IRS Case Selection: Automated Collection System Lacks Key Internal Controls Needed to Ensure the Program Fulfills Its Mission
Released: 2015-09-10T00:00:00

Letter

Background

The mission of IRS’s collection program, as set forth in the fiscal year 2015 collection program letter, is “to collect delinquent taxes and secure delinquent tax returns through the fair and equitable application of the tax laws, including the use of enforcement tools when appropriate, provide education to customers to enable future compliance, and thereby protect and promote public confidence in the American tax system.”

IRS collects unpaid tax debts through a complex, three-phase process: (1) a notice phase, (2) a telephone phase (ACS), and (3) an in-person phase (Field collection). While these phases are not necessarily sequential (for example, a case could go directly from the notice phase to Field collection), with few exceptions every collection case is required to go through the notice phase.

Of cases initiated in fiscal year 2014, more than two-thirds were resolved in the notice phase. If a case is not resolved during the notice phase, it is sent to the automated Inventory Delivery System (IDS), where the next step is determined. IDS will (1) identify and filter out uncollectible cases (i.e., removed from active collection status through a process known as shelving), (2) categorize some cases as high risk, and (3) determine whether cases should be routed to either ACS or Field collection to potentially be worked. See figure 1.

To make these determinations, IDS considers hundreds of factors about a case while carrying out two activities that facilitate closures, prioritization, and routing:

Modeling is a statistical process that analyzes the results of previously closed cases to predict likely case outcomes. In IDS, this process helps determine if a case should be shelved if a model predicts it would not be collectible.

Risking determines whether a case is high risk and influences case routing and shelving decisions. For example, cases where a taxpayer owes a large amount of money would be considered high risk and would be a priority for selection.

The outputs from the modeling and risking activities are used in conjunction with hundreds of business rules to determine where to route cases for further collection actions. For cases routed to ACS and Field collection, the predictive modeling results from IDS are transmitted and used again to further prioritize cases. Cases are sent to ACS for several reasons, the two most common of which, based upon IRS data, are:

Taxpayer case already established in ACS: Taxpayer already has one or more delinquency issues that are being pursued in ACS.

Default routing rules: No other IDS rule for routing cases to Field collection or for shelving cases proves applicable, and therefore by default the module is sent to ACS.

Once a collection case is sent to ACS, it is either established as a new case or added to an existing case on a taxpayer. IRS pursues ACS collection cases by taking one or more actions, including reminding taxpayers of their tax delinquency through automated outgoing calls and letters, as well as placing liens on property or levying wages or assets. These actions may prompt taxpayers to call ACS to attempt to resolve their cases. If collection cases in ACS do not contain up-to-date contact information for the taxpayer, or information about sources that IRS could levy, IRS collection representatives will search for such information. If they find it, the case enters the pool of cases on which a potential action could be taken.

ACS attempts to resolve two types of collection delinquencies: (1) balance due cases, in which a taxpayer has a tax liability to IRS, and (2) nonfiler cases, in which a taxpayer has an unfiled return. One case may include both types of delinquencies.

Balance due cases can be resolved by the taxpayer paying the outstanding tax debt in full, or arranging with IRS to pay the full or partial outstanding tax debt over time (known as an installment agreement). However, these cases could also be closed as currently not collectible if ACS collection representatives are unable to locate or contact the taxpayer, or if the taxpayer is facing economic hardship or unable to pay, among other reasons. Some cases closed as currently not collectible may reenter the collection inventory if IRS determines that in the future, the taxpayer will be able to pay some of the tax debt.

Unfiled return cases may be resolved if the taxpayer files the delinquent return, or if the taxpayer is no longer liable for the unpaid taxes during the period in question, among other reasons. If the collection case is unresolved by ACS, it may move to Field collection to be pursued further, or it could be shelved.

In November 2014, IRS began realigning collection operations across its Wage & Investment (W&I) and Small Business/Self-Employed (SB/SE) business operating divisions. According to IRS, the realignment will increase efficiency, reduce redundancies, and position IRS to improve identification of emerging compliance issues. Previously, ACS operations were split with W&I handling collections against individual taxpayers, and SB/SE handling individuals with business income and losses as well as all business entity taxpayers. As part of the realignment, IRS is consolidating all ACS call and support sites within SB/SE. At least through fiscal year 2015, ACS will operate separate phone numbers for W&I and SB/SE, and all sites will continue to handle the same type of taxpayers as they did prior to the realignment. IRS officials said that they plan to consolidate the management of its telephones by fiscal year 2016 to align with the new organizational structure.

Case Selection Is Mostly Automated, and Priority Cases Accounted for Half of ACS’s Closed Cases in Fiscal Year 2014

ACS Uses Case Characteristics and Predictive Models to Prioritize Cases for Selection through a Multistep Process

The ACS prioritization and selection process consists of three steps, as shown in figure 2. These steps are automated—that is, they do not involve manual intervention—and occur within seconds of each other. IRS managers responsible for ACS case prioritization and selection cannot change these steps without guidance from IRS collection program executives and input from IRS’s information technology staff. Overall, the ACS prioritization and selection process is set up so that high-priority cases are worked first. These include IRS program collection priorities and cases that have a greater potential to result in full payment or an installment agreement based on IRS’s predictive models discussed above. Documentation of the process is limited (an issue we discuss later in this report); therefore we based our description below largely on our reviews of the documentation that does exist, on multiple interviews with IRS officials, and on our observations during two visits to the ACS call site in Philadelphia.

The first step in the ACS prioritization and selection process is to assign a case to one of three inventory groups: (1) special inventories, (2) model priority inventories, and (3) the general population inventory.

During this step, ACS first assesses cases to determine whether they fall within one of ACS’s five special inventories, four of which align with IRS’s collection program priorities. ACS will look at the case characteristics, such as from which IRS division the case originated, to assign it to a special inventory. ACS works all but one of the special inventories at specific call sites where staff possess the expertise to work the cases. See table 1.

Next, ACS assesses the remaining cases to determine whether they qualify for assignment to one of the business model priority inventories. These inventories contain cases that IRS predicts as having a probability of resulting in full payment or installment agreements, among other outcomes. To make this determination, ACS uses the predictive model scores generated by IDS. If the model score on the case is above a specified threshold, ACS will assign the case to the corresponding model priority inventory. ACS assigns any remaining cases not placed into one of the special inventories or model priority inventories to the general population inventory.

Simultaneously with these actions, ACS assigns each case a risk category of high, medium, or low. ACS bases this assignment on the case’s characteristics, such as its age, the dollar value of the outstanding balance, and the type of return the taxpayer filed or failed to file, among others. According to IRS officials, the risk categories have remained largely unchanged since their inception in 2000. Many of the risk categories contain dollar thresholds, which have also remained unchanged; for example, if a taxpayer has a delinquent balance due that is within or above a specified amount, ACS will assign it to the corresponding risk category. In addition, ACS uses risk categories to determine how long to retain cases in ACS before sending them to the queue or shelving them. ACS sends high- and medium-risk cases to the queue after 26 weeks. Low-risk cases are not sent to the queue but are shelved after 104 weeks. IRS officials said that ACS retains low-risk cases for longer because ACS staff have to work through high- and medium-risk cases before they can get to low-risk cases. These officials added that if low-risk cases are not resolved in ACS and subsequently sent to the queue, it is unlikely that they would get worked by revenue officers in Field collection.

After ACS assigns a case to an inventory and a risk category, the case receives a priority level, which determines the order in which ACS works the case within each inventory. ACS uses the assigned inventory, risk category, and the predictive model scores unique to each case to assign it a priority level. Figure 3 illustrates how ACS sets the priority level for business taxpayers. The ACS process for setting the priority level for individual taxpayers is similar except that it prioritizes high-income nonfiler and FERDI cases, among others, first. Following the IRS realignment, which is consolidating all ACS call sites within SB/SE, IRS officials said that their goal is to integrate the case prioritization and selection processes used for SB/SE and W&I into one approach during fiscal year 2016.

IRS collection program officials said that they would like to continue to expand IRS’s use of the IDS model scores to prioritize cases within ACS. For example, ACS prioritizes cases into priority levels of 0 to 5, but does not prioritize the cases within each level. According to IRS collection program officials, using the model scores more robustly would allow IRS to better select among cases that have the same priority level or follow-up date. However, collection program officials have no plans to use the predictive model scores as the sole factor to prioritize cases as this would ignore the collection program priorities discussed above.

In the third step, ACS assigns each case to a function unit. Function units are holding bins for cases while they wait for action by either ACS collection representatives or the system itself (which acts automatically). Generally, these actions include contacting taxpayers, taking enforcement actions, such as liens and levies, or investigating cases for contact information. After segregating cases by inventory and function unit, ACS works cases in a specific order, beginning with priority level, then by follow-up date, and finally by taxpayer identification number in ascending order.

ACS Managers Aim to Balance Workload to Achieve Case Closure and Taxpayer Service Measures

Although the ACS prioritization process is largely automated, IRS managers responsible for case prioritization and selection have some discretion in choosing the number and type of cases worked to ensure that ACS meets two key performance measures: (1) the number of balance due and nonfiler case closures and (2) the level of service, which measures the quality of collection representatives’ interactions with taxpayers who call into ACS. To ensure ACS meets these measures, ACS managers consider: (1) how collection representatives’ time is spent; (2) how many notification and enforcement actions to initiate; and (3) how many and which cases to load for collection representatives to work.

How Collection Representatives’ Time Is Spent

ACS managers first balance the time collection representatives spend researching cases with the time they spend answering phone calls from taxpayers. In fiscal years 2013 and 2014, collection representatives spent 77 percent of their time answering phone calls, up from 66 percent in fiscal year 2012, and thus spent less time researching cases, including those that may be of higher priority. Representatives spent more time answering phones primarily because in fiscal year 2014 there were 20 percent fewer collection representatives (in terms of full-time equivalents) in ACS than in fiscal year 2012.

How Many Notification and Enforcement Actions to Initiate

ACS managers also balance the number of notification and enforcement actions—such as outgoing calls, letters, liens, and levies—with the expected number of taxpayers who will call in response. ACS managers target an expected call volume that allows collection representatives to answer taxpayers’ calls in a timely manner. This helps ensure that ACS meets targets for level of service. Over the previous 3 fiscal years, ACS issued fewer notification and enforcement actions because of the declining number of collection representatives spending an increasing share of their time answering calls. For example, IRS issued 37 percent fewer levies and 31 percent fewer letters between fiscal year 2012 and 2014.

How Many and Which Cases to Load for Collection Representatives to Work

Finally, ACS managers assess how many cases to upload for collection representatives to work. Managers track the number of cases and how long cases are residing in function units to ensure that older cases are worked by collection representatives in a timely manner. If the managers determine cases are residing in function units too long, they upload a block of cases from those function units to ACS’s inventory management tool. Each collection representative accesses the inventory management tool and works the next case available based on the priority level and oldest follow-up date. This process thus precludes collection representatives from selecting individual cases.

Priority Cases Accounted For Half of Case Closures in Fiscal Year 2014, and IRS Performed Better at Closing Priority Individual Cases Than Priority Business Cases

In fiscal year 2014, almost half of the 3.5 million cases closed or transferred out of ACS were high-priority cases, such as high-income nonfiler and trust fund cases. See figure 4. Furthermore, three-quarters of cases closed in ACS in fiscal year 2014 were for taxpayers who had a balance due outstanding with IRS (discussed further below). See appendix III for data on nonfiler cases for taxpayers who failed to file tax returns.

Table 2 shows the mix of closed cases by inventory type. About nine percent were in one of ACS’s five special inventories, which align with IRS collection program priorities. About one-third of cases were from the model priority inventories, in which IRS predicts the case has a certain potential to result in full payment or an installment agreement, among others, and the remaining cases were in ACS’s general inventory.

Broken out by type of taxpayer, about 60 percent of the balance due and nonfiler cases ACS closed in fiscal year 2014 were business taxpayers. These taxpayers included (1) business entities, such as corporations; (2) businesses which failed to file or remit fully their employment taxes; and (3) individuals with business income or losses.

Of the 3.52 million cases closed in or transferred out of ACS in fiscal year 2014, about 1.76 million cases (50 percent) were either resolved by IRS when the taxpayer paid the tax liability in full, or established an installment agreement to pay the liability partially or in full, or when IRS secured the delinquent return. IRS collected almost $6.2 billion in delinquent revenue for the federal government from those cases closed in fiscal year 2014. Another 1 million cases (29 percent) were transferred out of ACS to another location in the IRS collection program. Finally, about 373,000 cases (11 percent) were closed as currently not collectible or shelved, and the remaining 380,000 cases (11 percent) were closed for other reasons, such as being sent to IRS exam to potentially audit the taxpayer’s return.

In fiscal year 2014, IRS generally performed better at closing high-priority individual balance due cases than it did at closing these types of business cases. Figure 5 shows the outcome of these types of closed cases.

Of cases closed in ACS in fiscal year 2014, the median number of days high-priority individual and business balance due cases were open was 259 and 196 days, respectively. Of cases closed in fiscal year 2014, IRS closed 85 percent of business high-priority balance due cases within the first year they were open, whereas 61 percent of individual high- priority cases were closed within the first year.

ACS Objectives Are Unclear, and IRS Lacks Key Documentation of and Procedures for Evaluating Case Prioritization and Selection

An effective internal control system can help federal agencies achieve their missions and objectives and improve accountability. As set forth in Standards for Internal Control in the Federal Government, also known as the Green Book, internal controls comprise the plans, methods, and procedures used to meet an entity’s mission, goals, and objectives, which support performance-based management. Internal controls help agency program managers achieve desired results and provide reasonable assurance that program objectives are being achieved through, among other things, effective and efficient use of agency resources. Internal control is not one event, but rather an ongoing series of actions and activities that occur throughout an entity’s operations. Two examples of internal control standards are the establishment of clear, consistent objectives and a commitment to documenting significant events.

Internal control standards can serve as tools to help IRS management ensure that ACS contributes to the collection program’s mission of collecting delinquent taxes and securing delinquent tax returns through the fair and equitable application of the tax laws. However, when we compared IRS’s processes to these standards, we found that they were deficient in some areas, thereby increasing the risk that ACS activities may not fully contribute to the collection program’s mission.

The Collection Program and ACS Lack Clearly Documented Objectives, and the Key Term of Fairness Is Undefined

According to internal control standards, having clearly documented and communicated program objectives is a precondition of any further internal control activity, such as risk assessment, and is key to helping entities meet their mission, objectives, and goals. IRS officials responsible for the collection program and ACS were unable to produce documentation regarding collection program or ACS objectives. While during an interview with us, collection program executives described the objectives of ensuring adequate coverage of different types of collection cases and maximizing the revenue collected by IRS, neither of these concepts were clearly documented and communicated to IRS staff. We found elements of what could be developed into program objectives in various program documents—such as the collection program letter, which includes the collection mission, and collection policy statements. However, none of these documents were identified by IRS officials as establishing program objectives. IRS officials also pointed to a variety of established performance goals and measures used within the collection program as objectives. However, according to internal control standards and the GPRA Modernization Act of 2010 (GPRAMA), performance goals and measures are not objectives, but rather should be used to assess whether an entity is achieving its objectives, and are ultimately derived from those objectives.

The concept of fairness is of central importance to the collection program, as reflected in IRS’s and the collection program’s mission statement. However, the term “fairness” was not defined or operationalized in any ACS or collection program documents as it relates to case selection. IRS officials did share a number of viewpoints of how fairness could be defined. While these informal views on fairness may have meaning to some, they do not constitute an institutional definition of fairness, nor are they substitutes for documented objectives that are accessible and can be communicated to staff. One IRS official responsible for collection case selection processes offered a definition of fairness as “treating like taxpayers alike”—that is, that taxpayers with similar characteristics face an equal likelihood of being selected for collection. Another IRS official said ACS is fair because it is a “next case” system—that is, cases are automatically prioritized and selected for ACS staff to work, without IRS staff having any role in selecting them. According to this IRS official, fairness is “built into the system.” Another IRS official added that while IRS does not define and document fairness in the IRS collection program letter, IRS details the procedures and processes in the Internal Revenue Manual for how IRS staff are supposed to deal with taxpayers calling into ACS. He said that consistently following these procedures constitutes treating taxpayers fairly.

The absence of clearly documented objectives and a clearly communicated definition of fairness present a number of challenges for IRS. First, without clearly formulated and communicated program objectives, IRS cannot know how well ACS contributes to the collection program mission and is not able to effectively assess the risks ACS may face or its overall effectiveness. Further, without documentation, a key concept like fairness may be open to multiple interpretations by ACS management and staff, as well as by the public. Ensuring that the multistep ACS prioritization and selection process is documented will allow IRS to communicate the concept of fairness consistently and reduce the risk that the case selection and prioritization process is perceived as unfair.

ACS Has Processes for Assessing Risk and Monitoring Performance, but the Lack of Objectives Undercuts Their Effectiveness

Internal control standards state that management needs to identify and analyze relevant risks associated with achieving the objectives. In addition, management needs to decide how to manage those risks and what actions should be taken in response. IRS officials draw on a mix of daily, weekly, monthly, and ad hoc meetings as their means of identifying and managing operational risks, which could affect the functioning of ACS.

An IRS official illustrated one example of risk identification in which the agency’s process identified that some levy notices contained incorrect tax liability information. This error presented a risk that ACS might systematically supply taxpayers or third parties with incorrect information. She also described the steps IRS took to address this risk. These included working with IRS information technology staff to move the affected cases out of function units that issue letters and levies, as well as issuing an alert to inform relevant ACS staff of what was going on, in case they received questions from taxpayers.

ACS managers responsible for case prioritization and selection also have quality reviews and other processes to review ACS operations. For example, program reviews, among other things, ensure ACS collection representatives work cases according to IRM procedures. In fiscal year 2014, each of the seven program reviews completed at SB/SE call sites identified areas for improvement in case processing and outlined corrective actions each call site should take in response. These reviews check compliance with current procedures but do not assess the ACS case prioritization and selection process, according to IRS officials. IRS managers, including those in ACS, are to complete annual assessments of the effectiveness of controls within their own areas of responsibility, which include identifying and reporting risks.

Additionally, IRS is implementing an Enterprise Risk Management (ERM) program, which will consider risks more systematically across IRS. The SB/SE Commissioner chartered a risk committee for SB/SE, which provides input into the overall IRS ERM process. The collection program also has a risk council, which provides input to the SB/SE Risk Committee. ACS is represented on this council by the Director of Campus Collections, who oversees the various ACS call sites that are spread across the country. As of April 2015, SB/SE’s preliminary risk register listed 31 distinct risks, including some collection-related risks. IRS plans to periodically update the risk register and monitor the risks included on the register. IRS is also to develop and take actions in response to the risks listed on the register. In addition to these actions, ERM has procedures whereby ACS staff and management can elevate risks for management and executives to consider. The implementation of the ERM process in SB/SE is still in its initial stages with the preliminary risk register created in April 2015 and the first risk collection council meeting held that same month. As a result, it is too early to determine the effectiveness of the ERM in identifying and managing risk.

As noted above, ACS managers responsible for case prioritization and selection track performance measures, such as the number of balance due and nonfiler case closures as well as level of service. IRS officials responsible for ACS review these measures in daily, weekly, and monthly meetings, which provide information on how ACS is functioning and on whether it is meeting the targets established for its key measures. Internal control standards require management to establish activities to review performance measures and indicators, as well as to compare actual performance to planned or expected results. ACS managers responsible for case prioritization and selection monitor and review a range of reports. These reports provide data on staffing, total ACS dollars collected, enforcement activities (e.g., liens and levies), and customer satisfaction, among other measures. Collection program executives review similar ACS measures, as well as information on enterprise collection priorities, some of which ACS pursues.

IRS has established a management infrastructure for both assessing risk and monitoring performance. However, the lack of clearly documented collection program and ACS objectives undercuts its effectiveness. Without clearly documented program objectives, IRS cannot ensure that its risk assessment processes effectively identify and analyze relevant risks associated with achieving objectives. ERM’s training for managers reinforces the importance of understanding objectives at various levels across IRS and establishing a risk management process to minimize the effects of risk to the accomplishment of those objectives. Similarly, IRS cannot know the extent to which ACS performance measures align with or contribute to the collection program mission without deriving measures from established objectives.

The ACS Prioritization and Selection Process Is Not Clearly Documented

Internal control standards state that such controls need to be clearly documented and that documentation should be readily available for examination. However, IRS has incomplete documentation to describe ACS’s process for assigning a case to an inventory and risk category, priority level, and function unit. The information we used to outline the ACS case prioritization and selection process discussed above was mostly told to us by IRS officials over a series of discussions, rather than by clear and comprehensive documentation. IRS was able to provide documentation on the case characteristics that apply to each risk category and the IRM section that explains ACS operations, including information about how cases are assigned to function units. However, this documentation does not provide an overview of the multistep ACS case prioritization and selection process.

Using screen shots from their computer system, IRS officials were able to demonstrate how ACS assigns a case to an inventory and a priority level. However, the screen shots did not stand alone without explanation and input from IRS officials. IRS was able to provide documentation about how the process has changed overtime, such as information technology requests to implement the use of the predictive model scores and alter the model priority inventories in ACS.

IRS officials acknowledged that they have little formal documentation along these lines to comprehensively describe the ACS process. In lieu of documentation, IRS has to rely on the institutional knowledge of management and staff to be able to describe the process. For example, key IRS staff have been employed in ACS since at least 2000, when ACS began using the risk categories. The officials also acknowledged that the process needs to be written out to affect a smooth transition to future staff and management. Indeed, IRS officials told us that some ACS staff will soon be eligible for retirement, which highlights the importance for IRS to document the multistep ACS process.

Without adequate documentation, it is also difficult to determine whether the ACS case prioritization and selection process effectively supports collection program and ACS missions and objectives. Furthermore, as IRS realigns ACS collection operations within SB/SE, having baseline documentation of the process as structured would assist IRS in communicating the process to staff and in making decisions about how best to consolidate ACS. Finally, the absence of a fully documented prioritization process may make it difficult for IRS to defend against accusations that it is not following its collections procedures, since these procedures are not documented and cannot be communicated to parties inside and outside of IRS.

IRS Lacks Procedures for Periodically Evaluating the ACS Process and Has Not Taken Corrective Action from Ad Hoc Evaluation

According to internal control standards, separate evaluations of controls can be useful by focusing directly on the controls’ effectiveness at a specific time. The scope and frequency of separate evaluations should depend primarily on the assessment of risks and the effectiveness of ongoing monitoring procedures. ACS has no procedures or structure for regularly completing periodic evaluations of the ACS case prioritization and selection process, including its use of the special inventories, risk categories, predictive models, and priority levels. For example, according to IRS officials, the ACS risk categories have been relatively static since their creation in 2000, and dollar values within those risk categories have not been adjusted for inflation. While some changes have been made to the ACS case prioritization and selection process, these changes were based on ad hoc studies or recommended by management based on changes in priorities, rather than the result of regular and periodic evaluations of the ACS case prioritization process. For example, as a result of the IRS Collection Process Study completed in 2010, IRS decided to retain high-risk cases longer in ACS to ensure those cases get worked. IRS officials said that while they have no procedures to regularly or periodically evaluate ACS case prioritization, such evaluations could provide useful information for consolidating ACS operations in SB/SE, in light of the IRS realignment. In addition, according to IRS officials, the realignment is serving as a catalyst to review and enhance the ACS process in SB/SE, such as reviewing and enhancing the use of the risk categories and revisiting the amount of time cases are retained in ACS.

IRS’s December 2014 Collection Workload Optimization Project (CWOP) produced a number of findings and recommendations for how ACS could better manage and prioritize cases. For example, CWOP recommended that ACS stop prioritizing cases by follow-up date because selecting cases by the oldest follow-up date may result in ACS selecting cases with less collection potential. In our discussions about the status of the CWOP recommendations, IRS officials said that while CWOP remains an ongoing effort, they do not have a plan or time frame in place for next steps and corrective actions in response to the report. IRS officials stated that they have been unable to take action with regard to certain CWOP recommendations due to scarce resources and competing priorities for IRS’s information technology services.

Internal control standards note that managers are to (1) promptly evaluate findings from audits and other reviews, including those showing deficiencies and recommendations reported by auditors and others who evaluate agencies’ operations, (2) determine proper actions in response to findings and recommendations from audits and reviews, and (3) complete, within established time frames, all actions that correct or otherwise resolve the matters brought to management’s attention.

Without periodically reviewing and evaluating the ACS case prioritization and selection process and ensuring that findings from evaluations, such as CWOP, are addressed and corrective action is taken where necessary, ACS may be missing opportunities to better prioritize its workload and improve collection results. For example, CWOP recommends that ACS prioritize collection cases in each of its inventories by the model scores rather than by the priority level codes. According to IRS, this would help ACS select the cases with the greatest collection potential. Without such evaluations, IRS may also not be able to ensure that ACS case prioritization is working as intended and may be missing opportunities to more effectively align the ACS case prioritization process with IRS’s strategic objectives and with collection program and ACS objectives, once developed. In addition, if the prioritization and selection process is not periodically evaluated over time, it could lose its value and usefulness. For example, IRS does not know how the static dollar thresholds for the ACS risk categories affect the composition of cases assigned certain priorities and risks over time. Outdated dollar thresholds may no longer be serving their intended purpose of identifying high-risk or priority cases as they have remained static while taxpayer incomes have increased over time, potentially changing ACS’s composition of cases.

Conclusions

ACS is one of IRS’s primary enforcement tools for compelling noncompliant taxpayers to file their tax returns and pay their taxes. ACS ensures millions of taxpayers do just that, which results in billions of dollars being collected annually for the federal government, thereby helping to address the tax gap and encouraging future voluntary compliance. ACS’s process for prioritizing and selecting cases helps to ensure that high-priority taxpayers, including federal employees and retirees, high-income nonfilers, and large corporations, as well as taxpayers who have a higher probability of paying their taxes in full, comply with the tax laws. But the absence of key management controls— objectives, documentation, and procedures to complete periodic evaluations—creates multiple challenges for IRS. Without clearly documented objectives, IRS cannot know if ACS is meeting its mission and the agency will not be able to manage risk or monitor performance as well as it otherwise could.

The lack of clear and comprehensive documentation on ACS’s multistep case prioritization and selection process risks that it will not be communicated consistently to parties inside and outside of IRS. IRS has relied on institutional knowledge from experienced staff, some of whom are now retirement eligible. However, the risk of inconsistently communicating the ACS process increases as subsequent IRS employees work within ACS. By not periodically evaluating how the ACS process is structured (or acting on the findings of the ad hoc evaluation that was conducted), IRS is missing opportunities to enhance ACS’s effectiveness. Moreover, the absence of these controls could affect IRS’s ability to successfully consolidate W&I and SB/SE ACS call sites as part of the ongoing IRS realignment. Lastly, IRS risks the appearance that the ACS prioritization and selection process is unfair to taxpayers because IRS is unable to communicate key pieces of information, such as its definition of fairness, to the public.

Recommendations for Executive Action

To help ensure the IRS collection program meets its mission and selects cases fairly, we recommend that the Commissioner of Internal Revenue take the following four actions related to ACS: 1. Establish, document, and implement objectives for the collection program and ACS, and define the key term of “fairness” as it applies to collection activities, which can be communicated to IRS staff. 2. Establish and implement clear guidance and documentation for the ACS case prioritization and selection process, including inventory, risk, and priority designations, as well as changes to those designations over time, and communicate them to appropriate IRS staff. 3. Establish, document, and implement procedures to complete periodic evaluations of the ACS case prioritization and selection process and structure. The evaluation should cover the composition of the risk categories, model thresholds, and dollar thresholds used to prioritize cases. 4. Establish, document, and implement a plan and time frame to ensure follow-up for ad hoc evaluations of the ACS case prioritization and selection process.

Agency Comments and Our Evaluation

We provided a draft of this report to the Commissioner of Internal Revenue for review and comment. The Deputy Commissioner for Services and Enforcement provided written comments dated August 18, 2015, which are reprinted in appendix V.

IRS stated that it agrees with the importance of sound internal controls and is committed to their improvement, especially in the areas we recommended. To that end, IRS noted actions that it has taken to improve collection performance in fiscal years 2014 and 2015, including updates of analytical models and the realignment of the collection program to be entirely within SB/SE. IRS acknowledged that its documentation has not kept pace and affirmed its commitment to bringing the policies and procedures up to date. However, IRS did not believe that the level of current documentation has undercut the effectiveness of ACS.

In response to our recommendation to establish, document, and implement objectives for the collection program and ACS, IRS said it will review its current objectives for both, which it identifies as the collection program priorities, to identify and implement any additional objectives. IRS also said it plans to define key terms such as "fairness" as it applies to collection activities in a data dictionary, which is communicated to IRS staff. As we noted above, ensuring clearly documented and communicated objectives exist will allow IRS to use the management infrastructure in ACS for both assessing risk and monitoring performance to their full potential. In addition, communicating a key concept like fairness to IRS staff will help reduce the risk that it is open to multiple interpretations.

In response to our recommendation on establishing and implementing clear documentation, IRS said that it will review and implement clear guidance and documentation that can be communicated to IRS staff. As we discussed, having adequate documentation for the ACS case prioritization and selection process will assist IRS in communicating the process to staff, and in making decisions about the best way to consolidate ACS under the recent realignment of collection operations.

In response to our recommendation to periodically evaluate the ACS case prioritization and selection process, and follow up on prior ad hoc evaluations, IRS said it will review and, if needed, update its internal management documents and ensure follow up for ad hoc evaluations. IRS also noted that any evaluation of the ACS case prioritization and selection process completed will be based on a risk assessment at that time. Given that components of the ACS case prioritization and selection process have been in place since at least 2000 without being evaluated, ACS may be missing opportunities to better prioritize its workload and improve collection results through periodic evaluations, and ensuring follow up for ad hoc evaluations.

Lastly, IRS noted that our report did not identify any instances where the selection of a case was considered inappropriate or unfair. However, as described in our scope and methodology, we did not design our study to look for cases of inappropriate selection, but rather to assess the internal controls that help safeguard the fairness of the case selection process. By evaluating ACS’s internal control framework for selection, we were able to determine whether IRS had processes in place that help provide reasonable assurance of fair selection not just of cases selected in the past but also on an ongoing basis.

We are sending copies of this report to the Chairmen and Ranking Members of other Senate and House committees and subcommittees that have appropriation, authorization, and oversight responsibilities for IRS. We will also send copies of the report to the Secretary of the Treasury, Commissioner of Internal Revenue, and other interested parties. In addition, this report is available at no charge on the GAO website at http://www.gao.gov.

If you or your staff have any questions or wish to discuss the material in this report further, please contact me at (202) 512-9110 or mctiguej@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.

Appendix I: Objectives, Scope, and Methodology

Our objectives were to (1) describe the Automated Collection System (ACS) process to prioritize and select collection cases and the results of that process for fiscal year 2014, and (2) determine how well the ACS case prioritization and selection process supports the collection program mission and objectives.

To describe ACS’s process to prioritize and select collection cases, we obtained and reviewed, to the extent they were available, IRS documents on how cases are prioritized and selected once they are received within ACS. The documents reviewed include sections of the Internal Revenue Manual (IRM), program documents, IRS reports, and presentations prepared by IRS staff. To better understand background and context for ACS, we reviewed information on the Inventory Delivery System process, which routes cases to ACS, and interviewed IRS officials responsible for the IRS collection program. We also twice visited an ACS call site in Philadelphia. We interviewed IRS managers in the offices of Headquarters Collection and Campus Collection, including IRS managers responsible for managing case inventory in ACS, on how collection cases are received in and flow through the ACS process. We also interviewed IRS officials regarding the various factors that the officials take into consideration in deciding how to work certain cases to meet ACS performance measures and how IRS’s recent realignment will affect ACS’s process. In addition, we observed ACS staff working cases and taking telephone calls from taxpayers. To better understand the scale of operations for ACS and performance measures, we reviewed data from a number of prepared reports and other data provided by IRS covering fiscal years 2012 through 2014. The data we received included the number of notification and enforcement actions taken in ACS. We derived most of the data from IRS Collection Activity Reports (CAR). We previously used CAR data to report on the IRS notice phase process in 2009. At that time, we interviewed IRS officials with knowledge of CAR data about the steps taken to ensure data accuracy. We determined that the CAR data were sufficiently reliable for our purposes.

To describe the results of the ACS case prioritization and selection process for fiscal year 2014 (the most recent full year available), we obtained data from ACS on collection taxpayer cases that had been closed in fiscal year 2014 and partially from fiscal year 2015. We analyzed and reported closed ACS collection cases by the type of taxpayer (individual or business), case priority, type of delinquency, type of closure, and the average and median number of days cases were open in ACS. For purposes of our analysis of taxpayer type, individual taxpayers reflect cases handled by ACS call sites in the Wage & Investment division. We defined business taxpayers as those cases that were prioritized and worked within the Small Business and Self Employed division. These include the following types of taxpayers: Individual taxpayers who report business income, such as (1) nonfarm sole proprietorships that file Form 1040, Schedule C, are unincorporated and owned by a single individual in which net business income or loss is included in the owner’s individual adjusted gross income; (2) landlords, who file a Form 1040 and Schedule E- Part I and are individuals who report rental real estate activity on Part I of Schedule E; or (3) farmers, who file a Form 1040 and Schedule F or Form 4835 and are individuals who report farm income or landowners who report farm rental income;

Businesses which failed to file or remit fully their employment taxes; or

Business entity taxpayers, such as corporations.

For the purposes of our analysis, we treated taxpayers who had both a balance due and nonfiler account on their case, known as a combination case, as a balance due case, consistent with how IRS reports ACS data. For the purposes of this review, we determined that the ACS data used in our analysis were reliable. Our data reliability assessment included reviewing relevant documentation, interviewing knowledgeable IRS officials, and reviewing the data to identify obvious errors or outliers.

To assess how well the processes for case selection support collection program objectives and mission, we compared documentation for the processes identified above to selected standards in the Standards for Internal Control in the Federal Government (GAO/AIMD-00-21.3.1, November 1999). We also reviewed IRS and collection program guidance in which objectives could potentially be stated or implied, including the IRM, the mission statements of various collection program subunits and policy statements on collections, annual collection program letters for fiscal years 2013 through 2015, and potentially collection program-related objectives in IRS Publication 3744, Internal Revenue Service Strategic Plan FY2014-2017. We then assessed whether ACS’s procedures, IRM sections, IRS reports, and related internal controls conformed to the relevant standards for internal control in the federal government. To determine which internal control standards were most relevant, we utilized our Internal Control Management and Evaluation Tool, in conjunction with observations based on our preliminary audit work, to select the standards that most closely related to ACS activities. We then focused our assessment of ACS internal controls around our selected standards by interviewing IRS officials and reviewing available documentation. To determine IRS’s definition of fairness as it applies to collection activities, we reviewed the ACS procedures and process for case prioritization and selection. Furthermore, we surveyed relevant industry and institutional sources, and determined that there is no standard definition of fairness in the context of tax collection specifically— or even tax administration more generally—to which IRS could appeal in lieu of having its own internally-generated definition of fairness within the collection program. To determine whether there are procedures in place to monitor, evaluate, and review the ACS prioritization process periodically, we reviewed similar documentation mentioned above. We also interviewed relevant IRS officials concerning their understanding of the mission, objectives, and internal controls of the collection program and ACS, and about the extent to which procedures exist to monitor ACS case prioritization and selection.

We conducted this performance audit from October 2014 to September 2015 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.

Appendix II: Automated Collection System (ACS) Overview

Overview of ACS Process

Once a case arrives, ACS assigns it to an inventory and priority level, as well as to a function unit. Depending on the function unit, ACS may take a number of actions, such as searching for contact information and a levy source, contacting taxpayers, or issuing levies or liens as appropriate. See figure 6, which depicts the ACS process.

Also, the ACS process for setting the priority level for individual taxpayers is similar to the process used for business taxpayers. The main difference is that, within the Wage & Investment (W&I) process, high- income nonfiler and Federal Employee/Retiree Delinquency Initiative cases, among others, are prioritized first, as, unlike those of the Small Business/Self Employed (SB/SE) process, the W&I call sites do not have responsibility to pursue trust fund cases. The W&I prioritization process proceeds similarly to the SB/SE process thereafter. See figure 7.

Finally, after segregating cases by inventory and function unit, ACS works cases in a specific order, beginning with priority level, then by follow-up date, and finally by taxpayer identification number in ascending order. See figure 8 for how ACS sorts cases by priority and inventory within a function unit.

ACS Call Site Locations

In November 2014, IRS realigned compliance operations across its W&I and SB/SE business operating divisions. Prior to the realignment, ACS operations were split with W&I handling individual taxpayers and SB/SE handling business taxpayers. As part of the realignment, IRS consolidated all ACS collection operations within SB/SE under the authority of a single IRS collection director. Figure 9 shows the various ACS call and support sites, which receive taxpayer calls and research collection cases. Through the end of fiscal year 2015, the eight former W&I call sites will continue to handle and answer phone calls from individual taxpayers, while the seven former SB/SE call sites will do the same for business taxpayers.

ACS Notification and Enforcement Actions

Table 3 shows how notifications and enforcement actions have fallen significantly between fiscal years 2012 and 2014.

Appendix III: Automated Collection System (ACS) Data on Nonfiler Closed Cases, Fiscal Year 2014

This appendix shows the results of nonfiler cases closed in ACS in fiscal year 2014.

Appendix IV: Automated Collection System (ACS) Data on Balance Due and Nonfiler Case Closures, Partial Fiscal Year 2015

This appendix shows the results of balance due and nonfiler cases closed in ACS from October 1, 2014, to February 28, 2015.

Appendix V: Comments from the Internal Revenue Service

Appendix VI: GAO Contact and Staff Acknowledgments

Contact

Staff Acknowledgments

In addition to the contact named above, MaryLynn Sergent, Assistant Director, Vaughn Baltzly, Jehan Chase, David Dornisch, Steven Flint, Robert Gebhart, Ted Hu, Robert Robinson, Alan Rozzi, John Sawyer, Albert Sim, and Jason Vassilicos contributed to this report.