Madam Chairman and Members of the Subcommittee: We are pleased to be here today to assist the Subcommittee in its review of the Internal Revenue Service’s (IRS) tax debt collection practices. Every year IRS successfully collects over a trillion dollars in taxes owed the government, yet at the same time tens of billions more remain unpaid. As Congress works to balance the federal budget, these unpaid taxes become increasingly important, as do IRS’ efforts to collect them. While most taxpayers voluntarily pay their taxes on time, some are unable or unwilling to do so. It is this latter group whom IRS must deal with in its efforts to collect delinquent taxes. In doing so, IRS faces several significant challenges, including a lack of accurate and reliable information on either the makeup of its accounts receivable or the effectiveness of the collection tools it has at its disposal, as well as receivables that are often years old, out-of-date collection practices, and antiquated technology. It is these problems and challenges—and their results—that led us, the Office of Management and Budget (OMB), and IRS to recognize IRS’ accounts receivable as a high-risk area. To address these challenges, significant changes are needed in the way IRS does business, but IRS cannot do it alone. Recently, the IRS Commissioner has compared IRS to financial service organizations such as banks, credit card companies, and investment firms. Like these organizations, IRS processes data, maintains customer accounts, responds to account questions, and collects money owed. We agree with the Commissioner’s functional comparison and believe that, while there are significant differences between IRS and these private sector businesses, IRS may benefit from using private collectors as a part of its portfolio of collection programs, and it is reasonable to assume that IRS could learn from their best practices as it works to resolve long-standing problems with its debt collection activities. My testimony today, which is based on past reports and ongoing work, discusses the debt collection challenges facing IRS and the potential benefits of involving private parties in the collection of tax debts. A number of long-standing problems have complicated IRS’ efforts to collect its accounts receivable. Of foremost concern is the lack of reliable and accurate information on the nature of the debt and the effectiveness of IRS collection tools. Access to current and accurate information on tax debts is essential if IRS is to enhance the effectiveness of its collection tools and programs to optimize productivity, devise alternate collection strategies, and develop programs to help keep taxpayers from becoming delinquent in the first place. Without reliable information on the accounts they are trying to collect and the taxpayers who owe the debts, IRS agents generally do not know whether they are resolving cases in the most efficient and effective manner, and may spend time pursuing invalid or unproductive cases. Of the approximately $200 billion currently in the IRS accounts receivable inventory, IRS data shows that approximately $63 billion represents taxes that, although they have been assessed, may not be valid receivables, but rather are “place markers” for compliance actions. For example, under IRS procedures, when IRS’ information return matching process identifies a taxpayer who received a Form W-2 but did not file a tax return, IRS creates a return for the taxpayer. Generally, this is done using the standard deduction and single filing status, and often results in the taxpayer owing taxes. IRS then sends balance due notices to the taxpayer reflecting the amount of taxes owed as calculated by IRS—to encourage the taxpayer to file a return with the correct tax amount owed. If the taxpayer does not subsequently file the return, IRS records the amount it calculated as taxes due and generates a receivable. However, when contacted by IRS collection staff, the taxpayer may demonstrate that either no tax or a lesser amount of tax is actually owed. To more efficiently account for and collect money actually owed to the government, IRS would have to be able to differentiate these IRS-calculated accounts from those where there is an acknowledged balance due. System (ERIS) and other computerized systems. However, IRS has noted in the past that there are questions regarding the accuracy of the data produced by these systems. The age of the debts in IRS’ accounts receivable inventory is also problematic. IRS’ inventory of tax debt includes delinquent debts that may be up to 10 years old. This is because there is a 10-year statutory collection period, and IRS generally does not write off uncollectible delinquencies until this time period has expired. As a result, the receivables inventory includes old accounts that may be impossible to collect because the taxpayers cannot be located, or are deceased, or the corporations are defunct. Of the over $200 billion total receivables inventory as of September 30, 1995, IRS data show that about $38 billion was owed by either deceased taxpayers or defunct corporations. Out of a total of 460 accounts receivable cases that we reviewed in our audit of IRS’ 1995 financial statements, IRS identified 258 as currently not collectible; 198 of these cases represented defunct corporations, while the remaining 60 cases represented entities that either could not pay or could not be located. These cases represented $12 billion of the $26 billion included in accounts greater than $10 million. The age of the receivable does not reflect the additional time it took for IRS to actually assess the taxes in the first place. Enforcement tools, such as IRS’ matching programs and tax examinations, may take up to 5 years from the date the tax return is due until IRS finally assesses the additional taxes. This reduces the likelihood that the outstanding amounts will be collected. The age factor significantly affects the collectibility of the debt because, as both private and public sector collectors have attested, the older the debt, the more problematic collection becomes. Because of these and other factors, IRS considers many of the accounts in the inventory to be uncollectible. Specifically, IRS has estimated that only about $46 billion of the $200 billion inventory of tax debt as of September 30, 1995, was collectible. who have taxes withheld from their wages. Taxpayers with nonwage income are required to calculate their projected income and make estimated tax payments to IRS during the year. According to IRS data, the average tax delinquency for taxpayers with primarily nonwage income was about 4 times greater than that for wage earners—$15,800 versus $3,600. IRS data also show that, at the end of fiscal year 1995, about $75 billion, or 74 percent of the $101 billion in IRS’ inventory of tax debts owed by individuals, was owed by taxpayers whose income was primarily nonwage. IRS’ collection process was introduced several decades ago, and although some changes have been made, the process generally is costly and inefficient. The three-stage collection process—computer-generated notices and bills, telephone calls, and personal visits by collection employees—generally takes longer and is more costly than collection processes in the private sector. While the private sector emphasizes the use of telephone collection calls, a significant portion of IRS’ collection resources is allocated to field offices where personal visits are made by revenue officers. IRS has initiated programs and made procedural changes to speed up its collection process, but historically it has been reluctant to reallocate resources from the field to the earlier, more productive collection activities. IRS’ fiscal year 1997 budget request states that, although “these positions still comprise the lion’s share of IRS’ enforcement efforts, they also represent on the margin the least efficient use of IRS resources.” Due to budget cuts, however, IRS is in the process of temporarily reassigning about 300 field staff to telephone collection sites to replace temporary employees who were terminated. Upgrading its computer systems is another challenge facing IRS. IRS is in the midst of a massive long-term modernization effort—Tax Systems Modernization (TSM)—that if successful would, among other things, help IRS to better collect tax debts by providing its collectors with on-line access to information they need, when they need it. Modernized systems would also help provide the management information needed to evaluate the effectiveness of collection tools and the ability to adopt flexible and innovative collection approaches. Existing IRS computer systems do not provide ready access to needed information and, consequently, do not adequately support modern work processes. Although TSM is not expected to be completed any time in the near future, IRS has started to automate some collection activities. For example, IRS is currently developing an automated inventory delivery system that is intended to direct accounts, based on internally developed criteria, to the particular collection stage where they can be processed most efficiently and expeditiously. This system, which IRS plans to test in July 1996, is intended to move accounts through the collection process faster and cheaper than under the current system. Another effort under way involves the automation of certain field collection tasks. These tasks, like many in IRS, have for years involved the manual processing of paper, which has resulted in IRS field collection employees spending significant amounts of time on routine administrative duties. The Integrated Collection System (ICS) is a computer-based information system that is intended to automate some of the labor-intensive tasks performed by field revenue officers. While this effort is not a major technological advancement, it will be a step toward helping IRS employees be more productive by spending their time on more effective and efficient collection-related activities. Basic automation is a given in today’s business environment, and if IRS is to operate like a private sector business as it says, systems that automate basic work processes are a must. According to IRS, implementing this system in two pilot districts has resulted in increased collections, faster case closings, and less time spent on each case. IRS employees using the system were also very supportive of it and enthusiastic about its benefits. The system is currently operating in six districts, and IRS plans to roll it out in three additional districts this year. According to IRS, further implementation is dependent on future funding and final measurements of productivity. Many private and governmental entities are involved in debt collection. We believe that these entities offer the potential for improving IRS debt collection practices.