Tax Debt Collection: IRS Needs to Better Manage the Collection Notices Sent to Individuals
Published: 2009-09-30T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: According to the Internal Revenue Service (IRS), $23 billion in unpaid individual income tax debt existed in 2001, its most recent estimate. The notice phase is the first of IRS's three-phase process to collect unpaid debt. IRS annually sends notices to millions of individual taxpayers about billions of dollars of unpaid tax debt. Congress and others have questioned IRS's collection process's effectiveness. As requested, GAO is reporting on (1) how well IRS has established objectives, performance measures, and responsibility for reviewing notice-phase performance, and (2) how well IRS's business rules for sending notices to individuals help assure that the collection notice phase is achieving desired results at the lowest costs. To address these objectives, GAO compared the evidence obtained from IRS documents and responsible IRS collection officials to applicable guidance for internal control standards.
section_title: What GAO Found
paragraphs: Although the notice phase is a key part of IRS's approach and strategy for resolving billions of dollars of individuals' unpaid tax debt, IRS lacks certain internal controls to assure that notices to individuals are achieving the most benefits--such as debt collected or unpaid debt cases otherwise resolved-- with the resources being used. Management controls like clearly defined objectives, performance measures, and clear responsibility for reviewing program performance help provide reasonable assurance that the objectives of an agency are being achieved effectively and efficiently. However, IRS has no documented objectives for the notice phase and no performance measures to indicate how well the phase is performing in resolving debt cases or achieving other potential desired results. Further, IRS has not established responsibility for reviewing the performance of the complete notice phase. IRS lacks documentation for and evaluations of its business rules for notices to individuals to assure that the collection notice phase is achieving desired results. According to IRS officials, to make the best use of collection resources, IRS uses its business rules to--based on certain dollar thresholds and individual tax debt case characteristics--vary the number and types of notices sent to taxpayers and determine whether unresolved cases will be sent for further collection action or further action will be deferred. However, as shown in the table, in almost all cases, for the five business rules that IRS identified as affecting the most taxpayers, IRS did not have information on the date the rules were established, the rationale for the rule, or data supporting the rationale. IRS collection officials also lacked documentation describing the business rules and how they operate. Further, even though IRS officials estimated that the business rules had been established for years, IRS had documentation for an evaluation of only one of the five business rules. Without relevant evaluations IRS lacks assurance that the notice phase achieves desired collection results at the least cost.

section_title: Letter
paragraphs: The Internal Revenue Service (IRS) must pursue collection of unpaid tax  debt to help ensure compliance and confidence in the tax system and  address the tax gap, which is the estimated difference between tax  amounts that taxpayers voluntarily and timely pay and those they owe. IRS  most recently estimated that $23 billion of the gross tax gap ($345 billion)  for tax year 2001 was for nonpayment of known individual income tax  assessments.
As we previously reported to you, the first phase of IRS’s complex, three- phase collection process is the notice phase in which taxpayers are mailed  a series of notices informing them of their tax debts and asking for  payment. The notices provide opportunities for taxpayers to pay or  otherwise resolve their debts before their cases are potentially forwarded  to one of the following two phases—the phone and in-person contact  phases—where IRS may take enforcement action such as to levy financial  assets or seize physical property.
The notice phase provides IRS with an opportunity to maximize  collections while minimizing costs in pursuing individual tax debts.  Notices are computer-generated and mailed to taxpayers with little direct  involvement by IRS employees, a process that minimizes costs. To the  extent that taxpayers then take action to pay or otherwise resolve their  debts, collections can occur with relatively little additional IRS  investment. When individuals with tax debt do not respond to notices, IRS  either takes no action or takes enforcement action through the other two  phases to collect the tax debts. Such enforcement action is more labor- intensive and expensive.
Even though the notice phase is relatively low cost, opportunities may  exist to improve tax collections though notices sent to individuals. In  fiscal year 2008, IRS issued about 22 million notices to individual  taxpayers, including about 12 million notices involving almost $57 billion  in newly identified unpaid tax debts from multiple tax years. Putting aside  debt amounts that IRS abated or offset with refunds during fiscal year  2008, IRS sent about $40.6 billion in tax debt to the more expensive  collection phases for potential enforcement action compared to around  $5.6 billion that IRS collected.
Because of your continued concerns about unpaid tax debt and IRS’s  collection processes for individual taxpayers, you asked us to review IRS’s  procedures for sending notices of unpaid tax debt to individual taxpayers.  Specifically, this report addresses:    How well has IRS established objectives, performance measures and  responsibility for reviewing notice-phase performance?
How well do IRS’s business rules for sending notices to individuals help  assure that the collection-notice-phase is achieving desired results at the  lowest costs?
To assess IRS’s objectives, performance measures, and responsibility for  reviewing notice phase performance, we reviewed information on how IRS  has organized the work flow of the notice phase, including its objectives  and related measures of performance as well as the assignments of  responsibility for notice activities such as reviewing the results achieved.  To assess IRS’s business rules, we asked responsible IRS collection  officials to provide basic information on the key rules that affect the most  individual taxpayers in terms of which notices IRS sends to them. We  assessed the information for both objectives in light of applicable  guidance for federal internal control standards. More detailed information  on our objectives, scope, and methodology are below.
subsections: section_title: Background
paragraphs: IRS identifies unpaid tax liabilities through its program activities. The  most common include IRS (1) identifying a taxpayer who files a tax return  without fully paying the tax claimed to be owed, (2) adjusting tax liabilities  when filed returns are being processed by IRS by checking for obvious  errors such as those involving adding or subtracting numbers incorrectly  or using the wrong social security number for a claimed dependent,   (3) finding additional tax liabilities by auditing a filed tax return or  computer matching it to third party information on income paid to a  taxpayer, (4) assessing a penalty for some taxpayer action or inaction, and  (5) sending a tax bill to a taxpayer who did not file a required tax return  after IRS estimates, based on available information, how much tax the  person should have paid.
IRS’s process for collecting identified unpaid debt has three phases. Debt  goes through these phases until it is determined to be uncollectible, is  collected, or is otherwise resolved:    Notice: IRS sends the taxpayer a series of notices of balances due, in part,  to prompt a reply and payment by the taxpayer and handles responses to  those notices.
Telephone: IRS uses telephone contacts with the taxpayer to prompt  payment or takes enforcement action that may include levying financial  assets or filing a lien against property.  In-person: IRS staff contact the taxpayer to prompt payment or to take  enforcement action, including levies, liens, and seizures of property.
According to IRS officials, the phases and routing of tax debt-collection  cases result from IRS’s designing the collection process to effectively and  efficiently use resources to resolve taxpayer debt at the earliest possible  time and using the least costly resources. Although data is not readily  available to determine the relative costs and benefits of the notice phase  versus the other phases, given the relatively high automation of the notice  process and relatively low costs of postage compared to the more staff- intensive nature of enforcement actions in later collection phases, the  notice phase is likely the most cost effective way for IRS to resolve unpaid  debt cases.
During the notice phase for individual taxpayers IRS’s general practice is  to send up to four notices at 5-week intervals to collect the balances due.   Generally, 6 weeks after the fourth notice, IRS either determines that any  additional collection actions should be deferred or sends cases to be  worked potentially in the telephone or in-person contact phases. IRS has  made an administrative decision to separately send two notifications in the  notice phase that are required by law—notifications (1) of the debt due  and request for payment and (2) with regard to a levy of a state tax  refund—in the first and fourth notices, respectively. According to IRS  officials, IRS sends the discretionary second and third notices because  they are successful in resolving some cases at relatively low cost.
However, IRS has developed variations on the practice of sending four  notices before deciding whether to send any uncollected tax debt to the  next collection phase. Depending on specific debt-related characteristics,  IRS may take such actions as: (1) skip the discretionary reminder notices  to “accelerate” a debt to the next collection phase or (2) defer further  collection action on debts not resolved with notices. Based on these  characteristics, IRS has established “business rules” that are embedded in  IRS’s computer system. These rules are to determine the number and types  of notices as well as whether IRS defers collection action or sends the  debt to other phases for further collection action. IRS officials said  business rules were created in an attempt to make the most effective use  of collection resources.
As shown in figure 1, IRS annually has sent millions of notices (across the  four types) to collect billions of dollars in unpaid debt from individual  taxpayers. The total number of the notices generally increased from fiscal  years 2004 through 2008, reaching around 22 million in 2008, largely  because of the number of “first” notices sent.
Figure 2 shows that the total dollar values of these sent notices increased  overall in comparing fiscal years 2004 and 2008, with a decline in 2008,  when it reached around $129 billion.
Every year, IRS’s notice phase also disposes of debt for millions of notices  that had been sent. IRS dispositions arise in various ways, such as by  resolving the debt (including collecting payment from the taxpayer,  abating all or some of the debt, or offsetting the taxpayer’s refund with the  debt owed), deferring further collection action, or sending the case to the  next collection phase for potential enforcement action. (See app. I on the  trends in volumes and dollar values of dispositions from the notice phase  for fiscal years 1999 to 2008.)
Internal control is a major part of managing an organization. It comprises  the plans, methods, and procedures used to meet missions, goals, and  objectives and, in doing so, supports performance-based management.  Internal control also serves as the first line of defense in safeguarding  assets and in preventing and detecting errors and fraud. In short, internal  control, which is synonymous with management control, helps  government program managers achieve desired results through effective  stewardship of public resources. Internal control should provide  reasonable assurance that the objectives of the agency are being achieved  through, among other things, effective and efficient use of the agency’s  resources.
Federal Law requires that we issue standards for internal control in  government. The standards provide the overall framework for  establishing and maintaining internal control and for identifying and  addressing major performance and management challenges and areas at  greatest risk of fraud, waste, abuse, and mismanagement. In 2001, we  issued Internal Control Management and Evaluation Tool  (GAO-01-1008G, August 2001) based upon Standards for Internal Control  in the Federal Government (GAO/AIMD-00-21.3.1, November 1999), to  assist agencies in maintaining or implementing effective internal control.  This tool is not an authoritative part of the standards for internal control,  nor is it required to be used. Instead, it is intended as a supplemental guide  that federal managers and others may use in assessing the effectiveness of  internal control and identifying important aspects of control in need of  improvement. When used with GAO’s standards for internal control and  the Office of Management and Budget Circular A-123, Management’s  Responsibility for Internal Control, the tool is to provide a systematic,  organized, and structured approach to assessing an agency’s internal  control structure.
During the course of our review, in November 2008, IRS separately  initiated a review of notices sent to taxpayers, including notices sent to  taxpayers during the collection notice phase. The review was led by an IRS  team called the Taxpayer Communication Taskforce (TACT.) TACT’s  objectives included simplifying and clarifying notice language; instituting  effective measures; streamlining and improving business processes; and  eliminating unnecessary or duplicative notices, letters, reminders and  inserts. According to its director, TACT is to brief the Commissioner on a  proposed “road map” for addressing issues identified by the team. IRS did  not establish a date for the briefing before we concluded our work.
section_title: Objectives, Scope, and Methodology
paragraphs: Our objectives were to determine:    How well has IRS established objectives, performance measures, and  responsibility for reviewing notice-phase performance?
How well do IRS’s business rules for sending notices to individuals help  assure that the collection notice phase is achieving desired results at the  lowest costs?
To assess IRS’s objectives, performance measures, and responsibility for  reviewing notice-phase performance, we reviewed information on how IRS  has organized the work flow of the notice phase, including its objectives  and related measures of performance as well as assignments of  responsibility for notice activities such as reviewing the results. We  reviewed collection program documents including the Internal Revenue  Manual (IRM), IRS’s collectionwide performance measures, and any  related performance measures in the Wage and Investment Division’s  (W&I) and Small Business/Self-Employed Division’s (SB/SE)  periodic  business performance review documents. We were to analyze whether  these measures provided information adequate to assess whether the  notice phase achieved the desired results laid out in any stated objectives.  We also interviewed responsible IRS collection officials on any stated  objectives for the notice phase and whether and how the officials use  available data to assess the performance of the notice phase and develop  performance measures. We reviewed available organization charts and the  IRM sections on the managerial and reviewing responsibilities for the  collection operations. We also obtained and reviewed the charter of the  Collection Governance Council, which includes representatives of  collection operations in W&I and SB/SE. We reviewed these documents to  identify IRS officials responsible for managing aspects of the notice  process and reviewing notice-phase performance and interviewed these  officials.
To determine how well IRS’s business rules help assure that the collection  notice phase achieves desired results at the lowest costs, we asked IRS  collection officials who were the most knowledgeable about the business  rules to identify the key business rules that affect most individual  taxpayers in the notice phase. The five rules IRS identified were based on  (see app. II for further descriptions of the five rules):    certain dollar thresholds (minimum-, low- and medium-dollar amounts) or  “repeater” characteristics (taxpayers who recently had tax debt resolved  or currently have other tax debt in collection status).
For each of the five business rules, we interviewed these knowledgeable  officials on how the rule operates—i.e., how the rule determines the  number and types of notices sent—and asked IRS for documentation on  how the rules operated. We asked for information and documentation on  when the rule was established, the rationale or purpose for the rule to  include supporting data that IRS considered in establishing the rule, and  any evaluations of the rule since its establishment.
To answer both objectives, we used applicable internal control standards  in our Standards for Internal Control in the Federal Government  (GAO/AIMD-00-21.3.1, November 1999), Internal Control Management  and Evaluation Tool (GAO-01-1008G, August 2001), and the Office of  Management and Budget Circular A-123, Management’s Responsibility for  Internal Control. To assess IRS’s objectives, measures, and performance  review, we selected the applicable internal control standards based upon  our report on IRS’s collection process in which we addressed the  complexity, organization, and performance measures of the collection  process.
The IRS information we relied on for our audit work was descriptive. The  quantitative data in this report are from an IRS Collection Activity Report  (CAR) and are for the purpose of providing background and context on  the notice process. We interviewed IRS officials with knowledge about  CAR data about the steps taken to ensure data accuracy. We determined  that the data we use in this report were sufficiently reliable for our  purposes. We conducted this performance audit from July 2008 through  September 2009 in accordance with generally accepted government  auditing standards. Those standards require that we plan and perform the  audit to obtain sufficient, appropriate evidence to provide a reasonable  basis for our findings and conclusions based on our audit objectives. We  believe that the evidence obtained provides a reasonable basis for our  findings and conclusions based on our audit objectives.
section_title: IRS Lacks Reasonable Assurance That Collection Notices to Individuals Achieve Desired Results
paragraphs: To assure that programs operate efficiently and effectively, agencies must  assess the risks that the program will not achieve desired results at the  least possible cost. A precondition to risk assessment is the establishment  of clear, consistent goals and objectives at both the entity level and at the  activity (program or mission) level. Without objectives, an agency cannot  identify the risks that could impede the efficient and effective achievement  of program or activity purposes. As shown below, guidance for the federal  internal control standards states that objectives should be established for  all key operational activities.
Objectives have been established for all key operational activities and  support activities.
Activity-level (program or mission-level) objectives flow from and are linked  with the agency’s entitywide objectives and strategic plans. The activity-level  objectives are relevant to all significant agency processes.
All levels of management are involved in establishing the activity-level  objectives and are committed to their achievement.
Although the notice phase affects millions of taxpayers and is a key part of  IRS’s strategy for resolving billons of dollars of unpaid debt, IRS has not  established written objectives for the notice phase. Guidance for the  internal control standards is clear that such objectives should be written  and be the product of a process in which all levels of management have  been involved and have committed to the objectives. By not meeting these  standards, IRS cannot be assured that relevant staff and management  commonly understand and pursue the same outcomes that are linked to  IRS-wide objectives and strategic plans.
IRS officials said that written objectives are unnecessary because IRS  officials have widespread agreement on the objectives. However, our  discussions with IRS W&I and SB/SE executives and managers responsible  for all parts of the collection process show that they have different views  about the notice phase in terms of what it is intended to do. For example,  one official said that the purposes of the notice phase are to prompt a  response from the taxpayer and get the taxpayer actively engaged in  resolving the unpaid debt. Among other possible objectives, officials said  that the notice phase is to resolve unpaid debt cases at the lowest possible  cost or achieve the most economical resolution of the greatest number of  debts. Furthermore, IRS officials referred to abating certain debts,  achieving full payments for debts, or collecting as much unpaid debt as  possible as other desired outcomes.
These desirable outcomes strive for different things such as getting the  taxpayer involved, resolving as many debts as possible, minimizing costs,  and collecting the unpaid amounts. For example, one could focus on  minimizing costs or resolving more debt cases—such as through  abatements or deferring any collection action—but not collect any debt in  doing so. Without documenting how these different outcomes interact, IRS  does not have assurance that its staff clearly understand what the notice  phase should be producing or that they may maximize one type of  performance while adversely affecting other desired levels of  performance.
Without written objectives, IRS cannot move forward to the next step of  establishing program performance measures that are tied to the desired  results envisioned in the objectives. Without performance measures  related to established objectives agencies cannot be assured that a  program is achieving desired results and, if possible, improving results. As  shown below, guidance for the federal internal control standards states  that performance measures should be established for government  programs and, among other things, be linked to objectives.
Activity-level objectives include measurement criteria.
Performance measures and indicators have been established throughout the  organization at the entitywide, activity, and individual levels.
Performance measurement assessment factors are to be evaluated to ensure  they are linked to mission, goals, and objectives and are balanced and set  appropriate incentives for achieving goals while complying with law,  regulations, and ethical standards.
As with objectives, IRS has not established performance measures for the  notice phase. IRS established the Collection Governance Council (CGC) in  part to establish consistent performance measures that could be compared  across the divisions and operating units that administer parts of the  collection process and be rolled up to reflect IRS-wide collection  performance. However, the three IRS-wide collection process measures  do not provide information necessary to assess the notice phase in part  because two of the measures reflect telephone and in-person contact  phase work in addition to notice phase work and the other measure is  specific to the telephone contact phase.
Nor do the W&I and SB/SE unit-level performance measures that IRS uses  to hold managers accountable for performance in these units provide  information necessary to assess the notice phase in part because they  reflect work done in addition to notice phase work. For example, the  measures for the Compliance Services Collection Operations (CSCO) units  reflect performance not only on handling taxpayer written responses to  the four collection notices but also post-notice phase work, such as  taxpayer correspondence on defaulted installment agreements.
Without performance measures, IRS cannot tell how well the notice phase  works and helps achieve any objectives that are established. In discussing  this effect with IRS officials, they cited a percentage—total number of  cases disposed by the entire notice phase divided by the total number of  first notices issued in a given year —as evidence that the notice phase is  working well. However, IRS has not established this percentage as a  performance measure or defined how it is to be consistently calculated.  For example, the official who calculated the percentage explained that  more than one formula could be used to calculate the percentage, such as  including or excluding deferred cases from the number of cases disposed.  Furthermore, establishing this measure as the only measure of notice- phase performance would not meet IRS’s policy of having a set of  balanced measures that are linked to IRS goals, such as goals for customer  satisfaction, employee satisfaction, and business results.
In addition to performance information, IRS would also benefit from using  cost information to make data-based decisions about notice phase  effectiveness. Officials in IRS’s Office of Chief Financial Officer have  demonstrated the ability to determine full cost information on selected IRS  programs through a series of cost studies, but the notice phase was not  included in them. Even so, IRS has collected some information on the cost  to produce or mail collection notices to taxpayers. For just fiscal year 2006  and just the fourth notice (which is sent by certified mail), IRS tracked and  maintained postage cost data that showed IRS spent $22 million on  sending that notice type. According to IRS’s comments on a draft of this  report (see appendix III), IRS has an effort underway that is intended to  address the lack of some types of cost information. IRS said that it  awarded a contract in August 2009, to help develop the Correspondence  Management Information System (CMIS) to provide, among other things,  data on the costs of notice printing and postage which will assist in  determining the full cost of notices. The full costs also include such things  as labor cost of processing payments or handling taxpayers’  correspondence or telephone calls in response to notices.
Related to the establishment of objectives and measurement of  performance against those objectives, the internal controls also envision  top management reviews. To ensure that agencies are achieving desired  program results, it is important to have a chain of performance reporting  leading to top-level management reviews and accountability for program  performance. As shown below, guidance for the federal internal control  standards indicates that performance reporting up through higher levels of  agency management should create a chain of accountability where  performance is compared to targets.
Top-Level Reviews—Management tracks major agency achievements in  relation to its plans.
Top-level management regularly reviews actual performance against  budgets, forecasts, and prior period results.
Management Reviews at the Functional or Activity Level—Agency managers  review actual performance against targets.
Managers at all activity levels review performance reports, analyze  trends, and measure results against targets.
Without objectives and performance measures for the notice phase, IRS  top management cannot review notice-phase performance. IRS’s primary  system for periodically measuring and reviewing performance—the  Business Performance Review System (BPRS)—focuses on business units  rather than notice phase performance. According to IRS collection  officials, the performance reporting creates a chain of accountability up  through IRS for unit performance.
According to IRS collection officials, other data exist that IRS could use to  review notice phase performance—data that include notice-phase results  like full payments that do not involve W&I and SB/SE subunits—and are  contained in the Collection Activity Report. Selected report data—such as  the number of first notices and the number of notice cases disposed—are  trended and reported to the CGC. However, the CGC is not required to  report these data to higher levels of IRS management for its review as part  of a mechanism for being accountable for notice performance.
IRS faces a challenge in developing objectives, performance measures, and  related top management reviews for the notice phase, in part, because the  phase spans across IRS units or functions. As shown in figure 3, collection- notice-phase key activities are divided among five IRS units or functions.  Factors that determine whether a given unit will be involved in handling a  notice case include, among other things, whether the taxpayer is a W&I  taxpayer or an SB/SE taxpayer and whether the taxpayer chooses to reply  at all, pay the debt in full, or respond to a notice by telephone or by mail.
section_title: IRS Lacks Documentation on the Notice Phase Business Rules and Whether They Worked as Intended
paragraphs: Written documentation of processes is useful to managers in guiding an  agency’s operations and to those overseeing and analyzing operations. As  shown below, guidance for the federal internal control standards states  that there should be complete and accurate documentation of transactions  and significant events.
Written documentation exists covering the agency’s internal control  structure and for all significant transactions and events.
The documentation is readily available for examination.
Documentation, whether in paper or electronic form, is useful to managers in  controlling their operations and to any others involved in evaluating or  analyzing operations.
Documentation of transactions and other significant events is complete and  accurate and facilitates tracing the transaction or event and related  information from authorization and initiation, through its processing, to after  it is completed.
As noted earlier, IRS officials said that generally business rules were  established to make the best use of IRS resources. The five business rules  IRS identified as affecting most taxpayers use certain dollar thresholds  (minimum-, low- and medium-dollar amounts) or “repeater”  characteristics (taxpayers who either recently had resolved a previous tax  debt or currently have other debt in collection status) to determine  whether certain notices are sent or whether IRS will defer further  collection in a given case.
subsections: section_title: IRS Did Not Have Documentation on When and Why the Business Rules Were Established
paragraphs: Given the stated purposes of the business rules, the millions of taxpayers  impacted by them, and the billions of dollars in unpaid debt involved, the  establishment of a business rule is a significant event that should be  documented with enough detail to allow IRS managers and others to trace  the basis for its establishment. Such details could include the date the rule  was established, the rationale for the rule, and any data supporting the  rule. However, table 1 shows that IRS lacked such basic documentation  for four of the five business rules and that for the one rule with  documentation, IRS only had the information on the date it was  established.
IRS provided documentation that the repeater rule (for taxpayers that had  previous tax debt resolved) was established in August 2002. Without  documentation of when the other four rules were established, IRS lacked  information for tracking and evaluating events over time that could affect  how the rules operate. IRS officials’ recollections of when the four rules  were established were imprecise and in one case depended on the  official’s experiences in IRS. For example, an IRS official said the  minimum dollar rule was established as early as 1978 because the rule was  in effect when the official began working at IRS. Officials speculated that  the low dollar rule was established around 1995. Officials said the medium  dollar rule was established sometime in 1994 because an official had  retained a dated training manual on a related program that officials  recalled being established at the same time as the rule.
IRS could not provide documentation on the rationales (such as the  factors considered or reasons for adopting the rule) for any of the rules we  reviewed. As with the dates that rules were established, we had to rely on  the recollections of IRS officials to determine why IRS had adopted the  rule and its purpose. Such sources were of limited use because of their  reliance on staffs’ memories and because officials disagreed on some of  the rules, thus making it unclear what IRS’s reasoning was for the rule. For  example, officials said that the reason IRS established the medium dollar  rule to defer sending certain cases to ACS was that using automatic offsets  of future tax refunds to collect these debts was less costly than using ACS.  However, another official said that the rule was established not so much  because of the relative costs of ACS but instead to stem the flow of paper  because, at the time IRS began deferring sending cases, IRS’s process for  levying assets relied on paperwork, which overwhelmed the staffs. The  lack of documentation for the rationale of the rule—the basic reasoning on  why the rule exists—made it impossible to determine if the rule achieves  its intended purpose.
IRS also lacked data supporting the rationales for the rules. For example,  for the minimum-, low-, and medium-dollar rules that include dollar  thresholds for determining notices sent and whether further collection  action would be deferred, IRS officials were unable to provide analyses on  why a given dollar amount was chosen as opposed to a higher or lower  amount. As a further example, for the repeater rule for previously resolved  debts, IRS had no data to show why it selected the time period considered  in determining whether a taxpayer was a “repeater.”
IRS officials told us that documentation was lacking in most cases because  the rules were established so long ago. Further, the officials said the  current rules are not so much designed as a cohesive set of rules but  instead are the result of numerous decisions made over the course of  several years. Regardless, without documentation on when the rules were  established, the rationale for the rules, and data supporting those  rationales, IRS managers lack basic information to help assure that the  business rules are working as originally intended. Without such  documents, IRS has limited ability to determine whether the  circumstances under which a rule was established have changed in such a  way that the rationale for the rule is no longer valid and therefore it should  be revised or abandoned.
section_title: Collection Managers Lack Documentation to Know What the Rules Are and How the Rules Operate
paragraphs: To exercise control over government operations, managers need to know  how the programs they are responsible for operate. As shown below,  guidance for the federal internal control standards states that managers  should have pertinent information available in forms that are useful for  them to exercise their responsibilities to ensure efficiency and  effectiveness of operations.
Pertinent information is identified, captured, and distributed to the right  people in sufficient detail, in the right form, and at the appropriate time to  carry out their duties and responsibilities efficiently and effectively.
We found that collection officials lacked information to know what the  notice-phase business rules are and how the rules operate. In some cases,  the officials either did not know or misunderstood these key business  rules. For example, in a meeting with us, IRS executives and managers  cited three different amounts for the dollar threshold of the low dollar  rule, which determines which notices are sent and whether further  collection action will be deferred or the debt will potentially be offset by  levying a state refund. For the medium dollar rule, IRS managers who we  were told were most familiar with the rules originally said that a taxpayer  under this rule would receive four notices. The managers said that sending  four notices was to give the taxpayer the maximum opportunities to  respond given that IRS would not be taking further collection action if  payment or another response was not received. After further review,  officials later told us that taxpayers receive only three notices in these  cases.
IRS collection officials were able to provide specifics on the operations of  some of the rules and corrected some of their misunderstandings of the  rules by using a document called the Functional Specifications Package  (FSP) and consulting with Modernization and Information Technology  Services (MITS) staff. The FSP contains some of the computer  commands that control the sending of notices. Officials said the FSP and  related system documents are the only documentation for the existence  and operation of the rules. According to IRS collection officials, the  language of the FSP is difficult to understand. Consequently, the managers  had to consult with MITS staff to explain the rules. One of the roles of  MITS is to translate operational requirements devised by the collection  function into computer programming language.
Furthermore, not all collection notice rules are in the FSP. Some rules are  in at least one other information system—the program requirements  package (PRP) of the master file, the information system that sends the  first collection notice to taxpayers. With more than one system, IRS has  limited assurance that the business rules are identical because changes in  one system may not also be made in all the systems. For example, the FSP  sends a notice for debts of $5 and above, but the PRP has a slightly higher  dollar threshold for taking further action. IRS officials were unaware of  this inconsistency, and, after our further discussion with them, they agreed  that the FSP rules should be amended to be consistent with the PRP.
section_title: IRS Does Not Have a Process to Evaluate Whether Its Business Rules Work as Intended
paragraphs: A critical part of management control is monitoring to ensure that  programs are working as intended. Agency policies and procedures should  generally be designed to assure that ongoing monitoring occurs in the  course of normal operations and that periodic evaluations are part of  management’s continuous monitoring of internal control. As shown below,  guidance for the federal internal control standards shows that monitoring  is important as a means to provide a reasonable assurance that the  objectives of the agency continue to be achieved and to determine and  improve the quality of the agency’s performance over time. If deficiencies  are discovered, the agency can become quickly aware and take prompt  action to remedy them.
Management’s strategy provides for routine feedback and monitoring of  performance and control.
Management has a strategy to ensure that ongoing monitoring is effective and  will trigger separate evaluations where problems are identified, and it is  desirable that critical systems are periodically tested.
Control activities are regularly evaluated to ensure that they are still  appropriate and working as intended.
The strategy includes a plan for periodic evaluation of control activities for  critical operational and mission support systems.
Appropriate portions of the internal controls are evaluated regularly.
The agency takes appropriate follow-up actions with regard to findings and  recommendations of audits and other reviews.
Management and auditors follow up on audit and review findings,  recommendations, and the actions decided upon to ensure that those actions  are taken.
Even though IRS officials estimated that the business rules had been  established for years, IRS had documentation for an evaluation of only one  of the five business rules we reviewed (the minimum dollar rule). For the  remaining four rules we reviewed, IRS officials said that they had not  evaluated three rules and had evaluated one rule (the medium dollar rule)  but had no documentation of the evaluation. Without a process to evaluate  the business rules, IRS officials can not be assured that the rules work as  intended.
IRS collection managers were unaware of evaluation of the minimum  dollar rule and had no documentation on the follow-up action that was  promised. IRS collection officials had originally told us that no evaluation  had been done for the minimum dollar rule. During our work, we  separately learned that IRS had done an evaluation in response to a 2004  Taxpayer Advocacy Panel (TAP) recommendation that the $5 threshold  be raised to $25. The evaluation report showed that IRS had done analyses  to consider such factors as the costs of sending and handling responses to  notices and potential lost revenue. Although the report concluded that  raising the threshold to the recommended level would not be cost- effective, it said that IRS would do further evaluation to determine if the  threshold should be increased to some amount between $5 and $25.  However, IRS officials could not provide any documentation that a follow- up evaluation had been done nor did IRS have plans to conduct such an  evaluation. Also, IRS officials could provide none of the data supporting  the report conclusions, such as information on the costs of sending and  handling responses to notices.
For the medium dollar rule evaluation that IRS officials said was done, the  age of the evaluation and lack of documentation limited its usefulness. The  officials said that IRS had evaluated the medium dollar threshold in the  1980’s and concluded that it was appropriate. As we noted earlier, the  intended purposes of all the rules we reviewed were undocumented. To  the extent that IRS’s costs and collections may have been considered in  establishing the medium dollar rule, with changes over time—including  possible changes in taxpayer behavior and IRS’s processes along with the  certain change in the value of dollars due to inflation—it is unclear how  the results of an evaluation done over twenty years ago would serve as  adequate assurance that a current business rule is appropriate. Over time,  various changes could affect the continued validity of any rationale. For  example, according to IRS officials, the current medium dollar threshold  was set in 1994 as part of a program for accelerating debts above a certain  amount to ACS to make outbound telephone calls to attempt collection.  According to IRS officials, the acceleration program was dropped after  one year because future funding was eliminated. Even so, the medium  dollar threshold has remained unchanged in the computer programming.
IRS officials said that IRS has no requirement to periodically evaluate the  business rules. Because the business rules are not being regularly  evaluated, IRS risks that the rules will result in unnecessary costs or  missed collections. For example, IRS could defer sending a case for  collection action based on outdated assumptions about the costs of such  action. To the extent that evaluations are done, the lack of a system to  make managers aware of them or to maintain the evaluations and  supporting data limits their usefulness in making program decisions to  ensure that desired collection results are achieved at the least costs.
According to its director, TACT also found that evaluations of business  rules were lacking and was considering recommending certain actions to  improve such evaluations. As with the project to build a database for  measuring notice effectiveness and the proposal on management  responsibility discussed above, documentation on TACT’s evaluation  recommendation was not available for us to take into account in this  report.
section_title: Conclusions
paragraphs: Given the notice phase’s primary position in IRS’s collection process, its  potential to collect or otherwise resolve debts at relatively low cost and  the significant revenue that it can generate, notice-phase performance  could be a key indicator of the efficiency of IRS’s collection enforcement  efforts overall. The notice phase may be operating well, but given the lack  of objectives and performance measures for the process, its efficiency and  effectiveness are not reasonably assured, and opportunities for improving  performance may be missed. With the high volume of cases the process  handles and the revenue it generates, modest percentage change  improvement could result in significant cost savings or improvements in  dollars collected or cases otherwise resolved.
section_title: Recommendations
paragraphs: To better ensure the notice phase is achieving desired results at the lowest  costs, we recommend that the Commissioner of Internal Revenue:    establish objectives and performance measures to reflect the desired  results for the notice phase;    establish responsibilities for reviewing the performance of the notice  phase to help ensure accountability throughout IRS;    document the rationales for the key notice-phase business rules in terms  of efficiency, effectiveness, or other desired results;    provide IRS collection managers and executives accessible, reliable  information on what the business rules are; and    periodically and regularly evaluate the business rules in terms of efficiency  and effectiveness or other results and ensure the results are available to  managers so the data and methodologies can be used or considered in  future evaluations.
section_title: Agency Comments and Our Evaluation
paragraphs: The IRS Deputy Commissioner for Services and Enforcement provided  written comments on a draft of this report in a September 16, 2009, letter,  which is reprinted in appendix III. IRS staff also provided technical  comments. We incorporated these written and other technical comments  into the report as appropriate.
IRS agreed with all five of our recommendations and to make related  improvements. Specifically, IRS agreed to establish and document key  objectives, measures, and responsibilities. IRS also agreed to periodically  reevaluate its notice business rules and provide appropriate, reliable  information to its managers.
IRS also stated that it closes approximately 80 percent of its notice  accounts without need for further contact with the taxpayer, and that it  collected $23.6 billion through the notice process in fiscal year 2007. IRS  did not clarify whether this percentage and this dollar amount involved all  types of collection notices, closures, and taxpayers. In our report, we  noted in figure 5 that IRS collected about $6 billion during fiscal year 2008.  This total includes collections directly from notices sent to individual  taxpayers only and comes from data that IRS provided to us.
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If you or your staff have any questions about this report, please contact me  at (202) 512-9110 or brostekm@gao.gov. Contact points for our Offices of  Congressional Relations and Public Affairs may be found on the last page  of this report. Key contributors to this report are listed in appendix IV.
section_title: Appendix I: Data on Dispositions from the Notice Phase for Individual Taxpayers, Fiscal Years 1999 to 2008
paragraphs: Every year, IRS disposes of millions of tax debt collection cases through  its notice phase in various ways. For example, IRS closes cases when  taxpayers pay the debt in full or enter an installment agreement. In other  cases, IRS defers further collection action and suspends active collection  until some later date, which may be triggered by some taxpayer action. For  example, taxpayers in active combat duty who have unpaid tax debts will  be put in a deferred status. Also, IRS sends some unpaid tax debt cases  that have gone through the notice phase to the other collection phases for  potential enforcement action.
As shown in figure 4, from fiscal year 1999 through 2008, the most frequent  way that IRS disposed of tax debt cases that went through the notice  phase was by the taxpayer’s paying the debt in full. Specifically, in fiscal  year 2008, IRS disposed of 5.8 million (or 46 percent) unpaid tax debt  cases through the notice phase as full paid. Another 4.1 million unpaid tax  debt cases were deferred or sent to other collection phases.
On the other hand, when looking at the dollar values of the dispositions  from notices, IRS sent much more of the unpaid debt amounts to other  collection phases for potential collection than it collected. For example, in  fiscal year 2008, IRS sent $40.6 billion in unpaid tax debt to other  collection phases for potential collection enforcement action but collected  $5.6 billion during the notice phase, as shown in figure 5. The remaining  dollar amounts disposed through notices in fiscal year 2008 involved $4.4  billion in tax refund claims from the taxpayers that were used to offset the  debt and $4.6 billion that IRS had to abate based on new information.
section_title: Appendix II: Descriptions of Notice-Phase Business Rules Identified by IRS
paragraphs: Below are descriptions of the five business rules IRS officials identified in  response to our request for the key rules that affect the most individual  taxpayers. With the exception of the minimum dollar rule, the descriptions  do not provide specifics on the case characteristics that the business rules  consider because IRS considers that information to be sensitive. Such  information could potentially be used by purposefully noncompliant  taxpayers to not pay taxes due and avoid IRS’s collection actions.
Minimum dollar rule—if the unpaid debt is below $5 no notice is sent and  the debt is abated.
Low dollar rule—if the debt is below a certain threshold, three notices are  sent, and if the debt remains unresolved, further collection action is  deferred.
Medium dollar rule—if the debt is above the low dollar rule threshold but  below a certain higher amount, three notices are sent, and if the debt  remains unresolved and there is no known levy source, further collection  action is deferred.
Repeater rule for previously resolved debts—if a taxpayer had previous  tax debt resolved in the telephone contact phase, in-person contact phase,  or in the waiting queue for assignment to a revenue officer, for any new  debt identified within a selected number of weeks, two notices are sent,  and the case is sent to the phase that resolved the previous debt.
Repeater rule for current unresolved debts—if the taxpayer has a current  debt assigned to the telephone contact phase, in-person contact phase, or  in the waiting queue for assignment to a revenue officer, for any new debt  two notices are sent, and the case is sent to the phase handling the current  debt.
section_title: Appendix III: Comments from the Internal Revenue Service
section_title: Appendix IV: GAO Contact and Staff Acknowledgments
subsections: section_title: Acknowledgments
paragraphs: In addition to the contact named above, Tom Short, Assistant Director;  Susan Baker; Ray Bush; Bill Cordrey; George Guttman; Ronald W. Jones;  Veronica Mayhand; Ed Nannenhorn; Karen O’Conor; Cheryl Peterson;  Steve Sebastian; Jay Smale; and A.J. Stephens made key contributions to  this report.