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