In fiscal year  2005, CDP cases accounted for more than one-quarter of Appeals’ annual  caseload. CDP Appeals Identified Few Errors by Collection, but Some Taxpayers Received a Different Outcome

Our case file review indicates that during the CDP review process Appeals  found evidence that Collection had not followed proper procedures in an  estimated 2 percent of the cases closed in fiscal year 2004. Finally, in about 60 percent  of cases, Appeals upheld the lien filing or levy for a variety of reasons,  including because taxpayers did not file required returns, had not paid  their taxes for certain periods, or both. Of approximately 27 percent of CDP cases that resulted in a different  outcome after taxpayers appealed, Appeals negotiated a collection  alternative with taxpayers in about 16 percent of the cases. The Majority of Taxpayers Raised the Same Arguments with Both Collection and Appeals, Received the Same Determination, and Had Multiple Contacts with IRS

During fiscal year 2004, most taxpayers raised arguments permitted by  statute to Appeals, while we estimated that 5 percent of taxpayers raised  arguments considered frivolous under IRS guidance with either Collection  or Appeals. As shown in table 3, in general the median  number of IRS-initiated contacts with taxpayers—letters, telephone  conversations, and formal meetings—was twice as high as the median  number of taxpayer-initiated contacts with IRS. The highest median tax liability was associated with trust fund  recovery penalty cases, followed by employment tax liabilities, as shown  in table 6. IRS has taken some steps that may improve CDP program operations. However, IRS  has not established responsibility for analyzing future program outcome  data to determine if these changes will be effective. Specifically, we recommend that the  Commissioner    determine—for taxpayers seeking only a collection alternative—a  reasonable amount of additional time beyond the current 30-day period for  requesting a CDP hearing for these taxpayers to submit the required  supporting financial information necessary for Appeals to consider the  alternative of choice, and if seeking an OIC, to submit the OIC application  form;  instruct Appeals to transfer CDP cases where taxpayers seek an OIC as a  collection alternative and raise no liability issues to IRS’s specialized  processing units for investigation and evaluation of OICs before  consideration by Appeals; and    establish responsibility for analyzing future CDP appeal case outcome data  in order to determine whether revisions to the hearing request form and  program regulations will result in meeting their objectives. Appendix I: Objectives, Scope, and Methodology

Our objectives were to provide information on (1) the extent to which the  Internal Revenue Service’s (IRS) Office of Appeals (Appeals) found the  IRS Collection function (Collection) had made errors in processing liens  and levies and how often Collection Due Process (CDP) case results  changed after a taxpayer requested a CDP appeal hearing; (2) the nature of  the arguments presented by taxpayers seeking relief from a lien filing or  levy and the amount of communication between IRS and taxpayers; (3) the  characteristics of the taxpayers that availed themselves of the CDP appeal  process, such as the amount of their total liability; and (4) whether  opportunities exist to improve the operations of the CDP program while  protecting taxpayer rights.
Why GAO Did This Study

As a result of the Internal Revenue Service (IRS) Restructuring and Reform Act of 1998, taxpayers facing liens or levies can request a Collection Due Process (CDP) appeal hearing with IRS's Office of Appeals (Appeals). By 2005, CDP cases represented about one-quarter of Appeals' workload. GAO was asked to provide information on (1) whether the IRS Collection function (Collection) erred in processing liens and levies and how often CDP case results changed after the appeal, (2) the arguments raised and the communication between IRS and taxpayers, (3) the characteristics of CDP taxpayers, and (4) potential improvements to the CDP program. To develop this information, GAO analyzed a random sample of 208 CDP cases closed by Appeals during fiscal year 2004.

What GAO Found

GAO estimates that Appeals found Collection did not follow proper procedures in 2 percent of CDP cases closed during fiscal year 2004. About 27 percent of taxpayers received a different outcome than the lien filing or levy after appealing, including those that negotiated collection alternatives or ended up with no balance due to IRS. For about 60 percent of taxpayers, Appeals upheld the collection action often because taxpayers did not file all the required tax returns necessary to qualify for a collection alternative. GAO's estimates show that nearly 90 percent of CDP taxpayers raised arguments permitted by statute with both Collection and Appeals, such as requesting a collection alternative. An estimated 5 percent of taxpayers raised frivolous arguments--arguments without legal basis per IRS guidance--with either Collection or Appeals. When taxpayers raised the same argument with Collection and Appeals, Appeals reached the same conclusion as Collection in more than 80 percent of cases. In general, the median number of IRS-initiated contacts with taxpayers was twice as high as the median number of taxpayer-initiated contacts with IRS. CDP taxpayer characteristics varied among individual and business filers. Both did not pay taxes for multiple return filing periods. Total tax liability varied considerably, with trust fund recovery penalty and employment tax cases having the highest liabilities. Allowing certain taxpayers like those that offer arguments without a legal basis to use the CDP program may not be consistent with the program's goal of ensuring due process. Also, Appeals resources are not used efficiently when taxpayers request collection alternatives yet have not (1) submitted financial documentation with their CDP requests, (2) worked with specialized Collection units, or (3) filed all required tax returns needed to qualify for a collection alternative. IRS has taken steps to revise the CDP regulations and hearing request form, but has not established responsibility for analyzing program outcome data to determine if these changes will be effective.