IRS expects individual taxpayers to pay the full amount of tax owed when they file their tax return. However, Section 6159 of the Internal Revenue Code provides for taxpayers to pay their taxes in installments when full payment is not possible. Taxpayers who cannot pay their taxes are subject to IRS’ collection process. IRS’ routine collection process can involve three stages, and taxpayers may enter into an installment agreement during any stage. In the first stage, IRS is to send a series of notices to taxpayers requesting payment. Cases unresolved by these notices may be referred to the second stage—ACS telephone call sites. IRS employees at these sites are to contact taxpayers to secure payments and contact banks and employers to identify levy sources. The employees are to also answer calls from taxpayers who have been subjected to collection actions, such as levies and liens. If ACS call site employees cannot resolve a case, it may be referred to an IRS district office—the third stage in the collection process—for further collection action. IRS made changes to its installment agreement program in April 1992 making it easier for taxpayers to obtain agreements. IRS made the following changes under the revised program. Staff in all offices with taxpayer contact were delegated authority to approve installment agreements of up to $100,000. The thresholds for which IRS can approve an installment agreement without filing a lien increased from $2,000 to $10,000 and without requiring taxpayers to provide financial information demonstrating the need for an agreement increased from $5,000 to $10,000. IRS refers to these agreements as streamlined agreements. IRS allowed taxpayers to request installment agreements when they file by attaching a Form 9465, Installment Agreement Request, or note to their tax returns (see app. I). These agreements, called pre-assessed agreements, do not go through IRS’ routine collection process. IRS made these changes to the installment agreement program to (1) improve voluntary compliance by emphasizing to taxpayers that installment payments are an option available to them to pay their tax debts if full payments cannot be made on time; (2) expedite the IRS collection process by bringing more delinquent accounts into a current status sooner, thereby increasing collections on such accounts in the form of installment payments; and (3) enhance its “one-stop service” concept by allowing staff in all functions with taxpayer contact to approve agreements. In addition, IRS recently developed procedures to implement another change in the program—charging user fees for installment agreements. The Treasury, Postal Service, and General Government Appropriations Act of 1995 (P.L. 103-329) authorized the Secretary of the Treasury to supplement IRS’ appropriations through the imposition of user fees for services performed by IRS. As a result, in March 1995, IRS began charging a $43 user fee for a new installment agreement and a $24 user fee for amending or reinstating an existing agreement. Our objectives were to review (1) the increase in installment agreements following changes IRS made in April 1992; (2) the effects these changes had on IRS’ collection activity; (3) concerns raised by IRS’ internal auditors regarding these changes; and (4) administrative aspects of the program, such as the information IRS provides taxpayers regarding installment agreements, and opportunities for improvement. We also collected descriptive information on taxpayers who elected to pay past due taxes through installment agreements. To address the four objectives, we did the following: We met with officials in IRS’ National Office of the Assistant Commissioner for Collections to discuss IRS’ objectives for the installment program and gather information about the program’s administration and progress. We met with IRS officials in the Cincinnati Service Center (Collections Branch) and the Cincinnati District Office (including the Taxpayer Service, Collection, and Examination divisions) to obtain information on the experiences of these IRS personnel with the revised procedures. We selected the Cincinnati Service Center because we had available experienced staff in that area. We discussed the installment agreement program changes with members of the American Institute of Certified Public Accountants, the Federation of State Tax Administrators, the National Consumer Law Center, the Consumer Federation of America, and a Cincinnati-based commercial bank. We reviewed IRS internal audit and management reports concerning the installment agreement program. To accomplish our objective of collecting descriptive information on taxpayers, we analyzed the 722 useable cases from our random sample of 900 installment agreements from IRS’ Service Centers in Atlanta, GA; Cincinnati, OH; and Fresno, CA. The sample was taken from the inventory of 628,285 agreements at the 3 service centers as of April 23, 1994. In reviewing the sample, we obtained information about the agreements, such as (1) the tax periods covered by the agreements; (2) the original amount and current balance of the agreements; (3) the agreement payment history; and (4) certain taxpayer financial characteristics, such as adjusted gross income and source of income. The sample results were indicative of the installment agreement inventory at the three IRS service centers as of April 23, 1994. However, the results are not projectable to IRS’ total universe of installment agreements and may not be indicative of the inventory at any other point in time. Appendix II describes our sampling methodology in more detail. We did our audit work from January 1994 through November 1994 in accordance with generally accepted government auditing standards. On March 27, 1995, we met with IRS National Office officials to obtain their comments on a draft of this report. IRS representatives at that meeting included the Acting Assistant Commissioner, Collection. Their comments are summarized on page 16 and incorporated in this report where appropriate. As stated earlier, the installment agreement program grew rapidly during fiscal years 1991 through 1994. As shown in table 1, significant growth took place between fiscal years 1992 and 1993. While part of this growth may be attributable to the April 1992 program changes, IRS officials said that changes to federal tax withholding tables in 1992 caused many taxpayers who would normally have received refunds to owe taxes when they filed their returns in 1993. IRS estimated that installment agreement requests would increase by about 39 percent because of the changes to the withholding tables. Since 1992, installment agreements have played an increasing role in IRS’ collection process. Table 2 shows that installment agreements have made up an increasing percentage of IRS’ accounts receivable inventory for individual taxpayers since 1992. Table 3 shows that installment agreements have accounted for an increasing percentage of IRS’ total collections. IRS National Office collection officials said that the increase in total collections between fiscal years 1993 and 1994 was a positive result of the changes made to the installment agreement program. In raising service center and taxpayer service authority to grant installment agreements from $5,000 to $10,000, IRS wanted to shift some of the collection work from ACS call sites to service center collection and district taxpayer service offices. Some shift in workload has occurred. Taxpayer service and service center staffs originated about 82 percent of all agreements in fiscal year 1994, up from 43 percent in fiscal year 1991. Most of the increase was due to these two staffs granting streamlined agreements. ACS call sites granted fewer agreements in fiscal year 1994 (about 381,000 or 15 percent of agreements) than in fiscal year 1991 (about 579,000 or 53 percent of agreements). In shifting the installment agreement workload to service center and taxpayer service staff, IRS hoped to increase ACS collections by freeing up ACS staff to work on higher dollar cases. However, the expectation of increased collections had not materialized since ACS collections per staff year dropped between fiscal years 1992 and 1994 from $1.71 million to $1.44 million in current year dollars. Overall, the amount collected at ACS sites decreased from $4.88 billion to $3.30 billion during the same period. IRS collection officials said that the lower ACS collections are due, in part, to their decision during this same period to increase the deferral level—the amount under which delinquent accounts are not pursued beyond the notice stage, except to offset refunds. According to IRS officials, this increase reduced ACS workloads more than expected and contributed to reduced ACS collections. IRS subsequently lowered its deferral level in April 1994, a move IRS officials expect will increase ACS workloads and the resulting collections. Another indication of the greater impact the installment agreement program is having on collections was the increased number of balance due accounts that are being resolved earlier in the collection process. IRS data show that more balance due accounts are being favorably resolved by taxpayers paying or arranging to pay the amounts owed without IRS resorting to collection notices and subsequent collection actions. Between fiscal years 1991 and 1994, accounts favorably resolved before a collection notice rose from 41 percent to 52 percent, with installment agreements accounting for a growing share of the favorable early resolutions. In fiscal year 1994, installment agreements accounted for 41 percent of the favorable early resolutions, up from 14 percent in fiscal year 1991. IRS’ internal audit raised several questions regarding the installment agreement program since IRS implemented the April 1992 changes. In September 1994, IRS’ internal auditors raised concerns about whether (1) the new procedures for granting installment agreements were encouraging taxpayers to choose installments when they could be paying their taxes in full and (2) the program was leading some taxpayers to accumulate debt they may not be able to pay. The installment agreement program was established to provide taxpayers who cannot pay their taxes in full, when they are due, an opportunity to pay in installments. Before the program was revised in April 1992, taxpayers whose agreements were for tax debts above $5,000 were required to provide financial data to substantiate their inability to pay in full and on time. Under its streamlined procedures, IRS relies on taxpayers to determine for themselves whether they can pay in full or want to pay in installments, as long as the amount owed does not exceed $10,000 and the payment period meets IRS requirements. IRS recognizes that this may result in some taxpayers opting for installment agreements even though they could have paid in full and on time.