	Background

Each year, the federal government, through the Internal Revenue Service, collects tax revenue to fund government operations. The objective of this report is to provide detailed information on the composition and collectibility of IRS’ September 30, 1997, balance of unpaid assessments based on the work we performed as part of our audit of IRS’ fiscal year 1997 custodial financial statements. Write-offs are comprised largely of amounts owed for corporate income taxes and payroll taxes by businesses or corporations that have subsequently become bankrupt or defunct. In one case, over 60 percent of the $1 billion balance of amounts owed by the failed financial institution consisted solely of accrued interest and penalties. Many of these unagreed assessments resulted from IRS’ various compliance efforts, such as its examinations or audits and its various computer matching programs, in which IRS uses third-party information to identify potential underreporting of tax liabilities. Specifically, we noted less than $75,000 in collections since 1995 on the $2.6 billion balance of amounts owed for the 90 unpaid assessment sample items that were ultimately wholly or partially classified as compliance assessments. The remaining balance of IRS’ unpaid assessments as of September 30, 1997, $90 billion (42 percent) represent amounts that are considered to be taxes receivable under federal accounting standards. These amounts meet the definition of taxes receivable because they represent amounts for which IRS has obtained concurrence, either by the taxpayer or a court, that the amounts are in fact owed to the federal government. In these cases, we found no evidence of either ability or willingness on the part of the taxpayers to pay some or all of the amounts owed. Growth in Unpaid Assessments Balance Largely a Result of Continued Accrual of Penalties and Interest

Because IRS continues to accrue penalties and interest through the statutory collection period of a delinquent tax assessment, regardless of the likelihood of collecting on even the original tax assessment owed, this has, over time, contributed substantially to the buildup of IRS’ balance of unpaid assessments. Because much of IRS’ inventory of unpaid assessments consists of (1) write-offs, which have no future collection potential, (2) compliance assessments, which have little likelihood of being collected, and (3) taxes receivable with no estimated collectibility, and because these items are mostly penalties and interest, a substantial portion of the $136 billion in accumulated interest and penalties is not collectible. Conclusions

Less than half of IRS’ balance of unpaid assessments as of September 30, 1997, was considered taxes receivable, and only about one-third of the taxes receivable, about 13 percent of the $214 billion total unpaid assessments balance, was estimated to be collectible. Our objectives in the unpaid assessment segment of the audit were to determine (1) whether IRS had properly classified its balance of unpaid assessments between taxes receivable, compliance assessments, and write-offs, (2) whether the balances for taxes receivable, compliance assessments, and write-offs were accurate, and (3) in conjunction with IRS, an estimate of the amount IRS could reasonably expect to collect on its balance of taxes receivable.
Why GAO Did This Study

Pursuant to a congressional request, GAO provided information on the composition and collectibility of the Internal Revenue Service's (IRS) September 30, 1997, balance of unpaid assessments.

What GAO Found

GAO noted that: (1) most of IRS' $214 billion in unpaid assessments as of September 30, 1997, are not taxes receivable and are not collectible; (2) of this balance, $76 billion, or 36 percent, consists of write-offs, which are typically over 6 years old and have no potential for collection; (3) write-offs consist primarily of corporate income and payroll taxes owed by bankrupt or defunct businesses, including failed financial institutions resolved by the Federal Deposit Insurance Corporation and former Resolution Trust Corporation during the savings and loan and banking crises of the 1980s and early 1990s; (4) another $48 billion, or 22 percent, of the unpaid assessments represents compliance assessments, which are amounts IRS has identified as owed to the federal government, but which have not been agreed to by taxpayers or a court; (5) many of these unagreed assessments result from IRS' various compliance efforts; (6) the lack of acknowledgement by the taxpayer or courts of the amounts owed, and evidence of little or no payment activity on compliance assessments, diminish prospects for their collection; (7) GAO noted less than $75,000 in collections since 1995 on $2.6 billion of unpaid compliance assessments; (8) only $90 billion, or 42 percent of the September 30, 1997, balance of unpaid assessments, represents taxes receivable under federal accounting standards; (9) these are distinguished from compliance assessments in that they are amounts that either taxpayers or courts have agreed are owed to the federal government; (10) however, of this amount, only an estimated $28 billion, or 13 percent of the total balance of unpaid assessments, will likely be collected; (11) the accounts comprising this $28 billion balance show evidence of both willingness and ability on the part of the taxpayers to pay their tax liability; (12) GAO found little or no evidence of payments made on these uncollectible taxes receivable; (13) these cases are older debts, with most predating the 1990 tax year; (14) growth in the overall unpaid assessments balance reported by IRS in the last several years is largely due to the accrual of interest and penalties; (15) regardless of collection potential, IRS accrues interest through the statutory collection period of the delinquent tax debt, which can last 10 years or more; (16) as of September 30, 1997, $136 billion, or 64 percent, of IRS' balance of unpaid assessments represented interest and penalties; and (17) most of these amounts will not likely be collected.