Internal Revenue Service: Unpaid Taxes of Federal Workers and
Annuitants (14-JUN-01, GAO-01-195).
Voluntary compliance with tax laws is the foundation of the U.S.
tax system. This foundation can be eroded if the general public
perceives that federal workers and former federal workers
successfully evade their tax obligations. Internal Revenue
Service (IRS) records indicate that federal workers and
annuitants, and IRS workers in particular, appear to be more
compliant in meeting their tax responsibilities than the general
population. Nonetheless, there are some federal workers and
annuitants whom IRS records indicate are not fulfilling their tax
responsibilities and owe the federal government about $2.5
billion in outstanding taxes. In its attempt to improve
management and collection of federal taxes owed by federal
workers and annuitants, IRS faces the same issues hindering its
ability to manage and collect unpaid taxes of the general
population. With respect to IRS' efforts to improve compliance
among federal workers and annuitants, IRS must first be able to
determine how effective its program for this purpose has been and
what, if any, modifications are needed to ensure that the program
meets its objectives.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-01-195
ACCNO: A01187
TITLE: Internal Revenue Service: Unpaid Taxes of Federal Workers
and Annuitants
DATE: 06/14/2001
SUBJECT: Delinquent taxes
Federal taxes
Tax administration
Tax nonpayment
Voluntary compliance
Debt collection
Federal employees
IRS Federal Employee and Retiree
Delinquency Initiative Program
IRS Taxpayer Compliance Measurement
Program
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GAO-01-195
GAO United States General Accounting Office
Report to Congressional Requesters
June 2001 INTERNAL REVENUE SERVICE
Unpaid Taxes of Federal Workers and Annuitants
GAO- 01- 195
Page i GAO- 01- 195 Unpaid Taxes of Federal Workers and Annuitants Letter 1
Appendix I Scope and Methodology 32
Appendix II Details on Sample Cases of Federal Workers and Annuitants with
Outstanding Taxes 36
Appendix III Comments From the Internal Revenue Service 42
Appendix IV GAO Contacts and Staff Acknowledgments 44
Tables
Table 1: Federal Workers/ Annuitants With Multiple Unpaid Tax Accounts as of
October 1999 12 Table 2: Outstanding Taxes of Federal Workers/ Annuitants as
of
October 1999 by Tax Year 13 Table 3: Breakdown of Outstanding Amounts Owed
by Federal
Workers/ Annuitants as of October 1999 14 Table 4: Non- section 1203 Tax
Compliance Issues and Disciplinary
Actions 17
Figures
Figure 1: Breakdown of Valid Sample Cases of Federal Workers and Retiree Tax
Delinquencies 19 Figure 2: Breakdown of Cases Determined To Be Uncollectible
36 Figure 3: Breakdown of Cases Determined To Be Partially
Collectible 38 Figure 4: Breakdown of Cases Determined To Be Fully
Collectible 40 Contents
Page ii GAO- 01- 195 Unpaid Taxes of Federal Workers and Annuitants
Abbreviations
ALERTS Automated Labor and Employee Relations Tracking System ARDI accounts
receivable dollar inventory AUR Automated Underreporter Program CNC
currently not collectible CSED collection statute expiration date FERDI
Federal Employee and Retiree Delinquency Initiative FMS Financial Management
Service IRC Internal Revenue Code IRS Internal Revenue Service OGE Office of
Government Ethics OIC offer in compromise OPM Office of Personnel Management
RRA98 Internal Revenue Service Restructuring and Reform Act
of 1998 SES Senior Executive Service TIN taxpayer identification number
Page 1 GAO- 01- 195 Unpaid Taxes of Federal Workers and Annuitants
June 14, 2001 The Honorable Stephen Horn Chairman Subcommittee on Government
Efficiency, Financial Management, and Intergovernmental Relations Committee
on Government Reform House of Representatives
The Honorable Jim Turner House of Representatives
As the nation?s tax collector, the Internal Revenue Service (IRS) collects
about $2 trillion in federal taxes annually. While the majority of taxpayers
appear to comply with the nation?s tax laws by filing their tax returns and
paying their tax liabilities, some do not. IRS records as unpaid taxes or
assessments amounts taxpayers identify they owe through the tax returns they
file and amounts it determines are owed by taxpayers as identified through
its various enforcement programs. 1 Unpaid assessments also include
accumulated penalties and interest.
Despite the high level of tax collections, the agency continues to have a
significant balance of cumulative unpaid assessments. As of September 30,
2000, IRS reported cumulative unpaid assessments of $240 billion, of which
only $22 billion, or 9 percent, it estimated to be collectible. 2 Similarly,
as of September 30, 1999, IRS estimated that of $231 billion in unpaid
assessments, $21 billion, or 9 percent, was likely to be collected. IRS?
balance of unpaid assessments consists of various types of taxes, including
payroll, corporate, and individual income taxes. Included in this cumulative
balance are outstanding taxes IRS reports to be owed by
1 IRS? enforcement programs include examinations and constructing of tax
returns for nonfiling taxpayers using information from third- party sources,
such as wage and earnings statements and interest statements from financial
institutions. Also, IRS? Automated Underreporter Program identifies
potential underreported income and tax liabilities through discrepancies
between tax data provided by taxpayers and that provided by thirdparty
sources.
2 See Financial Audit: IRS? Fiscal Year 2000 Financial Statements (GAO- 01-
394, March 1, 2001).
United States General Accounting Office Washington, DC 20548
Page 2 GAO- 01- 195 Unpaid Taxes of Federal Workers and Annuitants
federal workers and annuitants. 3 According to IRS records, cumulative
amounts owed by federal workers and annuitants made up about 1 percent of
the total outstanding balance of unpaid assessments in both fiscal years
1999 and 2000.
This report responds to your request for information on unpaid taxes that
federal workers and annuitants owe the federal government. You asked for
information on the number of federal workers and annuitants that have
outstanding tax obligations, how much they owe, the type of taxes they owe,
and how the level of taxes they owe compares with that owed by nonfederal
taxpayers. You also asked for information on what impediments, if any,
affect IRS? ability to (1) collect amounts owed by federal workers and
annuitants and (2) promote tax compliance, and thus impact IRS?
effectiveness in enforcing the tax code for this federal population.
To respond to your request, we used a combination of (1) analyses of data
maintained on IRS? systems or otherwise provided by IRS as of October 1999,
(2) detailed reviews of federal worker and annuitant unpaid tax cases, (3)
interviews with IRS headquarters and field office officials, (4) interviews
with Office of Personnel Management (OPM) and Office of Government Ethics
(OGE) personnel on ethics and responsibilities of federal workers and
annuitants, and (5) discussions with the Department of the Treasury?s
Financial Management Service (FMS) personnel on the status of implementation
of Treasury?s continuous levy program. 4 Also, we obtained and reviewed
information on the laws governing dissemination of tax information, on IRS?
Federal Employee and Retiree Delinquency Initiative (FERDI) and Employee Tax
Compliance programs, and on the results of IRS? FERDI matches as of October
2000. For more details on our scope and methodology, see appendix I.
3 In this report, annuitants are defined as retired federal employees
receiving income related to their prior federal employment from the federal
government. 4 Levy is the legal process by which IRS orders a third party to
turn over property in its possession that belongs to the delinquent taxpayer
named in a notice of levy. Property is used in a broad sense and can cover
earned compensation, funds in financial accounts, as well as nonmonetary
property, such as real property. For each property source, IRS can effect a
one- time levy or a continuous levy. A continuous levy remains in effect
from the date the levy is first made until the tax debt is fully paid or IRS
releases the levy.
Page 3 GAO- 01- 195 Unpaid Taxes of Federal Workers and Annuitants
According to IRS data, as of October 1999, 390,000 federal workers and
annuitants owed cumulative unpaid federal taxes of about $2.5 billion. Of
this amount, about 54 percent was owed by federal annuitants and 46 percent
by federal workers. IRS records also identified an additional 65,000 federal
workers and annuitants who had not filed tax returns. The $2.5 billion
represented both taxes due and agreed to by taxpayers or courts, as well as
amounts IRS claims were owed by taxpayers, which are referred to as
compliance assessments. 5 Because compliance assessments often exceed the
actual taxes owed, the actual amount of unpaid taxes is not certain.
Included in this amount was about $660 million owed by taxpayers who had
reached agreements with IRS to pay their tax liabilities in installments
over time. According to IRS records, about 5 percent of the federal worker
and annuitant population owed taxes or had not filed tax returns as
required, compared to about 8 percent for the general population. These
rates appear to indicate a higher overall rate of compliance among federal
workers and annuitants than that of the general population. Information
recently reported by IRS indicated that, as of October 2000, 340,000 federal
workers and annuitants owed cumulative unpaid taxes of about $2.5 billion,
of which about $650 million was owed by taxpayers who had reached agreements
with IRS to pay their tax liabilities in installments over time. Also, as of
October 2000, IRS identified an additional 85,000 federal workers and
annuitants who had not filed tax returns and reported that about 5 percent
of the federal worker and annuitant population owed taxes or had not filed
tax returns as required, compared to about 7 percent for the general
population.
IRS has difficulty identifying the actual amount of unpaid taxes for the
federal as well as the general population because some taxpayers fail to
report or fully report their tax obligations. To the extent that IRS does
not detect or correct income that taxpayers either underreport or do not
report at all, the amount of unpaid taxes on IRS? records is understated.
Conversely, to the extent that IRS assesses taxes based on third- party
information, the amount of unpaid taxes on IRS? records can be overstated
because IRS may be unaware of legitimate deductions that would reduce or
even eliminate the taxpayer?s potential tax liability.
5 This amount consists of the total amount of unpaid tax assessments
accumulated from the inception of each assessment, with accumulated
penalties and interest that may apply and less any payments received.
Excluded from this amount are any assessments that have reached their
statutory collection expiration date and are thus no longer reflected in
IRS? records. Results in Brief
Page 4 GAO- 01- 195 Unpaid Taxes of Federal Workers and Annuitants
The taxes owed by federal workers and annuitants were predominantly unpaid
income taxes. About 48 percent of the balance IRS records indicate was owed
by federal workers and annuitants as of October 1999 was identified by IRS
through its enforcement programs. Also, over one- third of the 390,000
federal workers and annuitants owed taxes for more than one tax period, 6
and 56 percent of the amounts owed date back to before 1995. While the rate
of noncompliance of federal workers and annuitants was fairly consistent,
annuitants owed proportionally more in outstanding taxes than federal
workers. The rate of noncompliance by IRS employees, according to IRS
records, was lower than that of the rest of the federal population- about 3
percent of its employees either owed taxes or had not filed tax returns as
of both October 1999 and October 2000.
A significant portion of the outstanding balance owed by federal workers and
annuitants is potentially uncollectible. Based on a statistical sample of
tax cases involving federal workers and annuitants taken from six IRS field
offices 7 that account for $861 million of the reported $2.5 billion in
unpaid and potential unpaid taxes as of October 1999, we estimate that 32
percent of the amounts owed or claimed by IRS to be owed by federal workers
and annuitants is likely to be collected. In comparison, about 9 percent of
the total balance of unpaid assessments for all taxpayers is likely to be
collected.
Several impediments, which are also applicable to the general taxpayer
population, affect IRS? ability to collect taxes owed by federal workers and
annuitants and to promote compliance with the nation?s tax laws, thus
impacting IRS? effectiveness in enforcing the tax code. These impediments
include:
Ineffective systems and processes, which (1) hinder IRS? ability to
promptly identify underreported or nonreported income and (2) contribute to
errors in taxpayer accounts. For example, because of ineffective systems and
processes, IRS took 3 years or more to identify and assess delinquent taxes
for some federal workers and annuitants who failed to report or fully report
their income. Also, errors in taxpayer accounts have resulted in both lost
revenue to the federal government and increased taxpayer burden.
6 A tax period is defined as the period over which the tax liability was
created. That period is typically a year and, for individual taxes,
typically a calendar year. 7 The field offices selected are not believed to
be atypical.
Page 5 GAO- 01- 195 Unpaid Taxes of Federal Workers and Annuitants
Resource allocation decisions and limitations, which may hinder IRS?
ability to both assess and collect taxes owed. In some unpaid tax cases we
reviewed where case file information indicated that the taxpayers had the
resources or ability to pay at least some of the amount owed or claimed by
IRS to be owed, we saw no evidence that IRS was actively pursuing
collection.
We have previously reported on these issues and have provided
recommendations for corrective actions. 8 While IRS has taken steps to
address some of these issues, continuing efforts are needed to fully resolve
them.
Various government laws are in place which are designed to protect the
privacy of taxpayers and the confidentiality of taxpayer data. These laws
include prohibiting IRS from sharing with federal agencies data on
individual federal workers? unpaid taxes and/ or unfiled tax returns with
certain exceptions, such as communicating with agency payroll offices to
arrange for levying or garnishing the employee?s wages. IRS must work within
this framework in its attempts to promote compliance among federal workers
and annuitants.
IRS? FERDI program was intended to determine the degree of compliance with
federal tax laws among federal workers and annuitants and assist IRS in
improving compliance by this segment of the taxpayer population. While the
program has existed for about 8 years, IRS has not assessed its
effectiveness in improving federal worker and annuitant compliance with the
nation?s tax laws. Without an evaluation of the program, IRS does not have
information with which to determine its usefulness or what specific
modifications, if any, are needed to better enable it to achieve its
intended objectives. Also, IRS does not know the extent to which agencies to
which it provides information on the agency?s overall compliance rate
communicate the results to their employees, or whether such communication
results in increased compliance. Accordingly, we are recommending that IRS
assess the effectiveness of the FERDI program in promoting compliance by
federal workers and annuitants with the nations tax laws. We are also
recommending that, as part of this assessment, IRS determine the extent to
which each agency communicates information on
8 See Internal Revenue Service: Recommendations to Improve Financial and
Operational Management (GAO- 01- 42, November 17, 2000).
Page 6 GAO- 01- 195 Unpaid Taxes of Federal Workers and Annuitants
its compliance rate with its workforce and whether such communication can be
linked to improved compliance by the agency?s employees.
IRS recognizes the impediments discussed in this report affecting its
ability to collect outstanding taxes. IRS has agreed to explore the
possibility of conducting a study to assess the effectiveness of the FERDI
program, and to request information from federal agencies participating in
the FERDI program to determine whether communication by agencies to their
employees can be linked to improved tax compliance.
Presidential Executive Order 12764, ?Principles of Ethical Conduct for
Government Officers and Employees? (government code of ethics), provides
ethical guidelines to be followed in the executive branch of the federal
government. Among the ethical standards prescribed in the order is that
?Employees shall satisfy in good faith their obligations as citizens,
including all just financial obligations, especially those such as Federal,
State, or local taxes that are imposed by law.? The executive order, which
was recently emphasized by the current administration in January 2001,
continues to stress the ethical importance of federal workers? complying
with their federal tax obligations. Noncompliance by federal workers and
annuitants could adversely affect the public?s perception of tax
administration, government effectiveness, and the federal workforce. If the
general public perceives that federal workers and annuitants can
successfully evade their tax obligations, voluntary compliance, the
foundation of the U. S. tax system, could be eroded.
In 1992, IRS initiated FERDI, a program to identify the degree of compliance
with federal tax laws among federal workers and federal annuitants. IRS
began this program as a means to improve information on potential levy
sources and in response to the presidential executive order. Beginning in
1992, IRS began to periodically match its records of outstanding taxes and
nonfiled tax returns against federal personnel records to identify federal
workers and annuitants who either had outstanding taxes or had not filed
their tax returns. IRS entered into agreements with the Defense Manpower
Data Center, which receives personnel data files on many of the government?s
active and retired civilian and military workers, and the U. S. Postal
Service, which maintains and processes similar data for postal workers, to
match these personnel records against a data file of outstanding taxes and
unfiled tax returns Background
Page 7 GAO- 01- 195 Unpaid Taxes of Federal Workers and Annuitants
monthly. Most agencies, accounting for over 95 percent of the federal
workforce, participate in this matching process. For those federal agencies
and entities that do not, 9 including the National Security Agency, the
Federal Bureau of Investigation, the Central Intelligence Agency, the Board
of Governors of the Federal Reserve System, and legislative branch entities,
IRS attempts to identify these employees through a separate matching of Wage
and Earnings Statements (W- 2s). However, this process has certain
limitations. 10
Agencies that participate in the matching process and agencies where IRS is
able to perform a match using W- 2 information annually receive a letter
from IRS informing them of the number of employees with outstanding taxes or
unfiled tax returns. These letters also contain IRS? assessment of the
agency?s rate of compliance. Because of restrictions imposed by
confidentiality laws, these agencies do not receive information on the
specific names of individual employees whom IRS has identified as not
complying with the nation?s tax laws.
The broad objectives of FERDI are to enhance the federal government?s tax
administration process by improving the compliance of federal employees and
annuitants with their responsibility for filing tax returns and paying
taxes, thereby helping to ensure the public?s confidence in the tax system.
The program combines reaching out to federal agencies to raise their
awareness of this issue and prioritizing IRS? efforts to reduce its unpaid
tax cases. Because of the potential ethical concerns and public perceptions
related to federal employees and annuitants who do not comply with their tax
responsibilities, IRS until recently adopted what it referred to as a ?zero
tolerance? policy for these cases. Specifically, IRS? policy until January
2001 has generally been to actively pursue all known noncompliance cases
involving federal workers and annuitants, without
9 According to IRS, the agencies and entities that have declined to
participate in the program have cited security and potential privacy issues
as their principal reason. 10 For example, matching using the W- 2 records
can only be done annually and thus may not reflect the current status of
federal employees (i. e., individuals may have left the federal workforce
during the year and thus are no longer federal employees). Consequently, the
delay in identifying potentially delinquent taxpayers as federal workers
could delay IRS? efforts to pursue collection from these individuals. A
further limitation occurs with certain agencies whose payrolls are processed
through the Department of Agriculture?s National Finance Center (NFC) where
the automated W- 2s reflect NFC?s identification number, but not the
employer identification number of the employing agencies.
Page 8 GAO- 01- 195 Unpaid Taxes of Federal Workers and Annuitants
prioritizing by amount involved or potential for collection. 11 In January
2001, IRS changed its prioritization system for FERDI cases and these now
receive the same priority as the general population cases.
According to IRS records, as of October 1999, over 390,000 federal workers
and annuitants, or 4.5 percent of the total 8.7 million on- roll federal
worker and annuitant population, owed about $2.5 billion in unpaid federal
taxes. IRS records indicate that another 65,000 federal workers and
annuitants had not filed tax returns and were identified by IRS as potential
nonfilers. 12 In total, IRS records indicated that as of October 1999, over
5 percent of the federal population had outstanding taxes, had not met its
tax filing responsibilities, or both. This percentage compared favorably
with the general population: IRS? records indicated that as of October 1999,
over 8 percent of the general population owed amounts to the government for
unpaid taxes, had not filed tax returns, or both. Information recently
reported by IRS indicated that, as of October 2000, 340,000 federal workers
and annuitants owed cumulative unpaid taxes of about $2.5 billion, and
another 85,000 federal workers and annuitants had not filed tax returns.
This information indicated that, as of October 2000, slightly less than 5
percent of the federal worker and annuitant population owed taxes or had not
filed tax returns as required, compared to a little over 7 percent for the
general population.
Based on these percentages, federal workers and annuitants appear to be more
compliant than the general taxpayer population in meeting their tax
obligations. However, these percentages and the amounts reported as owed to
the federal government are affected by several factors. Not all taxpayers,
including federal workers and annuitants, pay the amounts they owe the
federal government. Some do not provide payments on their tax liability when
they file their tax returns. Others underreport, either mistakenly or
deliberately, the amounts they owe the government. Still others do not
report the amounts they owe. To the extent that underreporting or
nonreporting by taxpayers is not detected and corrected by IRS, the amount
of unpaid taxes IRS identifies is understated.
11 These individuals are afforded all due process rights available to other
taxpayers. 12 A nonfiler is an individual who meets filing requirements for
a tax period, but fails to file a return for that period. IRS Records
Indicate
Federal Workers and Annuitants Owe $2.5 Billion in Unpaid Taxes
Page 9 GAO- 01- 195 Unpaid Taxes of Federal Workers and Annuitants
Conversely, not all amounts IRS identifies as unpaid taxes are actually owed
by taxpayers; thus, the amount of unpaid taxes IRS identifies could be
overstated. This is particularly true for cases in which IRS assesses
additional taxes based on third- party- provided information, or when a
taxpayer has not filed a tax return for a given period and IRS constructs a
return for the individual based on third- party information. Erroneous
third- party information can result in IRS? erroneously assessing a taxpayer
for amounts that are not owed. Also, when IRS assesses taxes based on third-
party payment information, the assessed tax may be overstated because IRS
cannot consider legitimate deductions that may apply and that could reduce
or even eliminate the identified tax liability. In addition, if IRS errs in
applying taxpayer payments, its records could reflect a tax liability that
has already been paid. In other instances, IRS unpaid assessments include
amounts being contested by taxpayers. In some cases, the taxpayers may even
be due a refund.
It is also important to note that, for both the federal and the general
populations, the percentages noted above and the reported amounts of unpaid
taxes include balances taxpayers owe that are being paid under installment
agreements. The amount of unpaid taxes owed by the federal population as of
October 1999 and October 2000 included about $660 million and about $650
million, respectively, owed by taxpayers who were in installment agreements
with IRS. If these federal workers and annuitants were excluded from the
population of federal workers and annuitants who were considered to be
noncompliant, the percentages of the federal worker and annuitant population
who owed taxes or had not filed tax returns as required as of October 1999
and October 2000 would decline to 3.3 percent and 3 percent, respectively.
IRS? difficulty in better determining noncompliance is affected by a number
of issues including significant deficiencies in its systems and processes
leading to delays in identifying noncompliant taxpayers and errors in
taxpayer accounts, and resource allocation decisions and limitations. These
issues are discussed later in this report under
?Impediments Exist in Collecting Amounts Owed and Promoting Compliance.?
Page 10 GAO- 01- 195 Unpaid Taxes of Federal Workers and Annuitants
According to IRS records, as of October 1999, the taxes owed by the over
390,000 federal workers and annuitants predominantly stemmed from their
income. Nearly one- half of the outstanding amounts IRS reported as owed by
these federal workers were identified through IRS? enforcement programs.
About one- third of these individuals owed taxes for more than one tax
period and owed for extended periods of time, and about 56 percent of the
total outstanding amounts dated back to before 1995. Federal annuitants
accounted for 54 percent of the total outstanding amounts owed by federal
workers and annuitants, while constituting 40 percent of the number of
individuals with tax delinquencies. IRS employees were more compliant than
the rest of the federal population; however, they are subject to special
monitoring by IRS and can face substantial disciplinary actions for willful
noncompliance. Our work indicates that a significant portion of the
outstanding amounts owed by federal workers and annuitants is potentially
uncollectible.
The vast majority of federal workers and annuitants owe taxes stemming from
the income they earn. According to IRS records, as of October 1999, over 99
percent of the accounts owed by federal workers and annuitants was
attributable to individual income taxes owed. It is important to note that
such income taxes are not necessarily solely attributable to federal
salaries or pensions. Some income may be attributable to other sources such
as secondary nonfederal income, a spouse?s nonfederal income, or gains on
sale of property.
Among the less than one percent of federal workers and annuitants with
outstanding taxes as of October 1999 that were not related to their income,
approximately 2, 300 individuals owed the government penalty assessments
totaling $155 million resulting from IRS? finding them to be willful and
responsible for the failure to remit amounts withheld from employee salaries
for payroll taxes. 13 In some instances, these individuals were assessed for
multiple periods of withheld but nonremitted payroll taxes- the 2,300
individuals owe outstanding penalties on 3,019 separate tax accounts. 14 In
one case we reviewed, we found that IRS had assessed a
13 IRS can assess a trust fund recovery penalty against an individual whom
it determines was willful and responsible for not forwarding to the
government federal payroll taxes withheld from employees? salaries.
14 We previously reported on issues related to unpaid payroll taxes. See
Unpaid Payroll Taxes: Billions in Delinquent Taxes and Penalty Assessments
Are Owed
(GAO/ AIMD/ GGD- 99- 211, August 2, 1999). Type of Taxes Owed
and Other Characteristics of Federal Population
Taxes Owed Are Predominantly on Income
Page 11 GAO- 01- 195 Unpaid Taxes of Federal Workers and Annuitants
retired federal employee for withholding and not forwarding to the
government payroll taxes he withheld from employees of two businesses he
started after retiring. In each of these two businesses, the individual had
withheld taxes from his employees? salaries for 17 separate periods without
forwarding the withheld funds to the federal government. IRS subsequently
assessed the individual over $1.6 million in trust fund recovery penalty
assessments.
IRS records indicated that 48 percent of the cumulative amounts all federal
workers and annuitants owed as of October 1999 was identified by IRS through
its various enforcement programs. These amounts were attributable to
nonfilers and underreporters and were not due to mathematical errors
identified by IRS that were made by the taxpayers when preparing their tax
returns. Our statistical sample of 140 unpaid tax cases involving federal
workers and annuitants reinforces these statistics. In 55 of the cases (39
percent), some or all of the taxes owed were identified as a result of IRS?
enforcement programs, rather than through the taxpayers? own reporting.
Comparably, for the general population, IRS identified, through its various
tax enforcement programs, 37 percent of the cumulative amounts owed
according to IRS records as of October 1999.
According to IRS records, 36 percent of federal workers and annuitants with
outstanding unpaid tax assessments as of October 1999 owed taxes for
multiple periods or years. This proportion was consistent with that of the
general population; according to IRS records, about 37 percent of the
general taxpayers with outstanding taxes as of October 1999 owed for more
than one tax period. Over 390,000 federal workers and annuitants owed
outstanding taxes on over 690,000 separate accounts, each account
representing a tax period. Table 1 provides a breakdown of the federal
workers and annuitants by number of tax accounts owed. 48 Percent of Taxes
Owed Are Not SelfReported Some Taxes Are Owed For Multiple Periods and Are
Outstanding for Years
Page 12 GAO- 01- 195 Unpaid Taxes of Federal Workers and Annuitants
Table 1: Federal Workers/ Annuitants With Multiple Unpaid Tax Accounts as of
October 1999
Dollars in millions
Number of individuals
Percentage of total number of
individuals Number of accounts Outstanding
balance Percentage of
total outstanding
balance
250,219 64.1 1 $511.1 20.6 127,565 32.7 2 to 5 1, 308.6 52.7 11,854 3. 0 6
to 10 541.4 21.8 843 0.2 11 to 15 102.7 4. 1 31 NM a Over 15 18.3 0. 7
Total: 390,512 100 $2,482.1 100 b a NM = Not meaningful.
b Due to rounding, numbers do not total precisely 100. Source: Unaudited IRS
FERDI file data.
In addition, most of the amounts owed by federal workers and annuitants had
been outstanding for a number of years. As of October 1999, about 200,000
separate accounts (29 percent of the total number of accounts) related to
taxes assessed for years before 1995. These accounts totaled about $1.4
billion and represented 56 percent of the nearly $2.5 billion total balance
in tax assessments identified by IRS as owed by federal workers and
annuitants. About 23 percent, or $576 million, dated back to before 1990. In
contrast, as of October 1999, 79 percent of IRS? total balance of unpaid
assessments dated back to before 1995, and 40 percent pertained to amounts
owed for tax years before 1990. Table 2 provides a breakdown of the number
and associated outstanding balances owed by year in which the tax was due.
Page 13 GAO- 01- 195 Unpaid Taxes of Federal Workers and Annuitants
Table 2: Outstanding Taxes of Federal Workers/ Annuitants as of October 1999
by Tax Year
Dollars in millions
Tax year owed Number of
accounts Percentage of total accounts Outstanding
balance Percentage
of total outstanding
balance
1998- 1999 180,927 26.2 $269 10.8 1995- 1997 308,943 44.7 817 32.9 1990-
1994 160,615 23.2 820 33.0 1980- 1989 40,086 5. 8 552 22.2 Before 1980 368
0.1 24 1. 0
Total 690,939 100 $2,482 100 a a Due to rounding, numbers do not total
precisely 100.
Source: Unaudited IRS FERDI file data.
As our previous work on unpaid assessments shows, 15 the longer a tax
liability remains outstanding, the lower the likelihood that IRS will be
able to collect the outstanding amount. Further, because IRS continues to
accrue significant amounts of interest and penalties on these delinquent
taxes as they age, additional amounts having a lower likelihood of being
collected are added to IRS? balance of unpaid assessments. IRS records
indicated that 55 percent of the outstanding balance of unpaid taxes federal
workers and annuitants owed as of October 1999 consisted of interest and
penalties.
As discussed earlier, according to IRS records, as of October 1999, over 5
percent of federal workers and annuitants had or potentially had outstanding
federal taxes, had not filed tax returns and were thus potential nonfilers,
or both. This percentage was fairly consistent between federal workers and
federal annuitants: 5.5 percent for active federal workers and 5 percent for
federal annuitants. However, according to IRS records, federal annuitants
owed, on average, 50 percent more per account than active federal workers.
While the average account balance for federal annuitants was $4,387, the
average account balance for the active federal workers was $2,962. As a
result, as indicated in table 3, federal annuitants
15 See Internal Revenue Service: Composition and Collectibility of Unpaid
Assessments
(GAO/ AIMD- 99- 12, October 29, 1998). Federal Annuitants
Owe Proportionally More Taxes Than Active Federal Workers
Page 14 GAO- 01- 195 Unpaid Taxes of Federal Workers and Annuitants
owed 54 percent of the nearly $2.5 billion in unpaid taxes while accounting
for 40 percent of the population.
Table 3: Breakdown of Outstanding Amounts Owed by Federal Workers/
Annuitants as of October 1999
Dollars in billions
Individual Number of individuals
Percentage of total individuals Number of
accounts Outstanding balance
Percentage of total outstanding
balance
Worker 234,636 60 385,218 $1.14 46 Annuitant 155,883 40 305,721 1. 34 54
Totals 390,512 a 100 690,939 $2.48 100
a Adding the number of individual workers and individual annuitants owing
taxes yields 390, 519, which is 7 higher than the total number of
individuals owing taxes. The difference is the result of some individuals
owing taxes in more than one account and being identified by IRS as a
federal employee on some of these accounts and a retiree on others.
Source: Unaudited IRS FERDI file data.
Several factors account for this difference. For one, federal and nonfederal
retirees receiving civil service 16 or private- sector retirement pension or
annuity payments have the option to waive tax withholdings. This treatment
contrasts with that for active employees, both federal and nonfederal, who
cannot claim an exemption from withholding unless they meet certain
conditions. 17 The treatment of civil service and private- sector retirees
also differs from that of U. S. Armed Forces annuitants, since periodic
pension or annuity payments for the latter (as well as certain other types
of payments) are defined as wages and thus are subject to income tax
withholding.
If annuitants elect not to have amounts withheld and do not make the
appropriate financial adjustments, they increase the risk of finding
themselves without the means to pay their tax obligations. Discussions
16 This lack of mandatory withholding requirements applies equally to
federal annuitants participating in the Federal Employee Retirement System
(FERS) or in the Civil Service Retirement System (CSRS). A portion of Social
Security Administration (SSA) benefits may be taxable if other income in
addition to SSA income is over a certain threshold; Federal Thrift Savings
Plan (TSP) distributions require no withholdings except for eligible
rollover distributions which require 20 percent withholding.
17 These conditions are (1) for the last tax year, they had a right to a
refund of all federal income tax withheld because of no tax liability and
(2) for the current tax year, they expect a refund of all federal income tax
withheld because they expect to have no tax liability.
Page 15 GAO- 01- 195 Unpaid Taxes of Federal Workers and Annuitants
with IRS officials at several field offices we visited, and many of the
cases we reviewed in our statistical sample, indicate that one underlying
cause of tax delinquencies by federal annuitants is the lack of withholding
of amounts from pension payments throughout the year to ensure that the
individual is not faced with a substantial tax liability at the end of the
year. In 14 (19 percent) of the 73 unpaid tax cases we reviewed involving
federal retirees, the lack of adequate tax withholdings or the absence of
any withholdings contributed to substantial tax liabilities at the end of
the year.
Another factor contributing to the difference is that without automatic tax
withholdings from pension payments and without the means to pay amounts due,
annuitants? accounts are often older than those of active federal workers.
About 4 percent of the accounts and 15 percent of the outstanding balance
owed by active federal workers as of October 1999 dated back to before 1990.
In contrast, 9 percent of the accounts and 30 percent of the outstanding
balance owed by federal annuitants predated 1990. Because penalties and
interest continue to accrue on outstanding unpaid taxes, the longer an
account remains outstanding, the greater the extent to which the original
taxes are increased by the added penalties and interest. Over time, the
penalties and interest can grow to the point where they significantly exceed
the original balance due. IRS records show that penalties and interest
charges, both accrued and assessed, accounted for 59 percent of federal
annuitants? average account balance as of October 1999, compared with 50
percent of federal workers? average account balance.
IRS views compliance by its employees as critical to its mission as the
nation?s tax collector. In its rules of ethical conduct, IRS expands on the
ethical guidelines contained in Executive Order 12674 related to financial
obligations. IRS? rules of conduct specifically stress the requirement that
its employees promptly and properly file all tax returns, and that properly
filing tax returns includes providing the appropriate payments as reflected
on the return. IRS bases this requirement on the fact that, by virtue of
IRS? mission, the public must have confidence in its integrity, efficiency,
and fairness. IRS? rules of ethical conduct do allow the employee the same
rights with respect to tax issues as those afforded the general public, such
as the ability to file an extension or enter into an installment agreement
to pay any outstanding amounts. However, the rules specifically note that
failure to adhere to the filing requirements may result in disciplinary
action up to and including termination of employment. IRS Employees Are
Subject to Tax Compliance Program and Are More Compliant
Page 16 GAO- 01- 195 Unpaid Taxes of Federal Workers and Annuitants
Also, the Internal Revenue Service Restructuring and Reform Act of 1998
(RRA98) imposed more stringent requirements on IRS employees, with some
sanctions as severe as terminating their employment. Specifically, Section
1203 of the act cites two specific instances in which the commission of such
violation could result in the employee?s termination: (1) willfully failing
to file required tax returns, unless such failure is due to reasonable cause
and not willful neglect (Section 1203( 8)), and (2) willfully understating a
tax liability, unless such understatement is due to reasonable cause and not
willful neglect (Section 1203( 9)).
IRS has an Employee Tax Compliance Program to monitor the compliance of its
workers with its filing and tax requirements. The program is designed to
identify IRS employees who have filed or paid their taxes late, are
delinquent in paying any balance due, or for whom IRS has no record of a tax
return having been filed. The program is centralized at IRS? Cincinnati
Service Center, which periodically matches IRS? automated personnel records
against its master files- its detailed database of taxpayer accounts- and
downloads any matches into a separate Employee Tax Compliance database.
Program personnel review these data to identify the potential compliance
issue, and if they determine an infraction has occurred, refer the issue to
the employee?s labor relations office for review. Depending on the nature of
the issue identified, certain disciplinary action may be warranted.
It is important to note that potential non- Section 1203 violations are
dealt with in a different manner. Examples of the potential non- Section
1203 issues and disciplinary actions are reflected in table 4. The policies
and procedures for non- Section 1203 violations apply to all IRS employees
regardless of grade level. The only distinction is that cases involving
Senior Executive Service (SES) employees and GS- 15 employees are handled at
a central labor relations office at IRS headquarters.
Page 17 GAO- 01- 195 Unpaid Taxes of Federal Workers and Annuitants
Table 4: Non- section 1203 Tax Compliance Issues and Disciplinary Actions
Tax compliance issue Range of disciplinary action
Minor or technical violations occurring despite the exercise of ordinary
business care or prudence in filing or paying
No action to counseling Unintentional oversight in fulfilling tax obligation
(filing and paying) Counseling to admonishment Neglect in fulfilling tax
obligation (filing and paying) Admonishment to suspension Disregard of tax
responsibilities and indifference to tax laws Suspension to termination
Source: IRS Employee Tax Compliance Center; Guidelines for Closing/
Referring Cases and Applications of Guidelines.
If IRS personnel responsible for the Employee Tax Compliance program
determine that the violation falls within the provisions of Section 1203,
the case is brought before a Central Adjudication Unit at IRS headquarters
for review. If the unit determines that a Section 1203 violation exists, the
case is brought before the IRS Commissioner?s 1203 Review Board for final
disposition. The board, which is chaired by the IRS Deputy Commissioner for
Operations, can either terminate the employee or recommend that the IRS
Commissioner mitigate the disciplinary action. After the final
determination, the employee has the right to due process and can appeal the
final decision. From June 1999 through July 2000, 77 cases involving Section
1203 violations were brought before, and reviewed by, the Commissioner?s
1203 Review Board. Of these cases, 38 resulted in the dismissal of the
employee, 29 resulted in disciplinary actions less severe than termination
due to a finding of mitigating factors, and 10 were still pending
disposition.
Through its program, IRS identified 3,255 of its employees who either had
outstanding taxes or had not filed tax returns as of October 1999. The 3,255
employees with outstanding taxes or unfiled tax returns represented about
3.3 percent of IRS? overall population at that time. More recent information
reported by IRS showed that as of October 2000, 2,975 of its employees, or
3.1 percent of its overall workforce at that time, either had outstanding
taxes or had not filed tax returns. While the agency has employees it
believes are not complying with the nation?s tax laws, these percentages
reflect a better rate of tax compliance than those for the rest of the
federal government and the nation?s taxpayers.
Page 18 GAO- 01- 195 Unpaid Taxes of Federal Workers and Annuitants
As with the general population, not all amounts owed or identified by IRS as
being owed by federal workers and annuitants are collectible. A review of
IRS? records and a statistical sample of cases from a subpopulation of the
amounts owed by federal workers and annuitants indicate that a significant
portion of the outstanding amounts owed by federal workers and annuitants is
not likely to be collected. In reviewing cases in which IRS claims amounts
are owed, we focused on the collectibility of such amounts and not on the
legitimacy of IRS? claims.
IRS? records indicate that the current status of many accounts makes
collection of the outstanding taxes associated with these accounts doubtful.
IRS classified about $390 million of the outstanding taxes owed by federal
workers and annuitants as currently not collectible (CNC) 18 because of
various factors, such as (1) the taxpayer lacks the financial resources to
pay the amounts owed, (2) the taxpayer is deceased, or (3) IRS is unable to
contact or locate the taxpayer, despite the fact that these individuals are
receiving federal salary or benefit payments. Also, about $180 million was
owed by individuals who were in bankruptcy or other litigation proceedings
as of October 1999. In total, $570 million of the outstanding amounts owed
by federal workers and annuitants were classified by IRS as CNC or the
taxpayers were in bankruptcy or involved in litigation.
We reviewed a statistical sample of 152 unpaid taxes from a subpopulation 19
of $861 million in outstanding taxes owed by federal workers and annuitants
as of October 1999. Based on our review, we estimate that 32 percent of the
outstanding balance of this subpopulation will likely be collected.
In reviewing the cases we selected, we determined that 12 cases (8 percent)
were not valid since no tax liability should have been recorded as
outstanding as of October 1999. We determined that a case was invalid if
18 For cases closed as CNC, IRS does not actively pursue collection from the
taxpayer because it has concluded that the taxpayer currently does not have,
or IRS cannot determine whether the taxpayer has, the financial resources to
pay the outstanding tax obligation.
19 We selected a statistical sample from a subpopulation of the total
population of federal workers and annuitants with outstanding balances as
reflected in IRS records as of October 1999. The subpopulation consisted of
221,570 accounts with a total outstanding balance of $861 million. The
subpopulation constituted the total federal worker and annuitant caseload
assigned to six of IRS? field offices. A Significant Portion
of Amounts Owed by Federal Workers and Annuitants Is Potentially
Uncollectible
Page 19 GAO- 01- 195 Unpaid Taxes of Federal Workers and Annuitants
(1) the tax assessment recorded against the taxpayer as of October 1999 was
erroneous or (2) payments received before the October 1999 reporting date
fully satisfied the tax liability. Consequently, of the 152 cases we
reviewed, 140 represented valid tax liabilities of federal workers and
annuitants as of October 1999.
We categorized the remaining 140 selected sample cases as either
uncollectible, partially collectible, or fully collectible, based on our
estimate of collectibility for each case. Figure 1 provides a breakdown of
the valid cases we reviewed by category.
Figure 1: Breakdown of Valid Sample Cases of Federal Workers and Retiree Tax
Delinquencies
Uncollectible: 82 (59%)
Fully collectible:
28 (20%)
Partially collectible:
30 (21%)
Source: GAO statistical sample.
As figure 1 indicates, in 58 of the 140 valid cases (41 percent) we
reviewed, we found evidence that IRS would likely collect some or all of the
outstanding amounts. In contrast, for 82 cases (59 percent), we found no
evidence to indicate that IRS would collect any of the outstanding amounts.
Page 20 GAO- 01- 195 Unpaid Taxes of Federal Workers and Annuitants
Appendix II provides details on the types of cases that constitute the three
categories of estimated collectibility in which our sample fell. Appendix I
provides details on our basis and methodology used in reviewing the sample
cases and evaluating the results.
IRS? effectiveness in collecting the outstanding unpaid taxes federal
workers and annuitants owe and in promoting these taxpayers? compliance with
their tax responsibilities is adversely affected by several significant
impediments. These include significant systems and process deficiencies,
which (1) affect its ability to promptly identify and assess taxes, and (2)
affect the accuracy of taxpayer accounts; and resource allocation decisions
and limitations, which may hinder IRS? ability to both assess and collect
taxes owed. These impediments, which impact IRS? effectiveness in enforcing
the tax code with respect to federal workers and annuitants, also affect
IRS? efforts to collect taxes owed and promote compliance among the general
taxpayer population.
IRS? programs to identify underreporters or nonfilers can generally take
years to identify and assess taxes, significantly hampering IRS? ability to
collect these taxes. In addition, we continue to report serious deficiencies
in IRS? financial management and operational systems and processes that
affect the accuracy of taxpayer accounts. 20 These conditions continue to
result in unnecessary taxpayer burden and lost opportunities to collect
amounts owed. We have previously reported on these issues and have provided
recommendations for corrective action, including (1) ensuring IRS? ongoing
systems modernization effort includes the development of a subsidiary ledger
to accurately and promptly identify, classify, track, and report all IRS
unpaid assessments by amount and taxpayer, (2) manually reviewing and
eliminating duplicate or other assessments that have already been paid off
to assure all accounts related to a single assessment are appropriately
credited for payments received, and (3) better monitoring its procedures
requiring freeze codes be entered on all accounts of taxpayers IRS
determines are potentially liable for unpaid
20 See Financial Audit: IRS? Fiscal Year 1999 Financial Statements (GAO/
AIMD- 00- 76, February 29, 2000) and GAO- 01- 394. Also see Internal Revenue
Service: Custodial Financial Management Weaknesses (GAO/ AIMD- 99- 193,
August 4, 1999) and Unpaid Payroll Taxes: Billions in Delinquent Taxes and
Penalty Assessments Are Owed
(GAO/ AIMD/ GGD- 99- 211, August 2, 1999). Impediments Exist in
Collecting Amounts Owed and Promoting Compliance
Significant System and Process Deficiencies Impede Collections and Affect
Accuracy of Taxpayer Accounts
Page 21 GAO- 01- 195 Unpaid Taxes of Federal Workers and Annuitants
taxes. 21 IRS has acknowledged these issues and is working to address them.
IRS uses various enforcement programs to identify individuals who have
inaccurately reported or failed to report their tax liabilities. IRS?
underreporter program attempts to identify underreported taxes by verifying
tax return data with other third- party- supplied information, such as wage
and earnings statements. IRS? nonfiler program attempts to identify
taxpayers who failed to file tax returns. However, these programs can only
potentially assess underreported or unreported taxes. The process of then
determining whether amounts are, in fact, owed and then trying to collect
these outstanding amounts from taxpayers is the other critical element
involved.
IRS? various enforcement programs can take several years to identify and
assess the taxes against an individual for taxes owed. Of the 140 valid
federal worker and annuitant cases, 55 were cases in which IRS identified
taxes owed through its various enforcement programs. Of these 55 cases, 15
cases (27 percent) took over 3 years and 4 cases (7 percent) took over 5
years from the date the taxes were initially due until IRS assessed the
taxpayer for the outstanding amounts. In one case we reviewed, a federal
employee had not filed tax returns for 4 years from 1988 through 1994. For
the unfiled 1988 return, IRS was able to construct a substitute tax return
in late 1994, yet IRS then took another 6 months to record the unpaid tax
assessment in the taxpayer?s account.
During both our fiscal year 1999 and 2000 financial audits, 22 we continued
to find significant errors in taxpayer accounts. These errors included (1)
failing to record payments received to all related taxpayer accounts, (2)
delays in recording payments to related taxpayer accounts, and (3) delays in
recording assessments in taxpayer accounts. The omissions and delays in
recording activity resulted in numerous errors, such as issuing refunds to
taxpayers who owed taxes and erroneously assessing taxpayers who were
actually due refunds. These errors resulted in both a burden to taxpayers
and lost revenue to the federal government.
21 See GAO- 01- 42, November 17, 2000. 22 See GAO/ AIMD- 00- 76 and GAO- 01-
394. Difficulties in Identifying
Noncompliant Taxpayers Errors in Taxpayer Accounts
Page 22 GAO- 01- 195 Unpaid Taxes of Federal Workers and Annuitants
In our sample of federal worker and annuitant cases, we continued to find
deficiencies in IRS? systems and processes that affected the accuracy of
taxpayer accounts. For example, we found a case in which, due to an IRS
input error, a federal worker erroneously received a refund of $500,000 from
IRS. IRS identified the mistake in June 1999 and assessed the individual for
that amount. The individual returned the refund check, and the taxpayer?s
account was corrected in October 1999. In another case, a federal employee
did not file a tax return in 1994. IRS prepared a substitute tax return for
this federal worker and used it as a basis for assessing the individual.
However, in preparing the return, IRS used an erroneous W- 2 that showed
wages of $3,000,000. The taxpayer?s true wages were $17, 000. The error was
eventually detected when the revenue officer assigned to the case noticed
that the wages seemed very high and requested a new W- 2.
We also found instances in which IRS had not recorded payments received on
outstanding tax account balances promptly. In one case, a federal worker had
established that he had paid his taxes in 1992 yet, as of October 1999, IRS?
records still identified the individual as owing taxes. In total, in 12 of
the 152 cases we reviewed, the tax assessment recorded against the taxpayer
was either erroneous or the account should have had no outstanding balance
because payments had already been received that fully satisfied the tax
liabilities. Mistakes such as these erroneously increase any measure of
noncompliance of both federal workers and annuitants, and the general
population and can result in burden to the taxpayer.
As we have reported previously, 23 IRS does not follow up on all cases that
involve potential underreported or nonreported tax, nor does it always
actively pursue cases with some collection potential. IRS attributes this to
the need to allocate its limited resources among competing priorities.
Nonetheless, this significantly impedes IRS? ability to pursue collection of
outstanding taxes owed and creates the potential for increased
noncompliance.
IRS does not investigate all tax returns identified as having potential
underreported taxes. For example, for tax year 1996, IRS screened 155
million individual income tax returns and found that about 12 million (8
23 See GAO/ AIMD- 00- 76 and GAO- 01- 394. Also see GAO- 01- 42. Resource
Allocations
Affect IRS? Ability to Pursue Amounts Owed and Promote Compliance
Page 23 GAO- 01- 195 Unpaid Taxes of Federal Workers and Annuitants
percent) had potential underreported taxes totaling at least $15 billion.
However, IRS investigated only about 3.1 million (26 percent) of these
returns, accounting for estimated underreported taxes due of about $5.2
billion (35 percent). Consequently, about $10 billion in potential
underreported taxes went uninvestigated and thus will likely not be pursued
for possible collection. More recent statistics show this is a continuing
problem. IRS? screening of individual tax returns for tax year 1998 24
identified over 14 million individual tax returns that had potential
underreported taxes totaling $15.4 billion, yet IRS investigated only 2.5
million (18 percent) of these cases accounting for about $6.5 billion (42
percent) of the total underreported taxes. This limited investigation
activity results in billions of dollars in potential unpaid taxes annually
that are not pursued. This limitation also affects IRS? ability to
accurately assess the level of noncompliance, both for the general
population and for the population of federal workers and annuitants.
In addition, IRS also does not always actively pursue cases in which
outstanding taxes have been assessed, resulting in potentially billions of
dollars in lost revenue to the government. During both our fiscal year 1999
and 2000 financial audits, we found a number of cases that IRS was not
actively pursuing, including some in which we noted that the taxpayer had
financial resources to pay at least some of the amounts owed. IRS
enforcement data indicate that from fiscal years 1997 through 2000, the
number of case dispositions and the number of revenue officers available to
work those cases declined. Enforcement activities such as lien filings, levy
notices, and seizures all showed substantial declines during this period.
IRS attributes its inability to pursue such collections to a decrease in
staff, reassignment of collection employees to support customer service
activities, and additional staff time needed to implement certain taxpayer
protections that were included in RRA98.
Despite IRS? ?zero tolerance? policy then in effect for federal workers and
annuitants with outstanding taxes, we also found cases in our sample in
which IRS was not actively pursuing some federal workers and annuitants who
had resources that could have been used to pay some of the amounts owed. 25
Further, of the $390 million in outstanding taxes owed by federal
24 At the time of our review, tax year 1998 was the most recent year for
which substantially complete matching program results were available. 25 The
zero tolerance policy was replaced in January 2001. These cases now receive
the same priority as the general population cases.
Page 24 GAO- 01- 195 Unpaid Taxes of Federal Workers and Annuitants
workers and annuitants that IRS classified as CNC, about 580 cases, with a
total outstanding balance of over $1.8 million, appeared on IRS? records as
closed due to resource and workload constraints, despite IRS policy that all
federal worker and annuitant cases be actively pursued.
As we have previously acknowledged, like any large agency, IRS is confronted
by the ongoing management challenge of allocating its limited resources
among competing priorities. However, IRS does not have the management data
necessary to prepare reliable cost- benefit analyses to ensure that its
resource allocation decisions are appropriate. We have previously reported
on this issue and recommended that, using the best available information,
IRS develop reliable cost- benefit data relating to its enforcement and
collection programs. Cost- based performance information on enforcement and
collection activities combined with an assessment of the benefits to be
derived from such actions could enable IRS to better judge whether it is
optimizing its allocation of available resources among competing management
priorities.
IRS must consider the legal environment in which it operates in attempting
to both collect from, and improve compliance by, federal workers.
Specifically, IRS must adhere to laws governing the disclosure of taxpayer
information. These laws have been established to protect the privacy of
taxpayers, and IRS must work within this legal framework in its attempts to
promote compliance among federal workers and annuitants.
Section 6103 of the Internal Revenue Code (IRC) allows disclosure of
taxpayer information to federal agencies in limited circumstances. For
example, IRS is authorized to share taxpayer information to assist agencies
in enforcing and determining eligibility requirements for child support
programs, family assistance programs, and Medicaid. IRS can also share
taxpayer information with agencies if the taxpayer has consented to the
disclosure of this information with the agency. A federal agency becomes
aware of an employee?s tax delinquency status if (1) the employee
voluntarily discloses this information to the employer, (2) the employee
enters into a payroll deduction agreement to pay off the outstanding tax
debt, (3) IRS files a federal tax lien and the lien is brought to the
attention of the employer, (4) the employer receives a summons from IRS
regarding an employee tax liability, or (5) the employee is criminally
charged with tax violations and these charges become public.
IRS is authorized to collect outstanding taxes that federal employees owe by
garnishing, or levying, the employees? salaries. In these instances, IRS
Legal Considerations
in Promoting Federal Worker and Annuitant Tax Compliance
Page 25 GAO- 01- 195 Unpaid Taxes of Federal Workers and Annuitants
serves a Notice of Levy on the employing agency?s payroll office or agent.
By law, IRS can communicate the names of these individuals to an agency?s
payroll office for purposes of levying against an employee?s wages. However,
whereas private nonfederal payroll offices are not prohibited from sharing
such information with management, it is unclear whether federal workers in
an agency?s payroll office can, in turn, communicate these names to the
agency?s personnel office for follow- up action without violating IRC
Section 6103.
IRS questioned whether a federal agency?s payroll office could legally
disclose the tax delinquency status of employees to the agency?s personnel
or labor relations offices for appropriate review and, if warranted,
disciplinary action. In late December 1999, both IRS? legal counsel and the
U. S. Department of Justice concluded that, while such use of return
information may be permissible, the issue is a close legal question and IRS
should thus not encourage this practice. Instead, both IRS? legal counsel
and the Department of Justice concluded that IRC Section 6103 should be
amended to specifically permit IRS to disclose information on the tax
delinquency status of federal employees to the head of the employing agency
to determine if an ethics violation has occurred.
RRA98 contained a requirement for both the Joint Committee on Taxation and
the Secretary of the Treasury to each conduct a study on the scope and use
of IRC Section 6103 provisions regarding taxpayer confidentiality. The Joint
Committee?s study was issued in January 2000 and contained no
recommendations on amending the provisions of Section 6103 that presently
exist. The Treasury study, which was issued in December 2000, recommended
amending Section 6103 with respect to sharing information on federal
employee tax delinquencies with the employing agency. Specifically, the
study recommended that Section 6103 be amended to clarify that federal
employees working in federal payroll offices who receive tax information
pursuant to Section 6103( k)( 6) 26 are not subject to redisclosure
restrictions of Section 6103 for such information. If enacted, this
recommendation would, for example, clear payroll employees to disclose to
agency management information received in connection with the placement of a
levy on an employee?s wages.
26 Section 6103( k)( 6) covers tax information that IRS may disclose in
connection with audit, collection activities, or civil or criminal tax
investigations. The disclosure of such information must be necessary to
obtain information not otherwise reasonably available for correctly
determining tax, tax liability, or the amount to be collected or for
enforcing the tax code.
Page 26 GAO- 01- 195 Unpaid Taxes of Federal Workers and Annuitants
IRS? FERDI program was intended to identify and highlight the degree of
compliance with federal tax laws among federal workers and annuitants and in
so doing to assist IRS in improving compliance among this segment of the
taxpayer population. However, it is unclear what impact this program has had
in increasing tax compliance by federal workers and annuitants. While the
FERDI program has been in place since 1992, IRS has not assessed the
effectiveness of the program in meeting its intended objectives. Also, IRS
has not determined the degree to which participating agencies communicate
the information IRS provides them on the results of the program matches to
their workforce.
According to IRS records, since 1995 the percentage of the federal worker
and annuitant population that either owes or potentially owes taxes or has
not filed tax returns has fluctuated between 4.7 percent and 5.6 percent and
has not shown a consistent trend toward an increase in compliance. There is
no information available on the percentage of federal workers and annuitants
with actual or potential tax liabilities or unfiled tax returns before the
FERDI program was implemented which could be used as a benchmark. Also, IRS
has refined its analyses over the last several years. Thus, it is difficult
to draw any conclusions related to trending data in determining the
effectiveness of the program.
As discussed earlier, agencies that participate in the FERDI program and
agencies for which IRS is able to match its records of outstanding taxes or
unfiled tax returns using W- 2 information annually receive a letter from
IRS informing them of the number of employees with outstanding taxes or
unfiled tax returns. These letters also contain IRS? assessment of the
agency?s rate of compliance. However, IRS has not followed up with agencies
to determine whether and in what manner the results of the matching process
are communicated to agency employees. Such information could help IRS assess
the degree of correlation, if any, between agencies that proactively
communicate the results of the matching process to their workforce and
improved rates of compliance. Effectiveness of
FERDI Program Has Not Been Determined
Page 27 GAO- 01- 195 Unpaid Taxes of Federal Workers and Annuitants
The Taxpayer Relief Act of 1997 allows for IRS, through Treasury?s Financial
Management Service (FMS), to collect on outstanding tax obligations by
applying a continuous levy of up to 15 percent against certain federal
payments to be made to individuals and businesses. The continuous levy
program began a phased- in implementation in July 2000. This program should
assist in collecting some of the outstanding taxes owed by federal workers
and annuitants. However, not all federal payments are presently covered
under the program and the levy provisions may be insufficient to allow for
full repayment of many of the amounts these individuals owe.
Payments subject to the continuous levy program will eventually include
certain Social Security benefits, agency vendor payments, Railroad
Retirement Board benefits, and federal salary and all retirement payments.
In July 2000, Treasury began to levy vendor payments as well as certain
federal retiree payments. Officials we spoke with at FMS have indicated that
they expect to have certain Social Security benefits, civilian federal
salaries that are paid through FMS, and military salary and pension payments
under the program over the next year.
This program, when fully implemented, should help IRS collect some of the
outstanding amounts owed by federal workers and annuitants. However, it is
important to note that some of the delinquent tax accounts would still not
be subject to levy because of their current condition or status.
For example, IRS and FMS exclude from levy delinquent taxpayer accounts that
are
currently not collectible due to hardship,
currently not collectible because the taxpayer is deceased,
in bankruptcy or litigation,
subject to a pending or approved offer in compromise,
subject to a pending or approved installment agreement, or
within 3 months of their collection statute expiration date. 27 27 The
statutory expiration period for collecting taxes is generally 10 years from
the date of the assessment. However, the period can be extended or suspended
under a variety of circumstances, such as agreements by taxpayers to extend
the collection period, bankruptcy litigation, and court appeals.
Consequently, some tax assessments can and do remain on IRS? records for
decades. Levy Program Could
Improve Tax Collections But Not Necessarily Compliance
Page 28 GAO- 01- 195 Unpaid Taxes of Federal Workers and Annuitants
In addition to these requirements, those payments that could be subject to
the continuous levy program might not have the full 15 percent deducted from
the payments, depending on IRS? and FMS? determination of how much the
individual can afford.
It is also important to note that the continuous levy program by itself is
not designed to be a mechanism for promoting federal workers? and
annuitants? compliance with their tax obligations. It may provide another
tool for IRS to collect on delinquent accounts, but it is unclear whether it
can assist IRS in its efforts to obtain voluntary compliance by federal
workers and annuitants in fulfilling their tax obligations before
delinquencies occur.
Voluntary compliance with tax laws is the foundation of the U. S. tax
system. This foundation can be eroded if the general public perceives that
federal workers and former federal workers successfully evade their tax
obligations. IRS records indicate that federal workers and annuitants, and
IRS workers in particular, appear to be more compliant in meeting their tax
responsibilities than the general population. Nonetheless, there are some
federal workers and annuitants whom IRS records indicate are not fulfilling
their tax responsibilities and owe the federal government about $2.5 billion
in outstanding taxes.
In its attempt to improve management and collection of federal taxes owed by
federal workers and annuitants, IRS faces the same issues hindering its
ability to manage and collect unpaid taxes of the general population. In
particular, serious internal control and systems deficiencies, which prevent
IRS from having the routine and reliable information it needs to make
informed decisions, and IRS? inability to quickly identify and pursue
potential nonfilers, assess estimated federal taxes owed, and pursue
collection of unpaid federal tax assessments, affect its ability to collect
amounts owed and to improve compliance among the federal population, thus
precluding it from more effectively enforcing the tax code.
We have previously reported on these issues and made numerous
recommendations as well as presented matters for congressional consideration
to address them. 28 In particular, we have recommended that
28 See GAO- 01- 42, November 17, 2000. Conclusions
Page 29 GAO- 01- 195 Unpaid Taxes of Federal Workers and Annuitants
IRS, as part of its systems modernization efforts, develop a subsidiary
ledger to accurately and promptly identify, classify, track, and report all
IRS unpaid assessments by taxpayer. We have also made several
recommendations to improve the accuracy of taxpayer accounts and mitigate
instances of both taxpayer burden and lost revenue to the federal
government. In addition, we have recommended that (1) IRS develop the
capability to routinely and reliably measure the costs and benefits of its
various collection and enforcement activities in order to make informed
resource allocation decisions and (2) the Congress consider requiring IRS to
include in any budget request for additional resources for its various
collection and enforcement activities reliable aggregate cost- benefit
information. IRS has acknowledged these issues and is continuing to work to
address a number of them.
With respect to IRS? efforts to improve compliance among federal workers and
annuitants, IRS must first be able to determine how effective its program
for this purpose has been and what, if any, modifications are needed to
ensure that the program meets its objectives. This includes obtaining
information on the degree to which agencies share information on agencywide
tax compliance with their workforce and determining whether such information
sharing can be linked to improved compliance.
We believe efforts to enhance the rate of compliance of federal workers in
particular have merit. While we had not previously participated in IRS?
FERDI program, we have taken the necessary steps to voluntarily participate
in the program going forward.
To determine the degree to which IRS? program to improve compliance by
federal workers and annuitants with their tax obligations is achieving its
objectives and to identify any modifications needed in the program to better
enable it to achieve its objectives, we recommend that the Commissioner of
Internal Revenue
assess the effectiveness of the FERDI program in promoting compliance by
federal workers and annuitants with the nation?s tax laws and, as part of
this assessment
determine the extent to which agencies communicate information on their
compliance rates with their respective workforces, and whether such
communication can be linked to improved tax compliance by agency employees.
Recommendations
Page 30 GAO- 01- 195 Unpaid Taxes of Federal Workers and Annuitants
In commenting on a draft of this report, IRS stated that it recognized the
impediments affecting its ability to collect taxes owed by federal workers
and annuitants discussed in this report. IRS further stated its intention to
use its ongoing modernization efforts and recent reorganization to improve
its ability to manage and collect unpaid taxes of federal workers and
annuitants. IRS also mentioned certain changes it recently made in its
administration of FERDI, including the transferring of the program to its
recently created Wage and Investment business operating division,
centralizating all FERDI accounts in Automated Collection System (ACS)
status into one ACS call site to improve case handling and customer service,
and establishing the same priority for federal employee and retiree cases as
used for cases of the general population.
Regarding our recommendation to conduct an assessment of FERDI?s
effectiveness in promoting compliance by federal workers and annuitants, IRS
stated that it would explore the possibility of conducting a research study
to assess the program?s effectiveness. IRS did stress the efforts it had
made since 1993 to improve the program?s effectiveness and stated that it
tracked delinquency rates by agency and category annually.
IRS agreed with our recommendation to determine the extent to which agencies
communicate their compliance rates with their respective workforces, and
whether such communication can be linked to improved tax compliance by
agency employees. IRS will address this recommendation by first requesting
the needed information from the agencies. The complete text of IRS? response
to our draft report is included in appendix III.
We are sending copies of this report to the Chairman and Ranking Minority
Members of the Senate Committee on Appropriations; Senate Committee on
Finance; Senate Committee on Governmental Affairs; Senate Committee on the
Budget; Subcommittee on Treasury, General Government, and Civil Service,
Senate Committee on Appropriations; Subcommittee on Taxation and IRS
Oversight, Senate Committee on Finance; Subcommittee on Oversight of
Government Management, Restructuring, and the District of Columbia, Senate
Committee on Governmental Affairs; Subcommittee on International Security,
Proliferation, and Federal Service, Senate Committee on Governmental
Affairs. We are also sending copies of this report to the Chairman and
Ranking Minority Members of the House Committee on Appropriations; House
Committee on Ways and Means; House Committee on Government Reform; House
Committee on the Budget; Subcommittee on Treasury, Agency Comments
Page 31 GAO- 01- 195 Unpaid Taxes of Federal Workers and Annuitants
Postal Service, and General Government, House Committee on Appropriations;
Subcommittee on Government Efficiency, Financial Management, and
Intergovernmental Relations, House Committee on Government Reform; and
Subcommittee on Oversight, House Committee on Ways and Means. In addition,
we are sending copies of this report to the Chairman and Vice- Chairman of
the Joint Committee on Taxation, the Commissioner of Internal Revenue, the
Secretary of the Treasury, the Director of the Office of Management and
Budget, and other interested parties. Copies will be made available to
others upon request
If I can be of further assistance, please contact me at (202) 512- 2600.
This report was prepared under the direction of Steven J. Sebastian, Acting
Director, Financial Management and Assurance, who can be reached at (202)
512- 3406. Other contacts and key contributors to this report are listed in
appendix IV.
Jeffrey C. Steinhoff Managing Director Financial Management
and Assurance
Appendix I: Scope and Methodology Page 32 GAO- 01- 195 Unpaid Taxes of
Federal Workers and Annuitants
To determine the extent to which assessed taxes are not remitted to the
federal government by federal workers and annuitants, we analyzed data from
IRS? FERDI file and from its accounts receivable dollar inventory (ARDI)
system as of October 1999 as well as employee and annuitant personnel data
from the Office of Personnel Management, to identify the following
information relating to federal workers and annuitants: (1) the total number
of unpaid federal tax accounts, (2) the total dollar amount of unpaid taxes,
including tax assessment, interest, and penalties, (3) the age of these
unpaid federal tax accounts, (4) the total number of federal workers and
annuitants with unpaid federal taxes, and (5) the current status of the
taxpayer accounts and the classification of these accounts as current
employees and annuitants. We also considered information recently reported
by IRS on the results of its FERDI matches as of October 2000. We did not
specifically audit the data in IRS? systems used in our various analyses and
reviews.
To determine how the level of outstanding taxes owed by federal workers and
annuitants compares with those owed by the overall population, we matched
the IRS FERDI and ARDI files as of October 1999 using those delinquent
accounts and amounts present in ARDI and then analyzed the ARDI files for
information about the overall population.
To determine the effectiveness of IRS? efforts in enforcing the tax code
with respect to federal workers and annuitants, we reviewed a statistical
sample of a subpopulation of federal employees and annuitants with unpaid
taxes per IRS records as of October 2, 1999. As agreed to with our
requesters, we used data in IRS? records as of October 1999 because this was
the latest available information on federal workers and annuitants and was
the basis for IRS? last published information on taxes pertaining to federal
workers and annuitants at the time we commenced our fieldwork. Specifically,
the objectives for our sample were to determine an estimate of the amount
IRS could reasonably expect to collect on the subpopulation of unpaid
assessment balances and to gauge the degree of IRS? collection efforts by
reviewing specific cases.
The sample population was developed from the federal employee and annuitant
caseload of six IRS field offices. These offices were selected based on
their proportion of the dollar value of outstanding taxes owed by federal
workers and annuitants to the total dollar value owed by the entire federal
worker and annuitant population. These six offices together accounted for
$861 million, or 35 percent of the total federal worker and annuitant unpaid
assessments of $2.5 billion as of October 1999. While the sample of unpaid
assessments was statistically representative of those Appendix I: Scope and
Methodology
Appendix I: Scope and Methodology Page 33 GAO- 01- 195 Unpaid Taxes of
Federal Workers and Annuitants
taxpayers under the jurisdiction of the field offices included in the
subpopulation, it is not strictly representative of the entire population of
federal workers and annuitants with unpaid assessments as the sample,
according to the agreement with our requesters, was not selected from that
entire population. The population and associated amounts were obtained from
the information contained in the FERDI file as of October 2, 1999. The FERDI
file contains information on taxpayers for which (1) a third- party
information match identifies a potential nonfiler condition and a tax
assessment has not been made against the taxpayer?s account and (2) IRS has
assessed taxes based on a filed return or a completed nonfiler investigation
or other investigation, and the taxes remain unpaid.
Using the FERDI file, we summarized unpaid assessment balances in the
following 6 selected IRS field offices: Los Angeles, Oakland, LagunaNiguel,
Baltimore, Richmond, and Atlanta. The field offices were selected based on
the extent of unpaid tax assessment balances. From the subpopulation, we
selected a statistical sample of unpaid taxpayer accounts on which to
conduct detailed testing using a classical variables sampling approach. We
used classical variables sampling to project a statistically valid estimate
of the amount of unpaid assessments that IRS could reasonably expect to
collect from that subpopulation. We stratified the population into five
dollar ranges to (1) decrease the effect of variances in the subpopulation,
(2) gain assurance that the sample amounts were representative of the
subpopulation, and (3) obtain assurance that the resulting net collectible
amount is a reliable estimate of the amount IRS can reasonably expect to
collect. Separate random samples were then selected for four of the five
strata. For the remaining strata, which consisted of unpaid assessment items
in excess of $500,000 individually, all items were selected for testing. We
used a 95- percent confidence level, and a planned precision level of plus
or minus $96.6 million. This approach resulted in a total sample size of 152
unpaid tax accounts, totaling $47. 3 million or 5.5 percent of the
subpopulation of unpaid assessments.
To determine if and to what extent IRS could reasonably expect to collect
the outstanding unpaid assessments for each sampled account, we examined
detailed masterfile transcripts of the taxpayer?s accounts and IRS
collection case files, which, when submitted, could include documentation of
the taxpayer?s income and assets, earnings potential, other outstanding
unpaid assessments, payment history, and other relevant collection
information that affected our assessment of the taxpayer?s ability and
willingness to pay. We also considered the extent and result of IRS?
documented efforts to collect the assessment amount.
Appendix I: Scope and Methodology Page 34 GAO- 01- 195 Unpaid Taxes of
Federal Workers and Annuitants
The methodology used was generally consistent with that used to estimate the
collectibility of IRS? unpaid assessments that represent federal taxes
receivable under federal accounting standards, as reported by IRS in its
annual financial statements. 1 We projected the results of our assessments
of the book value of the unpaid tax and collectibility for each sampled
account to the subpopulation of FERDI unpaid assessments, using the
Stratified Difference method. This projection yielded an estimate of the
gross unpaid assessments amount with an achieved precision of $64.8 million
and an estimate of the collectible amount with an achieved precision of
$78.8 million.
To further understand federal worker and annuitant delinquencies, we
supplemented the sample of 152 cases with a nonrepresentative selection of
32 additional federal worker and annuitant cases in which the individual had
multiple periods of outstanding taxes, although these were not considered in
projecting our estimate of collectibility to the subpopulation from which we
sampled.
To determine what impediments, if any, exist which affect IRS? ability to
collect the unpaid taxes owed by federal workers and annuitants, we
conducted interviews with IRS revenue officers, group managers, FERDI
program personnel, and attorneys from IRS? Office of Chief Counsel. We
reviewed Section 6103 of the Internal Revenue Code, the Internal Revenue
Service Restructuring and Reform Act of 1998 (RRA98) as well as the Study on
Present Law Taxpayer Confidentiality and Disclosure Provisions prepared by
the Staff of the Joint Committee on Taxation and the Report to the Congress
on Scope and Use of Taxpayer Confidentiality and Disclosure Provisions
prepared by the Office of Tax Policy of the Department of the Treasury.
Also, we obtained and reviewed available information from IRS on its FERDI
and Employee Tax Compliance programs.
To determine the ethics standards and codes of conduct federal workers and
annuitants are required to follow, we conducted interviews with Office of
Personnel Management (OPM) and Office of Government Ethics (OGE) personnel.
To obtain an understanding of IRS? process for ensuring compliance with
provisions of federal tax laws among its employees, we interviewed key
1 See GAO/ AIMD- 99- 12.
Appendix I: Scope and Methodology Page 35 GAO- 01- 195 Unpaid Taxes of
Federal Workers and Annuitants
IRS employees responsible for the employee tax compliance program as well as
employees responsible for implementing provisions of RRA98. We obtained
copies of internal documents and discussed with IRS? Office of Chief Counsel
legal issues pertaining to the program. We obtained extracts of current and
closed tax related issues from IRS? Automated Labor and Employee Relations
Tracking System, IRS? database system that tracks closed and ongoing
potentially reportable IRS personnel issues. We also obtained a copy of IRS?
database of employee tax compliance cases that have been reviewed by the
IRS? 1203 Commissioner?s Review Board, specifically created for the purpose
of reviewing IRS employee tax compliance cases initially deemed to be
violations of Section 1203 of RRA98. We analyzed the information contained
in these databases to provide observations on the effectiveness of IRS?
process for ensuring compliance with federal tax laws among its employees.
In conducting our work, we did not specifically assess IRS? controls or the
completeness and accuracy of IRS records, although we did make certain
observations, contained in this report, from both our sample analysis of
unpaid accounts and other work performed as part of our annual audits of
IRS? financial statements.
We conducted our work at IRS? national office in Washington, D. C., and at
the Los Angeles, Oakland, Laguna- Niguel, Baltimore, Richmond, and Atlanta
field offices from May 2000 through March 2001. We conducted our work in
accordance with generally accepted government auditing standards.
Appendix II: Details on Sample Cases of Federal Workers and Annuitants with
Outstanding Taxes
Page 36 GAO- 01- 195 Unpaid Taxes of Federal Workers and Annuitants
Our review of a statistical sample of 152 federal worker and annuitant tax
cases identified 12 cases that were not valid unpaid tax cases as of October
1999. Of the remaining 140 cases, based on our review of available
documentation contained in the case files, we categorized each case as
either uncollectible, partially collectible, or fully collectible. The
following subsections discuss the composition of each of these categories in
more detail.
Of the 140 valid cases of outstanding taxes owed by federal workers and
annuitants that we reviewed, we determined, based on our review of IRS case
files and other documentation, that 82 (59 percent) were uncollectible. The
reasons for our conclusions are shown in figure 2.
Figure 2: Breakdown of Cases Determined To Be Uncollectible
Other: 28 (34%)
Offers- incompromise: 15 (18%)
Bankruptcies: 7 (9%)
Installment agreements:
5 (6%) CNC:
27 (33%)
Source: GAO statistical sample.
The 82 cases that we concluded were uncollectible were characterized as
follows:
In five cases, the taxpayers entered into installment agreements to pay
the outstanding taxes. However, in three cases, the taxpayers had
subsequently defaulted on the installment agreements, and in the other
Appendix II: Details on Sample Cases of
Federal Workers and Annuitants with Outstanding Taxes
Composition of Sample Cases Determined to be Uncollectible
Appendix II: Details on Sample Cases of Federal Workers and Annuitants with
Outstanding Taxes
Page 37 GAO- 01- 195 Unpaid Taxes of Federal Workers and Annuitants
two cases, the agreements had been established or reestablished (subsequent
to an earlier default) too recently to establish a payment history
sufficient to estimate any collectibility.
In seven cases, the taxpayers were in various stages of bankruptcy. In
these cases, documentation in the case files provided no clear evidence that
any payments that may arise from the bankruptcy proceedings would be
available to pay the outstanding tax liabilities.
In 15 cases, the taxpayers provided offers- called offers in compromise
(OICs)- to pay off some of the outstanding amounts owed. However, in each
case, documentation in the case files indicated that no amounts would be
paid on the specific account we sampled or that collection was uncertain.
For example, in seven of these cases, the taxpayer made an OIC that was
pending review by IRS. However, the amounts offered would not be sufficient
to pay any of the balance in our sample cases. In these instances, the
taxpayers owed outstanding amounts for multiple accounts, and any payments
that would be received from the taxpayers under the OIC would be applied to
accounts with an earlier CSED. In five other cases, IRS accepted the OICs,
but again, the offer amounts were not sufficient to pay any of the balances
owed in the sampled cases. Of the remaining three cases, the case file
documentation for one case did not provide sufficient evidence that the
taxpayer had the financial resources to pay the amounts offered, and the
case files for the other two cases did not provide sufficient evidence that
(1) IRS was likely to accept the offer and (2) the individual had the
financial resources to pay the amount being offered.
In 27 cases, IRS designated the accounts as CNC, primarily due to its
assessment that the taxpayers did not have the financial resources to pay
any of the outstanding taxes owed. In many instances, the individuals
involved were retired federal employees and evidence in the case files
indicated that these individuals did not have the financial resources to pay
the outstanding amounts owed. However, in one case we reviewed involving
approximately $14,000 in outstanding taxes that IRS designated CNC, both the
husband and wife were in the military and documentation in the case file
indicated that as recently as 1998, they reported combined income of over
$140,000.
In 28 cases, a variety of reasons exist as to why the amounts owed are
considered uncollectible. For example, in three cases, IRS was actually
obtaining regular payments resulting from levies against salaries and
Appendix II: Details on Sample Cases of Federal Workers and Annuitants with
Outstanding Taxes
Page 38 GAO- 01- 195 Unpaid Taxes of Federal Workers and Annuitants
other sources, yet these payments would not be sufficient to pay any of the
amounts owed in the sampled accounts before they reach their CSEDs. In seven
cases, IRS had been unable to locate or contact the individuals, despite
their receiving regular federal payments. In 13 cases, the documentation in
the case files provided no evidence of any recent collection actions taken
by IRS against the individuals.
Based on our review of IRS case files and other documentation, we determined
that 30 of the 140 valid cases we sampled (21 percent) were partially
collectible. The reasons for our conclusions are shown in figure 3.
Figure 3: Breakdown of Cases Determined To Be Partially Collectible
Other: 10 (34%)
Offers- incompromise: 4 (13%)
Bankruptcies: 3 (10%) Installment
agreements: 7 (23%)
Levies: 6 (20%)
Source: GAO statistical sample.
The 30 cases that we concluded were partially collectible were characterized
as follows:
In seven cases, the taxpayers entered into installment agreements to pay
the outstanding taxes. However, in these cases, the amounts stipulated to be
paid under the terms of the installment agreements would not be sufficient
to repay all of the taxpayer?s outstanding balances and associated penalties
and interest before the statutory collection periods expire, which is in
violation of the Internal Revenue Composition of
Sample Cases Determined To Be Partially Collectible
Appendix II: Details on Sample Cases of Federal Workers and Annuitants with
Outstanding Taxes
Page 39 GAO- 01- 195 Unpaid Taxes of Federal Workers and Annuitants
Code. 1 In some of these cases, the taxpayers owed amounts for multiple
years. Because IRS applies payments received under the installment
agreements to the accounts with the earliest CSEDs, only a portion of the
payments IRS was expected to receive would be available to apply to the
sampled cases. In one case we reviewed involving a federal annuitant with 6
years of outstanding tax liabilities who had entered into an installment
agreement, only 3 percent of the $93,000 total balance of the sampled case
would be paid before the CSED for the account expires, assuming that the
individual continued to make payments under the terms of the installment
agreement.
In four cases, the taxpayers submitted OICs to pay less than the full
amount owed to satisfy the outstanding taxes. In three of these cases, the
offers were pending and, at the time of our review, had not been accepted by
IRS. Our estimates of collectibility in these cases were based on payments
received from the taxpayer after October 1999. In the fourth case, IRS
accepted the offer of $110,000 to satisfy the outstanding balance of over
$500,000 owed by the individual; the offer amount in this case represented
22 percent of the total balance owed by the taxpayer.
In three cases, the taxpayers were in various stages of bankruptcy. In
these cases, documentation in the case files indicated that some payments
from the bankruptcy proceedings would partially pay the outstanding tax
liabilities. We based this expectation on evidence that the taxpayers?
assets would be sufficient to make these payments.
In six cases, IRS was receiving regular payments through levies against
the individuals? salaries, retirement payments, or other assets, yet these
payments would not be sufficient to fully pay the outstanding amounts owed
by these individuals before the accounts reached their CSEDs.
In the remaining 10 cases, the estimates of collectibility were based on
payments actually received after our sample date of October 1999 or on IRS?
retention of refunds that would otherwise be owed to the taxpayer on
subsequent tax years to reduce the outstanding balance owed on the sample
case. Specifically, in 9 of these cases, some payments were actually
received from the individuals after October 1999. However,
1 We have reported this as a noncompliance with laws and regulations issue
in our audits of IRS financial statements. See GAO/ AIMD- 00- 76 and GAO-
01- 42.
Appendix II: Details on Sample Cases of Federal Workers and Annuitants with
Outstanding Taxes
Page 40 GAO- 01- 195 Unpaid Taxes of Federal Workers and Annuitants
there was no other evidence in the case file to determine the source of
these payments or the prospects for their continuation. In the remaining
case, the taxpayer filed a tax return claiming a refund for a subsequent
period. Instead of paying the refund, IRS applied the amount to the
outstanding balance owed by the taxpayer.
Of the 140 valid cases of outstanding taxes owed by federal workers and
annuitants that we reviewed, we determined, based on our review of IRS case
files and other documentation, that 28 of these cases (20 percent) were
fully collectible. The breakdown of these cases is shown in figure 4.
Figure 4: Breakdown of Cases Determined To Be Fully Collectible
Other: 1 (4%)
Installment agreements:
20 (71%)
Paid in- full as of July 2000:
7 (25%)
Source: GAO statistical sample.
The 28 cases that we determined were fully collectible were characterized as
follows:
In 20 cases, the taxpayers entered into installment agreements to pay
their outstanding taxes and were current in their payments under the terms
of the agreements. The proceeds to be received by IRS under the installment
agreements would be sufficient to repay the sampled Composition of
Sample Cases Determined To Be Fully Collectible
Appendix II: Details on Sample Cases of Federal Workers and Annuitants with
Outstanding Taxes
Page 41 GAO- 01- 195 Unpaid Taxes of Federal Workers and Annuitants
account and any accounts the taxpayer had with an earlier statutory
collection expiration date.
In seven cases, the amounts owed had been fully paid off by the taxpayers
subsequent to our sample date of October 1999. In four of these cases the
amounts had been paid as part of installment agreements.
In the remaining case, we determined the amount would be fully collectible
based on (1) the small amount owed in relation to the taxpayer?s income, and
(2) the taxpayer?s record of compliance and of typically receiving refunds
in prior years which should be available in the future to offset this
liability if payments are not subsequently made.
Appendix III: Comments From the Internal Revenue Service
Page 42 GAO- 01- 195 Unpaid Taxes of Federal Workers and Annuitants
Appendix III: Comments From the Internal Revenue Service
Appendix III: Comments From the Internal Revenue Service
Page 43 GAO- 01- 195 Unpaid Taxes of Federal Workers and Annuitants
Appendix IV: GAO Contacts and Staff Acknowledgments
Page 44 GAO- 01- 195 Unpaid Taxes of Federal Workers and Annuitants
Steven J. Sebastian, (202) 512- 9521 Alain Dubois, (202) 512- 6365 Paul
Caban, (202) 512- 8451
Staff making key contributions to this report were William Cordrey, David
Elder, Meafelia Gusukuma, Sophia Harrison, Barbara House, Ted Hu, Jeffrey
Jacobson, Andrea Levine, Veronica Mayhand, Patrick McCray, Charles Payton,
Michael Wetklow, and Mark Yoder. Appendix IV: GAO Contacts and Staff
Acknowledgments GAO Contacts Acknowledgments
(901820)
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