Tax Debt Collection: IRS Has a Complex Process to Attempt to Collect Billions of Dollars in Unpaid Tax Debts
Published: 2008-06-13T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: The Internal Revenue Service (IRS) estimated that $33 billion in income tax assessments was not paid in 2001. If not collected, annual unpaid taxes keep accumulating each year along with penalty and interest charges to create an inventory of "tax debts," which approached $300 billion at the end of fiscal year 2007. IRS has shelved or delayed collection of billions of dollars of this tax debt. Congress and others have questioned IRS's collection process's effectiveness. As requested, GAO is reporting on (1) the process IRS uses to collect unpaid tax debts; (2) trends in the unpaid tax debt inventory, collections, and other resolutions from fiscal years 2002 through 2007; and (3) the performance measures and goals available to assess how well the collection process works overall. To meet these objectives, GAO interviewed IRS officials and reviewed IRS's unpaid assessments database, documentation on the collection process and factors used in managing it, and IRS's highest-level collection measures.
section_title: What GAO Found
paragraphs: IRS has a complex process to collect unpaid tax debts by contacting taxpayers through notices, telephone calls, and in person. Because IRS has a very large debt workload and limited resources spread across multiple units, it must make numerous decisions about how best to handle debt cases. The complexity also arises because debt cases can take various routes based on about 70 IRS decision rules used for handling cases. The rules respond to a wide variety of debt characteristics, information known about the taxpayer, and the results of attempts to contact the taxpayer or take enforcement action. From fiscal years 2002 through 2007, increases occurred in the unpaid tax debt inventory, the percentages of debt classified as potentially collectible and in active collection status, and the dollars IRS collected. It is unclear whether dollars collected will continue to grow at rates similar to the growth in debt classified as collectible or active because, for example, those categories do not mean that the debt has a high potential for collection and will be actively pursued or that debt resolution will necessarily result in dollars collected. IRS-wide collection performance measures cover three outcomes of the three-phase process with an emphasis on closing more debt cases in less staff time. IRS did not indicate why more measures for the whole collection process were lacking. For each of the phases, IRS had more performance measures such as on debt resolutions, time spent, satisfaction, and quality, which phase managers said were sufficient for them. GAO has identified material weaknesses in IRS's controls over unpaid tax assessments and collections partly due to the lack of agencywide cost-benefit data and related performance measures. Although IRS has made some progress on these weaknesses, progress has not been sufficient to resolve them. For example, over the past 3 years, IRS has employed various approaches, including sophisticated computer modeling and risk assessment techniques, to assist it in more effectively identifying the tax debt cases with the greatest collection potential, and to facilitate prioritizing of these cases for collection. IRS has also employed these techniques to identify the most effective collection approach to take for the various types of outstanding tax debt. Although IRS has ongoing projects to expand the use of these models and techniques, it does not yet have an agencywide, systematic approach to managing the collection of tax debts across IRS. In response, IRS has created a council of IRS collection officials to coordinate various collection activities across IRS and potential changes across the parts of the collection process. Further, IRS has a number of ongoing projects to improve aspects of the collection process. However, some of these projects will take a few years to be implemented.

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  estimated that $33 billion of the annual gross tax gap (which totaled $345  billion after including the underreporting and nonfiling portions) for tax  year 2001 was for nonpayment of known tax assessments. If not collected,  these annual unpaid tax assessments accumulate over time, along with the  related penalty and interest charges, to create an inventory of “tax debts.”  As of the end of fiscal year 2007, this inventory was approaching $300  billion, of which IRS considered about $100 billion to be potentially  collectible. Due to resource limitations, IRS has shelved or delayed  collection of billions of dollars of this tax debt. Given the many challenges  that IRS faces, the enforcement of the tax laws, including collection of  unpaid tax debt has been on our list of high-risk areas since 1990.
Although collecting unpaid tax debt is part of any strategy to help ensure  compliance and confidence in the tax system and reduce both the annual  tax gap and the cumulative unpaid tax debt inventory, Congress and other  stakeholders have raised questions about the effectiveness of IRS’s  collection process in helping ensure compliance. Because of your  concerns about unpaid tax debt and to enhance Congress’s understanding  of the current collection process, you asked that we describe IRS’s  collection process and results for fiscal years 2002 through 2007. This  report addresses the following questions.
What process does IRS use to attempt to collect or resolve unpaid tax  debts?
What are the trends in unpaid tax debt, including the size and composition  of the inventory, collections, and other resolutions of unpaid debt in fiscal  years 2002 through 2007?
What performance measures and related goals are available to assess how  well the collection process works overall?
To answer these questions, we interviewed IRS officials and reviewed  IRS’s unpaid assessments database, documentation on the collection  process and factors used in managing it, and IRS’s highest-level collection  measures. Appendix I provides more details on our scope and  methodology. In addition, we also attempted to track IRS’s tax assessment  and collection results across fiscal years 2002 through 2007, and asked IRS  about its efforts to improve its management of the inventory and  collection of debts. Appendix II describes our attempts to do this tracking  from fiscal years 2002 through 2007, focusing on what happened to fiscal  year 2002 assessments, and appendix III describes IRS’s improvement  efforts. We conducted our work from July 2007 to May 2008 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.
subsections: section_title: Background
paragraphs: IRS has many programs or activities that identify potentially unpaid taxes  and may ultimately result in unpaid taxes being assessed and collection  attempted. Unpaid assessments are generally identified by either (1) the  taxpayer, such as by submitting a tax return with a balance due but  without full payment, or (2) IRS compliance programs such as IRS’s audit  program that identifies reporting noncompliance on filed returns or the  Automated Substitute for Return (ASFR) program that—for taxpayers  who failed to file returns—creates a tax due return on the basis of  available data provided to IRS by third parties on income such as wages  and interest. Since IRS’s filing and reporting compliance programs  identify new tax debt when pursuing apparent noncompliance, IRS is  contributing continually to the unpaid assessments inventory.
After identifying potential tax assessments, IRS sends a series of notices to  taxpayers about these potential assessments as well as about any taxes  due. For example, IRS is required to send taxpayers certain statutory  notices. IRS first is to send a “30-day letter” that includes a proposed  assessment of tax, penalty, and interest. The letter is to instruct the  taxpayer on possible ways to respond, such as by accepting the proposed  assessment; filing an original return; providing evidence that there is no  filing requirement; or appealing the proposed assessment to IRS’s Office of  Appeals. If no response is received to the 30-day letter within the allotted  time, IRS is to send a 90-day statutory notice. The statutory notice is to  contain information similar to the 30-day letter and information on the  taxpayer’s right to petition the Tax Court. If IRS does not receive a  response within the allotted time, the tax, penalty, and interest on the  return are to be assessed. IRS’s practice is to send up to four balance-due  notices at 5-week intervals for the amount owed. Six weeks after the  fourth balance-due notice, IRS is to forward any unpaid accounts to IRS  staff who are to try to collect the unpaid amounts through other phases of  the collection process—-the telephone or in-person contact phases.
Congress enacted the IRS Restructuring and Reform Act of 1998 to  balance IRS’s responsibility to collect taxes with its responsibility to  protect taxpayers’ rights. One of the concerns addressed by the act was  the use of collection or enforcement data to assess performance. The act  restricted the use of records of tax enforcement results for assessing  employee performance.
We have previously looked at various aspects of IRS collection programs.  For example, in 2002 we reported on the lack of data on the effects of  collection programs on compliance. Also, although we have not assessed  the implementation of the private debt collection program, during our  reviews of IRS’s planning for the program in 2006, we reported that IRS  had not completed work on a suite of balanced measures for use in  evaluating the results of the program.
section_title: IRS Collects or Otherwise Resolves Unpaid Tax Debt through a Complex, Three-Phase Process
paragraphs: IRS’s process for collecting unpaid debt has three phases. Debt goes  through these phases until it is determined to be not collectible, is  collected, or is otherwise resolved:    Notice: IRS sends a series of notices of balances due to the taxpayer to, in  part, prompt a reply by the taxpayer and payment.
Telephone: IRS uses telephone contacts with the taxpayer to secure  payment or to take enforcement action, including a levy of financial assets  and a lien against property.  In-person: IRS attempts in-person contact with the taxpayer to secure  payment or take enforcement action, including levies, liens, and seizures  of property.
During the process, a debt case can also be placed in a “not active” status.  According to an IRS official, this status indicates that although potentially  collectible, the debt case is either in the queue awaiting assignment to the  final collection stage or is “shelved” due to inadequate IRS resources to  pursue it.
As shown in figure 2, the collection process for debt treated as potentially  collectible is a complex set of programs administered by several IRS units  handling a large workload that can take multiple routes based on about 70  decision rules that IRS has created in response to a variety of factors,  including the characteristics of a given debt or taxpayer and the results of  the process itself.
According to IRS officials, the phases and routing of cases result from  IRS’s designing the process to effectively and efficiently use resources to  resolve taxpayer debt at the earliest possible time and using the least  costly resources. For example, officials said that low-and medium-risk  cases are routed to the telephone contact phase where they are treated  according to case conditions in a bulk processing environment using  lower-cost resources. The telephone phase handled over 7 million  telephone contacts during fiscal year 2007—-of which 5.4 million calls  were made by taxpayers responding to IRS contacts and 1.9 million were  made by IRS staff. However, IRS is to route high-risk cases that require the  skills and tools of a revenue officer—including face-to-face interaction  with the taxpayer and use of more complex enforcement tools—to the in- person contact phase to resolve the debt though at greater cost in terms of  time and money. As a result, the number of contacts about tax debts in this  phase is lower—estimated at about 400,000 in fiscal year 2007.
subsections: section_title: The Process Is High- Volume and Spread among IRS Subunits
paragraphs: A part of the complexity of the process stems from having a very large  debt workload and limited resources spread across multiple units, which  contribute to the numerous decisions that IRS makes on how to handle  these debt cases. According to IRS data for fiscal years 2002 through 2007,  IRS sent over 83 million first notices to taxpayers involving about $444  billion in unpaid taxes; the notice phase is the highest “upstream” part of  the collection process. At the end of fiscal year 2007, IRS had $79.3 billion  worth of debt in the three phases of the process.
The IRS units that manage the computer and payment processing systems  send collection notices and process related payments. Written responses  to notices are handled by a Compliance Services unit which is operated,  depending on the type of taxpayer, by the Wage and Investment Division  (W&I) or the Small Business/Self-Employed Division (SB/SE). Taxpayer  telephone calls to IRS in response to collection notices are handled by  IRS’s Accounts Management organization. IRS’s outgoing calls to  taxpayers to prompt payment or other resolutions as well as taxpayer calls  in response to IRS’s telephone contacts are handled by the Automated  Collection System (ACS) operations of W&I and SB/SE. All in-person  contacts are handled by the Collection Field Function in SB/SE.
section_title: Cases Take Various Routes through the Process Based on Several Factors
paragraphs: In routing cases between and within the phases of the process, IRS  considers factors such as the types of debt and taxpayers as well as the  results of contacts with taxpayers.
subsections: section_title: Debt Characteristics
paragraphs: The characteristics that IRS considers include individual versus business  tax, the dollar amounts due, and the age of the debt, among others, to  evaluate whether the debt is potentially collectible. For example:  Individual taxpayers receive up to four notices while business taxpayers  receive up to two before their cases are routed to the next phase if IRS  receives no taxpayer response or a response inadequate to resolve the  debt.
Cases not resolved through the notice phase are placed in a system for  modeling to determine the appropriate routing through the telephone  phase or the in-person contact phase.
Due to the risk of businesses continuing to accumulate tax debt and the  resulting need for faster IRS intervention, trust fund tax cases are more  likely to be routed around the telephone contact phase to the waiting  “queue” for in-person contact or routed around the queue to be assigned  for in-person contact if the amount due exceeds a certain threshold.
Cases meeting certain criteria in the telephone contact phase—such as  amount due—may be routed to the ACS unit that does outbound calls to  taxpayers. Otherwise, any telephone contact with the taxpayer would  depend on whether the taxpayer calls in response to IRS notices or letters  on enforcement actions proposed or taken in this phase.
section_title: Known Taxpayer Information
paragraphs: The known information about the taxpayer includes whether IRS has  information on potential levy sources (such as bank accounts), a valid  mailing address or telephone number for the taxpayer, the taxpayer’s  financial assets or ability to pay, or other tax debts owed by the taxpayer.  Several examples follow.
After notices are sent, if IRS records (such as those from a financial  statement due to a previous tax debt) indicate that the taxpayer cannot  pay all or part of the debt, the debt may be categorized as not collectible  due to financial hardship.
Within the telephone contact phase, whether IRS attempts an outbound  call to the taxpayer is determined, in part, by whether IRS has a telephone  number for the taxpayer.  If IRS records indicate that the taxpayer already has outstanding unpaid  tax debt in a phase of the collection process, IRS is to forward the new  debt information to that phase to facilitate collection of all the debt. For  example, if a taxpayer’s debt was already being handled in the in-person  contact phase, the new debt would skip the telephone phase and the  waiting queue to go directly to in-person contact.
section_title: Results of Attempts to Contact Taxpayers to Resolve Tax Debts or Enforce Collection
paragraphs: The results of attempts to contact taxpayers to resolve tax debts or  enforce collection can vary widely. Taxpayers may respond by providing  more information about their debt or financial situation, making a partial  or a full payment, or asking about alterative ways to resolve the debt such  as by reducing amounts owed or paying through installments. Taxpayers  also may not respond at all. The nature of taxpayers’ responses help  determine subsequent IRS action and which IRS unit takes action.  Examples follow.
Within the notice phase, various IRS units can get involved and handle a  case differently depending on whether the taxpayer has income from a  small business or the taxpayer responds by telephone or through the mail.  In the telephone contact phase, IRS may place a lien on a taxpayer’s  property if previous attempts to resolve the debt have been unsuccessful.  Unless the lien filing prompts the taxpayer to resolve the debt, the case  can move to the waiting queue for in-person contact.  If IRS notices to the taxpayer are returned as undeliverable or IRS records  do not provide a levy source, IRS may send the case to be researched for a  good address or a levy source such as bank accounts.  If taxpayer responds by entering into an installment agreement, offering to  satisfy the debt by paying less than the full amount due (offer in  compromise), or questioning the amount due (such as in an appeal), IRS is  to temporarily suspend routing the case through the collection process  until IRS finishes dealing with these alternative ways to resolve the debt.
section_title: Tax Debt Collections Have Recently Increased, but Increases in Potentially Collectible Inventory and Active Cases May Not Portend Continuing Collection Increases
paragraphs: The revenue collected from pursuing the unpaid tax debt through the  collection process increased about 30 percent—from $33 billion in fiscal  year 2002 to $43 billion in fiscal year 2007. At the same time, the total IRS  tax debt inventory went from $280 billion to $290 billion, as new tax debt  was created and old tax debt was resolved each year. IRS officials  attributed the increase in collections and in debt inventory in part to  increased enforcement actions. Comparing fiscal years 2004 and 2007,  IRS’s assessments made from enforcement efforts accounted for a  growing portion of the new potentially collectible debt inventory,  increasing from about 30 percent to about 50 percent, respectively. IRS  officials said that assessments made through ASFR were a major factor in  this growth.
IRS collection officials said that to some extent IRS cannot control trends  in the total tax debt inventory, which they attribute to trends in the  economy and taxpayer compliance behaviors. They also said that IRS may  make enforcement-related tax assessments even when taxpayers likely  will not be able to pay the debt because IRS needs to signal taxpayers that  IRS will indeed pursue noncompliance.
Over the 2002 through 2007 period, IRS categorized more of the unpaid  debt inventory as worth pursuing with a growing portion of its unpaid  inventory being in potentially collectible and active collection status.  These increases, however, may not result in the total dollars actually  collected growing annually at rates similar to the growth in the inventory  defined as collectible or active.
As shown in figure 3, IRS’s potentially collectible inventory increased from  27 percent of the unpaid tax debt inventory in fiscal year 2002 to 36  percent in fiscal year 2007. Data on the inventory of unpaid assessments in  fiscal years 2002 through 2007, including more details on how IRS  classified the debt, are in appendix IV.
According to IRS, the potentially collectible inventory is the focus of its  collection efforts. However, not all potentially collectible debt has a high  potential for collection. Rather, potentially collectible means that the debt  has not been defined as uncollectible for a variety of reasons, such as the  taxpayer being bankrupt or facing a financial hardship or IRS being unable  to find the taxpayer or temporarily suspending the debt from collection  actions.
From fiscal year 2002 to 2007, IRS placed more of the inventory with  collection potential into “active collection status.” Comparing fiscal years  2002 and 2007, debt in active collection increased from 62 percent to 75  percent of the potentially collectible inventory, respectively, as shown in  figure 4.
Active collection status means that IRS makes the debt available to be  pursued in a phase of the collection process. This status does not mean  that IRS is actively and continuously contacting the taxpayer or using its  enforcement tools in the telephone or in-person contact phases until all  debt is resolved. Depending on competing priorities and IRS resources, for  example, some of this inventory could remain in this active status for  some time before it is acted upon or resolved. IRS also could decide to  move the debt to an inactive status during which no further collection  action is taken.
For debt that is resolved by removing it from the debt inventory, IRS often  does not collect any revenue. During each of fiscal years 2002 through  2007, over half of the annual resolutions in terms of dollar amounts were  removed from the debt inventory through abatements and collection  statue expirations, as shown in table 1.
Abatements occur for a number of reasons. For example, section 6404(a)  of the Internal Revenue Code, in part, authorizes IRS to abate the unpaid  taxes or any related liability which is:    excessive in amount,    assessed after the applicable period of limitation has expired, or    assessed erroneously or illegally.
Among reasons for abatements are errors by taxpayers or IRS and changes  to assessments resulting from additional information provided by  taxpayers or obtained by IRS that adjusts the appropriate tax assessment  and related penalty and interest amounts that have accrued over time.  Abatements can occur years after an original tax assessment was made. In  sum, the amount that IRS abates can exceed the amount collected during a  given year.
An example in which additional information leads to abatements involves  ASFR assessments. IRS uses the best information available when it  prepares returns for taxpayers who failed to file returns. When responding  to the IRS-prepared return, taxpayers may provide additional information,  such as on deductions to which they are entitled, which would produce a  lower tax assessment compared to the ASFR-generated assessment.  Accordingly, IRS abates any assessed taxes and any applicable penalties  associated with the ASFR return. Abatements also can be required when:    a taxpayer uses a net operating loss carryover amount to offset a tax    a taxpayer files an amended tax return that changes the tax liability,    a taxpayer provides information as part of a request to abate certain types  of penalty assessments due to reasonable cause,    a bankruptcy court has discharged a tax assessment,    a taxpayer has met the terms of the agreement for an offer in compromise  to reduce the amount the taxpayer must pay to satisfy a tax debt, or    a corporate officer has fully paid a trust fund recovery penalty amount  assessed for unpaid payroll taxes, which means that IRS then can abate  any other assessments of this amount against other officers.
Likewise, the law allows IRS a period of time to collect outstanding tax  debts through its collection process or court proceeding. This period,  which IRS refers to as the Collection Statue Expiration Date, generally is  10 years and usually begins from the date a tax liability is assessed. In  general, if IRS does not collect the full unpaid tax debt amount before the  statute period ends, then any remaining balance on the debt is removed  from the unpaid tax debt inventory because it is exempt from further IRS  collection action. Expired debt can happen, for example, when the  taxpayer does not have sufficient resources to pay the debt before the  statutory period elapses, such as when the taxpayer is a defunct business  or dies, or when IRS’s limited resources do not enable it to actively pursue  all debts. IRS officials noted that the increase in the portion of debt  removed due to statute expirations in the 2003 through 2005 period, for  instance, was attributable to the inability of failed financial institutions to  pay large tax assessments associated with Resolution Trust Fund cases  arising during the 1990s.
section_title: IRS-Wide Collection Performance Measures Cover the Collection Process and Some Outcomes
paragraphs: As shown in table 2, two of the IRS-wide collection performance measures  cover all phases of the collection process and focus on the extent to which  debt cases were closed and the efficiency in using staff resources for those  closures. A third measure covers IRS’s accuracy in the phone contact  phase.
Table 3 shows the goals and actuals for the three IRS-wide performance  measures for IRS’s collection process. Fiscal year 2005 is the earliest  available data for the coverage and efficiency measures.
The IRS units that manage the phases of the collection process have more  measures and data on their phases. The telephone contact phase  operations of SB/SE and W&I and the in-person contact phase operation  (which is only SB/SE) have measures and goals on customer satisfaction,  employee satisfaction, and quality. For the notice phase, IRS officials had  data on the speed and efficiency of collections. Other measures and data  in some units included the time taken to resolve the debt and the age of  the debt. IRS officials who manage the different phases of the collection  process said that their available data, performance measures, and goals  meet the needs of their operations.
These IRS officials also said that IRS does not have performance measures  and goals for dollars collected in part because of concerns about legal  restrictions on IRS using enforcement records to assess performance.  Under Public Law 105-206, IRS cannot evaluate employees or suggest  production quotas or goals by using “records of tax enforcement results.”  In addition, these officials said that IRS does not, in their view, need more  IRS-wide measures to indicate how well the overall collection process is  working. They said that to understand what was driving performance  trends, any rolled-up measure would have to be broken down into its  constituent parts. The officials did not explain why the two IRS-wide  measures on coverage and efficiency were useful while other measures  would not be useful even though they all would be rolled up.
Our previous work has identified material weaknesses in IRS’s controls  over unpaid tax assessments and over the collection of tax revenues due  the federal government. Although IRS has made some progress on these  weaknesses, progress has not been sufficient to resolve them. In  November 2007, we reported that IRS’s efforts to target cases for  collection have been hampered by an inability to reliably measure how  much it collects compared to the costs, and that these efforts did not  represent an agencywide, systematic approach to managing the collection  of unpaid taxes. The absence of agencywide cost-benefit information and  related performance measures also hampered IRS’s ability to form an  effective and efficient collection strategy.
Over the last 3 years, IRS has employed various approaches, including  sophisticated computer modeling and risk assessment techniques, to assist  it in more effectively identifying the tax debt cases with the greatest  collection potential and to facilitate prioritizing of these cases for  collection. IRS has also employed these techniques to identify the most  effective collection approach to take for the various types of outstanding  tax debt. Although IRS has ongoing projects to expand the use of these  models and techniques, it does not yet have an agencywide, systematic  approach to managing the collection of unpaid taxes across the scope of  IRS’s responsibilities. IRS has acknowledged the need for the parts of the  collection process to work better together. In response, IRS created a  council of IRS collection officials, for example, to coordinate various  collection activities and review how potential changes in one part of the  process could affect another part of the process. Further, IRS has a  number of ongoing projects to improve aspects of the collection process.  However, some of these projects will take a few years to be implemented,  as indicated in appendix III.
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 June 2, 2008 (which is reprinted in app.  V). The Commissioner noted that he appreciated the interest of Congress  and other stakeholders in tax debt collection and outlined some related  collection process highlights and accomplishments.
In addition to citing the two IRS-wide collection measures—coverage and  efficiency—which we discussed in this report, the Commissioner cited  other information as signs of IRS collection improvements since 2005. He  pointed to improvements in dollars collected, total dispositions,  productivity, and cycle time without reducing customer satisfaction,  quality, or accuracy. As we discussed in the report, beyond the two IRS- wide collection performance measures, the IRS units that manage the  phases of the collection process have other measures and data on their  phases of the collection process. We note that although IRS has only two  IRS-wide collection measures—coverage and efficiency—that are used by  agency management to set performance goals, IRS in effect used measures  from the unit level in order to portray a more complete picture of  collection performance in its comment letter.
The Commissioner further said that progress in collection performance  was recognized when, in October 2006, the material weakness “Collection  of Unpaid Taxes” was downgraded to a reportable condition. This  downgrade was made by IRS. As we noted in this report, although IRS has  made some progress on the material weaknesses we identified in previous  work, we concluded that the progress had not been sufficient to resolve  them as of November 2007. We will review this material weakness again in  our next report on IRS’s financial management systems.
The Commissioner also referred to 14 collection process improvement  projects underway, a count that differs from the 18 projects we identified  in our report  We did not reconcile the difference.
In addition to its letter, IRS provided technical comments on a draft of this  report which we incorporated as appropriate.
As agreed with your offices, unless you publicly announce its contents  earlier, we plan no further distribution of this report until 30 days after its  date. At that time, we will send copies to the Secretary of the Treasury, the  Commissioner of Internal Revenue, and other interested parties. This  report will also be available at no charge on GAO’s Web site at  http://www.gao.gov.
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 VI.
section_title: Appendix I: Scope and Methodology
paragraphs: To determine the process the Internal Revenue Service (IRS) uses to  attempt to collect or resolve unpaid tax debts, we interviewed IRS officials  and reviewed IRS documents. For example, we interviewed the Small  Business/Self-Employed Division (SB/SE) and Wage and Investment  Division (W&I) officials on how debt cases flow through the process and  the various factors that are taken into consideration in deciding how to  route cases. We also reviewed IRS documents on the process, including  written descriptions of the factors considered and flowcharts of how tax  debts are routed through the collection process. In addition, we obtained  information on the IRS units involved in administering the process and the  volume of workload going through the process from fiscal years 2002  through 2007.
To identify the trends in unpaid tax debt, including the size and  composition of the inventory, collections, and other resolutions of unpaid  debt in fiscal years 2002 through 2007, we obtained and analyzed data from  IRS’s unpaid assessments database, including how IRS categorized the  debt. For example, we analyzed debt to identify increases or decreases  over time in the various debt categories, such as potentially collectible  versus not potentially collectible debt. We also reviewed data IRS provided  on the resolution of debt cases, including the debt amounts collected,  abated, or written off due to collection statute expiration from fiscal years  2002 through 2007.
To determine the performance measures and related goals that are  available to assess how well the collection process works overall, we  requested and reviewed the highest-level available, IRS-wide measures of  collection performance. We reviewed the measures to determine what  results they report about the collection process. We also reviewed the  goals/targets and actual performance achieved for these measures from  fiscal years 2005 through 2007.
In addition, for context on the debt inventory and collection process, we  also asked IRS to provide (1) data and analysis on the inflow and outflow  of debt, and the status of debt identified in fiscal year 2002, from fiscal  years 2002 through 2007 and (2) a list of IRS efforts to improve the  management of the inventory and collection process. The results of these  requests for IRS information are in appendixes II and III, respectively.
Much of the IRS information we relied on was descriptive. To the extent  possible, we corroborated interview evidence with documentation. Where  not possible, we attributed descriptive information to IRS officials. The  reliability of quantitative data on the tax debt inventory is assured as part  of our annual audit of IRS’s financial statements. We corroborated data on  the resolutions of tax debt with other IRS data and determined that they  were reliable for our purposes.
We conducted this performance audit from July 2007 to May 2008 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: Appendix II: Challenges in Tracking the Inventory and Collection of Tax Debts across Fiscal Years
paragraphs: To help provide context on the magnitude of the Internal Revenue  Service’s (IRS) unpaid tax debt inventory and changes in the inventory  over time we requested data from IRS to show the flow of debt into and  out of the inventory during fiscal years 2002 through 2007. For example,  we requested for each fiscal year:  the amount of new debt that came into the inventory and the amount of  debt resolved during the year, and  the balance of the inventory at year’s end.
In addition, we requested data from IRS that tracked the dispositions and  status of unpaid tax debts identified in fiscal year 2002 through the end of  fiscal year 2007. For example, for each “new” unpaid tax debt assessed in  fiscal year 2002, we requested data that showed the amounts collected,  abated, or otherwise resolved by fiscal year. For the balance remaining at  the end of each fiscal year, we requested data on the status of the debt, for  example, where the debt was in the collection phase, such as, in the notice  phase or assigned for an in-person field contact.
Our data requests were a challenge for IRS, in part, because of how IRS  maintains data for the unpaid tax debts inventory and the resulting  complexity in trying to reconcile the data and ensure its reliability. For  example:  IRS does not have one information system that tracks, in detail, what  happens to unpaid tax debts over time. The unpaid tax debt data come  from several sources including reports from IRS’s Master file and  Compliance Data Warehouse (CDW). As such, doing the tracking that we  requested required much of it to be provided in the form of queries that  had to be analyzed and adjusted for things such as duplicate records,  anomalies in the data, or both.  IRS’s beginning and ending unpaid tax debt inventory balances for each  fiscal year represents a snapshot of the balances at those points in time.  Yet the inventory is based on what happens during each fiscal year to  accumulated tax debt from multiple tax years; therefore, a snapshot of the  balances at the end of a specific fiscal year will not reflect the details of  what occurred to the debt during the year.
IRS could provide mostly summary-level data. An IRS official responsible  for the data believed that the methodology used to produce the summary- level data provided enough details to reflect the various activities that  occurred in each fiscal year at the time the reports were generated. More  useful and reliable information that tracked all activity affecting the  unpaid tax debt inventory balances across fiscal years was difficult for IRS  to produce.
According to this IRS official, the difficulty in trying to produce this level  of detailed information is one reason that IRS requested and eventually  received an exemption from the Federal Accounting Standards Advisory  Board. This exemption relieved IRS from a financial reporting requirement  to disclose detailed information on the flow of debt into and out of the  unpaid assessment inventory.
section_title: Appendix III: IRS Efforts to Improve the Collection Process as of May 2008
paragraphs: The Internal Revenue Service (IRS) has numerous projects planned or  underway to improve the collection process. To better understand the  improvements, we asked IRS to provide us with a list of all improvement  projects on the collection process, and details such as their goals, their  objectives, their measures of success, and their status. We received a list  of projects from the Small Business/Self-Employed Division (SB/SE) and  Wage and Investment Division (W&I). We also identified additional ones  from various IRS documents, including the strategy and program plans of  W&I and SB/SE. Also, we did not include a number of outstanding  legislative proposals whose enactment would affect collection practices  because their enactment is uncertain and beyond the control of IRS. We do  not know if this list is complete, and IRS was not able to provide complete  information on some projects as of May 2008.
We did not attempt to evaluate the information provided; nor did we  attempt to evaluate the process for evaluating and approving collection  improvement projects to ensure that projects had clear goals, measures,  and rationales to support their implementation. Table 4 identifies the  various improvement projects provided by SB/SE and W&I as well as the  projects’ goals, measures, and status in terms of key milestone dates.
section_title: Appendix IV: Data on the Inventory of Unpaid Assessments and Collection Results from Fiscal Years 2002 through 2007
paragraphs: Telephone (Automated Collection  System)
In-person contact (Collection  Field Function)
section_title: Appendix V: Comments from the Internal Revenue Service
section_title: Appendix VI: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Acknowledgments
paragraphs: In addition to the contact named above, Tom Short, Assistant Director;  Ray B. Bush; William J. Cordrey; George Guttman; Ronald W. Jones;  Veronica Mayhand; Donna Miller; John G. Smale; and A.J. Stephens made  key contributions to this report.