IRS has two major programs to collect tax debts. First, IRS staff in the telephone function may attempt collection over the phone or in writing. Second, if more in-depth collection action is required, field collection staff may visit delinquent taxpayers at their homes or businesses as well as contact them by telephone and mail. Under certain circumstances, IRS staff can 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 collection staff also can be authorized to seize other taxpayer assets to satisfy the tax debt. However, as we have previously reported, IRS has deferred collection action on billions of dollars of delinquent tax debt and, until recently, IRS collection program performance indicators have declined, in part because of higher workload in other priority areas and unbudgeted cost increases (such as for rent or pay). Although IRS data indicate that trends in collections have shown some improvements, the enforcement of the tax laws—including the collection of unpaid taxes—remains one of GAO’s “high-risk” areas of government. To help address the growing tax debt inventory and declines in IRS’s tax collection efforts, the Department of the Treasury proposed that Congress authorize IRS to use PCAs to help collect tax debts for simpler types of cases, paying them out of a revolving fund of tax revenues that they collect. IRS officials said that this proposal arose, in part, because of the belief that Congress was not likely to provide the increased budget to hire enough IRS staff to work the inventory of collection cases. In 2004, Congress authorized IRS to use PCAs to take certain defined steps to collect tax debts—including locating taxpayers, requesting full payment of the tax debt or offering taxpayers installment agreements if full payment cannot be made, and obtaining financial information from taxpayers. PCAs are to have limited authorities and are not to adjust the amount of tax debts or to use enforcement powers to collect the debts, which are inherently governmental functions that are to be performed by IRS employees. IRS is authorized to pay PCAs up to 25 percent of the amount of tax debts collected and retain another 25 percent of taxes collected to fund IRS collection enforcement activities. IRS initially envisions using PCAs on simpler cases that have no need for IRS enforcement action and that involve individual taxpayers that (1) filed tax returns showing taxes due but did not pay all those taxes and (2) made three or more voluntary payments to satisfy an additional tax assessed by IRS but have stopped the payments. To start, IRS plans to send cases to PCAs that have not recently been worked by IRS because of their lower priority, such as cases set aside because of inadequate IRS resources to work them or those in the queue to be worked but not yet assigned to IRS staff. After gaining some experience, IRS plans to expand the types of cases to be sent to PCAs to include those unassigned cases that IRS staff now may work, including those in which IRS attempts to find taxpayers that appeared to not file required tax returns, according to IRS officials. IRS first attempted to contract collections with a pilot test in 1996 but abandoned the effort, in part, because the $3.1 million collected fell below the $4.1 million in direct costs plus the $17 million in lost revenues from using IRS staff to work on the pilot test rather than collect taxes. Also, limitations in IRS’s computer systems and ability to transfer data hampered efforts to send appropriate cases to PCAs. The current PDC program differs from the 1996 pilot because IRS will require PCAs to try to resolve collection cases within guidelines rather than just remind taxpayers of their debt, will pay PCAs a percentage of dollars they collect rather than a fixed fee, and will electronically send and protect taxpayer data rather than send the cases manually. Appendix III provides some data and information about the PDC program in terms of costs, projected tax revenue to be collected, staffing, and cases to be sent to PCAs. Our 2004 report identified and validated five critical success factors for contracting with PCAs to collect tax debt. Table 1 describes the critical success factors and their related subfactors. To identify the critical success factors, we reviewed reports on contracting and interviewed parties with experience in contracting for debt collection, such as officials from 11 states, the Department of the Treasury’s Financial Management Service, the Department of Education, and three PCA firms that IRS selected as subject matter experts for the program. To corroborate the factors, we interviewed officials from IRS who were developing the PDC program, the IRS Office of Taxpayer Advocate, and the National Treasury Employees Union, which represents IRS employees. As a validation tool, we asked for comments on our draft list of factors from those whom we consulted to identify the factors as well as from officials at four additional PCA firms. We made changes based on their comments where appropriate. After receiving authority to use PCAs in 2004, IRS had planned to issue task orders to three PCAs in January 2006 as part of a limited implementation phase running through December 2007. However, IRS was delayed by a lawsuit and bid protest filed by certain PCAs to challenge IRS’s request for and evaluation of bids from PCAs. Specifically: IRS issued a Request for Quotations (RFQ) to solicit debt collection services for the PDC program on April 25, 2005, under which IRS would start sending cases to three PCAs in January 2006. Because of a lawsuit filed in June 2005, IRS revised and reissued the RFQ on October 14, 2005, with plans to send cases to the PCAs in July 2006. IRS selected the three PCAs on March 9, 2006. Because one of the PCAs that were not selected filed a bid protest later in March 2006, IRS stopped working with the three selected PCAs and pushed back the date to send cases to those PCAs to the August-September 2006 time frame. IRS prevailed in the bid protest in a decision issued on June 14, 2006, allowing it to resume its work with the selected PCAs. IRS sent cases to the three PCAs on September 7, 2006. In addition to contracting with PCAs, the PDC program includes IRS’s acquisition and deployment of an information system for automating case selection and managing the case workload. IRS plans to eventually also use this system to select and manage the caseloads for its telephone and field collection functions. IRS had originally planned to deploy the system with two limited-functionality subreleases concurrent with the limited implementation phase (in which IRS is contracting with three PCAs through December 2007) and begin ramping up the number of contractors (eventually to up to 12) with the third, fully functional information system subrelease in January 2008. However, IRS officials said that information systems budget constraints require IRS to change its information system plan. Although IRS has not yet finalized decisions on ramping up the number of PCAs and implementing the information system, the proposed plan IRS officials are considering is to begin increasing the number PCAs and deploy an interim subrelease with some enhancements in January 2008, but delay the full-function subrelease indefinitely. As shown in table 2, in preparation for turning over collection cases to PCAs, as of September 15, 2006, IRS has made major progress in addressing the 5 critical success factors and 17 related subfactors for contracting for tax debt collection, but nevertheless has more to do. IRS has completed steps to address 14 of the 17 subfactors. Although IRS has taken steps on the remaining 3 subfactors, IRS still has work to do to complete addressing them. For example, IRS had not yet documented all of its specific goals and related measures to orient and evaluate the PDC program in terms of achieving desired results, such as goals and measures for improving the productivity of IRS staff. Also, IRS had not determined all historical program costs, that is, how much IRS has invested to date to develop and implement the PDC program. Finishing work to address the critical success factors could help achieve desired results—such as collecting tax debts—but cannot guarantee success, which depends, in part, on how well IRS addresses the factors, identifies problems, and resolves problems in the limited implementation phase. Although IRS officials indicated that a purpose of the limited implementation phase is to assure readiness for full implementation, IRS has not yet documented how it will identify and use the lessons learned to ensure that each critical success factor is adequately addressed before expanding the program. Because program success will be affected by how well IRS identifies and makes needed adjustments to resolve problems, tracking the lessons learned in the limited implementation phase is critical. According to IRS officials, during the limited implementation phase, they plan to collect information to provide baselines, trends, and a basis for making any necessary changes. However, officials did not have specifics on how IRS would ensure all factors had been adequately addressed before moving to full implementation in January 2008. Also, IRS has not documented criteria that it will use to determine whether limited implementation phase performance was sufficient to warrant program expansion. IRS officials indicated that they plan to further discuss performance criteria that could trigger a go/no go decision, and might consider criteria such as the amount of taxes collected and indications of PCAs abusing taxpayers or misusing taxpayer data. IRS has not decided on whether these targets will include the amounts of collected taxes compared to program costs, which was a key reason for canceling the 1996 PCA pilot program. Finally, IRS will have a little more than a half year to identify the lessons learned before incorporating them into the solicitation for the next contract, which IRS intends to release in March 2007 in order to begin expanding the number of PCAs in January 2008. IRS has begun work to design a study intended to respond to a recommendation in our May 2004 report. IRS plans to compare the net dollars collected through the PDC program (dollars paid by taxpayers less fees paid to PCAs) to the dollars IRS could expect to collect if it invested its PDC-related operating costs into having IRS staff work the “next best” cases under IRS’s collection system.