Under our voluntary tax system, taxpayers are responsible for filing tax returns that report the full amount of taxes owed (referred to as self- assessment of taxes) as well as pay any taxes that are due. IRS has established eight major compliance and collection programs to check on taxpayer compliance with these responsibilities and to initiate collection action if payment is not received. A descriptive overview of these compliance and collection programs is shown in figure 1. (A detailed description appears in table 4 in app. I.) In general, the compliance programs were designed to assure that taxpayers fully and accurately report and pay the amount of taxes that they owe to IRS. As shown in figure 1, IRS’s compliance checks begin when taxpayers file their tax returns. As returns are received and processed, they are checked for errors (e.g., math errors and omitted schedules) and unpaid balances. After processing, a tax return may also be selected for review by other compliance programs. Two of these compliance programs use computers to analyze information available to IRS (e.g., earnings on bank deposits) to detect taxpayers who have not filed tax returns or taxpayers who have underreported the amount of taxes owed. IRS may also audit the tax returns filed by individuals, corporations, and others, such as estates, to determine whether the correct tax has been reported and paid. At this point in the compliance process, taxpayers may be asked for records to substantiate their returns. If the compliance programs identify unpaid taxes, IRS makes the tax assessments and requests the taxpayers to make the appropriate payment. If payment is not received, IRS sends a series of collection notices to taxpayers demanding payment of the assessment. If taxpayers become delinquent—if they do not pay their taxes after being sent collection notices—IRS may initiate collection action through its telephone and field collection programs. In addition to requesting payment from delinquent taxpayers, these programs research the taxpayers’ ability to pay their tax debts and may use sanctions, including levies, liens, and seizures, to obtain payment. More-complex unpaid assessments are referred from telephone collection to field collection. Beginning in fiscal year 2001, IRS reorganized into four operating divisions, each responsible for administering tax law for a set of taxpayers with similar needs. By reorganizing in this manner, IRS sought to establish clearer lines of responsibility and accountability for improving service to taxpayers and resolving their tax problems. Through such improvements, IRS expected to better enable taxpayers to comply with the tax laws. The two largest divisions in terms of staff and number of taxpayers covered, and the primary focus of this report, are the small business division and the wage and investment division. The small business division is responsible for individuals who are fully or partially self-employed and for businesses with assets up to $10 million. The wage and investment division is responsible for individuals who are not self-employed (e.g., wage earners). The other two divisions are responsible for large and midsized businesses and for tax-exempt and government entities. In general, the IRS operating divisions are responsible for managing the daily operations of the eight major compliance and collection programs, as appropriate for their taxpayers. In some instances, however, the programs are consolidated in one division or two divisions. For example, the field collection program is housed within the small business division and the telephone collection program is split between the small business division and the wage and investment division. The operations of the compliance and collection programs differ from each other in many respects. Some of the programs (e.g., returns processing and underreporter programs) rely on automation and deal with millions of taxpayers. Some (e.g., corporate audit) are highly labor intensive and deal with far fewer taxpayers. Others (e.g., the nonfiler program) are a combination of automated programs and labor intensive investigations. Although day-to-day management of IRS’s compliance and collection programs is the responsibility of the operating divisions, the commissioner and his senior management team maintain responsibility for making decisions on major operational changes, allocating resources within IRS, and developing agencywide strategic plans. The process for making these decisions starts with the operating divisions’ preparing strategic assessments that report on major trends, issues, and problems facing the divisions and proposals for dealing with them. These decisions are subject to public oversight. The IRS Restructuring and Reform Act of 1998 (IRS Restructuring Act) established an IRS oversight board, in part to assist Congress in reviewing and approving IRS’s budget and strategic planning decisions. Overall, our analysis showed significant and pervasive declines in IRS’s compliance and collection programs, as measured by indicators such as those covering staffing, work completed, and work outcomes from fiscal year 1996 to fiscal year 2001. Moreover, an increasing gap between collection workload, stemming from assessments made by compliance programs, and collection case closures has led IRS to defer taking action to collect on billions of dollars of tax delinquencies. A number of factors have contributed to these declines. These factors include decreases in overall staffing, decreases in compliance and collection staffing, decreased productivity of the remaining compliance and collection staff, increased compliance and collection procedural controls to better safeguard taxpayer interests, temporary details of compliance and collection staff to taxpayer assistance work, and constraints imposed by the need to process returns and issue refunds. From fiscal year 1996 through fiscal year 2001, most compliance programs showed significant declines in the amount of staff time expended on compliance work, in the number of compliance cases closed, and in the proportion of the workload reviewed to determine whether additional tax assessments were warranted (i.e., coverage). About half of the programs also saw declines in the productivity of the compliance staff (i.e., case closures per hour of staff time), in the amount of unpaid taxes identified, and in the percentage of unpaid taxes resolved (i.e., the proportion of the unpaid taxes collected without involving the two collection programs). While the declines were not universal, they were pervasive, as illustrated by the shaded areas in table 1. The declines occurred over a period when the programs’ workload (e.g., the number of returns filed, apparent nonfilers, or apparent underreporters) was increasing, as also shown in table 1. Compliance coverage fell notably for all compliance programs except returns processing. The declines ranged from about 29 percent to about 69 percent in the five audit and matching compliance programs. Further, the number of cases closed by these programs declined by about 55 percent or more, with the exception of the underreporter program, which declined by about 10 percent. Also, these five compliance programs generally experienced marked declines in the staff time committed to compliance work and, with one exception, the productivity of staff in closing cases. According to the underreporter program staff, the increased use of automation enabled the program to increase productivity but not sufficiently to maintain coverage. In general, the amount of unpaid taxes identified by these compliance programs did not decline as much as the number of cases closed. In two of the six compliance programs, the amount of unpaid taxes identified increased. The data available to us do not make clear the extent to which this increase may represent a change in the type of cases worked, increased levels of noncompliance by taxpayers, or other factors, including inflation. For this period, the data also show a mixed picture with respect to the percentage of unpaid taxes resolved—that is, the percentage of the compliance assessments that the compliance programs collect at the conclusion of their work, without referral to telephone or field collection.The individual audit and corporate audit programs tended to collect a greater proportion of the tax assessments in fiscal year 2001 than in fiscal year 1996, while the nonfiler, underreporter, and other audit programs collected a somewhat reduced proportion of the assessments. In general, the table indicates that the programs that showed the biggest gains in the proportion of unpaid taxes collected also showed the largest declines in the amount of unpaid taxes identified. For example, while the individual audit program showed a 68 percent increase in its collection rate, it also experienced a 43 percent decline in the amount of unpaid taxes identified. Overall, there were almost universal declines in the two collection programs’ performance between fiscal years 1996 and 2001, as indicated by the shaded areas in table 2. While collection workload (i.e., the number of delinquencies assigned to collection) declined somewhat as a result of the reduced levels of compliance work, the programs’ capacity to close collection cases—such as by securing payment or completing sufficient analysis to determine that payment cannot be made at that time—declined much more. Another indicator of the change in the telephone and field collection programs is IRS’s decreasing use of enforcement sanctions, both in absolute numbers and as a proportion of closed collection cases. The number of liens, levies, and seizures dropped precipitously between fiscal years 1996 and 2000 and then increased somewhat during fiscal year 2001. Even with this change, however, table 3 shows that the number of levies and seizures remained 78 and 98 percent below 1996 levels, respectively. Also, when considered as a proportion of closed collection cases, the use of levy and seizure sanctions declined by 64 and 96 percent between fiscal years 1996 and 2001, as shown in table 3. The use of liens showed the most significant turnaround, but as of 2001, the number of lien filings was down 43 percent and as a percentage of case closures was down 6 percent. By March 1999, collection officials recognized that changes were needed. Their case inventory of delinquent accounts was growing and aging, and the gap between their workload and their capacity to complete work was increasing. They recognized that they could not close all collection cases, and they believed that they needed to be able to deal with taxpayers more quickly, particularly taxpayers who were still in business and owed employment taxes. The officials believed that getting to these delinquencies quickly, before they became unmanageable to the taxpayers, would make collection easier and faster. In response, collection managers introduced a new collection case selection system.