The Internal Revenue Code (IRC) requires IRS to notify taxpayers of taxes they might owe and about actions it plans to take to collect the taxes. Since the Revenue Act of 1928, IRS has been required to send such notifications to a taxpayer’s last known address. A taxpayer’s last known address was not defined by the Revenue Act nor has it been defined by Department of the Treasury regulations. However, over the years, courts have generally defined a taxpayer’s last known address as the address shown on the taxpayer’s most recently filed tax return, unless the taxpayer notified IRS of an address change. Generally, IRS requires that such notifications be in writing. If IRS’ notices cannot be delivered to the taxpayer as addressed, the Postal Service is supposed to return them to IRS. The Postal Service is also supposed to forward mail to taxpayers’ new addresses if a change of address form has been submitted to it. Also, the Postal Service is to return mail that is refused or unclaimed by taxpayers. However, IRS generally does not consider mail that is refused or unclaimed to be undeliverable mail. IRS’ processing of undeliverable mail involves labor-intensive and manual procedures at the 10 IRS service centers. Mail at each service center is separated into two groups—high and low priority. Mail in the high-priority group includes notices such as the final notices that are sent taxpayers regarding delinquent tax returns and collection of taxes and notices returned with change of address information provided by the Postal Service. For mail in the high-priority group, IRS’ procedures require that efforts be made to find the taxpayers’ current addresses. To do this, high-priority undeliverable mail is to be returned to the IRS service center function that originated it. For example, those notices involving proposed assessments for underpayment of taxes are returned to the Examination or Underreporter functions for processing. Similarly, notices involving taxpayers’ failures to file tax returns and pay delinquent taxes are returned to the Collection function for processing. All low-priority mail is destroyed without further processing. All service center functions generally use internal IRS sources, such as W-2 Forms and other types of information returns, as leads to help them contact taxpayers whose high-priority mail was returned as undeliverable. Service center staff may also use forwarding address information provided on mail returned to IRS by the Postal Service. If a different address is located, IRS is to make an attempt to contact the taxpayer at that address to request verification of an address change. If a taxpayer responds to IRS by confirming a new address, IRS is to change its master file address record—a taxpayer’s last known address at IRS. In situations where verification of a different address is not received from the taxpayer and the law requires that a notice be sent to the taxpayer’s last known address, IRS’ procedures require that the notification be sent to both the master file address and the unverified address. This may be done in situations where IRS is sending notices of intent to levy taxpayers’ liquid assets (e.g., bank accounts or wages) that are in the possession of third parties (e.g., financial institutions and employers) or statutory notices of tax deficiencies to taxpayers. Unresolved cases from service center functions, other than Collection, may ultimately become collection cases when proposed taxes are assessed. After assessments are made against taxpayers, IRS is to begin sending them collection notices. If unresolved by collection notices, cases over a predetermined dollar threshold are to be sent to the next stage of IRS’ collection process—the Automated Collection System (ACS) call sites, where more detailed address searches are to be done. In addition to address sources used by service centers, ACS uses sources such as state employment commissions and motor vehicle records to find better addresses for taxpayers. ACS may also try to contact taxpayers by telephone to get taxpayers to file delinquent tax returns or pay taxes owed. If the case is not resolved while in ACS and it falls within a certain dollar range, it may be referred to a revenue officer in a district office, where the revenue officer is to attempt to contact taxpayers by conducting field investigations and using local information sources. If a taxpayer does not provide IRS written notification of an address change, IRS continues to send notices to the master file address, which is the same as the last known address, even though previous mail sent to that address has been returned as undeliverable. When mail is undeliverable, taxpayers are generally still accountable for the taxes, interest, and penalties IRS says are owed as long as the mail was sent to the taxpayer’s last known address. Our objectives were to obtain information on (1) the number of undeliverable notices that are returned to IRS, (2) the impact these notices have on taxpayers and IRS, and (3) the causes for nondelivery of the mail. Another objective was to assess IRS’ procedures for processing undeliverable mail. To obtain information on the extent of IRS’ undeliverable notices, we reviewed relevant IRS studies and data that estimated the volume of undeliverable mail. We did not test or independently verify the data provided by IRS. To gather information on the impact undeliverable notices can have on taxpayers and IRS, we interviewed staff from IRS’ National Office and all 10 service centers with responsibilities for processing this mail. We also reviewed studies and projects on undeliverable mail by IRS’ Internal Audit, service centers, and other groups within IRS. Because certain notices are legally required to be sent to taxpayers, we discussed the impact that undeliverable mail can have on taxpayers and IRS with representatives of IRS’ Chief Counsel’s Office. To acquire information on the causes of IRS’ undeliverable mail, we reviewed service center policies and procedures for processing undeliverable mail and for accepting changes of address from taxpayers. To help in understanding the possible effects of these policies and procedures, we interviewed IRS officials in both the National Office and service centers with responsibilities for processing undeliverable mail. Also, to obtain information on reasons why mail may be undelivered in general, we contacted Postal Service officials at the National Address Information Center in Memphis, Tennessee. To assess IRS’ procedures for processing undeliverable mail, we reviewed prior IRS studies focusing on ways to better process this mail. We contacted staff at the Cincinnati and Fresno Service Centers to determine (1) how specialized locator services units at these locations were used to locate taxpayers whose mail was undelivered and (2) how their procedures may have varied from the other service centers. Because IRS recently implemented the Undeliverable Mail System (UMS) in 9 of its 10 service centers, we discussed how it affects undeliverable mail with National Office Collection officials. We also interviewed Collection staff in the Southeast Region, where UMS was piloted. We limited our work to undeliverable mail at IRS’ service centers because the majority of IRS’ mail originates at the centers, and undelivered mail is returned to its originating location. Because other companies have problems with undeliverable mail, we contacted two large credit card companies to determine whether their procedures offered methods that IRS could possibly use in handling its undeliverable mail. The two companies were judgmentally selected and are similar to IRS in that they send notices and bills to their customers regarding account adjustments and delinquent payments. We did our work between August 1992 and March 1994 in accordance with generally accepted government auditing standards. On October 26, 1994, we met with Collection’s Acting Executive Director, (Operations); the Chief of Document Handling, Taxpayer Services; and other IRS National Office officials responsible for overseeing undeliverable mail to obtain their comments on a draft of this report. Their comments are summarized and evaluated on pages 16 and 17 and incorporated in the report where appropriate. American society is very mobile. According to the U.S. Census Bureau, between 15 and 20 percent of Americans move annually. At that rate, as many as 49 million people may move yearly. Keeping up with address changes for such a mobile society presents IRS with a formidable task. Current addresses are critical to IRS because it mails hundreds of millions of pieces of correspondence to taxpayers yearly. IRS does not have precise information on the volume of mail it sends taxpayers annually that is returned undeliverable. However, from time to time various IRS study groups have made estimates of the undeliverable mail volume. Estimates made by these groups indicated that undeliverable mail rose from 6.5 million pieces in 1986 to as much as 15 million pieces in 1992. Because IRS often sends more than one notice to a taxpayer, the number of taxpayers affected by undeliverable mail was probably less than these estimates, but the exact number is unknown. The volume of IRS’ undeliverable mail may continue to rise if its accounts receivable inventory continues to grow as it has done for years. This is because the volume of mail IRS sends to taxpayers pertaining to their tax cases is directly related to the number of delinquent accounts in the receivables inventory. Virtually all delinquent accounts are sent notices, and some of this mail may be returned to IRS as undeliverable. According to IRS, most undeliverable mail has three principal causes. Taxpayers move and leave no forwarding addresses with either the Postal Service or IRS. When this occurs, the taxpayers may ultimately bear responsibility for the fact that their mail was delayed or undelivered, but IRS still has to process the undeliverable mail. The Postal Service may not deliver or forward mail, and mail is returned to IRS. This happens even though Postal Service policy states that all First-Class Mail, which most IRS notices are, is to be forwarded for up to 1 year when a valid forwarding address is on file. IRS incorrectly records taxpayers’ addresses in its databases. Of the three principal causes, IRS can completely control only the one dealing with how its staff records taxpayers’ addresses in its databases.