxes liabilities had  more delinquent periods. The majority of individuals requesting a CDP  appeal were lower-income taxpayers.
subsections: section_title: Most Taxpayers That Requested CDP Appeal Were Individuals, although Businesses Also Used the Program
paragraphs: Individuals constituted about 87 percent of all taxpayers that exercised  CDP appeal rights. Of these individuals, approximately 79 percent filed a  CDP appeal related to individual income tax liability. Business entities  constituted the remaining 13 percent of all taxpayers that requested CDP  appeals, with business-related liabilities such as employment and  unemployment tax. See table 4 for more detail on the types of taxpayers  requesting CDP appeal.
Both the ACS and Field Collection areas of IRS generate lien and levy  notices, which may lead to eventual CDP appeals. ACS issued the vast  majority of notices related to individual cases, about 88 percent. Our  sample data suggest that Field Collection issued the majority of notices  related to business cases, about 78 percent. However, because of a small  sample size we cannot conclude that this observed level of notice issuance  is statistically different from the level of notices issued to individuals. IRS  procedures specify that simpler cases are usually handled by ACS. Field  Collection handles complex, high-risk, high-dollar, and certain other types  of collection cases.
Although taxpayers are afforded CDP appeal rights for lien and levy  notices, about 64 percent of all CDP appeals resulted from a levy notice.  ACS issued levy notices for an estimated 49 percent of all cases, while  Field Collection issued levy notices for about 15 percent of all CDP cases.  Lien notices, which may be issued by either ACS or Field Collection,  accounted for about 29 percent of all cases. For the remaining estimated 7  percent of cases, taxpayers either received both a lien and levy notice on  the same liability amount and tax periods or a different type of levy  notice, such as SITLP or FPLP.
section_title: Businesses with Employment Tax Liabilities Had More Delinquent Periods Than Individuals with Income Tax Liabilities
paragraphs: Business entities that appealed proposed collection of quarterly  employment tax liabilities had on average over twice as many delinquent  periods included in their appeals as individual taxpayers with income tax  liabilities. As shown in table 5, these businesses had on average nearly 6  delinquent periods included in their appeals. In calendar terms, this means  that on average businesses that requested a CDP appeal for failure to pay  employment tax liabilities were delinquent for nearly 1-½ years. The  number of delinquent periods included in the CDP appeal for these  taxpayers ranged from a low of 1 to a high of 26 quarters, or in calendar  terms, from 3 months to 6-½ years. In contrast, individuals who appealed  the lien filing or levy on income tax liabilities in CDP had on average 2.6  delinquent periods, or years, included in their appeals. For individual  income tax liabilities the number of multiple periods involved ranged from  a low of 1 to as many as 9 years per case.
Similarly, the estimated amount of the tax liability associated with CDP  appeals varied widely and was associated with the type of tax liability  involved. The highest median tax liability was associated with trust fund  recovery penalty cases, followed by employment tax liabilities, as shown  in table 6.
In general, taxpayers represented themselves more than half of the time in  CDP appeal cases, an estimated 56 percent of the time. Individual  taxpayers represented themselves even more frequently, about 61 percent  of the time. Individuals engaged the services of a professional  representative, such as a tax attorney, certified public accountant (CPA),  or enrolled agent, during CDP about 30 percent of the time. Our sample  data suggest that 50 percent of businesses retained professional  representation; however, because of our small sample size we cannot  conclude that this observed level of representation is statistically different  from the level of professional representation for individuals.
section_title: Most Individuals Were Lower-Income Taxpayers with Varied Liability Amounts
paragraphs: More than an estimated 50 percent of individual taxpayers who requested  a CDP appeal had most recently reported an adjusted gross income (AGI)  of less than or equal to $50,000 prior to their CDP appeals. The estimated  median tax liability associated with these cases varied somewhat when  compared to income level, as shown in table 7.
section_title: Appeals Devoted Many Staff Hours to Resolving CDP Cases That May Not Be Consistent with Goals of the Program or an Efficient Use of Resources
paragraphs: The results of our case file review and interviews with IRS officials have  raised concerns that certain types of taxpayers have used CDP in a manner  that may be inconsistent with the goal of the Restructuring Act to ensure  due process. IRS also raised concerns that taxpayers have used CDP in a  manner that resulted in an inefficient use of Appeals’ resources. Our case  file review enabled us to develop quantitative estimates of the extent to  which cases with selected characteristics of concern were present among  cases closed by Appeals during fiscal year 2004. IRS devotes a significant  amount of its resources to resolving CDP appeals cases. Changing the CDP  process could release a significant amount of Appeals’ resources for other  purposes. In operating the CDP program, IRS must balance efficient  resource utilization against the goal of protecting taxpayer rights.
subsections: section_title: Concerns about Certain Types of CDP Cases
paragraphs: The Restructuring Act permits any taxpayer who receives a lien or levy  notice to request a CDP appeal hearing. The act makes no distinction with  respect to the type of taxpayer, type of tax liability, or whether the liability  is self-reported or asserted by IRS. According to the legislative history, the  Senate Committee on Finance believed that following procedures  designed to afford taxpayers due process in collections would increase  fairness to taxpayers. However, the results of our case file review and  interviews with IRS officials raised concerns that certain taxpayers are  using CDP in ways that may be inconsistent with the goal of the  Restructuring Act to ensure due process. These would include the  following:  Frivolous arguments: As discussed earlier, an estimated 5 percent of  taxpayers requesting a CDP appeal presented a frivolous argument to  either Collection or Appeals. An estimated 4 percent of CDP taxpayers  raised a frivolous argument to Appeals alone. IRS has publicized those  arguments that are considered frivolous and that will not be considered as  a basis for contesting tax liabilities. IRS officials said that taxpayers that  submit frivolous arguments may simply be delaying collection efforts. In  the budget submissions for fiscal years 2005 to 2007, the administration  submitted a legislative proposal that would increase the penalty for filing  frivolous income tax returns from $500 to $5,000. The proposal would  permit IRS to dismiss requests for CDP hearings (as well as IAs and OICs)  if they are based on frivolous arguments or are intended to delay or  impede tax administration. In 2005, IRS’s Office of Chief Counsel also  issued guidance encouraging Counsel staff to coordinate with Collection  staff in order to file a motion to levy during CDP proceedings where a  taxpayer raises solely frivolous arguments.
Nonresponsive taxpayers: About an estimated 20 percent of taxpayers  requesting a CDP hearing in fiscal year 2004 did not respond at all or  responded initially and then became nonresponsive to attempts by  Appeals to contact them for additional information. IRS officials  questioned whether taxpayers that requested CDP hearings but did not  respond to Appeals’ efforts to contact them were serious about resolving a  lien or levy. According to Appeals’ procedures, taxpayers are provided at  least two opportunities by correspondence to schedule the CDP hearing or  discuss the case. While it is possible that nonresponsive taxpayers may no  longer reside at the most recent address on file with IRS, Appeals makes  efforts to contact the taxpayers using the most recent information it has  available. In addition, the taxpayer can initiate contact with IRS to inform  it of a new address and continue the CDP hearing. If the taxpayer does not  respond, Appeals will issue a final determination on the lien or levy. For  cases closed during fiscal year 2004, nonresponsive taxpayers that  requested a CDP hearing experienced an estimated average cycle time of  314 calendar days from the time they requested a CDP hearing until the  time the final determination was issued by Appeals. As previously  discussed, IRS generally suspends all collection efforts during CDP until  the final determination is issued.
Basis for questioning the existence of the liability: As discussed  earlier, taxpayers challenged the existence or amount of the liability with  both Collection and Appeals about 37 percent of the time. An estimated   38 percent of taxpayers raised the issue with Appeals alone. In addition,  Appeals agreed with Collection’s evaluation of the merits of the argument  an estimated 89 percent of the time. However, as discussed earlier, in only  7 of 80 cases in our sample where the taxpayer raised the existence of the  liability with Appeals during CDP was the taxpayer claiming not to have  received a statutory notice of deficiency from IRS. The remaining 73 out  of the 80 taxpayers raised existence of the liability for a variety of other  reasons, including contesting the amount of the liability. IRS intends to  clarify the circumstances under which a taxpayer may appropriately  dispute the existence or amount of the liability in CDP when it revises the  hearing request form.
Self-reported liabilities: Taxpayers that self-reported their liabilities  accounted for nearly an estimated 50 percent of Appeals’ total CDP  caseload for cases closed during fiscal year 2004. Of these taxpayers,  nearly one-quarter raised the existence of the liability issue during their  CDP appeals. The Restructuring Act states that taxpayers can use the  CDP process to appeal the underlying tax liability in limited  circumstances. IRS initially interpreted the language as meaning an  additional tax assessment by IRS, not a liability reported by the taxpayer  on the return. In 2004, the U.S. Tax Court rejected this interpretation and  concluded that the term underlying tax liability referred to self-assessed  amounts as well as amounts assessed under deficiency procedures. The  U.S. Tax Court held that petitioners generally could dispute their self- reported tax liability because they had not received a notice of deficiency  and had no other opportunity to challenge the merits of the disputed tax  liability.
Employment and unemployment taxes: In previous reports GAO has  discussed the unique problems associated with ensuring business  taxpayers comply with their employment tax deposit requirements. IRS  also expressed concern about business taxpayers who use CDP to appeal  collection action for employment and unemployment taxes because many  of them continue to incur additional liabilities by not filing subsequent  returns or paying related taxes, often referred to as “pyramiding.” As  previously discussed, businesses that requested CDP appeal for  employment taxes were on average delinquent for 6 quarterly periods, or  behind on their payments for 1-½ years. For example, in one case the  business requested a CDP appeal hearing to contest collection of  employment taxes dating back over 26 quarterly periods, or 6-½ years. The  administration has submitted a legislative proposal with its fiscal year 2007  budget to amend CDP procedures for employment tax liabilities. In  contrast to most other CDP cases, the proposal would allow IRS to levy  businesses with delinquent employment tax liabilities first, and then  provide the taxpayer with the opportunity for a postlevy CDP appeal  hearing within a reasonable period of time. This proposal is similar to the  postlevy hearing established by the Restructuring Act for levies issued to  collect a federal tax liability from state tax refunds under SITLP and for  levies where IRS has made a finding that the collection of tax is in  jeopardy.
IRS also raised concerns that other types of cases result in an inefficient  use of Appeals’ resources. These include the following:  Offers-in-compromise: In 2001, IRS established two centralized OIC  processing centers to reduce inventory, processing times, and costs. IRS  officials said that some taxpayers fail to work with these specialized units  and instead go directly to Appeals to seek OICs. In addition, when making  its determination about the acceptability of an OIC, Appeals in most cases  does not refer the OIC to the specialized processing units or a Field  Collection offer specialist for investigation or for a recommendation on  acceptance or rejection. In contrast, Appeals refers CDP cases involving  innocent spouse issues to either IRS’s Centralized Innocent Spouse  Operation (CISO) or a field examination office for investigation and  evaluation. Appeals will delay its ruling on any other issues or collection  alternatives until the CISO or field examination area issues a preliminary  determination on the innocent spouse issue. As a result of taxpayers that  seek OICs directly from Appeals instead of working with the specialized  processing centers, Appeals deviates from its mission of settling disputes  between taxpayers and Collection and instead spends time doing original  case-building work, such as trying to get taxpayers to file overdue returns  for prior periods, an important eligibility criterion for OICs.
IRS also said that many taxpayers who apply for a collection alternative do  not (1) meet the basic requirement of having filed all necessary tax returns  or (2) provide with their CDP requests the necessary supporting  documentation or a completed OIC application for Appeals to consider,  causing further delay and consuming more staff resources. As discussed  earlier, for those taxpayers that asked both Collection and Appeals for an  OIC, Appeals requested the OIC application form and other supporting  financial documentation from about an estimated one-third of the  taxpayers.
One option for ensuring that taxpayers timely provide overdue tax returns,  supporting financial information, or a completed OIC application with  their requests for a collection alternative would be to require taxpayers to  provide this information before IRS accepts the request for a CDP hearing.  However, according to officials from IRS’s Office of Chief Counsel, under  the current statute IRS may not deny a taxpayer’s request for a CDP  hearing even if the taxpayer only wants a collection alternative and has  not met basic filing compliance requirements. Similarly, IRS said that it  also lacks authority to deny a request for a CDP hearing to taxpayers  seeking an alternative that fail to submit the supporting financial  information or OIC application form. IRS also stated that most taxpayers  would be unable to provide this information within the 30 days they have  to request a CDP hearing.
Another option would be to require taxpayers to provide the information  within a reasonable time following the request for the CDP hearing and for  IRS to proceed to make a final determination at that time on the basis of  whatever information the taxpayer had provided. This would be similar to  IRS’s current practice of proceeding to make a final determination when  taxpayers have not been responsive to IRS’s request for information. At  the time we completed our review, however, IRS had not determined  whether it could do this without a statutory change.
Installment agreements: As with OIC cases, IRS also said that many  taxpayers do not provide the necessary documentation for Appeals to  even consider an IA with their CDP requests. Instead of concentrating on  dispute resolution, Appeals officers instead must attempt to bring  noncompliant taxpayers into filing compliance in order to meet the basic  eligibility criteria for the alternative, and then develop the IAs, including  requesting application forms and the necessary financial information from  the taxpayers.
Low liability cases: For cases closed during fiscal year 2004, about 3  percent of the taxpayers, or approximately 1,100, requested a CDP hearing  for liabilities totaling less than $500. One Appeals official stated that small  liability cases may not be the most efficient use of Appeals’ resources.  However, establishing a dollar threshold would deny some taxpayers the  right to appeal the lien filing or levy at the judicial level while taxpayers  with perhaps slightly higher liabilities would retain that right. In addition,  for some lower-income taxpayers, an improperly assessed liability of $500  may represent a significant amount of money. The median for the most  recently reported AGI for taxpayers in our sample with a liability of less  than $500 was estimated at approximately $36,000, with a range from as  low as about $11,000 a year to a high of more than $200,000 a year.
section_title: Changing the CDP Process Could Free Up a Significant Amount of Appeals’ Resources
paragraphs: Restricting CDP appeals rights for certain kinds of taxpayers or  implementing other processing changes, such as requiring taxpayers to  submit documentation for collection alternatives following the CDP  hearing request, could release a significant amount of Appeals’ resources  for other purposes. According to IRS records, in fiscal year 2004, Appeals  allocated more than 285,000 direct staff hours, or about 23 percent of all  direct case time charges, to resolve about 32,000 CDP cases. We estimate  that this cost was approximately $8.2 million.
Table 8 shows the resources devoted to selected types of CDP cases.  However, the data on direct case time charges and salary costs for each  type of CDP cases may overstate the potential resource savings of  changing the CDP process. First, the table represents the resources  devoted to cases that exhibited the specific characteristic, but other  characteristics could also be present, so the categories are not mutually  exclusive. A case with a self-reported liability may also be an  employment/unemployment tax case, and the resources devoted to that  case would be included in each category. As a result, the potential staff  hour savings to be realized from excluding more than one category of  cases from CDP cannot be estimated by totaling the salary costs  associated with each category. For example, suppose taxpayers with self- reported liabilities and employment/unemployment taxes were deemed  ineligible for the CDP process. The table shows that Appeals devoted  about 135,000 staff hours to cases with self-reported taxes and about  34,000 hours to cases with employment/unemployment taxes. However,  the total staff hours that would be released by deeming both categories  ineligible would not be the sum of those two categories (169,000 staff  hours) because some of employment/unemployment taxes are also self- reported. The actual total would be less. Second, although we obtained the  total direct time charges involved in resolving each case in our sample, we  could not isolate the amount of direct time Appeals expended in  requesting and obtaining documentation in order to develop collection  alternatives. (For more detail on the confidence intervals associated with  the estimated hours and salary costs shown in table 8, see app. I.)
section_title: IRS Has Taken Some Steps to Improve the CDP Program
paragraphs: IRS has taken some steps to improve the CDP program. IRS has drafted a  revised CDP hearing request form in an effort to assist taxpayers in  determining what types of collection alternatives are available. In addition,  in 2005, IRS issued proposed revisions to the CDP program regulations  intended to allow Appeals to effectively and fairly handle the cases of  taxpayers that raise issues of substance. Included in these proposed  changes is a provision stating that Appeals will not offer a face-to-face  meeting with a taxpayer when Appeals staff determine that the conference  would not serve a useful purpose, such as with a taxpayer that offers only  frivolous arguments. Further, the proposed changes state that a face-to- face conference need not be granted if a taxpayer does not provide the  reasons for disagreeing with the lien filing or levy on the written CDP  request. As previously discussed, stakeholder groups, including the  Advocate and the ABA, voiced concerns about whether Appeals would  have the ability under the proposed revised regulations to deny face-to- face hearings to taxpayers in need of assistance and thereby adversely  affect taxpayer rights.
In issuing the proposed regulatory changes for the CDP program, IRS  asserted as its goal to increase efficiency without compromising the  quality and fairness of review. Appeals anticipates collecting detailed  information on CDP case outcomes as a result of planned enhancements  to its information management system. IRS guidance lays out a seven-step  process for data collection and analysis, the last of which is that managers  should use data to follow up and monitor the effectiveness of a course of  action. However, we found that IRS has not clearly assigned responsibility  for analyzing future CDP outcome data to assess whether the revised  hearing request form or updated program regulations achieve their  objectives or whether further corrective actions will be necessary.
section_title: Conclusions
paragraphs: Providing taxpayers with the ability to appeal unfair lien filings or levies is  an important consideration in ensuring IRS continues to respect taxpayer  rights as it collects tax revenue. However, Appeals devotes a significant  amount of resources to CDP cases and decision makers need to weigh the  value of the existing program against the value of potentially redirecting  those resources to serve other taxpayers better.
The results of our case file review and interviews with IRS officials raised  concerns about whether Appeals is devoting a large share of its resources  to providing temporary relief from collection action to taxpayers that  Congress may not have intended to benefit from the CDP process. The  statute currently affords all taxpayers the protection of due process  appeal, even those that raise frivolous arguments or that do not respond to  Appeals after requesting a hearing and may not be serious about working  with IRS. For those taxpayers, which collectively may represent as much  as approximately 24 percent of the total CDP workload, the delay in  collection activity until Appeals issues its final determination may be an  incentive to request an appeal, even though penalties and interest continue  to accrue during the time the case is with Appeals. Other types of CDP  cases represent those that may involve an inefficient use of Appeals’  resources, such as taxpayers that are seeking OICs or IAs but are not in  compliance with basic tax return filing requirements.
IRS has taken some steps that may improve CDP program operations.  Appeals anticipates collecting more detailed CDP case outcome data as a  result of planned enhancements to its information system. However, IRS  has not established responsibility for analyzing future program outcome  data to determine if these changes will be effective. Given the significant  share of Appeals staff resources dedicated to resolving CDP cases,  balancing the need to employ these resources efficiently versus the goal of  protecting taxpayer rights as required by the Restructuring Act has been,  and will likely continue to be, a challenge for IRS.
section_title: Recommendations for Executive Action
paragraphs: We are making three recommendations to the Commissioner of Internal  Revenue to ensure that Appeals uses its resources in line with its mission  as well as more efficiently. Specifically, we recommend that the  Commissioner    determine—for taxpayers seeking only a collection alternative—a  reasonable amount of additional time beyond the current 30-day period for  requesting a CDP hearing for these taxpayers to submit the required  supporting financial information necessary for Appeals to consider the  alternative of choice, and if seeking an OIC, to submit the OIC application  form;  instruct Appeals to transfer CDP cases where taxpayers seek an OIC as a  collection alternative and raise no liability issues to IRS’s specialized  processing units for investigation and evaluation of OICs before  consideration by Appeals; and    establish responsibility for analyzing future CDP appeal case outcome data  in order to determine whether revisions to the hearing request form and  program regulations will result in meeting their objectives.
section_title: Matters for Congressional Consideration
paragraphs: Since the Restructuring Act permits any taxpayer who receives a lien or  levy notice to request a CDP hearing, Congress should consider amending  the statute to remove eligibility for CDP appeal for selected categories of  taxpayers or types of cases if it judges that they have characteristics that  are inconsistent with the Restructuring Act’s goal of ensuring due process.  These categories may include self-reported tax liabilities, including  employment and unemployment taxes, or other categories deemed  inconsistent with the goal of the Restructuring Act provisions. In order to  leverage IRS resources more efficiently, Congress should consider  requiring taxpayers that seek collection alternatives, such as OICs or IAs,  and that raise no other allowable issues to comply with the basic eligibility  criteria, that is, file all required tax returns before Appeals reviews their  cases. In addition, Congress should consider requiring taxpayers that raise  only collection alternatives to submit the supporting financial information  needed to consider the alternative of choice, and if seeking an OIC without  raising any liability issues, to submit the OIC application form within a  reasonable time following their CDP request.
section_title: Agency Comments and Our Evaluation
paragraphs: The Commissioner of Internal Revenue provided written comments on a  draft of this report in a September 20, 2006, letter, which is reprinted in  appendix II. The Commissioner agreed that our findings would assist IRS  in its effort to improve CDP program operations, and provided technical  comments and clarifications that we have incorporated throughout this  report where appropriate.
With regard to our recommendation on transferring cases where taxpayers  request OICs as a collection alternative to one of IRS’s specialized  processing units for consideration before Appeals considers the cases, IRS  agreed that our recommendation merited consideration, although IRS  concluded that additional study is needed to assess the advantages and  disadvantages of such a change in order to achieve the proper balance  between agency resource allocation and imposing unnecessary delays in  processing OICs. IRS also agreed with our recommendation regarding  establishing responsibility for evaluating CDP outcome data in order to  determine if the changes to the hearing request form and proposed  regulatory changes will achieve desired objectives. IRS expressed support  for our matter for congressional consideration related to suggesting that  Congress consider amending the statute to remove eligibility for CDP  appeal for selected categories of taxpayers or types of cases, noting that  IRS has submitted several legislative proposals in past years aimed at  limiting taxpayer access to CDP.
In our draft report we recommended that IRS require taxpayers seeking a  collection alternative to submit supporting financial information with their  requests for a CDP hearing in order to consider the alternative of choice.  We also recommended that IRS require each taxpayer seeking an OIC that  raises no liability issues to submit the OIC application form with the  hearing request. IRS disagreed with both of these recommendations. While  IRS agreed that having this information would be desirable to facilitate  consideration of taxpayers’ requests for collection alternatives, IRS  believes that most taxpayers would be unable to provide this information  within the 30-day period taxpayers are provided to request a CDP appeal  hearing. Further, IRS stated that it does not currently have statutory  authority to deny CDP hearings to taxpayers who fail to submit financial  information forms or the OIC application form. IRS believes that  congressional action would be required to enable it to impose these  requirements on taxpayers. We incorporated this information into the  body of our report. Given IRS’s concerns, we revised our report to say that  taxpayers should be given a reasonable amount of time after filing a CDP  request to provide supporting financial information and OIC applications.  If taxpayers do not provide the materials within that time, IRS would  proceed to make a final determination on the basis of available  information. Further, because at the time we completed our review IRS  had not decided if this could be done without a statutory change, we made  this a matter for congressional consideration. Finally, we also added a  recommendation that IRS should determine what a reasonable amount of  additional time would be for taxpayers to assemble and submit this  information since IRS would be in a position to make this determination.
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If you or your staff have any questions, please contact me at (202) 512- 9110. I can also be reached by e-mail at 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 III.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: Our objectives were to provide information on (1) the extent to which the  Internal Revenue Service’s (IRS) Office of Appeals (Appeals) found the  IRS Collection function (Collection) had made errors in processing liens  and levies and how often Collection Due Process (CDP) case results  changed after a taxpayer requested a CDP appeal hearing; (2) the nature of  the arguments presented by taxpayers seeking relief from a lien filing or  levy and the amount of communication between IRS and taxpayers; (3) the  characteristics of the taxpayers that availed themselves of the CDP appeal  process, such as the amount of their total liability; and (4) whether  opportunities exist to improve the operations of the CDP program while  protecting taxpayer rights.
To develop information addressing our objectives, we interviewed  stakeholder groups with an interest in CDP, both within and outside of  IRS. Within IRS we interviewed officials in Appeals as well as from the  Collection area of the compliance divisions where CDP appeal cases  originate. We also interviewed officials in the Office of Chief Counsel and  the Office of the National Taxpayer Advocate. Outside of IRS, we met with  representatives from organizations whose members provide professional  representation to taxpayers during CDP appeals, including the American  Institute of Certified Public Accountants, the American Bar Association,  and the National Association of Enrolled Agents.
We reviewed the Appeals Centralized Database System (ACDS) to  determine whether it contained sufficient case results information to  address our objectives. In conjunction with another GAO study addressing  the operations of IRS Appeals, we tested the reliability of the data in  ACDS. Based on this assessment, we found that data in ACDS were not  sufficiently reliable for our use. Therefore, we collected data through a  random probability sample of CDP cases closed by Appeals during fiscal  year 2004 using IRS case files. The sample of 208 cases was drawn from a  population of 32,241 cases. Results from this sample are generalizable to  all cases closed in the CDP program in fiscal year 2004.
For each of the cases in our sample, we requested the Appeals closed  office file and reviewed the documentation in the files to determine case  characteristics, such as the ultimate outcome of the CDP appeal process,  including whether a case was “sustained” or “not sustained.” We reviewed  documents available in the file, including the taxpayer’s Request for CDP  Hearing, the Case Activity Record (documented notes on the case history  recorded by the Appeals officer), and the Appeals Case Memorandum (a  summary memorandum outlining the Appeals officer’s findings at the  conclusion of the hearing process). Based on the documents available, we  determined the nature of the arguments raised by each taxpayer, including  whether the taxpayer sought a collection alternative, such as an offer-in- compromise (OIC) or installment agreement (IA).
Through our case file review we also determined whether Appeals  identified any evidence of improper procedures or errors that occurred  during the Collection phase of the case. Based on the Internal Revenue  Service Restructuring and Reform Act of 1998, as part of each case  determination, Appeals is legally required to verify that the requirements  of any applicable law or administrative procedure have been met.  Specifically, Appeals will verify that Collection met legal and procedural  requirements by reviewing whether (1) an assessment was made in  accordance with the Internal Revenue Code, which requires IRS to make  inquiries, determinations, and assessments of taxes; (2) a notice and  demand for payment was issued to the taxpayer; and (3) the taxpayer had  a balance due at the time the notice of lien or levy was issued. In addition  to reviewing cases to determine if Appeals found any instances where  Collection did not comply with these requirements, we also identified  cases where all of these legal conditions may have been met, but Appeals  identified some other type of procedural error or problem. We used this  broader, more inclusive definition of improper procedures when compiling  and reporting our results.
We also requested access to the Collection administrative file associated  with each of our sample CDP cases in order to assess what transpired  between the taxpayer and IRS during the collection phase of the case prior  to the CDP appeal. We sought access to these files so we could develop  additional case characteristics, such as the nature of the arguments raised  by the taxpayer with IRS Collection, as well as the extent to which the  taxpayer and the IRS employee working the collection case actively  initiated communication with each other to resolve the collection dispute.  Of the 208 cases in our sample, 162 originated from the Automated  Collection System (ACS) area. When documents were missing from the  Collection administrative files for ACS cases, we supplemented the file  information by reviewing the ACS history transcript for the case. The  remaining 46 cases in our sample originated in the Field Collection area of  IRS. IRS Field Collection officials were concerned that providing GAO  with access to the complete case file for our sample cases would be  burdensome and potentially disruptive in cases where collection  enforcement was ongoing. In response to this concern, we agreed to  consider using case history information stored in the Integrated Collection  System (ICS). We tested the reliability of ACS and ICS history transcripts  by comparing the information on issues raised and communication  contacts documented in the collection administrative file to the  information in ICS for a subsample of cases. We found that the  information in both systems generally agreed with the administrative case  file data and was therefore sufficient for our data-gathering purposes.  While we relied on ACS transcripts as a supplement to the collection case  file documentation, for CDP cases that originated in the Field Collection  area, we relied exclusively on reviewing the detailed ICS case history  transcript.
To record the descriptive data obtained from case file review for our  sample cases, we developed a detailed data collection instrument (DCI).  We refined this DCI through extensive pretesting, and also shared an  interim draft of the instrument with officials from both IRS Appeals and  Office of Chief Counsel to ensure that it was technically accurate. To  ensure that the data entered on the DCI conformed to GAO’s data quality  standards, each completed DCI was subject to secondary review by at  least one other GAO analyst. Reviewers compared the data recorded on  the DCI to the data in the case files to determine whether they concurred  with the interpretation of the case files and the way the data were  recorded on the DCI. When there were differing perspectives, the analysts  met and reconciled them.
We input the data recorded on the DCIs into a computer data collection  program. To ensure the accuracy of the transcribed data, each electronic  DCI entry was compared to its corresponding paper DCI by analysts other  than those who electronically entered the data. If the reviewers found any  errors, changes were made to the electronic entries, and the entries were  reviewed again to ensure that all data were transcribed accurately.
To tabulate and analyze the results of the compiled DCI information, we  used a standardized statistical software package. All cross-tabulation  analyses of case file characteristic data were based on computer programs  that were reviewed by a second independent data analyst.
Because we followed a probability procedure based on random selection,  our sample is only one of a large number of samples that we might have  drawn. Since each sample could have provided different estimates, we  express our confidence in the precision of our particular sample’s results  as a 95 percent confidence interval, less than plus or minus 8 percentage  points unless otherwise noted. This is the interval that would contain the  actual population value for 95 percent of the samples we could have  drawn. In some instances, we report our sample estimates as medians. The  median, or midpoint in a series of numbers, was selected in certain  instances because the total number of observations for a given  characteristic varied greatly across the population. To determine the  reliability of median estimates, we calculated the relative standard error  associated with each estimate by dividing the standard error of the median  by the median and multiplied by 100 to get a percentage. All medians  based upon the results of our sample have a relative standard error of less  than 30 percent unless otherwise stated. In instances where our sample  estimate included a fraction, we rounded the estimate up if the fraction  was greater than or equal to 0.50.
To estimate the salary costs associated with selected types of CDP cases  with specific characteristics shown in table 8, we estimated the total direct  hourly time charges based on the sample cases that had the characteristic  of interest. We multiplied direct hourly time charges by a weighted hourly  salary rate that was based on Appeals data for time charged to working  CDP cases during fiscal year 2004. Each of the figures for direct hours  worked and salary costs, as well as the average number of additional case  characteristics present for each category, have their own confidence  intervals, which are shown in tables 9, 10, and 11.
section_title: Appendix II: Comments from the Internal Revenue Service
section_title: Appendix III: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Acknowledgments
paragraphs: In addition to the contact named above, Jonda Van Pelt, Assistant  Director; Carl Barden; Keira Dembowski; Evan Gilman; Shirley Jones;  Laurie King; Edward Nannenhorn; Bryan Rogowski; Ellen Rominger;  Susan Sato; Sam Scrutchins; and Michael Trujillo made key contributions  to this report.