IRS’s process for collecting identified unpaid debt has three phases. According to IRS officials, the phases and routing of tax debt-collection  cases result from IRS’s designing the collection process to effectively and  efficiently use resources to resolve taxpayer debt at the earliest possible  time and using the least costly resources. These rules are to determine the number and types  of notices as well as whether IRS defers collection action or sends the  debt to other phases for further collection action. As shown in figure 1, IRS annually has sent millions of notices (across the  four types) to collect billions of dollars in unpaid debt from individual  taxpayers. Internal control should provide  reasonable assurance that the objectives of the agency are being achieved  through, among other things, effective and efficient use of the agency’s  resources. How well do IRS’s business rules for sending notices to individuals help  assure that the collection notice phase is achieving desired results at the  lowest costs? To assess IRS’s objectives, performance measures, and responsibility for  reviewing notice-phase performance, we reviewed information on how IRS  has organized the work flow of the notice phase, including its objectives  and related measures of performance as well as assignments of  responsibility for notice activities such as reviewing the results. To determine how well IRS’s business rules help assure that the collection  notice phase achieves desired results at the lowest costs, we asked IRS  collection officials who were the most knowledgeable about the business  rules to identify the key business rules that affect most individual  taxpayers in the notice phase. The five rules IRS identified were based on  (see app. Although the notice phase affects millions of taxpayers and is a key part of  IRS’s strategy for resolving billons of dollars of unpaid debt, IRS has not  established written objectives for the notice phase. However, IRS has not established this percentage as a  performance measure or defined how it is to be consistently calculated. As noted earlier, IRS officials said that generally business rules were  established to make the best use of IRS resources. IRS also lacked data supporting the rationales for the rules. Even though IRS officials estimated that the business rules had been  established for years, IRS had documentation for an evaluation of only one  of the five business rules we reviewed (the minimum dollar rule). Recommendations

To better ensure the notice phase is achieving desired results at the lowest  costs, we recommend that the Commissioner of Internal Revenue:    establish objectives and performance measures to reflect the desired  results for the notice phase;    establish responsibilities for reviewing the performance of the notice  phase to help ensure accountability throughout IRS;    document the rationales for the key notice-phase business rules in terms  of efficiency, effectiveness, or other desired results;    provide IRS collection managers and executives accessible, reliable  information on what the business rules are; and    periodically and regularly evaluate the business rules in terms of efficiency  and effectiveness or other results and ensure the results are available to  managers so the data and methodologies can be used or considered in  future evaluations.
Why GAO Did This Study

According to the Internal Revenue Service (IRS), $23 billion in unpaid individual income tax debt existed in 2001, its most recent estimate. The notice phase is the first of IRS's three-phase process to collect unpaid debt. IRS annually sends notices to millions of individual taxpayers about billions of dollars of unpaid tax debt. Congress and others have questioned IRS's collection process's effectiveness. As requested, GAO is reporting on (1) how well IRS has established objectives, performance measures, and responsibility for reviewing notice-phase performance, and (2) how well IRS's business rules for sending notices to individuals help assure that the collection notice phase is achieving desired results at the lowest costs. To address these objectives, GAO compared the evidence obtained from IRS documents and responsible IRS collection officials to applicable guidance for internal control standards.

What GAO Found

Although the notice phase is a key part of IRS's approach and strategy for resolving billions of dollars of individuals' unpaid tax debt, IRS lacks certain internal controls to assure that notices to individuals are achieving the most benefits--such as debt collected or unpaid debt cases otherwise resolved-- with the resources being used. Management controls like clearly defined objectives, performance measures, and clear responsibility for reviewing program performance help provide reasonable assurance that the objectives of an agency are being achieved effectively and efficiently. However, IRS has no documented objectives for the notice phase and no performance measures to indicate how well the phase is performing in resolving debt cases or achieving other potential desired results. Further, IRS has not established responsibility for reviewing the performance of the complete notice phase. IRS lacks documentation for and evaluations of its business rules for notices to individuals to assure that the collection notice phase is achieving desired results. According to IRS officials, to make the best use of collection resources, IRS uses its business rules to--based on certain dollar thresholds and individual tax debt case characteristics--vary the number and types of notices sent to taxpayers and determine whether unresolved cases will be sent for further collection action or further action will be deferred. However, as shown in the table, in almost all cases, for the five business rules that IRS identified as affecting the most taxpayers, IRS did not have information on the date the rules were established, the rationale for the rule, or data supporting the rationale. IRS collection officials also lacked documentation describing the business rules and how they operate. Further, even though IRS officials estimated that the business rules had been established for years, IRS had documentation for an evaluation of only one of the five business rules. Without relevant evaluations IRS lacks assurance that the notice phase achieves desired collection results at the least cost.