IRS’ routine collection process can involve three stages, and taxpayers may enter into an installment agreement during any stage. 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. Objectives, Scope, and Methodology

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. In doing so, IRS contacted 87 taxpayers who were granted pre-assessed installment agreements and found that 39 percent had not adjusted their withholding or estimated payments to avoid owing money on successive tax returns. According to IRS data, pre-assessed installment agreements accounted for almost 31 percent of the 2.6 million new agreements in fiscal year 1994. Conclusions

Since 1991, taxpayer use of installment agreements has grown considerably, and installment agreements have accounted for a growing portion of IRS’ collection activity. The auditors also raised concerns about the ease with which taxpayers could accumulate additional tax debt by adding new income tax liabilities to existing agreements. IRS has acted to address the internal auditors’ concerns. Recommendations

To improve the information provided to taxpayers and the administration of the installment agreement program, we recommend that the Commissioner of Internal Revenue notify taxpayers about projected total costs and payoff periods when setting up agreements with taxpayers and when mailing monthly reminder notices, experiment with Form 9465 to test whether having space for taxpayers to authorize direct debit installment payments increases the frequency with which this option is used, and send agreement default notices to taxpayers by regular mail instead of certified mail unless an account is being referred for levy action.
Why GAO Did This Study

Pursuant to a congressional request, GAO reviewed the Internal Revenue Service's (IRS) Installment Agreement Program, focusing on the: (1) increase in installment agreements since IRS streamlined the processing and approval of taxpayers' requests for installment agreements; (2) effects these changes had on IRS collection activities; (3) internal auditors' concerns regarding these changes; (4) information that IRS provides taxpayers on their liabilities under installment agreements; and (5) administrative practices that could improve the installment agreement program.

What GAO Found

GAO found that: (1) the 2.6 million new installment agreements approved in fiscal year (FY) 1994 represented a 136-percent increase over the number of FY 1991 installment agreements; (2) the amount of taxes paid through new installment agreements increased 135 percent between FY 1991 and 1994 and accounted for 33 percent of the delinquent taxes paid in FY 1994; (3) installment agreement program changes have affected IRS collection activities by reducing Automated Collection System collections and the routine collection process workload; (4) IRS internal auditors have raised concerns about the ease of entering into installment agreements and IRS failure to instruct taxpayers to amend their withholding or estimated taxes to prevent future delinquencies; (5) IRS may be permitting financially capable taxpayers to avoid paying their tax debts in one on-time payment and to accumulate tax debts by adding new tax balances to existing agreements; (6) IRS is taking steps to reduce the problems the auditors identified; and (7) administrative changes to improve the installment agreement program and reduce costs include informing taxpayers of the applicable penalties and interest that will be added to their installment agreements, allowing taxpayers to make electronic direct debit payments, and sending some default notices by regular mail instead of certified mail.