Coding Errors Excluded Tax Debt from the FPLP

To maximize the effectiveness of the FPLP as a tool to collect outstanding  federal taxes, it is crucial that IRS record and maintain accurate status  codes for all tax debt within its systems. As a result of  these errors, we estimate that over a half-million tax records containing  about $2.4 billion in uncollected tax debt were erroneously excluded from  the FPLP. However, IRS tax collections personnel can exclude  these cases from the FPLP on a case-by-case basis. More Effective Monitoring Could Prevent Errors and Help Ensure Ongoing Accuracy of Account Status

IRS’s current monitoring of the ongoing status of accounts did not identify  and correct the errors in our sample. As a result, these cases remained excluded from the FPLP and other  collection actions. In that review,  IRS examines other available data on the taxpayer, assesses whether a tax  return should have been filed, and estimates the amount of tax due. Policy Changes Could Allow Billions of Dollars in Tax Debt to Enter the FPLP

IRS has significantly improved the effectiveness of the FPLP by making an  additional $28 billion in unpaid tax debt eligible for the program since  2004. Since 1992, IRS has almost tripled the  income it allows tax debtors in financial hardship to earn without pursuing  collection, but IRS does not have documentation of any data analysis that  justified the large increases. The exclusion of tax debt from collection actions may be appropriate in  many circumstances to provide relief for those experiencing financial  difficulty. IRS had previously set rates in 1992. The lowest state  median income in 2004 was $31,500. Allowing relatively high income tax debtors, such as those earning $84,000,  to avoid tax collection action calls into question the fair application of the  tax system and may contribute to noncompliance by other taxpayers. Additionally,  the FPLP is a cost-effective means of collecting from tax debtors. IRS excludes tax debt from  the FPLP during the entire notice phase. IRS faces tough challenges in balancing its tax collection activities against  its available resources. Recommendations for Executive Action

To increase the amount of tax debt eligible for, and to expedite the entry  of tax debt into, the FPLP, we recommend that the Commissioner of  Internal Revenue take the following actions:    monitor the timely termination of defaulted installment agreements to  help ensure tax debt is made available to the FPLP as soon as possible;    place tax debt in the notice phase into the FPLP as soon as legally    consider adding language to IRS’s second communication in the notice  process informing the tax debtor that IRS has the authority to collect  the debt by levying the tax debtor’s income and assets if the tax debt is  not paid voluntarily; and    modify FPLP exclusion policy to allow tax debt in ACS subcategories  R-5 and I-6 that is being considered for a levy on financial assets  through paper levies to be concurrently included in the FPLP. To help ensure that IRS’s financial hardship FPLP exclusions are  appropriate, we recommend that the Commissioner of Internal Revenue  take the following actions:  reevaluate whether the dollar ranges for existing financial hardship  income thresholds, especially those that exceed the national median  income, are appropriate and reasonable;    consider changing the financial hardship closing codes for tax debtors  designated as being in financial hardship prior to the 2004 income  threshold increases to a closing code that most closely corresponds to  the originally designated income threshold—for example, tax debtors  who were in a threshold of $50,000 prior to the change would be given  a different subcode (closing code) so that the tax debtor’s income  ceiling stays as close to the original $50,000 ceiling as possible under  the new income thresholds;    establish a policy so that in implementing future financial hardship  income threshold changes, tax debtors’ financial hardship subcodes  (closing codes) are changed to ones that maintain the tax debtor’s  income ceiling as close as possible to the ceiling prior to the change;    establish a policy to review tax debtors’ financial condition periodically  to verify the continued validity of the financial hardship designation;    evaluate the ongoing validity of the financial hardship designations  whenever tax debtors fail to file their annual tax returns by comparing  third-party income information to the tax debtors’ designated financial  hardship income threshold ceilings; and  refer tax debtors with a financial hardship designation to IRS’s  withholding compliance program for special attention if those tax  debtors do not pay their current income tax obligations. Appendix I: Scope and Methodology

To determine whether and to what extent Internal Revenue Service (IRS)  tax records contain inaccurate or out-of-date status or transaction codes  that exclude them from the Federal Payment Levy Program (FPLP), we  used IRS’s unpaid assessments database as of September 30, 2005, to  select two statistical samples.
Why GAO Did This Study

GAO previously testified that federal contractors abused the tax system with little consequence. While performing those audits, GAO noted that the Internal Revenue Service (IRS) records sometimes contained inaccurate or outdated tax information that prevented IRS from taking appropriate collection actions against those contractors, including submitting their tax debt to the Federal Payment Levy Program (FPLP) for collection. As a result, GAO was asked to review IRS's coding of tax debt excluded from the FPLP to determine whether (1) IRS tax records contain inaccurate status or transaction codes that exclude tax debt from the FPLP, (2) IRS's monitoring could be strengthened to ensure the accuracy of its status and transaction codes, and (3) other opportunities exist to increase the amount of tax debt included in the FPLP.

What GAO Found

IRS tax records had inaccurate information that resulted in it erroneously excluding cases from the FPLP and other tax collection actions. The FPLP is a cost-effective automated system used to collect unpaid taxes from certain federal payments. GAO estimates that as of September 30, 2005, over 500,000 tax records' equating to about $2.4 billion in tax debt--contained inaccurate codes that IRS systems used to exclude tax debts from the FPLP. Inaccuracies included tax debts coded as having active installment agreements even though the tax debtor had stopped making payments. IRS's monitoring of cases was insufficient to identify and correct the coding errors GAO identified. Additionally, IRS's monitoring of financial hardship cases is not sufficient to ensure their ongoing accuracy. IRS grants tax debtors experiencing financial difficulty a hardship designation that excludes them from the FPLP and other tax collection activities until their income increases. To measure this, IRS solely uses the income reported on the tax debtor's annual tax returns. However, IRS does not monitor those tax debtors to ensure they are filing and paying current taxes. For 31 financial hardship cases GAO examined, 24 had ceased to file tax returns. Although IRS has increased the amount of tax debt it submits to the FPLP, additional policy changes could further improve the program's effectiveness. Since 1992, IRS has almost tripled the maximum income it allows tax debtors in financial hardship to earn; raising it to $84,000 in 2004--almost double the national median income. As a result, whereas in 1992 no one earning above the median income was considered to be in financial hardship (and therefore excluded from the FPLP), in 2005 almost two-thirds of the tax debt in financial hardship was owed by individuals earning over the median income. Although a financial hardship designation may be appropriate in many situations, allowing relatively high-income tax debtors to avoid tax collection action, including the FPLP, calls into question the fair application of the tax system and may contribute to noncompliance. IRS policy also limits the amount of tax debt in the FPLP by excluding $5 billion in tax debt from the program while IRS is pursuing levies from other assets or income sources. Additionally, during notification IRS excludes individuals' tax debt from the FPLP about twice as long as legally necessary.