Compliance and Collection: Challenges for IRS in Reversing Trends and Implementing New Initiatives
Published: 2003-05-07T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Taxpayers' willingness to voluntarily comply with tax laws depends in part on their confidence that friends, neighbors, and business competitors are paying their fair share of taxes. The Internal Revenue Service's (IRS) programs to ensure compliance and to collect delinquent taxes are viewed by many as critical for maintaining the public's confidence in our tax system. Congress asked GAO to present information on trends in IRS's compliance and collection programs and to discuss issues related to IRS's efforts to increase staffing for these programs. GAO was also asked to discuss IRS's plans to launch new initiatives to reduce noncompliance with the Earned Income Tax Credit (EIC) and to use private collection agencies to assist in collecting delinquent taxes.
section_title: What GAO Found
paragraphs: From fiscal years 1993 through 2002, IRS's four major compliance programs for individual taxpayers had mixed trends in the portion of taxpayers they contacted with two declining, one increasing, and one staying relatively the same. Among the programs, IRS's often-cited audit rate declined about 38 percent. From fiscal years 1996 through 2001, IRS's collection program experienced almost universal declines in workload coverage, cases closed, direct staff time used, productivity, and dollars of unpaid taxes collected. Many parties have expressed concern about the compliance--especially audit--and collections trends for their potential to undermine taxpayers' motivation to fulfill their tax obligations. Since 2001 IRS has sought more resources including increased staffing for compliance and collections. Despite receiving requested budget increases, staffing levels in key occupations were lower in 2002 than in 2000. These declines occurred for reasons such as unbudgeted expenses consuming budget increases and other operational workload increases. Based on past experience and uncertainty regarding some expected internal savings, fiscal year 2004 anticipated staff increases might not fully materialize. IRS's 2004 budget proposes a substantial initiative to address known sources of EIC noncompliance. IRS intends to ramp up the initiative rapidly with planning and implementation proceeding simultaneously. If it is to succeed, the initiative will require careful planning and close management attention. IRS also proposes to use private collection agencies to assist in collecting certain delinquent tax debt. IRS is seeking authority to retain some tax receipts in a revolving fund to pay the private collectors. A pilot effort to use private collectors in 1996 was unsuccessful, in part because IRS was unable to identify and channel appropriate collection cases to the private collectors. Key implementation details for this proposal must be worked out and it too will require careful planning and close management attention.

section_title: Letter
paragraphs: I am pleased to participate in the Subcommittee’s hearing today focusing  on compliance issues and initiatives in the Internal Revenue Service’s (IRS)  fiscal year 2004 budget request.  Specifically, my statement today will cover  recent trends in IRS’s compliance and collection programs, IRS’s staffing  for these programs, and its initiatives to expand compliance efforts for the  Earned Income Credit (EIC) and to use private collection agencies to assist  in the collection of delinquent tax debt.
From fiscal years 1993 through 2002, IRS’s compliance programs for  individual taxpayers—audits, document matching, nonfiler identification,  and math error corrections—had mixed trends in the rate at which they  contact potentially noncompliant taxpayers with two declining, one  increasing, and one staying relatively the same.  Among the four programs,  IRS’s often-cited audit rate declined approximately 38 percent comparing  1993 to 2002.  In the collection area, comparing fiscal years 1996 to 2001  IRS’s collection program experienced almost universal declines in  workload coverage, cases closed, direct staff time used, productivity, and  dollars of unpaid taxes collected.  Many parties have expressed concern  about the compliance program--especially audit—and collection program  trends for their potential to undermine taxpayers’ motivation to fulfill their  tax obligations.
Concerned about these trends, IRS has sought additional resources,  including increased staffing levels for compliance and collection since  fiscal year 2001.  However, despite receiving requested budget increases,  staffing levels in key occupations were lower in 2002 than in 2000.  Reasons  for this decline include unbudgeted expenses consuming budget increases  and workload increases in other essential operations. The 2004 budget  again proposes funding increases in part to augment staffing for  compliance and collection activities. Also, as it did last year, IRS projects  that savings from more efficient operations will enable it to shift more  staffing into these activities in 2004.  Current savings projections since the  budget was prepared, as well as the past history of unrealized staffing  increases, raise questions about whether IRS will realize the full staffing  increases it expects.
In the compliance area, IRS’s 2004 budget proposes a new initiative to  address noncompliance in the EIC.  The EIC initiative is a substantial new  effort to target known sources of EIC noncompliance that IRS intends to  ramp up rapidly.  Planning and implementation for this initiative will  proceed simultaneously.  The success of the initiative will depend on  careful planning and close management attention as IRS’s implementation  progresses.
In the collection area, IRS has proposed using private collection agencies  to assist it with a portion of the collection activities for some delinquent tax  debt.  IRS is requesting authority to retain some tax collection receipts in a  revolving fund that would be used to pay the private collectors.  A pilot  effort to use private debt collectors in 1996 was unsuccessful, in part  because IRS was unable to identify and channel appropriate collection  cases to the private debt collectors.   Various key details for implementing  this proposal must be worked out and it, like the EIC initiative, will require  careful planning and close management attention if Congress authorizes  the effort.
Our assessment of IRS compliance and collection trends, and budget issues  is based on recently issued GAO products.  We updated certain trends for  IRS’s fiscal year 2002 operations by analyzing IRS management reports.  We  also used data reported by the Treasury Inspector General for Tax  Administration.   To assess the status of IRS’s EIC initiative and plans to use  the assistance of private collection agencies, we interviewed IRS officials  and reviewed documents prepared to justify both initiatives.
I will now discuss these issues in more detail, turning first to trends in IRS’s  compliance and collection programs.
subsections: section_title: Trends in Compliance and Collection Programs Have Triggered Concern
paragraphs: In recent years, steep declines have occurred in some of IRS’s compliance  programs for individual taxpayers, as have broad declines in its efforts to  collect delinquent taxes.  These trends have triggered concerns that  taxpayers’ motivation to voluntarily comply with their tax obligations could  be adversely affected.
subsections: section_title: Compliance Trends Are Mixed; the Often Cited Audit Rate Has Declined Steeply
paragraphs: Taxpayers’ willingness to voluntarily comply with the tax laws depends in  part on their confidence that their friends, neighbors, and business  competitors are paying their fair share of taxes.  IRS’s compliance  programs, including audits, document matching, and other efforts, are  viewed by many as critical to maintaining the public’s confidence in our tax  system.
Looking across all four of IRS’s major enforcement programs between  fiscal years 1993 and 2002 reveals a somewhat mixed picture, as shown in  figure 1.  The four programs and their trends are as follows:    The math error program that identifies obvious errors such as  mathematical errors, omitted data, or other inconsistencies on the filed  tax return. Using only the math error count, which is consistent  throughout the 10 years, the math error contact rate rose 33 percent  (from 3.59 to 4.79 percent).
The document matching program that identifies unreported income  using information returns filed by third parties such as employers and  banks. Document matching rates went up and down at various times but  ended 45 percent lower  (from 2.37 percent to 1.30 percent) in 2002  compared to 1993.
The nonfiler program that identifies potential nonfilers of tax returns by  using information return and historical filing data. The nonfiler rates  also went up and down but ended in 2002 about where they were in  1993.
The audit program that checks compliance in reporting income,  deductions, credits and other issues on tax returns through  correspondence or in face-to-face meetings with an IRS auditor.   Comparing 1993 to 2002, the audit contact rate dropped 38 percent  (from 0.92 to 0.57 percent) even though it rose significantly between  1993 and 1995.
Figure 2 shows compliance program trends based on income ranges.   Although audit rates for individual taxpayers in higher and middle-income  ranges rose slightly in 2002, overall they were significantly lower in 2002  than in 1993, while the rate for the lowest income range was virtually the  same in 2002 as in 1993.  The audit contact rates for the highest and lowest  income individuals essentially converged at around .8 percent in fiscal  years 2001 and 2002.   Most of the audits of the lowest income individuals  dealt with EIC claims.   Document matching contact for all three income  ranges rose somewhat between 2001 and 2002.  However, rates for all three  income ranges ended significantly lower in 2002 than 1993 following similar  patterns of change over the years.   Data on contact rates by income level  were not available for the math error and nonfiler programs.
section_title: Collection Trends Have Declined
paragraphs: As we reported in May 2002, between fiscal years 1996 and 2001 trends in  the collection of delinquent taxes showed almost universal declines in  collection program performance, in terms of coverage of workload, cases  closed, direct staff time used, productivity, and dollar of unpaid taxes  collected.  Although IRS’s workload generally declined for two of those  indicators, workload and cases closed, the collection work it completed  declined more rapidly creating an increasing gap as show in figure 3.   During that 6-year period, the gap between the new collection workload  and collection cases closed grew at an average annual rate of about 31  percent.
The increasing gap between collection workload and collection work  completed led IRS in March 1999 to start deferring collection action on  billions of dollars in delinquencies.  IRS’s inventory of delinquent accounts  was growing and aging and the gap between its workload and capacity to  complete work was increasing.  Officials recognized that they could not  work all collection cases, and they believed that they needed to be able to  deal with taxpayers more quickly, particularly taxpayers who were still in  business and owed employment taxes.
By the end of fiscal year 2002, after the deferral policy had been in place for  about 3 and one-half years, IRS had deferred taking collection action on  about $15 billion in unpaid taxes, interest, and penalties.  IRS’ deferral of  collection action has declined somewhat since the deferral policy was  adopted.  Although the rate has declined from 45 percent in 2000 to about  32 percent in 2002, IRS is still deferring collection action on about one out  of three collection cases.
section_title: Concerns Regarding the Compliance and Collection Trends
paragraphs: Many parties have expressed concern about these trends in IRS’s  compliance and collection programs.  Since the mid-1990s, we have issued  six reports on IRS compliance and collection trends in response to  congressional concerns. During annual oversight hearings on IRS,  Congress often raises questions about the declining audit rate and possible  effects on compliance.  In recent years, congressional concerns as well as  IRS’s requests have resulted in efforts to augment IRS’s staffing levels.
In fact, the former IRS Commissioner’s report to the IRS Oversight Board  during September 2002 made what was perhaps the most explicit case for  additional staffing to address IRS’s compliance and collection  performance.  Although the Commissioner recognized that IRS needed to  improve the productive use of its current resources, he cited a need for an  annual 2 percent staffing increase on top of planned productivity increases  over 5 years to help reverse the trends. In terms of the collection of tax  debts, the IRS Commissioner estimated that an almost 60 percent gap  exists between IRS’s collection workload and the work it has completed.   Closing this gap, according to the Commissioner, would require 5,450 new  full-time staff.  IRS also has been looking for ways to free resources for  compliance programs by boosting productivity or reducing workload in  other areas.
In our recent Performance and Accountability Series report on the  Treasury Department, we cite the collection of unpaid taxes as one of the  management challenges facing IRS. In that report, we state that IRS is in  various stages of planning and implementing management improvements,  including reengineering compliance and collection practices.  However, as  of September 30, 2002, IRS’s inventory of known unpaid taxes totaled  $249 billion, of which $112 billion has some collection potential, and is at  risk.
section_title: Increasing Compliance and Collection Staffing Has Been and Remains an IRS Priority, but Declines Have Continued
paragraphs: Since 2001, IRS's budget requests have made increasing its compliance and  collection staff one of several key priorities. For example, in its 2001  budget request IRS asked for funding for the Staffing Tax Administration  for Balance and Equity initiative, which was designed to provide additional  staff for examination, collection, and other enforcement activities.  However, as shown in figures 4 and 5, staffing in two key compliance and  collection occupations were lower in 2002 than in 2000.  This continues a  general trend of declining staffing in these occupations for a number of  years.
The declines in compliance and collection staffing occurred for several  reasons, including increased workload and unbudgeted costs. In  September 2002, the Commissioner attributed the decline in compliance  staffing to increases in workload in other essential operations, such as  processing returns, issuing refunds, and answering taxpayer mail.  In the  most recently completed fiscal year, 2002, IRS faced unbudgeted cost  increases, such as rent and pay increases, of about $106 million. As a result,  IRS had to delay hiring revenue agents and officers. IRS noted in its 2002  budget request that any major negative changes in the agency's financial  posture, such as unbudgeted salary increases, will have a negative effect on  staffing levels.
subsections: section_title: Fully Realizing a Fiscal Year 2004 Staffing Increase May Be Challenging
paragraphs: For fiscal year 2004, IRS is requesting $10.4 billion, an increase of 5.3  percent over fiscal year 2003 requested levels, and 100,043 full-time  equivalents (FTE).  Also, IRS's 2004 budget request is its second in a row to  propose increased spending for higher priority areas that would be funded,  in part, with internal savings redirected from other areas.  Specifically, IRS  proposes to devote an additional $454 million and 3,033 more FTEs to  enhance programs, including compliance and some customer service areas.  As shown in figure 6, $166 million of the enhancements would be funded  from internal savings with the remainder funded from the budget increase.
We commend IRS for identifying savings to be reinvested in operations to  improve IRS performance. This approach implements a key principle of  IRS's long-term modernization effort. Under this approach, the  reengineering of IRS's work processes, much of which depends on  investments in computer modernization, would automate or eliminate  work, improve productivity, and free staff time that could then be  redirected to higher priority customer service and compliance activities.
Some caution is appropriate, however, in considering whether the  additional FTEs will be realized.  In addition to the potential that some cost  increases may not be funded as in prior years, revised projections  developed since the 2004 budget request was prepared raise questions  about IRS's ability to achieve all the savings projected and shift resources  to compliance as planned.
IRS has revised the savings associated with several reengineering efforts  identified in the 2004 budget request. Revisions this far in advance of the  start of the fiscal year are not a surprise.  They do indicate some  uncertainty associated with the budget request's savings projections.
For example, most significant reengineering efforts planned for fiscal year  2004, in terms of FTEs and dollars to be saved, will not achieve all of their  projected savings because the efforts were based on assumptions that will  not be realized, according to IRS data and officials. IRS's effort to improve  the efficiency of compliance support activities, the single most significant  effort, depended partially on IRS implementing individual compliance  savings projects in 2003. This effort was projected to save 394 FTEs and  almost $26 million. However, due in part to delays until 2004 to allow for  additional testing, this effort is now expected to save about 30 percent of  the original projections through the end of fiscal year 2004.  IRS now  projects that the seven most significant efforts will save 1,073 FTEs and  $60.5 million, down from original projections of 1,356 FTEs and   $77.7 million.
Reengineering efforts may not achieve all of their savings goals, in part,  because of the long time lag between when IRS begins developing its  budget request and when the fiscal year begins. As with most other federal  agencies, IRS usually begins formulating its budget request about 18  months before the start of the fiscal year and about 10 months before the  President submits his budget to Congress. With planning beginning so far  ahead of the budget's actual execution, inevitable intervening events, such  as delays in implementing computer systems, make the assumptions upon  which projections are based no longer realistic.
In addition to lower current estimates of the potential savings from the  seven most significant reengineering estimates, some of the other  reengineering efforts listed in the 2004 budget request are not well defined.
This raises questions about whether they will achieve their savings goals.  For example, IRS still is reviewing its procedures to identify ways to make  tax return processing more efficient. Although IRS projected this effort to  save 203 FTEs and $6.9 million, it has not yet identified the operational  areas that will be reengineered. IRS officials said that the projected savings  are based on a 2 percent efficiency increase, but they are currently  determining how to achieve that goal.
According to IRS budget officials, IRS uses its budget formulation process  to establish productivity goals, although the responsible business units may  not know specifically how savings will be achieved.  Officials said that this  approach encourages innovation in meeting performance goals while  identifying ways to save FTEs and budget dollars.
section_title: EIC Initiative Is a Substantial and Challenging Strategy to Target Known Compliance Problems
paragraphs: IRS’s 2004 budget submission requests $100 million and 650 FTEs for a new  initiative to improve compliance in one area in which noncompliance is  known to be a concern: EIC.   Although Treasury and IRS have made  progress in defining the scope and nature of the initiative, many details  about its implementation are still to be settled as planning for and  implementation of the initiative proceed simultaneously.  IRS hopes that  this effort will reduce EIC noncompliance without unnecessarily burdening  or discouraging those who are eligible for and claim EIC.  Given its scope,  potential effects on EIC claimants, and planned rapid expansion, the  success of the initiative will depend on careful planning and close  management attention as IRS implements the initiative.
Begun in 1975, the EIC is a refundable tax credit available to certain low- income, working taxpayers.  Two stated long-term objectives of Congress  have been: 1) to offset the impact of Social Security taxes on low-income  individuals; and 2) to encourage these same individuals to seek  employment, rather than depend on welfare benefits.  Researchers have  reported that the EIC has been a generally successful incentive-based  antipoverty program, as was intended by Congress.  For tax year 2001,  about $31 billion was paid to about 19 million EIC claimants.
However, in addition to its successes, the EIC program has historically  experienced high rates of noncompliance—including both overclaims and  underclaims of benefits.  For over a decade we have reported on IRS’s  efforts to reduce EIC noncompliance.  Due to persistently high  noncompliance rates, we have identified the EIC program as a high-risk  area for IRS since 1995.  An IRS study of 1985 tax returns estimated that  the EIC overclaim in that year rate was 39.1 percent.  The results of  subsequent EIC compliance studies conducted by IRS are shown in table 1.
In 1997, Congress instructed IRS to improve EIC compliance through  expanded customer service and outreach, strengthened compliance, and  enhanced research efforts.  For these efforts Congress authorized a 5-year,  EIC-specific appropriation of $716 million.  Although the 5-year period  elapsed in fiscal year 2002, Congress appropriated $145 million specifically  for EIC compliance for fiscal year 2003.  For fiscal year 2004, IRS is  requesting $153 million for this appropriation; the $100 million request for  the new EIC initiative is separate.
Early in 2002, when the results of IRS’s most recent study of EIC  compliance for tax year 1999 were released, the Assistant Secretary of the  Treasury and the IRS Commissioner established a joint task force to seek  new approaches to reduce EIC noncompliance.  The task force sought to  develop an approach to validate EIC claimants’ eligibility before refunds  are made, while minimizing claimants’ burden and any impact on EIC’s  relatively high participation rate.  Through this initiative, administration of  the EIC program would become more like that of a social service program  such as Food Stamps or Social Security Disability, where proof of eligibility  is required prior to receipt of any benefit.
Based on its various studies of EIC noncompliance, IRS determined that  three specific areas account for a substantial portion of EIC  noncompliance.   These three areas—qualifying child eligibility, improper  filing status, and income misreporting (also called “underreporter”)— account for nearly 70 percent of all EIC refund errors, according to IRS.   The joint Treasury/IRS task force designed an initiative that would address  each of these sources of EIC noncompliance.
Filers that improperly claim qualified children represent the single largest  area of EIC overclaims, on a dollar basis.  Under the proposed initiative,  IRS will attempt to verify all taxpayers’ claims for EIC-qualifying children  under two criteria: a residency and a relationship certification.  IRS plans to  use third-party databases and other means to verify qualifying children for  an estimated 80 percent of EIC claimants.  All other EIC claimants will be  asked to provide additional eligibility documentation prior to the filing  season.  Those who do not respond and/or are unable to document their  eligibility will have the EIC portion of their returns frozen.  If taxpayers do  not provide documentation before the filing season, IRS plans to require  them to provide it during or after the filing season.  When and if they  document their eligibility, the EIC portion of their returns will be released.
Initially, beginning in the summer of 2003, IRS intends to select 45,000 EIC  claimants whose qualifying child residency or relationship requirements  could not be verified from available databases.  IRS plans under its  initiative to contact these taxpayers and give them the opportunity to  provide verifying documentation for the child (or children) that is (are)  claimed to qualify for the EIC.  The two components of establishing  qualifying child eligibility—the claimant’s relationship to the child, and  residency with the claimant for more than 6 months—will be treated  somewhat differently.  Taxpayers who establish their qualifying child  relationship will not have to do so in future years but all taxpayers will  have to show annually that the children lived with them for the required  time.  IRS expects to expand the program in July 2004 by starting to contact  approximately 2 million taxpayers; in another planned expansion in July  2005, IRS would contact 2.5 million taxpayers.
The other two parts of this initiative will cover an additional 180,000 high- risk filers for tax year 2003—5,000 to verify their filing status and 175,000 to  verify their income.  Criteria for selecting the 5,000 cases in the filing status  category have not yet been determined.  They will be drawn from tax year  2003 cases.  For the 175,000-case income verification initiative, IRS will use  document matching to identify EIC filers who have a history of  misreporting income in order to increase (or receive) the EIC.  Based on  that history, these taxpayers’ returns are to be flagged when their 2003 EIC  claims are filed.  Any EIC refund portion of each return is then to be frozen  until IRS can verify the taxpayers’ income through document matching or  audit procedures in the fall of 2003.  These filers will be identified out of tax  year 2002 and 2003 cases.  Table 2 shows IRS’s projections for future  casework in all three initiative areas.
Although the Treasury/IRS task force and now IRS have made progress in  defining the scope and nature of this initiative, many details about its  implementation are still to be settled.  IRS expects to learn lessons from  initial sample cases it will work in 2003 that will be incorporated into  planned expansions of the effort later in 2003 and in 2004.  IRS officials said  that estimates of the number of new employees that will be needed and  their training requirements are evolving.  For example, although IRS’s 2004  budget submission identifies 650 FTEs for this initiative, current plans are  for a much lower staffing level at this point.  In addition, cost and FTE  estimates are based on historical data that may not be directly comparable  to the staffing and technological demands of the initiative.  Based on these  estimates, of the $100 million 2004 request, IRS has proposed budgeting  just under $55 million for direct casework in the three compliance areas.   The remaining $45 million is allocated to technology improvements and  management, development, and implementation costs related to the three  targeted compliance areas.
Fundamental to the precertification of qualifying children is the  development of clear forms that identify the specific types of  documentation IRS will accept to substantiate that a qualifying child meets  the relationship and residency tests for EIC.  IRS is currently working with  others, like the Taxpayer Advocate, to develop these new forms, which are  to be used beginning this summer.
Recently, concerns have been expressed about IRS’s intention to request  marriage certificates as proof of relationship to the qualifying child.  We  have not looked at this specific issue.  However, our 2002 report noted that  EIC forms and instructions that IRS used for similar attempts to determine  qualifying child eligibility could be confusing to taxpayers and required  documents that EIC claimants had difficulty obtaining.  When taxpayers  have been disallowed the EIC through an IRS audit, they are required to  substantiate their qualification for the EIC—that is, “recertify”—before  they can receive the credit again.  As part of this process, IRS’s forms  indicated that EIC claimants could, for example, use medical records to  prove a child’s residency with them.  However, EIC claimants faced  difficulty in providing such records.  Low-income working families are less  likely to have stable relationships with medical service providers and their  children are less likely to have routine medical care.
IRS officials said that they plan to pretest the proposed precertification  forms both to determine whether they are clear and understandable to EIC  claimants but also to determine whether the claimants can provide the  required information.  This is a critical step in implementing the initiative.   We recently reported that IRS seldom tests the new and revised individual  tax forms and instructions.
Ensuring consistent interpretation of documentation gathered in the new  initiative will also be important.  In our 2002 report, we noted that IRS  examiners did not consistently assess documentation for qualifying  children.  For example, we asked 21 examiners to examine five EIC  scenarios.  The 21 examiners did not agree for any of the scenarios, and, in  some cases, the examiners reached widely varying judgments about  whether the evidence was sufficient to support an EIC claim.  In order to  better ensure consistent and accurate decisions based on documentation  submitted, we recommended that IRS provide training to its examiners.
Administering the EIC is not an easy task for IRS.  IRS has to balance its  efforts to help ensure that all qualified persons claim the credit with its  efforts to protect the integrity of tax system and guard against fraud and  other forms of noncompliance associated with EIC.  This initiative is a  substantial undertaking with a relatively aggressive implementation  schedule.  Although it appears to be targeted to address known compliance  issues, its success will depend on careful planning and close management  attention.  Any one of many challenges could put the initiative at risk.   These include whether, for instance, the proposed new forms will result in  evidence that IRS can use to verify relationship and residency  requirements. Further, IRS must determine whether lessons from the first  attempts to verify the eligibility of relatively small numbers of EIC  claimants can be learned and incorporated before the substantial  expansion of the initiative in fiscal years 2004 and 2005.
section_title: Challenges Must Be Met if IRS Is to Successfully Use Private Collection Agencies
paragraphs: IRS’s 2004 budget requests $2 million and legislative authorization for use  of private collection agencies (PCA) to assist IRS in collecting certain  types of delinquent tax debt.  IRS proposes to fund continuing use of PCAs  from a to-be-established revolving fund that would receive a portion of  taxes collected through use of PCAs.
As with its EIC initiative, IRS has defined the parameters for its use of  PCAs, but many key details for implementing the initiative remain to be  resolved.  These implementation details, such as identifying delinquent  debt cases suitable for PCAs to pursue and protecting taxpayer rights, will  be critical if the initiative is to succeed.  If the PCA initiative is authorized,  IRS will need to put focused management attention on planning and  monitoring the implementation of the PCA initiative to ensure proper  handling of these issues.
As previously noted, IRS’s inventory of delinquent debt is growing and  aging, with the gap between its workload and capacity to complete work  increasing.  As a consequence, IRS has been deferring about one in three  new delinquency cases without pursuing any collection action.  This  practice is contrary to the experience of Treasury and IRS, which indicates  that referring eligible debts for collection as early as possible greatly  enhances the success of collection efforts.  The former IRS Commissioner  estimated in 2002 that it would take 5,450 FTEs and $296.4 million for IRS  to bridge the gap between its workload and capacity to complete the  collection casework.
To help bridge this gap, Treasury has proposed an initiative to reach  taxpayers to obtain payment on delinquent debt through the assistance of  PCAs. Under this initiative, IRS would give PCAs specific, limited  information on outstanding tax liabilities, such as types of tax, amount of  the outstanding liabilities, tax years affected, and prior payments.  Based  on the information provided by the IRS, PCAs would then be permitted to  locate and contact taxpayers, requesting payment of liabilities (i.e., tax,  interest, or penalty) in full or in installments (within 3 years, as specified by  IRS).  If a taxpayer’s last known address is incorrect, the PCAs would  search public records for the correct address.  PCAs are not to be  permitted to contact third parties to locate taxpayers.  PCAs would not be  allowed to accept payments; all payments must be made to IRS.   PCAs  would generally have 12 to 24 months to attempt collection.  Afterwards,  uncollected accounts are to be redistributed to other PCAs for additional  collection efforts.  Because PCAs would have no enforcement power, the  initiative would allow the IRS to focus its own enforcement resources on  more complex cases and issues.
Other procedural conditions under the proposal include requiring PCAs to  inform taxpayers of the availability of assistance from the Taxpayer  Advocate.  Furthermore, PCAs would not be permitted to take any  enforcement action against a taxpayer, such as seizing assets to satisfy the  debt.  To ensure that taxpayer rights and privacy would be safeguarded,  PCAs would be governed by the same rules by which IRS is governed.
Initially, IRS plans to stagger implementation of the initiative.  For the first  6 months, IRS will place collection cases with no more than five PCAs, with  a total volume estimate not to exceed 50,000 cases per month for the first 3  months.  IRS will contract with additional PCAs at a 6-month interval with  an anticipated rate of 2.6 million total cases annually by the time all  agencies have been operational for 1 full year.  Assigned case inventory  rates will depend on a number of factors, including PCA performance,  ability to manage new inventory, quality control, volume of cases referred  to IRS for review, and readiness of IRS to supply cases.  Based on this  implementation framework, Treasury has projected revenue estimates of  $46 million in 2004, and $476 million from 2004 through 2008.
In order to implement the PCA initiative, IRS must ensure that it will have  the capacity to fulfill its responsibilities under the proposed contracts and  to oversee the PCAs.  Further, it must make some difficult design decisions.   One significant capacity issue concerns whether IRS will be able to identify  those delinquent debts with the highest probability of resolution through  PCA contacts.  Earlier pilot efforts to study use of PCAs in 1996 and 1997  were hindered, in part, because IRS was unable to do this.  For example,  we reported that the numbers and types of collection cases sent to PCAs  during those pilots were significantly different from those anticipated in  the pilot program’s original design.  This resulted in substantially fewer  collection cases than PCAs could productively work to make the effort  cost-effective.  IRS realizes that identifying appropriate cases for referral to  PCAs is a key issue.  While IRS proposes using “case selection analytics” to  identify appropriate cases, the analytical model has not been developed.
Another IRS capacity issue relates to the cases that PCAs, for several  reasons, will refer back to IRS.  For instance, under the proposed  arrangement, if a taxpayer was unable to fully pay the delinquent debt, the  case would be referred back to IRS.  Some cases would then go to a  different PCA; therefore, the success of that PCA’s efforts in these cases  would depend on how well IRS reprocesses the cases.  Until some  experience is gained under the proposed program, it will be difficult to  reliably estimate the number of cases that will be referred back to IRS and  the number of resources it will need to devote to the cases.
Other IRS capacity issues concern, for instance, how many resources it will  take to administer the contracts and to oversee the PCAs’ performance.   IRS expects to have up to 12 contractors, 2 of which would be small  businesses, and proposed procedures call for on-site visits and some direct  observation of PCAs’ collection efforts.  IRS would also need to ensure  PCAs’ performance, such as having adequate procedures to safeguard  taxpayer information before and after the contracts are awarded, and that  it and the PCAs have secure computer systems to manage the work flow.
How the PCAs will be compensated is a key design decision that must be  finalized.  On the one hand, IRS needs to provide the PCAs an incentive to  be efficient in collecting the delinquent debts and on the other hand, it must  ensure that the incentive does not lead to inappropriate performance  pressure on PCA staff.  IRS intends to make part of PCAs' compensation  dependent on other factors, such as quality of service, taxpayer  satisfaction, and case resolution, in addition to collection results.  Both the  law and IRS policy prohibit IRS managers from using records of tax  enforcement results, such as dollars collected and taxes assessed, to  evaluate employee performance or set production goals.  IRS and Treasury  report that existing taxpayer protections would be fully preserved under  the PCA initiative.  Specifically, as with IRS employees, PCA employees  could not be evaluated based on tax enforcement results.  IRS is  considering using a “balanced scorecard” to measure contractors’  performance, but has not proposed specifically how this compensation  balance will be struck.
Finally, although the revolving fund mechanism presents potential  advantages to IRS in better ensuring that it can pursue delinquent tax  debts, IRS has not done a cost analysis on implementing the PCA initiative  versus expanding the use of traditional IRS collection activities.  We have  not seen any plans to do so in the future.  Some IRS officials believe that  because IRS telephone collection staff have a broader scope of authority  (e.g., the ability to levy a bank account to satisfy the debt) and greater  experience with collecting delinquent taxes, IRS telephone staff are likely  to be more effective and cost-efficient than PCAs.  PCAs, however, may  have advantages that IRS lacks.  A number of factors would need to be  considered in doing a cost analysis, and a comparison may not be possible  without having some experience in using PCAs to collect this type of debt.
section_title: Concluding Observations
paragraphs: Although IRS has received increases in its budgets since fiscal year 2001 in  part to increase staffing to enhance in its compliance and collection  programs, IRS has been unable to achieve the desired staffing levels.  Based  on past experience and uncertainty regarding some expected internal  savings that would enable IRS to reallocate staff to these programs, fiscal  year 2004 staff increases might not fully materialize.  Today’s hearing  provides a useful venue for the Subcommittee to explore these funding  issues and how IRS should prioritize its efforts.
IRS has defined the scope and nature of its proposed new initiatives to  address known sources of EIC noncompliance and to use private collection  agencies to assist in collecting certain delinquent taxes.  However, in both  cases IRS faces significant challenges in moving forward to successfully  implement the proposals.  In commenting on a GAO report on IRS’s  National Research Program—IRS’s ongoing effort to measure the level of  taxpayers’ compliance while minimizing the burden on taxpayers selected  for the study—the former Commissioner said that IRS would not  compromise the quality of the program in order to meet the program’s  target date.  We believe this is a sound standard for these efforts as well.
Careful planning for and testing of key implementation steps can help  ensure the initiatives’ success.
This completes my prepared statement.  I would be pleased to respond to  any questions.
section_title: Contact and Acknowledgments
paragraphs: For further information on this testimony, please contact Michael Brostek  at (202) 512-9110 or brostekm@gao.gov.  Individuals making key  contributions to this testimony include Leon Green, Demian Moore, Neil  Pinney, and Tom Short.
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