Tax Debt Collection: IRS Is Addressing Critical Success Factors for Contracting Out but Will Need to Study the Best Use of Resources
Published: 2004-05-24T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Congress is considering legislation to authorize IRS to contract with private collection agencies (PCA) and to pay them out of the tax revenue that they collect. Some have expressed concerns that this proposal might be unsuccessful, inefficient, or result in taxpayers being mistreated or having their private tax information compromised. This report discusses (1) the critical success factors for contracting with PCAs for tax debt collection; (2) IRS's actions to address these factors in developing the PCA program and actions left to be done; and (3) whether IRS, if it receives the authority to use PCAs, plans to do a study that will help policy makers judge whether PCAs are the best use of funds to meet IRS's collection objectives.
section_title: What GAO Found
paragraphs: Based on our analysis of information from various parties, including officials from selected state revenue departments and federal agencies that use PCAs, five factors are critical to the success of a PCA collection program. Together, these factors increase the chances for success and help the program achieve desired results. Although incomplete, IRS has taken actions to address these factors. For example, IRS has been developing (1) program performance measures and goals, (2) plans for a computer system to transmit data to PCAs, (3) a method to select cases for PCAs, and (4) contract provisions to govern data security and PCAs' interactions with taxpayers. IRS officials recognize that major development work remains and have plans to finish it. Officials said they would suspend work if PCA authorizing legislation is not passed during 2004. If legislation passes, officials estimated that it would take 18 to 24 months to send the first cases to PCAs. Aware of concerns about the efficiency of using PCAs, IRS intends to study the relative performance of PCAs and IRS employees in collecting tax debts after gaining some experience with them. However, the initial idea for a study would provide limited information to judge whether or when the PCA approach is the best use of resources. The tentative idea--comparing PCA and IRS performance for the same type of simpler cases to be sent to PCAs--does not recognize that IRS officials believe that using IRS employees on such cases would not be the best use of staff. Federal guidance emphasizes efficiently and effectively using resources to achieve results and identifying the most realistic and cost-effective program option. Experience gained in using PCAs and a new IRS case selection process would help officials design such a study.

section_title: Letter
paragraphs: For the last several years, Congress, the Internal Revenue Service (IRS),  and others have been concerned that performance declines in IRS’s  programs to collect known unpaid taxes due the government might be  affecting taxpayers’ confidence in the fairness of our tax system and  voluntary compliance.  In testimonies and reports, we have highlighted  such declines in the collection programs, including a growing gap between  the number of cases assigned for collection action and the number of cases  closed each year.  Also, the amount of potentially collectable known tax  debt has grown.  As of September 30, 2003, IRS had an inventory of unpaid  taxes with some collection potential—including interest and penalties—of  $120 billion, up from $112 billion the previous year.  According to IRS, the  backlog of outstanding tax debt continues to grow 3 to 4 percent each year.  Because of potential revenue losses and the threat to voluntary  compliance, we have designated collection of unpaid taxes as a high-risk  area for the federal government.
To help address the growing tax debt inventory, the Department of the  Treasury has proposed that Congress pass legislation to authorize IRS to  use private collection agencies (PCA) to help collect tax debts for simpler  types of cases, paying them out of a revolving fund of tax revenues that  they collect.  IRS officials said that this proposal arose, in part, because of  the belief that Congress was not likely to provide the increased budget to  hire enough IRS staff to work on the inventory of collection cases.    Although the proposal has received support, some have expressed  concerns that it might be unsuccessful, inefficient, or result in taxpayers  being mistreated or having private tax information compromised.  In  addition, some in Congress and elsewhere in the tax community have said  that increasing IRS collection staff—instead of contracting out tax collection—could result in tax debts being collected at less cost.  A 1996  IRS pilot test to contract with PCAs was discontinued, in part, because the  revenue collected was less than IRS’s direct costs plus revenues lost from  using IRS employees to support PCAs rather than to collect taxes.  Our  review of the pilot found that, among other limitations, IRS’s computer  systems and inability to transfer data hampered efforts to send appropriate  cases to PCAs.
Due to congressional interest in the legislation being considered to  authorize IRS contracts with PCAs to collect simpler tax debts, we  reviewed, as part of our basic legislative responsibility for reviewing  federal programs and activities, various issues related to IRS’s preparations  to implement the proposal, if enacted, and to report on the role of PCAs in  IRS’s overall collections strategy.  Specifically, our objectives were to (1)  identify the critical success factors for contracting with PCAs for tax debt  collection; (2) determine whether IRS has addressed the critical success  factors in developing the proposed PCA contracting program and, if not,  what is left to be done; and (3) determine whether, if IRS receives authority  to use PCAs, it will do a study that will enable policymakers to judge  whether contracting with PCAs is the best use of limited federal funds to  achieve IRS’s collection objectives.
To identify the critical success factors, we interviewed officials from  selected state revenue departments and federal agencies that use PCAs and  PCA contractors for government debt collection.  We reviewed related  documentation from these sources.  In addition, we analyzed our reports  on contracting practices. For our other objectives, we gathered and  analyzed PCA program development documents and interviewed IRS  officials responsible for developing the PCA program.  We conducted our  work between June 2003 and March 2004 in accordance with generally  accepted government auditing standards.  Our scope and methodology are  discussed in detail beginning on page 7.
subsections: section_title: Background
paragraphs: IRS has two major programs to collect tax debts: telephone collection and  field collection.  If taxpayers become delinquent (that is, do not pay their  taxes after being notified of amounts owed), IRS staff assigned to the  telephone collection program may attempt collection over the phone or in  writing.  According to IRS officials, IRS collection staff who make phone  calls have not been initiating many calls to ask taxpayers to pay their tax  debts but rather have been responding to phone calls from taxpayers about  mailed tax due notices.  If more in-depth collection action or analyses of  the taxpayer’s ability to pay tax debt is required, telephone collection staff  may refer the case to field collections, where staff may visit delinquent  taxpayers at their homes or businesses as well as contact them by  telephone and mail.  Under certain circumstances, the telephone or field  staff are authorized to initiate enforced collection action, such as recording  liens on taxpayer property and sending notices to levy taxpayer wages,  bank accounts, and other financial assets held by third parties.  Field staff  also can be authorized to seize other assets owned by the taxpayer to  satisfy the tax debt.
As we have previously reported, in recent years IRS has deferred collection  action on billions of dollars of delinquent tax debt and IRS collection  program performance indicators have declined. By the end of fiscal year  2003, IRS’s inventory of tax debt with some collection potential was $120  billion (up from $112 billion in the previous year). As we reported in May  2002, from fiscal years 1996 through 2001, IRS had almost universal  declines in collection performance, including declines in coverage of  workload, cases closed, direct staff time used, productivity, and dollars of  unpaid taxes collected.  Although IRS’s collection workload declined, the  collection cases closed declined more rapidly, increasing the gap between  the number of cases assigned for collection action and the number of cases  closed each year (see fig. 2 in app. I).  As a result, in March 1999, IRS  started deferring collection action on billions of dollars in delinquencies.  By the end of fiscal year 2002, IRS had deferred collection action on about  $15 billion, and, as of May 2003, was deferring action on about one of every  three collection cases.
Furthermore, IRS’s collection staffing has declined overall comparing 1996  to 2003 (see fig. 3 in app. I) despite IRS’s efforts to increase collection  staffing in its budget requests since 2001.  As we previously reported, IRS  officials have said that collection staffing declines and delays in hiring have  been caused by increased workload in other essential operations (such as  as processing returns, issuing refunds, and answering taxpayer mail), other  priorities (such as taxpayer service), and unbudgeted cost increases (such  as rent and pay increases).
According to statements by the previous and current IRS commissioners,  IRS’s growing workload has outpaced its resources.  The former IRS  Commissioner’s report to the IRS Oversight Board during September 2002  made a case for additional staff to check tax compliance and collect taxes  owed. The Commissioner recognized that IRS needed to improve the  productive use of its current resources, but also cited a need for an annual  2 percent staffing increase over 5 years to help reverse the trends.   According to the Commissioner, IRS would require 5,450 new full-time  collection staff.  IRS officials said that the PCA program proposal was  undertaken because it is unlikely that IRS will receive funding adequate to  handle the growing collection workload.
Since current law requires IRS to collect tax debts, legislation has been  proposed to authorize IRS to use PCAs to collect simpler tax debts under  defined activities—including locating taxpayers, requesting full payment of  the tax debt or offering taxpayers an installment agreement if full payment  cannot be made, and obtaining financial information from taxpayers.   Given the limited authorities proposed for PCAs, IRS would refer those  cases that are simplest to collect and have no need for IRS enforcement  action, including cases in which (1) taxpayers filed a tax return showing  taxes due but that have not been paid and (2) taxpayers made three or  more voluntary payments to satisfy an additional tax assessed by IRS but  have stopped the payments.
In 1996, Congress directed IRS to test the use of PCAs, earmarking $13  million for that purpose. IRS canceled the pilot project in 1997, in part,  because it resulted in significantly lower amounts of collections and  contacted significantly fewer taxpayers than expected (about 14,000 of  153,000 taxpayers).  IRS reported that through January 1997, this program  accounted for about $3.1 million in collections and about $4.1 million in  expenses ($3.1 million in design, start-up, administrative expenses, and  about $1 million in PCA payments).  IRS also reported lost opportunity  costs of about $17 million because IRS collection staff shifted from  collecting taxes to helping with the pilot.
The current proposal to use PCAs has some significant differences from the  1996 pilot test of PCAs.  First, PCAs in the current proposal will actually try  to resolve collection cases within certain guidelines.  In the 1996 test, PCAs  only contacted taxpayers to remind them of their outstanding tax debt and  suggest payment options.  Second, PCAs under the current proposal will be  paid a percentage of dollars they help collect from a revolving fund of all  PCA collections. In the 1996 test, PCAs were paid a fixed fee for such  actions as successfully locating and contacting taxpayers, even if payments  were not received. Third, IRS will electronically transmit cases and data  about the taxpayer and taxes owed to PCAs.  In 1996, IRS’s computers were  not set up to electronically transmit the cases and data to PCAs.  For the  current proposal, IRS intends to develop the capability to make secure  transmissions to PCAs and protect confidentiality.
section_title: Objectives, Scope, and Methodology
paragraphs: To identify the critical success factors for contracting with PCAs for tax  debt collection, we used multiple sources.  We reviewed three of our  reports on leading practices in contracting and interviewed our staff that  review government contracting.  We also interviewed parties with  experience in contracting for government debt collection, including both  tax and non-tax debt, to identify any factors common to both debt types.  Specifically, we interviewed officials from  11 state revenue departments that, according to officials from the  Federation of Tax Administrators (FTA), represented a mix—in  aspects such as amount of resources and PCA roles—of experience in  contracting with PCAs for tax debt collection and provided examples of  program practices in such areas as case selection and use of  performance data; the Department of the Treasury’s Financial Management Service and  Department of Education—two federal agencies with large-scale, non- tax debt collection contracting; and  the three PCA firms that IRS selected as subject matter experts to assist  in drafting the provisions of a contract for PCA collection services.
To help corroborate the factors that others identified, we interviewed  officials from the IRS office that is developing the proposed PCA program,  the IRS Office of Taxpayer Advocate, and the National Treasury Employees  Union, which represents IRS employees.
To summarize and categorize the critical success factors identified, we  grouped together similar factors that were most frequently cited by the  officials with experience in government debt collection contracting.  We  first grouped factors associated with the start of a program and with a  maturing program into two broad time-oriented factors, including topics  we identified as implicit in the interviews and documents cited above.   Between these two time-oriented factors, we categorized three other  factors according to the broad topics that were most frequently cited.  To  validate our summarization and categorization, we asked for comments on  our draft list of critical success factors from those who we had consulted to  identify the factors as well as from officials at four additional PCA firms  that, according to interviewed officials from two state revenue  departments and the two federal agencies, had experience in government  debt collection.  In commenting on the draft list of factors, some officials  stressed certain factors more than others or elaborated on selected factors  or subfactors, but generally did not suggest factors beyond those  encompassed in our draft list.  We made changes based on their comments  where appropriate.
To determine whether IRS has addressed the critical success factors in  developing the PCA contracting program and, if not, what is left to be done,  we interviewed IRS program officials.  We analyzed program documents,  including the draft PCA contract as outlined in IRS’s Request for Quotes  (RFQ) and the Office of Management and Budget (OMB) Form E-300  budgetary document that describes goals and plans for the program.  We  did not attempt to analyze how well or to what extent IRS addressed the  factors, or whether IRS made the right decisions on issues such as the  program goals or measures.
To determine whether, if IRS receives authority to use PCAs, it will do a  study that will enable policymakers to judge whether contracting with  PCAs is the best use of federal funds to achieve IRS’s collection objectives,  we interviewed IRS program officials.  We reviewed any studies IRS had  done to compare the use of PCAs with other strategies and assessed IRS’s  intended approach for any future studies.  We also applied our knowledge  of how to study the cost-effectiveness of options to meet a desired result or  benefit.
We did our work from June 2003 through March 2004 in accordance with  generally accepted government auditing standards.
section_title: Five Factors Are Critical for a Successful PCA Collection Program
paragraphs: Our work identified and validated five broad factors that are critical to the  success of a proposed program for contracting with PCAs to collect tax  debt.  A general description of each critical success factor follows:  Results orientation involves establishing expectations, measures, and  desired results for the program.
Agency resources involve obtaining and deploying various resources.
Workload involves ensuring that the appropriate cases and case  information are provided to PCAs.
Taxpayer issues involve ensuring that taxpayer privacy and other rights  are protected.
Evaluation involves monitoring performance and collecting data to  assess the performance of PCAs and the overall program.
As figure 1 illustrates, the factors are considered “success” factors because  each one, if adequately addressed, can help ensure that the PCA program  achieves desired results, such as in collecting tax debts.  Although  addressing all factors during program design and implementation does not  guarantee success, doing so could improve the chances.
Table 1 further describes the critical success factors by showing their  related subfactors that we identified and validated.
section_title: IRS Has Taken Steps to Address Aspects of the Critical Success Factors but Has Much Work Remaining
paragraphs: IRS has taken steps to address the critical success factors and developed a  project plan to help finish addressing the factors if Congress authorizes use  of PCAs.  Officials recognize that much work needs to be done to  sufficiently address each factor, which they estimate will take 18 to 24  months after any legislation passes.  Table 2 shows examples of the key  actions taken to address the critical success factors and major tasks  remaining.  Discussion after table 2 elaborates on some of these major  tasks.
IRS officials are aware of these major tasks that must be completed to  address the critical success factors and implement the PCA program.  In  discussing their intent to address them, IRS officials elaborated on some of  the major tasks.
Under “results orientation,” IRS is aware that it has to clarify a goal on  how much it expects to collect.  IRS had estimated originally that the  PCA program would result in $9 billion in tax collections and produce  $7.2 billion in net revenue over 10 years.  The Department of the  Treasury estimated that $1.5 billion in net revenue would be produced  over 10 years.  IRS officials said the differences arise because each  estimate was done differently.  IRS acknowledged that its original  estimate may be too high and is reworking it in light of the Treasury  estimate.
Under “workload,” IRS officials said that they are aware of the  importance of selecting the right cases to send to PCAs for collection  and plan to use consumer credit history data on delinquent taxpayers to  identify those that would be more likely to pay if contacted.  IRS  officials said that the new case collection system will extend beyond  selecting cases for PCAs, and that the experience and knowledge IRS  will gain would contribute to IRS’s broader modernization program for  using data to improve how IRS does collection work.  For example, IRS  officials said that, in the future, the case selection data might be used to  help determine which collection method—such as sending notices,  using PCAs, or making in-person contact—might be more effective in  attempting collection from a given taxpayer.
Under “evaluation,” IRS officials said that they were aware that they had  not developed plans or dates for evaluating the program to assess how  well the PCA program achieves its results.  IRS officials said that  developing the evaluation was premature given the other work needed  to develop the program and lack of legislative authority.  IRS officials  said they intend to start developing the evaluation plan after they  receive this authority and to finish it before sending cases to PCAs.   Evaluation plans developed before program implementation increase  the likelihood that the necessary data and resources for proper  evaluation will be available when needed.
Many of the factors involve the development of an information system.   Testing of information systems being developed for the PCA program is  an important task left to do.  Our interviews with IRS officials and our  reviews of IRS documents indicate that IRS plans on testing the  information systems to be used in the PCA program.
IRS officials informed us that they have slowed development of the  program due to funding constraints and uncertainty over whether and  when legislation will pass to authorize contracts with PCAs. Because IRS’s  fiscal year 2004 budget was not passed until January 2004, IRS officials said  that, since September 2003, IRS slowed work on the PCA program.   These  officials said that, because of various budgetary procedures, the  appropriated funds were not released to the PCA program until March  2004.  However, the officials explained that IRS, intending to be fiscally  prudent, is delaying spending of the funds until passage of the legislation  appears to be more imminent.
IRS officials stated that if legislation to authorize the program was not  passed during 2004, IRS eventually would suspend work on developing the  program.  These officials said that they have been balancing and managing  their existing funds and the timing of their work given that the authorizing  legislation might not pass.  If this legislation passes, IRS officials said that  they would need another 18 to 24 months afterwards to complete the many  tasks remaining, as shown in table 2.  IRS officials said that, if Congress  passes authorizing legislation in summer 2004, the estimated date for  starting to send cases to PCAs is July 2006.
section_title: Potential Study Design Would Provide Limited Information to Judge Whether Contracting with PCAs Is the Best Use of Resources
paragraphs: Although IRS officials intend to study the relative performance of PCAs and  IRS employees in collecting delinquent taxes, the study approach under  initial consideration would provide policymakers limited information to  judge whether and when the PCA strategy is the best use of resources.  The  tentative idea for a design—comparing PCA and IRS performance for  similar types of simple cases that would be sent to PCAs—does not  recognize that IRS officials believe that using employees on these cases  would not be their best use given the need to work on other, higher priority  cases.
subsections: section_title: The Cost-Effectiveness of the Proposed Use of PCAs Has Been Questioned
paragraphs: Among other issues concerning the proposed use of PCAs, policymakers  and others have questioned whether using PCAs to collect tax debts is  more efficient or effective than having IRS employees do so.  During  consideration of IRS’s proposal, some members of Congress questioned  whether IRS could collect the taxes that IRS plans to assign to PCAs at less  cost or whether IRS would be able to collect a higher portion of the taxes  that are due.  During hearings, some witnesses raised similar concerns.
IRS officials have said that IRS employees might be more effective than  PCAs in collecting delinquent taxes because IRS employees have greater  powers to enforce collections.  These powers (such as tax liens and wage  levies) may enable IRS employees to collect a higher portion of the taxes  from the same types of cases on which PCAs would work.
IRS officials said that the proposal to use PCAs to collect simpler tax debts  was not based on a judgment that PCAs would necessarily be more  efficient or effective in collecting delinquent tax debt.  Rather the proposal  was based on a judgment that Congress was unlikely to approve a  substantial increase in IRS’s budget to fund additional staff for the  collection function.  Officials believed that the growing inventory of tax  debts was not a good signal to taxpayers about the importance of  complying with their tax obligations. Given constraints in hiring staff, IRS  officials said that using PCAs was the only practical means available to  begin working on significantly more collection cases that otherwise would  not be worked on due to IRS staffing constraints.
Although this policy judgment served as the rationale behind the PCA  proposal, in March 2004, IRS provided us with projections of revenues and  federal government costs for the proposed PCA program compared to  projections for an alternative approach under which IRS would hire  additional staff to work on the same volume for selected types of cases on  which the PCAs would work.  According to the analysis, PCAs would  generate $4.6 in revenue for every dollar in cost and IRS employees would  generate $4.1.
We did not review the data and assumptions that underlie these revenue  and cost projections because the comparison that IRS constructed did not  address the relevant economic question for policymakers seeking to reduce  the backlog of uncollected taxes—which is, what is the least costly  approach for reaching a certain revenue collection goal.  IRS’s analysis did  not examine other feasible approaches that IRS might be able to use, if  given additional resources, to collect the same amount of revenue that the  PCAs would bring in, but at lower cost.
section_title: Study Approach Being Considered
paragraphs: Assuming IRS receives authority to use PCAs, IRS officials said they would  design a study to compare the performance of PCAs versus IRS employees.  However, the study approach under initial consideration would provide  policy makers limited information to help determine whether the use of  PCAs as currently proposed is the best use of federal resources to collect  tax debts.  IRS’s approach might show whether PCAs or IRS employees are  best at working on certain types of collection cases, but would not show  whether the use of PCAs as planned would be the best use of resources to  deal with the overall collection workload.
IRS officials said that although they believe they should conduct a study  that compares PCA results to results achieved by IRS employees, they have  not designed such a study.   They expect to design the study after  authorization to use PCAs is enacted and before sending cases to PCAs.
Although the study approach will evolve, officials said that they are  considering selecting a sample of the same type of simpler cases that will  be sent to PCAs and having such cases also sent to a group of IRS  telephone collection employees.  The results generated by these IRS  employees and by PCAs would be compared to see which option is more  effective; how effectiveness would be defined and measured would be  determined in designing the study.  This potential design would help answer  the relatively narrow—but important—question of whether and when  PCAs or IRS employees are a better choice for working on the specific  types of cases to be sent to PCAs.
However, IRS officials told us that using IRS employees on these simpler  cases would be less productive than assigning them to work on a different  mix of collection cases.  These officials said that the simpler cases IRS  plans to assign to PCAs are generally not those cases that IRS would assign  to any additional collection employees, if hired.  IRS employees would  work on more complex cases that fit their skills and enforcement powers  and that have a higher priority due to such factors as the type and amount  of tax debt or length of the delinquency.
Generally, federal officials are responsible for ensuring that they are  carrying out their responsibilities as efficiently and effectively as possible.   Various federal and IRS guidance reinforces this responsibility.  For  example, according to OMB Circular A-123 “the proper stewardship of  Federal resources is a fundamental responsibility of agency managers and  staff.  Federal employees must ensure that government resources are used  efficiently and effectively to achieve intended program results.”  OMB  Circular A-94 states that agencies should have a plan for periodic, results- oriented studies of program effectiveness to, among other purposes, help  determine whether the anticipated benefits and costs have been realized  and program corrections are needed.  IRS guidance states that in selecting  among course of action options, IRS managers should determine which is  the most realistic and most cost effective.  Further, IRS has adopted a  critical job responsibility for its managers that specifies their responsibility  to achieve goals by leveraging available resources to maximize efficiency  and produce high-quality results.
A study that focuses on the least costly approach to collecting a desired  amount of tax debts would be more in line with federal guidance than the  study that officials anticipate performing.  Such a study would more likely  answer the broader question of how IRS can be the most efficient and  effective in achieving its collection goals.  One alternative design might  entail comparing the results of using PCAs to the results from using the  same amount of funds to be paid to PCAs in an unconstrained manner that  IRS determines to be the most effective overall way of achieving its  collection goals.  Determining the most effective and efficient overall way  of achieving collection goals would undoubtedly require some judgment.   However, because IRS is developing a new case selection model for its own  use, after some experience is gained both with using PCAs and with new  IRS case selection processes, IRS should have better data to use in  determining the best way of achieving its collection goals.   If using PCAs as  expected under the current proposal meets IRS’s collection goals at less  cost than the best unconstrained alternative, policymakers could be  comfortable with continuing their use.  If not, policy makers would have  information available to consider whether changes in the use of PCAs  would be appropriate.
Regardless of the approach chosen, IRS would have to address several  challenges in designing a study to compare the use of PCAs and IRS  employees.  For instance, contracting for PCA assistance may provide  flexibility over hiring additional IRS staff.  To recruit, select, and train the  new staff, IRS could need many months or more and, if experienced staff  assists in training newly hired staff, the experienced staff would not be able  to handle normal workloads.  Further, if the collection workload were to  decrease, IRS may be able to reduce contract commitments more rapidly  than it could reassign and, if needed, retrain IRS staff.   To some extent, the  study would have to account for similar types of direct and opportunity  costs to hire, train, assign, and release employees of the PCA contractor.   Accounting for these and other factors raises challenges to the design of a  comparative study.
Because IRS would not assign cases to PCAs for collection until 2006, it  will have time to take these challenges into account and to better ensure  that its study would be useful to policy makers.   Further, in designing the  study, IRS would have time to identify the data that would be needed for  the study and develop systems or processes for collecting the data.
section_title: Conclusions
paragraphs: IRS has an inventory of over $100 billion dollars of tax debts that has some  potential for being collected.  In recent years, IRS has deferred collection  actions on billions of dollars of debt because it lacked collection staff to do  the work.  The growth in the backlog of unpaid taxes poses a risk to our  voluntary tax system, particularly as IRS has fallen further behind in  pursuing existing as well as new tax debt cases.  We have placed the  collection of unpaid taxes on our high-risk list since 1990 due to the  potential revenue losses and the threat to voluntary compliance with our  tax laws.
Accordingly, we believe that effective steps need to be taken to improve the  collection of these unpaid taxes.  Because we did not analyze available  options in this review, we are not taking a position on whether the use of  PCAs is a preferable option.  However, doing nothing more than has been  done recently is not preferable.  The compliance signals sent to taxpayers  from the backlog of delinquent tax debts are not appropriate.  When the  majority of taxpayers receiving phone calls from IRS are those who  respond to written IRS notices, taxpayers and practitioners may conclude  that failing to respond to IRS is an effective tactic for avoiding tax  responsibilities.
If Congress does authorize PCA use, IRS’s planning and preparations to  address the critical success factors for PCA contracting provide greater  assurance that the PCA program is heading in the right direction to meet its  goals and achieve desired results.  Nevertheless, much work and many  challenges remain in addressing the critical success factors and helping to  maximize the likelihood that a PCA program would be successful.
Although IRS did an analysis that suggests that using PCAs may be a  somewhat more efficient means to collect certain types of delinquent  debts, that analysis was not done in a manner that informs policymakers  whether the proposed use of PCAs is the least costly option to achieve  IRS’s collection goals.  Further, given the lack of experience in using PCAs  to collect tax debts, key assumptions are untested.  Accordingly, if  Congress authorizes the use of PCAs, Congress and IRS would benefit from  a study that uses the experience gained with PCAs and by IRS itself in using  new case selection processes to better determine whether and how the use  of PCAs fits into an overall collection strategy that is designed to most  effectively and efficiently collect delinquent taxes.  Although IRS officials  have preliminary plans to do a study that compares the use of PCAs and  IRS employees to work the same type of cases, this study design would not  help policymakers in Congress and the executive branch judge whether  using PCAs as currently proposed is the best use of scarce federal  resources.
section_title: Recommendation
paragraphs: If Congress authorizes the use of PCAs, as soon as practical after  experience is gained using PCAs, the IRS Commissioner should ensure that  a study is completed that compares the use of PCAs to a collection strategy  that officials determine to be the most effective and efficient overall way of  achieving collection goals.
section_title: Agency Comments and Our Evaluation
paragraphs: The Commissioner of Internal Revenue provided written comments on a  draft of this report in a letter dated May 14, 2004 (see app. III).  In the letter,  the Commissioner said that our findings would help IRS focus its PCA  program development efforts on those areas most critical to success of the  program if Congress authorizes IRS’s use of PCAs.  He agreed that IRS had  taken actions to address the critical success factors we identified and  acknowledged that significant actions are yet to be done, referring to  several key PCA program project plan steps that have not been completed.
In response to our recommendation that, if Congress authorizes IRS’s use  of PCAs, IRS do a study that compares the use of PCAs to a collection  strategy that officials determine to be the most effective and efficient  overall way of achieving collection goals, the Commissioner agreed that  IRS would need to analyze the PCA program to determine its effectiveness  and impact on the overall collection of delinquent taxes.  He said that the  detailed design for evaluating the PCA program will include a study to  ensure that IRS is making the most effective and cost efficient use of total  resources available.
We are also sending copies to the Secretary of the Treasury, the  Commissioner of Internal Revenue, the Director, Office of Management and  Budget, and other interested parties.  We will make copies available to  others on request.  In addition, the report will be available at no charge on  the GAO Web site at http://www.gao.gov.
This report was prepared under the direction of Thomas D. Short, Assistant  Director.  Appendix IV also lists major contributors to this report.  If you  have any questions about this report, contact me at brostekm@gao.gov or  Tom Short at shortt@gao.gov, or either of us at (202) 512-9110.
section_title: Trends in IRS Collections Programs, 1996- 2003
paragraphs: Figure 2 below shows the annual gap between the number of cases  assigned to field and telephone collections and the number of delinquent  accounts worked to closure (excluding accounts for which collection  workload was deferred) expressed as a percentage of the number of cases  assigned.
section_title: Actions IRS Has Taken to Address Critical Success Factors
paragraphs: The following appendix provides some detail on various IRS actions to  address the critical success factors.
Critical Success Factor—Results Orientation: IRS envisions that the PCA program will meet the following goals:  Increase the collection of tax debts by $9.2 billion.
Increase the closure of tax debt cases by 17 million taxpayers.
Reduce the tax debt backlog; and  Increase taxpayer satisfaction by 12.5 percent.
To motivate PCAs to achieve these results, IRS is devising a balanced set of  measures--the “balanced scorecard”--and a related performance-based  compensation system.  The performance scores on these measures also are  to be used in determining financial bonuses and future case allocations to  PCAs.   Specifically, PCAs with above-average performance scores are to be  eligible for monetary bonuses if they meet minimum thresholds for five of  six performance measures.  Also, the performance score is to be translated  into a value for each PCA that is to be used to determine a proportionate  allocation of cases for the next quarter. IRS’s intent is that the balanced  scorecard will ensure that collection efforts are balanced appropriately in  providing quality service; ensuring adherence to taxpayer rights; and  complying with IRS policies, procedures, and regulations.  The  performance measures are to include the following.
Collection effectiveness:  Dollars collected as a percentage of dollars  assigned to be collected over the contract period.
Case resolution:  Resolving cases assigned through the payment of the  tax debts immediately or through installment payments over 3 years,  identification of bankrupt or deceased taxpayers, or identification of  hardships that affect the taxpayers’ ability to pay.
Taxpayer satisfaction:  Satisfaction will be measured through random  surveys of taxpayers on the accuracy and quality of actions taken by  PCA employees and their adherence to various standards, and through  taxpayer complaints.
PCA employee satisfaction:  Satisfaction will be measured through  surveys of employees and their retention rates.
Work quality:  Quality will be measured through audits of PCA cases and  telephone monitoring of interactions with taxpayers.
Validated taxpayer complaints:  Financial penalties will be assessed and  points will be subtracted from PCA performance scores if taxpayer  complaints are validated.
Critical Success Factor—Agency Resources: IRS has set up an infrastructure to   administer the PCA program,  oversee PCA contractors, and  work on cases referred back to IRS from PCAs.
IRS has identified initial staffing needs for the PCA program. IRS has  estimated that 100 full-time equivalency positions (FTE) will be needed to  initially staff the three elements of the program.  IRS estimates that it will  need 30 FTEs to administer the program and do oversight, and 70 FTEs to  work on the cases referred back to IRS from PCAs for the first round of  PCAs selected to work on cases.  As IRS learns about its staffing needs and  sends cases to more PCAs over time, IRS plans to adjust its staffing  accordingly.
IRS has informed PCAs that the number of cases that they receive over a  set time period is to be based on their performance scores against balanced  measures.  IRS plans to oversee the assigned workload to ensure that PCAs  work on the full range of simpler cases. To motivate PCAs to work on the  full range of cases, IRS plans to measure, among other things, the extent to  which PCAs resolve cases sent to them, including those that PCAs refer  back to IRS without resolving the tax debt.  IRS also is working on systems  to help it identify the best cases to send to PCAs and to help it transmit and  manage those cases.
Critical Success Factor—Taxpayer Issues: IRS has drafted provisions to ensure that PCAs know that they have to treat  taxpayers properly and make them aware of the consequences of not  treating taxpayers properly. Proper treatment of taxpayers is one of the  performance measures used to determine a performance score for use in  granting monetary bonuses and case allocations for PCAs. The following  provides examples of the draft provisions on proper taxpayer treatment.
PCAs shall comply with all applicable federal and state laws.  The  principal federal statues and regulations currently governing collection  activities are to be followed. Further, IRS plans to monitor PCA  collection activities and treatment of taxpayers; any behavior that is not  in conformance with cited federal and state laws and regulations will be  considered a breach of contract.
IRS has informed PCAs that it will be conducting customer satisfaction  surveys and that customer satisfaction is one of the key components of  the balanced scorecard to be used to determine financial bonuses and  future case allocation.
IRS plans to require that PCAs inform taxpayers orally and in writing on  how to report improper treatment by PCA employees to IRS.
IRS has established preliminary plans for monitoring and measuring PCA  performance through such means as conducting site visits and  compensating PCAs according to their performance reflected in the  balanced measures scorecard.  However, IRS has deferred doing much  work on evaluating program performance overall given the other work that  had to be done and the resources that were available.
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