Tax Administration: Impact of Compliance and Collection Program Declines on Taxpayers
Published: 2002-05-22T00:00:00

Fast Facts:

Highlights:
section_title: What GAO Found
paragraphs: For several years, Congress and others have been concerned about declines in the Internal Revenue Service's (IRS) compliance and collection programs. 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 share of taxes. GAO found large and pervasive declines in five of the six compliance programs and in both collection programs between fiscal years 1996 and 2001. Factors contributing to the declines in the program and in collection coverage include declines in IRS staffing, increased workloads, and increased procedural controls mandated by Congress to better safeguard taxpayer interests. The declines in IRS's compliance and collection programs had several impacts. The likelihood that taxpayer noncompliance would be detected and pursued by IRS declined and the length of time that taxpayers owed back taxes at the time that they were assigned to collection increased between 1996 and 2001. The amount of penalties and interest continued to accumulate on deferred collection cases, making future payment increasingly demanding if subsequently pursued by IRS. Strategic assessments, which were prepared to provide a basis for decisions on significant program changes in IRS dealings with individual and small business taxpayers, identified the risk of declining compliance as a major trend, issue, or problem for IRS. The assessments could not quantify the impact that the initiatives may have on taxpayer compliance because IRS has yet to implement a system to measure taxpayer compliance.

section_title: Letter
paragraphs: For the last several years, Congress and others have been concerned about declines in the Internal Revenue Service’s (IRS) compliance and collection programs. Many view these programs—such as audits to determine whether taxpayers have accurately reported the amount of taxes that they owe and collection follow-up with taxpayers who have not paid what is owed—as critical for maintaining the public’s confidence in our tax system. 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 share of taxes.
As we previously reported, some declines in compliance and collection programs have been dramatic. For example, from fiscal year 1996 to fiscal year 2000, the number of individual tax returns audited by IRS declined by over 60 percent. Furthermore, IRS was unable to pursue many delinquent taxpayers, deferring collection action on billions of dollars in unpaid taxes.
Because of concerns about declines in IRS’s compliance and collection programs, you asked us to assess the declines’ overall impact on taxpayers. You asked that in making this assessment, we examine IRS’s compliance and collection programs as a whole, recognizing that the amount of unpaid taxes identified by the compliance programs largely determines the workload of the collection programs. Accordingly, we agreed to   describe the changes since 1996 in IRS’s compliance and collection programs, including the extent of collection deferrals, and the factors contributing to the program changes;   determine how the program changes have affected taxpayers, including their compliance with tax laws, the buildup of penalties and interest, and the length of time before collection actions are initiated; and   determine how IRS addressed the program changes, including their effect on taxpayers, in its strategic assessments.
The preparation of strategic assessments is a first step in IRS’s new strategic planning, budgeting, and performance management process. In the assessments, IRS’s operating divisions are to provide the commissioner and his senior management team with information on significant trends, issues, and problems facing the divisions and present proposals for addressing them.
To measure the change in IRS’s compliance and collection programs, we focused on the performance of eight major programs from fiscal years 1996 to 2001. In general, the six compliance programs were designed to (1) check for math errors and unpaid balances during returns processing, (2) determine taxes due from apparent nonfilers detected through computer matching, (3) determine taxes due from apparent underreporters detected through computer matching, (4) audit tax returns filed by individuals, (5) audit tax returns filed by corporations, and (6) audit other tax returns such as estate and gift returns. For taxpayers who are delinquent in paying taxes owed, IRS’s collection programs pursue collection through (1) telephone contacts with the taxpayers and (2) personal visits with the taxpayers by IRS field staff.
To measure changes across these eight programs, we compiled data on performance indicators that were common to the programs’ operations and that, in the aggregate, would provide an overview of the long-term direction of IRS’s compliance and collection programs. The indicators show changes in   workload, such as tax returns filed and therefore available for audit or tax delinquencies assigned to collection;   coverage, such as the proportion of tax returns that were audited;   cases closed, such as the number of apparent nonfiler cases in which IRS made a determination of taxes due;   staff time devoted to a program;   productivity, such as the number of collection cases closed per staff hour;   amount of unpaid taxes identified by compliance programs or collected by collections programs; and   percentage of unpaid taxes resolved by full payment or alternative arrangement.
Appendix I contains a detailed discussion of the scope and methodology of the assignment, including a detailed description of the performance indicators used and random samples selected to analyze taxpayer delinquencies and timing of collection actions. Although most data in the report describe changes between 1996 and 2001, we reviewed interim-year data to assure that significant changes were not overlooked. We did our work between October 2000 and April 2002 and in accordance with generally accepted government auditing standards.
subsections: section_title: Background
paragraphs: Under our voluntary tax system, taxpayers are responsible for filing tax returns that report the full amount of taxes owed (referred to as self- assessment of taxes) as well as pay any taxes that are due. IRS has established eight major compliance and collection programs to check on taxpayer compliance with these responsibilities and to initiate collection action if payment is not received. A descriptive overview of these compliance and collection programs is shown in figure 1. (A detailed description appears in table 4 in app. I.)
In general, the compliance programs were designed to assure that taxpayers fully and accurately report and pay the amount of taxes that they owe to IRS. As shown in figure 1, IRS’s compliance checks begin when taxpayers file their tax returns. As returns are received and processed, they are checked for errors (e.g., math errors and omitted schedules) and unpaid balances. After processing, a tax return may also be selected for review by other compliance programs. Two of these compliance programs use computers to analyze information available to IRS (e.g., earnings on bank deposits) to detect taxpayers who have not filed tax returns or taxpayers who have underreported the amount of taxes owed. IRS may also audit the tax returns filed by individuals, corporations, and others, such as estates, to determine whether the correct tax has been reported and paid. At this point in the compliance process, taxpayers may be asked for records to substantiate their returns. If the compliance programs identify unpaid taxes, IRS makes the tax assessments and requests the taxpayers to make the appropriate payment. If payment is not received, IRS sends a series of collection notices to taxpayers demanding payment of the assessment.
If taxpayers become delinquent—if they do not pay their taxes after being sent collection notices—IRS may initiate collection action through its telephone and field collection programs. In addition to requesting payment from delinquent taxpayers, these programs research the taxpayers’ ability to pay their tax debts and may use sanctions, including levies, liens, and seizures, to obtain payment. More-complex unpaid assessments are referred from telephone collection to field collection.
Beginning in fiscal year 2001, IRS reorganized into four operating divisions, each responsible for administering tax law for a set of taxpayers with similar needs. By reorganizing in this manner, IRS sought to establish clearer lines of responsibility and accountability for improving service to taxpayers and resolving their tax problems. Through such improvements, IRS expected to better enable taxpayers to comply with the tax laws.
The two largest divisions in terms of staff and number of taxpayers covered, and the primary focus of this report, are the small business division and the wage and investment division. The small business division is responsible for individuals who are fully or partially self-employed and for businesses with assets up to $10 million. The wage and investment division is responsible for individuals who are not self-employed (e.g., wage earners). The other two divisions are responsible for large and midsized businesses and for tax-exempt and government entities.
In general, the IRS operating divisions are responsible for managing the daily operations of the eight major compliance and collection programs, as appropriate for their taxpayers. In some instances, however, the programs are consolidated in one division or two divisions. For example, the field collection program is housed within the small business division and the telephone collection program is split between the small business division and the wage and investment division.
The operations of the compliance and collection programs differ from each other in many respects. Some of the programs (e.g., returns processing and underreporter programs) rely on automation and deal with millions of taxpayers. Some (e.g., corporate audit) are highly labor intensive and deal with far fewer taxpayers. Others (e.g., the nonfiler program) are a combination of automated programs and labor intensive investigations.
Although day-to-day management of IRS’s compliance and collection programs is the responsibility of the operating divisions, the commissioner and his senior management team maintain responsibility for making decisions on major operational changes, allocating resources within IRS, and developing agencywide strategic plans. The process for making these decisions starts with the operating divisions’ preparing strategic assessments that report on major trends, issues, and problems facing the divisions and proposals for dealing with them. These decisions are subject to public oversight. The IRS Restructuring and Reform Act of 1998 (IRS Restructuring Act) established an IRS oversight board, in part to assist Congress in reviewing and approving IRS’s budget and strategic planning decisions.
section_title: Compliance and Collection Programs Showed Declines, with Billions of Unpaid Taxes Not Pursued
paragraphs: Overall, our analysis showed significant and pervasive declines in IRS’s compliance and collection programs, as measured by indicators such as those covering staffing, work completed, and work outcomes from fiscal year 1996 to fiscal year 2001. Moreover, an increasing gap between collection workload, stemming from assessments made by compliance programs, and collection case closures has led IRS to defer taking action to collect on billions of dollars of tax delinquencies. A number of factors have contributed to these declines. These factors include decreases in overall staffing, decreases in compliance and collection staffing, decreased productivity of the remaining compliance and collection staff, increased compliance and collection procedural controls to better safeguard taxpayer interests, temporary details of compliance and collection staff to taxpayer assistance work, and constraints imposed by the need to process returns and issue refunds.
subsections: section_title: Compliance Programs Showed Declines in Staffing and Case Outcomes
paragraphs: From fiscal year 1996 through fiscal year 2001, most compliance programs showed significant declines in the amount of staff time expended on compliance work, in the number of compliance cases closed, and in the proportion of the workload reviewed to determine whether additional tax assessments were warranted (i.e., coverage). About half of the programs also saw declines in the productivity of the compliance staff (i.e., case closures per hour of staff time), in the amount of unpaid taxes identified, and in the percentage of unpaid taxes resolved (i.e., the proportion of the unpaid taxes collected without involving the two collection programs). While the declines were not universal, they were pervasive, as illustrated by the shaded areas in table 1. The declines occurred over a period when the programs’ workload (e.g., the number of returns filed, apparent nonfilers, or apparent underreporters) was increasing, as also shown in table 1.
Compliance coverage fell notably for all compliance programs except returns processing. The declines ranged from about 29 percent to about 69 percent in the five audit and matching compliance programs. Further, the number of cases closed by these programs declined by about 55 percent or more, with the exception of the underreporter program, which declined by about 10 percent.
Also, these five compliance programs generally experienced marked declines in the staff time committed to compliance work and, with one exception, the productivity of staff in closing cases. According to the underreporter program staff, the increased use of automation enabled the program to increase productivity but not sufficiently to maintain coverage.
In general, the amount of unpaid taxes identified by these compliance programs did not decline as much as the number of cases closed. In two of the six compliance programs, the amount of unpaid taxes identified increased. The data available to us do not make clear the extent to which this increase may represent a change in the type of cases worked, increased levels of noncompliance by taxpayers, or other factors, including inflation.
For this period, the data also show a mixed picture with respect to the percentage of unpaid taxes resolved—that is, the percentage of the compliance assessments that the compliance programs collect at the conclusion of their work, without referral to telephone or field collection.The individual audit and corporate audit programs tended to collect a greater proportion of the tax assessments in fiscal year 2001 than in fiscal year 1996, while the nonfiler, underreporter, and other audit programs collected a somewhat reduced proportion of the assessments. In general, the table indicates that the programs that showed the biggest gains in the proportion of unpaid taxes collected also showed the largest declines in the amount of unpaid taxes identified. For example, while the individual audit program showed a 68 percent increase in its collection rate, it also experienced a 43 percent decline in the amount of unpaid taxes identified.
section_title: Collection Programs Showed Declines in Workload, Results, and Staffing
paragraphs: Overall, there were almost universal declines in the two collection programs’ performance between fiscal years 1996 and 2001, as indicated by the shaded areas in table 2. While collection workload (i.e., the number of delinquencies assigned to collection) declined somewhat as a result of the reduced levels of compliance work, the programs’ capacity to close collection cases—such as by securing payment or completing sufficient analysis to determine that payment cannot be made at that time—declined much more.
subsections: section_title: Use of Collection Enforcement Sanctions Decreased
paragraphs: Another indicator of the change in the telephone and field collection programs is IRS’s decreasing use of enforcement sanctions, both in absolute numbers and as a proportion of closed collection cases. The number of liens, levies, and seizures dropped precipitously between fiscal years 1996 and 2000 and then increased somewhat during fiscal year 2001. Even with this change, however, table 3 shows that the number of levies and seizures remained 78 and 98 percent below 1996 levels, respectively. Also, when considered as a proportion of closed collection cases, the use of levy and seizure sanctions declined by 64 and 96 percent between fiscal years 1996 and 2001, as shown in table 3. The use of liens showed the most significant turnaround, but as of 2001, the number of lien filings was down 43 percent and as a percentage of case closures was down 6 percent.
section_title: Increasing Gap between Compliance and Collection Capacity Has Led IRS to Defer Collection Action on Billions of Dollars in Tax Delinquencies
paragraphs: By March 1999, collection officials recognized that changes were needed. Their case inventory of delinquent accounts was growing and aging, and the gap between their workload and their capacity to complete work was increasing. They recognized that they could not close 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. The officials believed that getting to these delinquencies quickly, before they became unmanageable to the taxpayers, would make collection easier and faster.
In response, collection managers introduced a new collection case selection system. The selection system delivered to collection staff delinquencies that met newly established collection priorities based on delinquency amount and recency, with priority given to employment tax over income tax delinquencies and to taxpayers who contacted IRS to resolve their delinquencies. The system also periodically reviewed cases in telephone collection and field collection backlog and automatically purged those that met certain aging criteria as a result of having been passed over for more recent delinquencies. The automatic purging was accomplished by closing the collection cases as not collectible. This had the effect of deferring collection action, in that IRS maintained the right to reinitiate collection action.
Once collection action has been deferred, however, two conditions must be met before IRS will consider reopening a collection case, according to IRS officials. The two conditions are (1) if the taxpayer becomes delinquent again or if IRS receives information indicating that the taxpayer had additional assets that could help pay off the delinquency and (2) if IRS finds the resources to work the collection cases. The taxpayers will, however, be sent annual notices of taxes due and will be subject to having any refunds from subsequently filed tax returns offset by IRS to cover unpaid taxes. Also, IRS will continue to monitor the deferred collection accounts for possible collection action until IRS’s statutory right to collect the taxes expires, generally 10 years after taxes are assessed.
Even though IRS has systems for monitoring deferred collection cases, the senior IRS officials responsible for managing collection programs indicated that, absent significant operational changes, they had little expectation that a telephone or field collection case would be reopened for these tax debts alone once collection action had been deferred.
On the basis of our random sample of unpaid tax accounts, we estimate that by the end of fiscal year 2001, after the deferral policy had been in place for about two and one-half years, IRS had deferred collection action on the tax debts of an estimated 1.3 million taxpayers. We also estimate that these 1.3 million taxpayers owed about $16.1 billion in unpaid taxes, interest, and penalties that originated from assessments by all six compliance programs. By fiscal year 2001, IRS was deferring collection action on tax debts at a rate equal to one of three new delinquencies assigned to the collection programs.
While the amounts owed by these taxpayers were not inconsequential, we found that, consistent with IRS’s stated collection deferral priorities, these taxpayers owed less and had been delinquent longer than other delinquent taxpayers. We estimate that the median amount owed by the taxpayers for whom collection action was deferred was about $4,500, compared with $5,500 for other delinquent taxpayers in the collection population. Also, the taxpayers for whom collection action was deferred tended to have been delinquent for a longer period of time—about an estimated 5.6 years versus an estimated 3.9 years.
section_title: Declining Staff and Productivity and an Emphasis on Taxpayer Service Contributed to Compliance and Collection Declines
paragraphs: A number of factors contributed to the decline in compliance and collection programs. Generally, IRS faced overall staffing declines while it confronted several competing and growing workload demands. Overall,   aggregate staffing, measured by full-time equivalents, was about 107,000 in fiscal year 1996 and about 98,000 in fiscal year 2001—about an 8 percent decline; individual income tax returns filed increased from about 119 million in fiscal year 1996 to about 130 million in fiscal year 2001—about a 9 percent increase; and   business income returns (corporate and partnership), which are filed by taxpayers that have more complex dealings with IRS, increased by 17 percent, from 6.5 million returns in 1996 to 7.6 million returns in 2001.
While overall staffing declined about 8 percent, the impacts on almost all of the compliance and collection programs were generally much larger, as shown in tables 1 and 2. According to IRS senior officials, to assure that the tax returns filed by taxpayers are processed timely and that timely payments are made to taxpayers owed refunds, IRS first allocated its resources to meet the returns processing program’s increasing workload before it funded the other compliance and collection programs. Also, the officials provided data that showed that at the beginning of the six-year period, IRS was adjusting down from compliance and collection staffing increases during the late 1980s and early 1990s. Comparing IRS data on professional staff levels for audit and field collection in fiscal year 2001 with data on the pre-1987 buildup shows a decline of about 21 percent.
Also during this period, the IRS Restructuring Act, enacted in 1998, provided additional rights for taxpayers and imposed additional administrative responsibilities on IRS’s compliance and collection programs. For example, prior to IRS’s using enforcement sanctions to collect unpaid taxes, additional notifications and opportunities for appeals were required to be provided to taxpayers. Also, compliance and collection staff were required to keep records of contacts with third parties and to make taxpayers aware of such contacts. Further, collection staff were required to prepare additional documentation, such as certifications that they had verified that the taxes were past due and that the sanctions were appropriate given the taxpayers’ circumstances, and to submit that documentation to a higher-level manager for review and approval. Deviations from this and other requirements of the act may subject compliance and collection staff to disciplinary action, including mandatory termination of employment, for actions such as willfully not obtaining certain required approval signatures or for actions constituting taxpayer harassment. According to some senior officials, the potential for disciplinary action has resulted in IRS compliance and collection staff’s working more slowly and hesitantly, spending much more time documenting their actions.
In addition, the act mandated that IRS improve service to taxpayers, such as telephone assistance; following this mandate, IRS undertook a major organizational restructuring and modernization effort. In response to these demands, and with a declining pool of staff resources, IRS reallocated staff from compliance (other than returns processing) and collection programs to provide additional support to taxpayer assistance services. Some of the reallocation was accomplished by allowing attrition to occur without hiring replacement staff for compliance and collection programs, and some was accomplished by temporarily detailing compliance and collection staff to other IRS programs. For example, from fiscal year 1996 to fiscal year 2000, the percentage of field collection professional staff time detailed to supplement taxpayer assistance staff during the tax filing season—in large part assisting taxpayers who requested assistance at IRS offices—grew from about 4 percent of collection time in fiscal year 1996 to about 14 percent in fiscal year 2000 before dropping to 5 percent in 2001. Staff time charged to compliance and collection programs between fiscal years 1996 and 2001 declined in all but one program (i.e., returns processing) and in several instances by 20 percent or more, as shown in tables 1 and 2.
According to IRS officials, the demands on resources also affected productivity as indicated by the number of cases closed per staff hour of compliance and collections staff time. The officials said that some of the IRS Restructuring Act requirements, such as suspending collection action to provide time for additional notifications and appeal hearings, increased the amount of staff time and calendar time required to close a case. They also noted that some of the potentially available staff time was consumed in training for the new requirements. In addition, according to IRS officials, from 1996 through 2001 the complexity of cases worked by compliance and collection staff had changed, requiring more time to complete cases. For example, many erroneous claims for tax credits that had been handled by audit prior to fiscal year 1997 were reassigned to returns processing, which could handle the claims largely on an automated basis.
IRS officials did not provide us with any quantitative analysis that distinguished between the effects of the IRS Restructuring Act and those of other factors influencing productivity. On the basis of the data available to us, we could not discern the extent to which the changes in productivity were attributable to the act or to other factors.
section_title: Taxpayers Face Reduced Sanctions for Noncompliance and Reduced Incentives to Voluntarily Comply
paragraphs: The declines in IRS’s compliance and collection programs affected taxpayers in several ways. Our analysis showed that noncompliance was less likely to be detected by compliance programs and pursued or sanctioned by collection programs. Also, the length of time that taxpayers had owed back taxes when they were assigned to collection increased between fiscal years 1996 and 2001, although IRS intended that by deferring collection action on some older collection cases, it could get to newly assigned cases quicker. For the deferred cases, penalties and interest continue to accumulate, making future payment of those assessments increasingly demanding. Taken together, these changes have reduced the incentives for voluntary compliance, a concern of IRS senior managers. Some available, but very limited, data suggest that voluntary compliance may have begun to deteriorate.
subsections: section_title: Noncompliance Was Less Likely to Be Detected and Pursued
paragraphs: The data presented earlier on the changes in IRS’s compliance and collection programs showed that the likelihood that taxpayer noncompliance would be detected and pursued by IRS declined between fiscal years 1996 and 2001. For example, in situations where IRS had information that a tax return was due but not filed, the rate of IRS compliance follow-up declined about 69 percent. In situations where IRS had information that a tax return understated the amount of taxes owed, the decline in follow-up was about 29 percent. Moreover, even when compliance follow-up took place and the taxpayers were found to owe back taxes, because of IRS’s practice of deferring collection action, the taxpayers had about a one in three chance of not being pursued by IRS collection staff. And, if pursued, the delinquent taxpayers were about 64 percent less likely to experience an enforced collection action such as the levying of their assets. These changes reduced the incentives to comply with the tax laws.
section_title: Some Increased Time in Initiating Collection
paragraphs: Although IRS intended that by deferring collection action on some tax debts it would be able to initiate collection action for some higher-priority cases sooner, our random samples showed that the median length of time that taxpayers had owed back taxes at the time they were assigned to collection increased between 1996 and 2001. We estimate these increases as follows:   Taxpayers who were assigned to collection as of the end of fiscal year 1996 had owed back taxes for about 1.2 years when they were assigned to telephone or field collections.
Taxpayers who were assigned to collection as of the end of fiscal year 2000 had owed back taxes for about 1.3 years when they were assigned to telephone or field collections   Taxpayers who were assigned to collection as of the end of fiscal year 2001 had owed back taxes for about 1.6 years when they were assigned to telephone or field collections.
On the basis of our analysis of randomly sampled collection case files related to taxpayers who were delinquent at the end of fiscal year 2000 (2001 case files were not available at the time of our field work), we noted that much of this timeframe was attributable to the concluding of interim matters—for example, resolving questions on the amount of the taxpayers’ tax liability or providing time for the taxpayers to make periodic payments. When we factored in the time taken to conclude these interim matters, our sample showed that, on average, the taxpayers had been potentially eligible for collection actions for about 6 months when they were contacted by collection staff. Also, on comparing the sampled collection cases that were initiated before and after IRS started deferring collection cases, we found no statistically significant difference in the timing of the collection action.
Accordingly, as shown by our samples, deferring some collection cases helped IRS to keep its collection caseload from ballooning but did not improve collection timeliness. According to IRS senior officials, some recent procedural changes, designed to speed up the assignment of priority cases to collection staff, should improve the timing of the collection actions that are initiated.
section_title: Taxpayers Face Buildup of Penalties and Interest When IRS Defers Taking Collection Action
paragraphs: As expected, our random sample of unpaid tax assessments as of the end of fiscal year 2001 showed that taxpayers for whom collection action was deferred were statistically different from taxpayers who were assigned to telephone and field collection. We estimate these differences as follows:   Taxpayers who were assigned to telephone or field collection were about three times as likely to have made payments on their delinquencies during the previous year as those for whom collection action was deferred.
Taxpayers for whom collection action was deferred owed about 7 times more in penalties and interest as a percentage of their income (or of payroll for businesses) than the taxpayers who were assigned to collection.
Not surprisingly, these differences indicate that follow-up by telephone or field collections may have a strong impact on generating payment on tax liabilities and preventing a buildup of penalties and interest. In turn, deferring collection action to a later date would make resolution of the delinquencies more demanding on affected taxpayers.
section_title: Incentives to Voluntarily Comply Are Reduced
paragraphs: Improving voluntary compliance—the percentage of the taxes owed that taxpayers voluntarily report and pay—is a major goal of IRS’s compliance and collection programs. Although the compliance and collection programs may focus on noncompliant taxpayers, IRS believes that the deterrent effect of the programs influences the compliance of all taxpayers. Currently, IRS does not have a measure of voluntary compliance.
The declines in IRS’s compliance and collection programs that occurred from fiscal year 1996 through fiscal year 2001 have reduced some of the incentives useful for (1) inducing noncompliant taxpayers to become compliant and (2) reassuring compliant taxpayers that they are not being disadvantaged by voluntarily reporting and paying the full amount of taxes that they owe. Because only a little more than two years of data were available for analyzing taxpayers for whom collection action was deferred, we were not able to determine whether the deferral will have any long- term effects on the taxpayers’ future payment compliance and on the amount of interest and penalties owed. If no action is taken to collect the delinquent tax, however, the motivation to pay the taxes owed is reduced.
Available, but very limited, data suggest that voluntary compliance may have deteriorated. For example, the growth in the number of apparent nonfilers (i.e., individuals who have not filed tax returns, as identified by IRS document matching over the period fiscal years 1996 to 2001) increased about three and one-half times faster than the tax filing population. Similarly, the number of apparent underreporters increased about one and one-half times faster. As discussed in the following section, compliance trends are a concern of IRS senior managers.
section_title: IRS’s New Strategic Assessments Address Tax Noncompliance but Could Provide More Quantitative Information
paragraphs: The strategic assessments prepared by the wage and investment and small business operating divisions identified the risk of declining compliance as a major issue for IRS. These assessments, part of IRS’s new strategic planning, budgeting, and performance management process, also proposed a number of compliance and collection initiatives to address noncompliance. The operating divisions could not quantify the impact that their initiatives are expected to have on compliance, because IRS is several years away from finishing a system for making compliance estimates. However, as a partial substitute for such information, the assessments could have provided quantitative information on the expected impacts of the initiatives on compliance and collection programs.
subsections: section_title: Strategic Assessments Are a Key First Step in IRS’s Strategic Planning, Budgeting, and Performance Management Process
paragraphs: To make decisions for fiscal year 2002 and subsequent year operations, IRS implemented a new strategic planning, budgeting, and performance management process during fiscal year 2000. The process begins, as outlined in figure 2, with the operating divisions’ preparing strategic assessments. After receipt and review of the strategic assessments, the commissioner provides detailed guidance (step 2) to the operating divisions for developing their strategy and program plans (step 3). These plans are then incorporated (step 4) into an IRS-wide performance plan (which sets out measurable objectives such as the number of audits to be done). These plans are, in turn, incorporated into IRS’s budget justification (which sets out its resource requests to Congress). The remaining steps (5 and 6) involve allocating resources across IRS divisions and programs and monitoring division adherence to the planning and budgeting decisions.
According to IRS senior management, the strategic assessments are intended to provide “big picture” information for making decisions on significant operational changes. To obtain that decision-making information, senior management instructed the operating divisions to prepare brief strategic assessment documents that summarize important trends, issues, and problems facing the operating divisions and IRS and   proposals for dealing with those trends, issues, and problems.
The operating divisions were instructed to describe the trends, issues, and problems, using quantifiable, measurable data when possible. Also, in proposing changes, the operating divisions were to determine the most critical trends requiring attention by considering their impact on the achievement of IRS’s goals. These goals included increasing taxpayer compliance and increasing the fairness of the compliance programs.
The planning process helps IRS to implement the Government Performance and Results Act (Results Act). The act’s goal was to improve the management of federal programs by having federal agency decision making focus on impacts (i.e., the measurable results achieved by their programs). The agencies were required to periodically develop strategic plans, identify measures for assessing progress in achieving plan goals, and use the measures to report on the progress in meeting plan goals. Operationalizing the act’s mandate was left to the agencies. We have reported in the past that IRS’s approach, designed to reconcile competing priorities and initiatives with the realities of available resources, has helped it to make progress in defining its strategic direction.
In addition, IRS’s strategic plans and budgets are reviewed by an oversight board before they are submitted to the Congress. The board was established by the IRS Restructuring Act as a means of providing Congress with advice on IRS’s strategic plans and budget.
section_title: Strategic Assessments Proposed Initiatives to Address Noncompliance but Provided No Quantitative Information on the Expected Impact
paragraphs: In the strategic assessments that we reviewed, both the wage and investment and small business operating divisions recognized that declines in their compliance and collection activities created a risk that taxpayer compliance could be negatively affected. Some of the identified risks included the potential for decreased tax collections, potential for increased numbers of nonfilers, and potential for increased underreporting of taxes owed.
To counter declines in both compliance and collection activities and to deal with the potential risks, the IRS operating divisions identified a number of changes warranting priority attention, including the need to reengineer the audit process, reengineer the collection process, reevaluate the telephone collection selection criteria for individuals,   use more document matching to identify underreporters, and  increase audit and underreporter program resources.
The proposed initiatives have the potential both to increase compliance and collection activities and to rebalance those activities. For example, if productivity gains result from collection process reengineering, the collection staff will be able to close additional delinquency cases. Also, according to IRS officials, additional delinquencies could possibly be closed by outsourcing some collection activities. The officials indicated that outsourcing is an issue being studied by the collection reengineering team.
Because of a lack of information, the operating divisions’ strategic assessments could not quantify the impact that their changes may have on taxpayer compliance. Currently, IRS lacks reliable data on the voluntary compliance rate and information on how IRS’s compliance and collection programs influence that rate. In May 2000, IRS established a research office to develop a new approach for measuring compliance. However, IRS will not have new data on the compliance rate for individuals and businesses for several years and could take longer to develop estimates of how compliance and collection programs influence the rate.
The assessments that we reviewed, however, missed opportunities to at least partially compensate for the lack of quantitative estimates of the impact that the proposed changes would have on compliance. Some examples of the type of quantitative estimates that could be provided are suggested by the information that we presented in the first two sections of this report. Such quantitative estimates might include the impact on compliance and collection workload, coverage, cases closed, staffing, productivity, dollars of unpaid taxes identified, and percentage of taxes resolved. Other quantitative estimates could address the benefits and costs associated with the proposed changes. Although such estimates would be only a partial substitute for an estimate of the impact on the ultimate result, compliance, they would provide quantitative information about the expected impact on the declines in compliance and collection programs and the growing gap between them.
Senior managers told us that the strategic assessments were important, providing the starting point in the management decision-making chain for rationing IRS’s limited resources to the most important priorities. The officials also said that even if the basis for some aspects of strategic decision making, such as the balance between compliance and collection programs, were not explicitly addressed in the strategic assessments, they believed that sound decisions had been made as a result of IRS’s implementing the new strategic planning process. For example, they indicated that the collection reengineering effort had the potential to affect the balance between collection and compliance activities. They said that as managers gained more experience with the process, their strategic assessment reports would improve.
Estimating the impacts of proposed initiatives would have some costs and could lengthen a document intended to be “strategic” and therefore brief. However, both IRS guidance and the Results Act emphasize the value of quantitative information related to performance, especially the impact or results that programs were achieving. Some quantitative information about the expected impacts of proposed program changes could provide IRS senior managers a fuller understanding of the trade-offs involved in planning the allocation of IRS resources to compliance and collections programs.
In addition, quantitative information might have other benefits. Internally, it might provide lower-level managers not directly involved in strategic decision making a better understanding of the reasons for decisions and expected results. Externally, quantitative information from the strategic assessments might facilitate decision making by Congress, the oversight board, and others. For example, quantitative information from the strategic assessments could be incorporated into documents going to Congress, such as the annual budget request.
section_title: Conclusions
paragraphs: The commissioner and senior managers recognize that the declines in IRS’s compliance and collection programs are a strategic problem that puts a major part of the agency’s mission, ensuring compliance with the tax laws, at risk. Problems of this magnitude, involving the level of IRS resources and the allocation of those resources within the agency, must be dealt with by top management and external stakeholders including Congress and the oversight board. To facilitate such decision making, IRS has implemented its new strategic planning, budgeting, and performance management process. Strategic assessments are the basis for the process and, by extension, are also part of the basis for decisions about IRS’s budget and strategy made by Congress and others.
We support IRS’s new approach to strategic planning, an approach that seeks to integrate planning and budgeting based on quantifiable information with management decision making. We also recognize that IRS’s strategic assessments, and thus strategic planning, are constrained by the absence of data on the impact that IRS operations have on taxpayer compliance. Nonetheless, opportunities exist to make the strategic assessments more informative. How much quantitative information should be provided in strategic assessments is a decision for the primary users of the assessments, IRS’s top managers. Making the strategic assessments more quantitative will not resolve IRS’s strategic problems but could contribute more information to the decision-making process.
section_title: Recommendation
paragraphs: Based on experience to date using strategic assessments, we recommend that the commissioner of internal revenue reexamine the extent to which some quantitative information on the impact of proposed program changes should be included in strategic assessments.
section_title: Agency Comments
paragraphs: The commissioner of internal revenue provided written comments on a draft of this report in a May 13, 2002, letter, which is reprinted in appendix II. The commissioner agreed with our findings and recommendation and described some ongoing efforts to improve productivity and to reverse declines in compliance and collection programs. He said that steps were being taken to increase the use of quantitative data in strategic decision making, including the development of a methodology for assessing costs and benefits that will be refined as IRS proceeds through future planning cycles.
As arranged with your office, we plan no further distribution of this report until 30 days from its date of issue, unless you publicly announce its contents earlier. After that period, we will send copies to Representative William M. Thomas, chairman, and Representative Charles B. Rangel, ranking minority member, House Committee on Ways and Means; Representative William J. Coyne, ranking minority member, Subcommittee on Oversight, House Committee on Ways and Means; and Senator Max Baucus, chairman, and Senator Charles E. Grassley, ranking republican member, Senate Committee on Finance. We will also send copies to the Honorable Paul H. O’Neil, secretary of the treasury; the Honorable Charles O. Rossotti, commissioner of internal revenue; the Honorable Mitchell E. Daniels, Jr., director, Office of Management and Budget; and other interested parties. Copies of this report will be made available to others on request. In addition, the report will be available at no charge on the GAO Web site (www.gao.gov).
If you have any questions, please contact me or Thomas Richards at (202) 512-9110. Key contributors to this report are acknowledged in appendix III.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: As requested, the objectives of GAO’s review were to   describe the changes since 1996 in IRS’s compliance and collection programs, including the extent of collection deferrals, and the factors contributing to the program changes;   determine how the program changes have affected taxpayers, including their compliance with tax laws, the buildup of penalties and interest, and the length of time before collection actions are initiated; and   determine how IRS addressed the program changes, including their effect on taxpayers, in its strategic assessments.
subsections: section_title: Scope and Methodology
paragraphs: We first identified IRS’s major compliance and collection programs. On the basis of our analysis of IRS data system reports and discussions with IRS officials, we identified 8 such programs. In general, compliance programs are designed to assure that taxpayers fairly and accurately report and pay the amount of taxes that they owe. Collection programs are to follow up with taxpayers to obtain payment and initiate enforcement action if taxpayers become delinquent by not paying their tax after being sent notices. Descriptions of the compliance and collection programs appear in table 4.
As indicated by table 4, the separation point between compliance and collection programs is the point at which a taxpayer is determined to be delinquent. At that point, the taxpayer has not paid taxes after being notified by the compliance component of the amount due and after being sent collection notices—usually three or more to individuals and two to businesses.
subsections: section_title: Changes in Compliance and Collection Programs
paragraphs: To measure changes across the eight programs, now managed by four divisions, we identified performance indicators that would be common to their operations and that, in the aggregate, would provide an overview of the long-term direction of IRS’s compliance and collection programs. The indicators were not intended to provide a comprehensive evaluation of program performance. Rather, the indicators were to provide a general overview of changes in compliance and collection workload, staff resources committed to dealing with the workload, productivity of the resources, work completed, extent of the workload addressed, and work outcomes in terms of unpaid taxes identified and unpaid taxes resolved. Table 5 provides a general description of the seven performance indicators, together with a more detailed description of the indicators as they apply to the eight compliance or collection programs.
To compile the performance data related to these performance indicators, we substantially relied on the data output from various IRS information systems. For example, IRS uniformly collects data on resources, typically staff hours or staff years used, as program input. We did not evaluate the internal controls over the collection and processing of this IRS information system data. Because IRS managers routinely use the information from these systems to manage program operations, we believe that the information is appropriate for use in compiling an overview of program changes.
The routine output from the IRS data systems alone, however, was not sufficient to provide data on the following: 1.  The nonfiler program. Because IRS’s nonfiler program involved cases managed by several IRS divisions, we worked with IRS managers to consolidate data from a number of different sources to compile the trend data. In doing this, we obtained data from IRS’s Audit Management Information System, collection reports prepared through IRS’s Integrated Data Retrieval System, and supplemental data prepared by IRS’s Nonfiler Program office in response to internal IRS requirements. 2.  The amount of additional tax assessments made by the returns processing program. To develop data on compliance assessments made by returns processing, we obtained a data extract from IRS’s Enforcement Revenue Information System (ERIS). That system was designed by IRS to accumulate collection data for assessments that result from IRS’s compliance work.
From the ERIS data extract, we first derived data to indicate the amount of additional tax assessments made by returns processing compliance work, such as identifying returns with a balance due or making assessments to correct errors or omissions identified on the tax returns. To do this, given the manner in which IRS accounts for the assessments, we identified the total assessments made by returns processing, other than returns that were filed with full payment or with no errors requiring an IRS notice; identified the amount of payment made on the accounts prior to IRS’s notifying the taxpayer of the amount due; and   subtracted the prenotification payments from the total assessments.
We subtracted the prenotification payments from the total assessments in order to eliminate taxes that were voluntarily reported and paid by taxpayers. 3.  The amount of unpaid tax assessments resolved by the five compliance programs. From the ERIS data, we also derived data to compute the percentage of unpaid tax assessments that were collected by the five compliance programs. We included as collections any payments made by the taxpayers in response to written notices sent to the taxpayers. Data were not available to extend the analysis period for collections for fiscal years beyond 2001. Therefore, to ensure comparable collection data on the proportion of fiscal year 1996 and 2001 assessments collected by the assessing compliance program, we limited the collection period to the fiscal year of the assessment.
We also interviewed officials from IRS’s operational divisions responsible for wage earners, small businesses, and large and midsized businesses to obtain an understanding of compliance and collection programs and to discuss reasons for compliance and collection trends. We provided our performance trends and supporting computations to IRS staff, who reviewed and commented on our analyses.
section_title: Effect of Compliance and Collection Program Changes on Taxpayers
paragraphs: To determine how these changes have affected taxpayers, we examined two samples of IRS data. The first sample from IRS’s automated masterfile records of unpaid tax accounts provided the data to examine overall changes in the number of accounts with unpaid balances; changes in the characteristics of delinquent taxpayers, such as the amounts of interest and penalties owed; and the age of the accounts. In order to examine contacts between taxpayers and the IRS and events affecting the timeliness of resolution, we examined a sample of taxpayer collection case files.
subsections: section_title: Accounts Receivable Sample
paragraphs: To analyze the delinquent taxpayer characteristics, we selected a random sample of taxpayers who had an unpaid tax assessment outstanding at the end of fiscal years 1996, 1998, 2000, and 2001. In developing this sample, we partitioned the population into different groups, or strata, based on the collection status of their modules on September 30 of each year and by type of taxpayer (i.e., individuals and businesses). We stratified this sample to ensure that taxpayers at different stages in IRS’s collection process were represented. Once we had selected a sample of taxpayers, we also obtained information on recent payments made to IRS by those taxpayers and information from recent tax returns filed by the taxpayers and posted to IRS data systems. To review this sample, we used analysis software to produce statistically reliable estimates of the characteristics of the population of taxpayers whom IRS had identified as not having paid their taxes as of the end of the four fiscal years.
section_title: Taxpayer Case File Sample
paragraphs: To examine data on collection actions taken with respect to taxpayers— such as the length of time from when the delinquencies became available for assignment to telephone or field collection staff to when the taxpayers were contacted by the collection staff—we used a random sample that was taken as part of our audit of IRS’s financial statement for fiscal year 2000. This sample consisted of randomly selected unpaid tax assessments that were owed by 520 taxpayers.
From this sample, we reviewed IRS collection case file documentation on 108 taxpayers, that is, those taxpayers who had been assigned to either telephone or field collection and about whom IRS had sufficient collection case file documentation for us to analyze. IRS had limited the accumulation of case files to those relevant to estimation of the collectibility of its accounts receivable.
We analyzed these cases with two different data collection instruments. The first captured (1) dates that distinct field collection phases started and ended, (2) occurrences of IRS collection contacts or attempted contacts with taxpayers, and (3) the disposition of cases when the collection phases ended. The second data collection instrument captured information from IRS’s masterfile records on these taxpayers. This information described the number of delinquencies, type of taxes owed, and dollar amounts. It also provided a history of the collection-related transactions (i.e., payments, defaults on installment agreements, or litigation pending) for the taxpayer.
section_title: Sampling Error
paragraphs: Because our estimates come from random samples, there is some sampling error associated with them. We express our confidence in the precision of our results as a 95 percent confidence interval around the estimate. For example, for the estimate of 1.3 million taxpayers, the actual value would be between 1.25 million and 1.35 million taxpayers. All percentage estimates from the samples have sampling errors of ±5 percentage points or less, unless otherwise shown in footnotes to the report text. All numerical estimates other than percentages have sampling errors of ±5 percent or less of the value of those numerical estimates, unless otherwise shown in footnotes to the report text.
section_title: Strategic Planning
paragraphs: With respect to objective 3, we reviewed the strategic assessments made by the IRS operating division responsible for individual taxpayers other than the self-employed and by the operating division responsible for small businesses and self-employed individuals. The assessments were made during the first half of fiscal year 2001 for consideration by senior management in developing strategy and program plans for fiscal year 2002 and 2003. We reviewed the strategic assessments along with IRS instructions for preparation of the assessments. Our review of these documents focused on identifying how the strategic assessments addressed the compliance and collection trends and taxpayer impacts that we identified in response to objectives 1 and 2. We also interviewed IRS strategic planning, small business, and wage and investment officials responsible for developing and monitoring strategic plans. We did not evaluate the strategic assessment’s selection of IRS’s priorities, proposed improvement projects, and resources needed to implement the projects. Evaluating the operating division’s plans would require an assessment of IRS’s entire strategic planning process, which was outside the scope of this assignment.
We performed our work at IRS’s national office in Washington, D.C.; IRS’s Kansas City Submissions Processing Center, Missouri; and IRS’s Oakland, California, area office between October 2000 and April 2002 and in accordance with generally accepted government auditing standards.
We requested comments on a draft of this report from the commissioner of internal revenue. We received written comments from the commissioner on May 14, 2002. The comments are reprinted in appendix II and discussed in our report.
section_title: Appendix II: Comments from the Internal Revenue Service
section_title: Appendix III: GAO Contacts and Staff Acknowledgments
subsections: section_title: GAO Contacts
section_title: Acknowledgments
paragraphs: In addition to those named above, Leon Green, Mary Jankowski, John Mingus, Sam Scrutchins, Anjali Tekchandani, Thom Venezia, Wendy Ahmed, Cheryl Peterson, Susan Baker, Anne Laffoon, Kristina Boughton, and Avram Ashery made key contributions to this product.