IRS Collects or Otherwise Resolves Unpaid Tax Debt through a Complex, Three-Phase Process

IRS’s process for collecting unpaid debt has three phases. As shown in figure 2, the collection process for debt treated as potentially  collectible is a complex set of programs administered by several IRS units  handling a large workload that can take multiple routes based on about 70  decision rules that IRS has created in response to a variety of factors,  including the characteristics of a given debt or taxpayer and the results of  the process itself. The Process Is High- Volume and Spread among IRS Subunits

A part of the complexity of the process stems from having a very large  debt workload and limited resources spread across multiple units, which  contribute to the numerous decisions that IRS makes on how to handle  these debt cases. At the end of fiscal year 2007, IRS had $79.3 billion  worth of debt in the three phases of the process. These increases, however, may not result in the total dollars actually  collected growing annually at rates similar to the growth in the inventory  defined as collectible or active. However, not all potentially collectible debt has a high  potential for collection. Abatements can occur years after an original tax assessment was made. IRS-Wide Collection Performance Measures Cover the Collection Process and Some Outcomes

As shown in table 2, two of the IRS-wide collection performance measures  cover all phases of the collection process and focus on the extent to which  debt cases were closed and the efficiency in using staff resources for those  closures. Our previous work has identified material weaknesses in IRS’s controls  over unpaid tax assessments and over the collection of tax revenues due  the federal government. Although IRS has made some progress on these  weaknesses, progress has not been sufficient to resolve them. Over the last 3 years, IRS has employed various approaches, including  sophisticated computer modeling and risk assessment techniques, to assist  it in more effectively identifying the tax debt cases with the greatest  collection potential and to facilitate prioritizing of these cases for  collection. IRS has also employed these techniques to identify the most  effective collection approach to take for the various types of outstanding  tax debt. Although IRS has ongoing projects to expand the use of these  models and techniques, it does not yet have an agencywide, systematic  approach to managing the collection of unpaid taxes across the scope of  IRS’s responsibilities. In response, IRS created a  council of IRS collection officials, for example, to coordinate various  collection activities and review how potential changes in one part of the  process could affect another part of the process. Further, IRS has a  number of ongoing projects to improve aspects of the collection process. However, some of these projects will take a few years to be implemented,  as indicated in appendix III. Appendix I: Scope and Methodology

To determine the process the Internal Revenue Service (IRS) uses to  attempt to collect or resolve unpaid tax debts, we interviewed IRS officials  and reviewed IRS documents. To identify the trends in unpaid tax debt, including the size and  composition of the inventory, collections, and other resolutions of unpaid  debt in fiscal years 2002 through 2007, we obtained and analyzed data from  IRS’s unpaid assessments database, including how IRS categorized the  debt. To determine the performance measures and related goals that are  available to assess how well the collection process works overall, we  requested and reviewed the highest-level available, IRS-wide measures of  collection performance. In addition, for context on the debt inventory and collection process, we  also asked IRS to provide (1) data and analysis on the inflow and outflow  of debt, and the status of debt identified in fiscal year 2002, from fiscal  years 2002 through 2007 and (2) a list of IRS efforts to improve the  management of the inventory and collection process.
Why GAO Did This Study

The Internal Revenue Service (IRS) estimated that $33 billion in income tax assessments was not paid in 2001. If not collected, annual unpaid taxes keep accumulating each year along with penalty and interest charges to create an inventory of "tax debts," which approached $300 billion at the end of fiscal year 2007. IRS has shelved or delayed collection of billions of dollars of this tax debt. Congress and others have questioned IRS's collection process's effectiveness. As requested, GAO is reporting on (1) the process IRS uses to collect unpaid tax debts; (2) trends in the unpaid tax debt inventory, collections, and other resolutions from fiscal years 2002 through 2007; and (3) the performance measures and goals available to assess how well the collection process works overall. To meet these objectives, GAO interviewed IRS officials and reviewed IRS's unpaid assessments database, documentation on the collection process and factors used in managing it, and IRS's highest-level collection measures.

What GAO Found

IRS has a complex process to collect unpaid tax debts by contacting taxpayers through notices, telephone calls, and in person. Because IRS has a very large debt workload and limited resources spread across multiple units, it must make numerous decisions about how best to handle debt cases. The complexity also arises because debt cases can take various routes based on about 70 IRS decision rules used for handling cases. The rules respond to a wide variety of debt characteristics, information known about the taxpayer, and the results of attempts to contact the taxpayer or take enforcement action. From fiscal years 2002 through 2007, increases occurred in the unpaid tax debt inventory, the percentages of debt classified as potentially collectible and in active collection status, and the dollars IRS collected. It is unclear whether dollars collected will continue to grow at rates similar to the growth in debt classified as collectible or active because, for example, those categories do not mean that the debt has a high potential for collection and will be actively pursued or that debt resolution will necessarily result in dollars collected. IRS-wide collection performance measures cover three outcomes of the three-phase process with an emphasis on closing more debt cases in less staff time. IRS did not indicate why more measures for the whole collection process were lacking. For each of the phases, IRS had more performance measures such as on debt resolutions, time spent, satisfaction, and quality, which phase managers said were sufficient for them. GAO has identified material weaknesses in IRS's controls over unpaid tax assessments and collections partly due to the lack of agencywide cost-benefit data and related performance measures. Although IRS has made some progress on these weaknesses, progress has not been sufficient to resolve them. For example, over the past 3 years, IRS has employed various approaches, including sophisticated computer modeling and risk assessment techniques, to assist it in more effectively identifying the tax debt cases with the greatest collection potential, and to facilitate prioritizing of these cases for collection. IRS has also employed these techniques to identify the most effective collection approach to take for the various types of outstanding tax debt. Although IRS has ongoing projects to expand the use of these models and techniques, it does not yet have an agencywide, systematic approach to managing the collection of tax debts across IRS. In response, IRS has created a council of IRS collection officials to coordinate various collection activities across IRS and potential changes across the parts of the collection process. Further, IRS has a number of ongoing projects to improve aspects of the collection process. However, some of these projects will take a few years to be implemented.