Tax Debt Collection: IRS Needs to Complete Steps to Help Ensure  
Contracting Out Achieves Desired Results and Best Use of Federal 
Resources (29-SEP-06, GAO-06-1065).				 
                                                                 
In 2005, the inventory of tax debt with collection potential had 
grown to $132 billion. The Internal Revenue Service (IRS) has not
pursued some tax debt because of limited resources and higher	 
priorities. Congress has authorized IRS to contract with private 
collection agencies (PCA) to help collect tax debts. IRS has	 
developed a Private Debt Collection (PDC) program to start with a
limited implementation in September 2006 and fuller		 
implementation in January 2008. As requested, GAO is reporting	 
whether (1) IRS addressed critical success factors before limited
implementation, (2) IRS will assess lessons learned before fuller
implementation, and (3) IRS's planned study will help determine  
if using PCAs is the best use of federal funds. 		 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-06-1065					        
    ACCNO:   A61705						        
  TITLE:     Tax Debt Collection: IRS Needs to Complete Steps to Help 
Ensure Contracting Out Achieves Desired Results and Best Use of  
Federal Resources						 
     DATE:   09/29/2006 
  SUBJECT:   Data collection					 
	     Debt collection					 
	     Evaluation criteria				 
	     Financial analysis 				 
	     Government contracts				 
	     Lessons learned					 
	     Performance measures				 
	     Program evaluation 				 
	     Strategic planning 				 
	     Taxes						 
	     Taxpayers						 
	     Program implementation				 
	     Private Debt Collection program			 

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GAO-06-1065

     

     * Background
     * Results
     * Conclusions
     * Recommendations for Executive Action
     * Agency Comments and Our Evaluation
          * Recommendation 1: Establish Results-Oriented Goals and Measu
          * Recommendation 2: Establish a System for Tracking All Costs
          * Recommendation 3: Establish Plans for Evaluating the Results
          * Recommendation 4: Establish Clear Criteria and Processes for
          * Recommendation 5: Ensure the Comparative Study Informs Decis
     * Appendix I: Briefing on the IRS Private Debt Collection Prog
     * Appendix II: Scope and Methodology
     * Appendix III: Selected Data Related to IRS's Expectations fo
     * Appendix IV: Proposed Private Debt Collection Program Perfor
     * Appendix V: Comments from the Internal Revenue Service
     * Appendix VI: GAO Contact and Staff Acknowledgments
          * GAO Contact
          * Acknowledgments
               * Order by Mail or Phone

Report to the Committee on Finance, U.S. Senate

United States Government Accountability Office

GAO

September 2006

TAX DEBT COLLECTION

IRS Needs to Complete Steps to Help Ensure Contracting Out Achieves
Desired Results and Best Use of Federal Resources

GAO-06-1065

Contents

Letter 1

Background 2
Results 7
Conclusions 9
Recommendations for Executive Action 10
Agency Comments and Our Evaluation 11
Appendix I Briefing on the IRS Private Debt Collection Program 14
Appendix II Scope and Methodology 47
Appendix III Selected Data Related to IRS's Expectations for Elements of
the Private Debt Collection Program 49
Appendix IV Proposed Private Debt Collection Program Performance Measures
and Goals for Fiscal Year 2007 50
Appendix V Comments from the Internal Revenue Service 52
Appendix VI GAO Contact and Staff Acknowledgments 59

Tables

Table 1: Critical Success Factors and Related Subfactors for Contracting
with PCAs for Tax Debt Collection 5
Table 2: Extent to Which IRS Has Taken Steps to Address the Critical
Success Factors and Related Subfactors for Contracting for Tax Debt
Collection as of September 15, 2006 7

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separately.

United States Government Accountability Office

Washington, DC 20548

September 29, 2006

The Honorable Charles E. Grassley Chairman The Honorable Max Baucus
Ranking Minority Member Committee on Finance United States Senate

Each year, the federal government does not collect billions of dollars of
delinquent taxes. At the end of fiscal year 2005, the Internal Revenue
Service's (IRS) inventory of delinquent tax debt with some collection
potential was $132 billion (up from $122 billion in the previous year).
Because of inadequate resources to deal with the workload and the need to
work higher priority cases, IRS has shelved or delayed collection on
billons of dollars of delinquent taxes due since 1999. In addition,
voluntary compliance may be undermined to the extent taxpayers become
aware that IRS is unable to collect taxes due.

Because of concerns about, and congressional consideration of, proposals
that IRS use private collection agencies (PCA) to help collect more of the
growing tax debt inventory, in May 2004 we issued a report on IRS's
efforts to plan for a Private Debt Collection (PDC) program.1 We
identified 5 critical success factors and 17 related subfactors that
should be addressed to help ensure that a PDC program achieves desired
results and recommended that after gaining some experience with PCAs, IRS
do a study to compare the use of PCAs to another collection strategy that
IRS officials determine to be the most effective and efficient overall way
of achieving collection goals.

In October 2004, Congress authorized PDC contracting authority in the
American Jobs Creation Act of 2004.2 Based on that authority, IRS has
contracted with 3 PCAs as part of a planned limited implementation phase
that started with delinquent tax cases being turned over to the PCAs on
September 7, 2006, and has plans to expand the program, beginning in
January 2008, eventually to up to 12 PCAs. However, members of Congress,
the National Treasury Employees Union, the National Taxpayer Advocate, and
others continue to raise concerns about IRS using PCAs, such as the
potential for misuse of taxpayer data, taxpayer mistreatment, or higher
costs and lower effectiveness when compared to hiring more IRS employees.

1GAO, Tax Debt Collection: IRS Is Addressing Critical Success Factors for
Contracting Out but Will Need to Study the Best Use of Resources,
GAO-04-492 (Washington, D.C.: May 24, 2004).

2 Pub. L. No. 108-357 (2004).

Given our 2004 report and these concerns, you asked that we answer these
questions:

           o  To what extent will IRS have addressed the critical success
           factors before turning over collection cases to PCAs for the
           limited implementation phase?
           o  How will IRS use the lessons learned from the limited
           implementation phase to assess critical success factors and
           program performance before full program implementation?
           o  Is the design of IRS's planned study of using PCAs adequate to
           provide useful information to help determine whether contracting
           is the best use of federal funds for achieving tax collection
           goals?

           To answer these questions, we reviewed available IRS documents and
           interviewed responsible IRS officials to identify the steps taken.
           For example, to determine the extent to which IRS has addressed
           the critical success factors before sending cases for the limited
           implementation phase, we sought documentation on IRS's steps taken
           to address each of the 17 subfactors. For areas such as the
           contracting process, information systems, and cost tracking, we
           used generally accepted criteria. We focused on whether IRS would
           complete the steps to address each subfactor. We did not test or
           otherwise evaluate how well IRS's actions would work or address
           the factors. Appendix I summarizes the results of our work for
           each of the subfactors as well as the results of our work on the
           other two questions through a series of briefing slides. Appendix
           II offers more details on our scope and methodology overall. We
           did our work from August 2005 to September 2006 in accordance with
           generally accepted government auditing standards.

           Background
			  
			  IRS has two major programs to collect tax debts. First, IRS staff
           in the telephone function may attempt collection over the phone or
           in writing. Second, if more in-depth collection action is
           required, field collection staff may visit delinquent taxpayers at
           their homes or businesses as well as contact them by telephone and
           mail. Under certain circumstances, IRS staff can initiate enforced
           collection action, such as recording liens on taxpayer property
           and sending notices to levy taxpayer wages, bank accounts, and
           other financial assets held by third parties. Field collection
           staff also can be authorized to seize other taxpayer assets to
           satisfy the tax debt. However, as we have previously reported, IRS
           has deferred collection action on billions of dollars of
           delinquent tax debt and, until recently, IRS collection program
           performance indicators have declined, in part because of higher
           workload in other priority areas and unbudgeted cost increases
           (such as for rent or pay).3 Although IRS data indicate that trends
           in collections have shown some improvements, the enforcement of
           the tax laws-including the collection of unpaid taxes-remains one
           of GAO's "high-risk" areas of government.4

           To help address the growing tax debt inventory and declines in
           IRS's tax collection efforts, the Department of the Treasury
           proposed that Congress authorize IRS to use PCAs to help collect
           tax debts for simpler types of cases, paying them out of a
           revolving fund of tax revenues that they collect. IRS officials
           said that this proposal arose, in part, because of the belief that
           Congress was not likely to provide the increased budget to hire
           enough IRS staff to work the inventory of collection cases.

           In 2004, Congress authorized IRS to use PCAs to take certain
           defined steps to collect tax debts-including locating taxpayers,
           requesting full payment of the tax debt or offering taxpayers
           installment agreements if full payment cannot be made, and
           obtaining financial information from taxpayers. PCAs are to have
           limited authorities and are not to adjust the amount of tax debts
           or to use enforcement powers to collect the debts, which are
           inherently governmental functions that are to be performed by IRS
           employees. IRS is authorized to pay PCAs up to 25 percent of the
           amount of tax debts collected and retain another 25 percent of
           taxes collected to fund IRS collection enforcement activities.

           IRS initially envisions using PCAs on simpler cases that have no
           need for IRS enforcement action and that involve individual
           taxpayers that (1) filed tax returns showing taxes due but did not
           pay all those taxes and (2) made three or more voluntary payments
           to satisfy an additional tax assessed by IRS but have stopped the
           payments. To start, IRS plans to send cases to PCAs that have not
           recently been worked by IRS because of their lower priority, such
           as cases set aside because of inadequate IRS resources to work
           them or those in the queue to be worked but not yet assigned to
           IRS staff. After gaining some experience, IRS plans to expand the
           types of cases to be sent to PCAs to include those unassigned
           cases that IRS staff now may work, including those in which IRS
           attempts to find taxpayers that appeared to not file required tax
           returns, according to IRS officials.

           IRS first attempted to contract collections with a pilot test in
           1996 but abandoned the effort, in part, because the $3.1 million
           collected fell below the $4.1 million in direct costs plus the $17
           million in lost revenues from using IRS staff to work on the pilot
           test rather than collect taxes. Also, limitations in IRS's
           computer systems and ability to transfer data hampered efforts to
           send appropriate cases to PCAs.5

           The current PDC program differs from the 1996 pilot because IRS
           will require PCAs to try to resolve collection cases within
           guidelines rather than just remind taxpayers of their debt, will
           pay PCAs a percentage of dollars they collect rather than a fixed
           fee, and will electronically send and protect taxpayer data rather
           than send the cases manually. Appendix III provides some data and
           information about the PDC program in terms of costs, projected tax
           revenue to be collected, staffing, and cases to be sent to PCAs.

           Our 2004 report identified and validated five critical success
           factors for contracting with PCAs to collect tax debt. Table 1
           describes the critical success factors and their related
           subfactors.

           Table 1: Critical Success Factors and Related Subfactors for
           Contracting with PCAs for Tax Debt Collection
			  
			  Critical success                                                           
factor              Related subfactors
Results orientation    o  Determine expected program goals, costs, and     
                          overall results for contracting with PCAs.          
                          o  Establish contract provisions and operational    
                          expectations, measurable PCA performance evaluation 
                          standards, and PCA rewards and disincentives based  
                          on performance and ensure that the government       
                          agency and PCAs have a common understanding of      
                          these elements.                                     
                          o  Give PCAs as much freedom as practical on how to 
                          achieve performance goals.                          
                          o  Use a contracting process that will help ensure  
                          that PCAs selected are able to meet operational and 
                          performance expectations.                           
Agency resources       o  Provide sufficient staffs to do work associated  
                          with contracting with PCAs, including               
                          administrative functions, contract oversight, and   
                          working collection cases referred back by the PCAs. 
                          o  Have management commitment to using PCAs.        
                          o  Ensure that PCA employees receive appropriate    
                          training on such areas as taxes and case-handling   
                          procedures.                                         
                          o  Ensure that computer systems will allow data to  
                          be exchanged electronically between PCAs and the    
                          government agency and that payments will be tracked 
                          and accounts updated.                               
                          o  Be aware of and control costs of functions       
                          related to contracting.                             
Workload               o  Select the appropriate type and volume of cases  
                          for PCAs to work on.                                
                          o  Ensure that contractors work on the range of     
                          cases that they are assigned in terms of ease of    
                          collection and amounts due.                         
                          o  Provide PCAs appropriate, accurate information   
                          on taxpayers and accounts.                          
Taxpayer issues        o  Ensure that taxpayers are treated properly by    
                          PCAs.                                               
                          o  Ensure the security of taxpayer information      
                          provided to PCAs.                                   
Evaluation             o  Perform ongoing monitoring of PCAs in various    
                          aspects of operations and performance expectations. 
                          o  Measure PCAs' performance in light of            
                          performance standards and distribute                
                          rewards/disincentives.                              
                          o  Evaluate whether the program meets its goals and 
                          expectations and adjust the program as needed.      

           Source: GAO analysis of selected GAO reports and interviews with
           officials from selected state and federal agencies and PCA firms.

           To identify the critical success factors, we reviewed reports on
           contracting and interviewed parties with experience in contracting
           for debt collection, such as officials from 11 states, the
           Department of the Treasury's Financial Management Service, the
           Department of Education, and three PCA firms that IRS selected as
           subject matter experts for the program. To corroborate the
           factors, we interviewed officials from IRS who were developing the
           PDC program, the IRS Office of Taxpayer Advocate, and the National
           Treasury Employees Union, which represents IRS employees. As a
           validation tool, we asked for comments on our draft list of
           factors from those whom we consulted to identify the factors as
           well as from officials at four additional PCA firms. We made
           changes based on their comments where appropriate.

           After receiving authority to use PCAs in 2004, IRS had planned to
           issue task orders to three PCAs in January 2006 as part of a
           limited implementation phase running through December 2007.
           However, IRS was delayed by a lawsuit and bid protest filed by
           certain PCAs to challenge IRS's request for and evaluation of bids
           from PCAs. Specifically:

           o  IRS issued a Request for Quotations (RFQ) to solicit debt
           collection services for the PDC program on April 25, 2005, under
           which IRS would start sending cases to three PCAs in January 2006.
           Because of a lawsuit filed in June 2005, IRS revised and reissued
           the RFQ on October 14, 2005, with plans to send cases to the PCAs
           in July 2006.
           o  IRS selected the three PCAs on March 9, 2006. Because one of
           the PCAs that were not selected filed a bid protest later in March
           2006,6 IRS stopped working with the three selected PCAs and pushed
           back the date to send cases to those PCAs to the August-September
           2006 time frame.
           o  IRS prevailed in the bid protest in a decision issued on June
           14, 2006, allowing it to resume its work with the selected PCAs.
           IRS sent cases to the three PCAs on September 7, 2006.

           In addition to contracting with PCAs, the PDC program includes
           IRS's acquisition and deployment of an information system for
           automating case selection and managing the case workload. IRS
           plans to eventually also use this system to select and manage the
           caseloads for its telephone and field collection functions. IRS
           had originally planned to deploy the system with two
           limited-functionality subreleases concurrent with the limited
           implementation phase (in which IRS is contracting with three PCAs
           through December 2007) and begin ramping up the number of
           contractors (eventually to up to 12) with the third, fully
           functional information system subrelease in January 2008. However,
           IRS officials said that information systems budget constraints
           require IRS to change its information system plan. Although IRS
           has not yet finalized decisions on ramping up the number of PCAs
           and implementing the information system, the proposed plan IRS
           officials are considering is to begin increasing the number PCAs
           and deploy an interim subrelease with some enhancements in January
           2008, but delay the full-function subrelease indefinitely.

           Results
			  
			  As shown in table 2, in preparation for turning over collection
           cases to PCAs, as of September 15, 2006, IRS has made major
           progress in addressing the 5 critical success factors and 17
           related subfactors for contracting for tax debt collection, but
           nevertheless has more to do.

3See GAO, Tax Administration: Impact of Compliance and Collection Program
Declines on Taxpayers, GAO-02-674 (Washington, D.C.: May 22, 2002);
Compliance and Collection: Challenges for IRS in Reversing Trends and
Implementing New Initiatives, GAO-03-732T (Washington, D.C.: May 7, 2003);
and Internal Revenue Service: Assessment of Fiscal Year 2005 Budget
Request and 2004 Filing Season Performance, GAO-04-560T (Washington, D.C.:
Mar. 30, 2004).

4GAO, High-Risk Series: An Update, GAO-05-207 (Washington, D.C.: January
2005).

5GAO, Internal Revenue Service: Issues Affecting IRS's Private Debt
Collection Pilot, GAO/GGD-97-12R (Washington, D.C: July 18, 1997).

6Another PCA that was not selected also filed a bid protest that was later
withdrawn by that protester.

Table 2: Extent to Which IRS Has Taken Steps to Address the Critical
Success Factors and Related Subfactors for Contracting for Tax Debt
Collection as of September 15, 2006

                                                      Status of  
                                                     step(s) to  
                                                     address the 
                                                      subfactor  
Critical                                                              
success factor Related subfactor                   Complete   Partial 
Results        Determine expected program goals,                   X  
orientation    costs, and overall results                     
                  Establish contract provisions,   X             
                  operational expectations, and                  
                  standards                                      
                  Give PCAs freedom to achieve     X             
                  performance goals                              
                  Use a contracting process for    X             
                  selecting PCAs to meet                         
                  expectations                                   
Agency         Provide sufficient staffs to do         X      
resources      contract-related work                          
                  Have management commitment to    X             
                  using PCAs                                     
                  Ensure appropriate PCA employee  X             
                  training                                       
                  Ensure computer systems can      X             
                  exchange data, track payments,                 
                  and update accounts                            
                  Be aware of and control costs of        X      
                  functions related to contracting               
Workload       Select the appropriate type and         X      
                  volume of cases                                
                  Ensure that contractors work the X             
                  range of cases                                 
                  Provide PCAs appropriate and     X             
                  accurate information                           
Taxpayer       Ensure that taxpayers are treated       X      
issues         properly                                       
                  Ensure the security of taxpayer  X             
                  information                                    
Evaluation     Perform ongoing monitoring of PCAs      X      
                  Measure PCAs' performance and    X             
                  distribute rewards/disincentives               
                  Evaluate whether program meets          X      
                  goals and expectations, make                   
                  adjustments                                    

Source: GAO analysis of IRS's data.

Note: Our analysis was not to determine the adequacy of IRS's actions to
address the critical success factors and subfactors, but rather to
determine whether IRS had completed steps to address the various factors.

IRS has completed steps to address 14 of the 17 subfactors. Although IRS
has taken steps on the remaining 3 subfactors, IRS still has work to do to
complete addressing them. For example, IRS had not yet documented all of
its specific goals7 and related measures to orient and evaluate the PDC
program in terms of achieving desired results, such as goals and measures
for improving the productivity of IRS staff. Also, IRS had not determined
all historical program costs, that is, how much IRS has invested to date
to develop and implement the PDC program. Finishing work to address the
critical success factors could help achieve desired results-such as
collecting tax debts-but cannot guarantee success, which depends, in part,
on how well IRS addresses the factors, identifies problems, and resolves
problems in the limited implementation phase.

Although IRS officials indicated that a purpose of the limited
implementation phase is to assure readiness for full implementation, IRS
has not yet documented how it will identify and use the lessons learned to
ensure that each critical success factor is adequately addressed before
expanding the program. Because program success will be affected by how
well IRS identifies and makes needed adjustments to resolve problems,
tracking the lessons learned in the limited implementation phase is
critical. According to IRS officials, during the limited implementation
phase, they plan to collect information to provide baselines, trends, and
a basis for making any necessary changes. However, officials did not have
specifics on how IRS would ensure all factors had been adequately
addressed before moving to full implementation in January 2008. Also, IRS
has not documented criteria that it will use to determine whether limited
implementation phase performance was sufficient to warrant program
expansion. IRS officials indicated that they plan to further discuss
performance criteria that could trigger a go/no go decision, and might
consider criteria such as the amount of taxes collected and indications of
PCAs abusing taxpayers or misusing taxpayer data. IRS has not decided on
whether these targets will include the amounts of collected taxes compared
to program costs, which was a key reason for canceling the 1996 PCA pilot
program. Finally, IRS will have a little more than a half year to identify
the lessons learned before incorporating them into the solicitation for
the next contract, which IRS intends to release in March 2007 in order to
begin expanding the number of PCAs in January 2008.

7As used in this report, a goal is the desired numerical value of a
program performance measure, which can also be called a target.

IRS has begun work to design a study intended to respond to a
recommendation in our May 2004 report. IRS plans to compare the net
dollars collected through the PDC program (dollars paid by taxpayers less
fees paid to PCAs) to the dollars IRS could expect to collect if it
invested its PDC-related operating costs into having IRS staff work the
"next best" cases under IRS's collection system. IRS is planning to define
the cases it considers to be "next best;" gather data on PCA cases for
6-12 months; and do two iterations of the study, one in September 2006 and
one in March 2007. In the documented study design, IRS would exclude the
fees paid to PCAs from the costs and subtract those fees from the tax
debts collected by PCAs. While such a study might produce useful
information, it will not meet the intent of our recommendation. The study
would not compare the results of using PCAs with the results IRS could get
if given the same amount of resources, including the fees to be paid to
PCAs (which are to be paid from federal tax receipts), to use in whatever
fashion that officials determine would best meet tax collection goals.

Appendix I includes more information on the status of IRS's implementation
of the PDC program.

As discussed in more detail below, we are recommending that IRS complete
establishing for the PDC program results-oriented goals and measures;
information on costs; plans for evaluations; and criteria and process for
assessing the critical success factors and program performance. We also
are recommending that IRS ensure that its planned comparative study of
using PCAs informs decision makers of all the program costs and the best
use of those federal funds. In providing written comments on a draft this
report (see app. V) the Commissioner of Internal Revenue agreed with our
recommendations and outlined some actions IRS has initiated to respond to
some of them.

                                  Conclusions

Although IRS's actions do not guarantee PDC program success, IRS made
significant progress in addressing the 5 critical success factors and 17
related subfactors before sending cases to PCAs for the limited
implementation phase. Taken together, these actions were intended to
achieve such important ends as ensuring that the selected PCAs will be
able to do the job and work the range of cases assigned, that IRS will
have the necessary resources and caseload ready to do its part, and that
taxpayers' rights and data will be protected. Even with this progress, IRS
has not yet completed the related steps that it must take for 3 subfactors
on setting goals and measures, determining all program costs, and
evaluating the program. Having information on whether the program met its
goals and desired results given the program costs would be critical for
policymakers. In addition, IRS lacks clear criteria and processes for
assessing how well it addressed the critical success factors and whether
the program performance warrants expanding the number of PCAs and turning
over more cases to them.

It is understandable that IRS officials have focused on rolling out this
new program and dealing with many pressing concerns such as making sure
that the PCAs are ready and that IRS can do its part, while delaying work
on these three subfactors and on the criteria and processes for deciding
on future program expansion. However, if it waits too long, IRS risks not
having critical information in a timely and cost-effective manner in order
to answer important questions about whether the PDC program is producing
desired results at acceptable costs and whether the program should be
expanded. Having plans to answer these questions is especially critical
now that lawsuit and bid protest delays have reduced the time that IRS has
to collect and analyze performance data before having to make decisions
about expanding the PDC program. Therefore, it is all the more important
that IRS determine program costs and make decisions about its goals and
measures, evaluation plans, approach to assessing critical success
factors, and program expansion decision criteria as soon as possible.

Related to such decisions on expansion is IRS's planned comparative study
of using PCAs. If this study is not adequately designed and implemented,
policymakers may not be aware of the true costs of contracting with
PCAs-including the fees paid to PCAs. They also would not be aware of the
potential impact of increasing IRS funding, and thereby miss the
opportunity to know whether contracting with PCAs is the best use of
federal funds for meeting tax collection goals.

                      Recommendations for Executive Action

To ensure that IRS decision makers will timely have the information needed
to make informed, data-based decisions about the private debt collection
program, we recommend that, as soon as possible, and certainly before any
expansion of the PDC program beyond the initial round of cases sent to
PCAs, the Commissioner of Internal Revenue complete establishing:

           o  results-oriented goals and measures for the program based on
           the best available information;
           o  reliable, verifiable information on all the costs of the
           program, to the extent possible;
           o  plans for evaluating the results of the program in terms of
           expected costs, goals, and desired results; and
           o  clear criteria and processes for assessing how IRS addressed
           the critical success factors in the limited implementation phase
           and whether PDC program performance warrants program expansion.

           We also recommend that, as IRS continues planning its comparative
           study of using PCAs, the Commissioner of Internal Revenue ensure
           that the study methodology and the IRS reports on the study
           results will inform decision makers of the full costs of the PDC
           program, including the fees paid to PCAs and the best use of those
           federal funds.

           Agency Comments and Our Evaluation
			  
			  The Commissioner of Internal Revenue provided written comments on
           a draft of this report in letter dated September 20, 2006 (which
           is reprinted with its enclosures in app. V). The Commissioner
           noted that he was pleased that our report acknowledges IRS's
           accomplishments and steps to protect taxpayer data and rights.8
           The Commissioner also noted that IRS agreed with our
           recommendations and had initiated efforts to address them, as
           discussed below.

           Recommendation 1: Establish Results-Oriented Goals and Measures
			  for the Program Based on the Best Available Information
			  
			  IRS agreed with the recommendation. In discussing our draft report
           with IRS officials, we clarified that the goals and measures
           should be logically linked to IRS's five desired results and that
           IRS should document any indirect links and why more direct
           linkages were not made. In turn, IRS's letter provided information
           on such linkages, including the indirect linkage for the desired
           result involving increased public confidence, and provided a
           revised version of our appendix IV (which we reprint with the
           Commissioner's letter in app. V) with columns added to show the
           linkages between the desired results and the proposed goals and
           measures as they appeared in our draft report. Although we did not
           have time to fully review IRS's information, we are gratified to
           see that IRS has established some program goals and measures and
           has made progress in developing the linkages. We look forward to
           IRS developing the related measures and data, such as for reducing
           the penalties and interest paid, better utilizing IRS staff,
           freeing up IRS staff to work more complex cases, and significantly
           reducing case backlogs. We also look forward to IRS identifying
           specific goals-referred to as "targets" in IRS's comments-that IRS
           will strive to achieve beyond those listed in appendix IV.
			  
			  8Although our report does document IRS's progress, it is important to note
that our report points out that we did not assess the adequacy of IRS's
actions or whether they would work, and that success would depend, in
part, on how well IRS addressed the critical success factors, including
identifying and resolving any problems.

           Recommendation 2: Establish a System for Tracking All Costs of
			  the Private Debt Collection Program
			  
			  IRS agreed with our recommendation. In response to our draft
           report, IRS provided us documentation that it had implemented a
           system to track PDC program costs going forward from July 2006. In
           discussing our draft report with IRS officials, they said that IRS
           will face difficulties in estimating some of the of the PDC
           program costs incurred before the tracking system was established.
           Based on this new information, we revised our recommendation to
           state that IRS should complete establishing verifiable, reliable
           information on all the costs of the program, to the extent
           possible. IRS's comments state that it will furnish reconstructed
           historical costs as soon as they are compiled. Although we look
           forward to receiving such cost information, we encourage IRS to
           use the cost information to manage and evaluate the PDC program
           and inform policymakers.

           Recommendation 3: Establish Plans for Evaluating the Results of
			  the Program in Terms of Expected Costs, Goals, and Desired Results
			  
			  IRS provided a combined response on this and the last
           recommendation dealing with the comparative study (which is
           discussed below). IRS agreed with our recommendation to evaluate
           the program, but did not provide any additional information on how
           it plans to do so. We look forward to IRS establishing and
           documenting specific plans for evaluating the program over time
           and reporting the evaluation results.

           Recommendation 4: Establish Clear Criteria and Processes for
			  Assessing How IRS Addressed the Critical Success Factors in the
			  Limited Implementation Phase and Whether PDC Program Performance
			  Warrants Program Expansion
			  
			  IRS agreed with this recommendation and noted that its decision on
           whether to expand the PCA program will be driven by several
           factors, such as the composition of the inventory and cases to be
           worked by PCAs, IRS resource capacity, and PCA performance. We
           look forward to IRS finalizing and documenting the criteria and
           processes, which could consider factors listed in this report,
           such as PCAs' treatment of taxpayers and taxpayer data, the tax
           amounts collected, and the cost of collecting the taxes. We also
           look forward to IRS documenting its criteria and processes for
           assessing the critical success factors.

           Recommendation 5: Ensure the Comparative Study Informs Decision
			  Makers of All PDC Costs, Including PCA Fees
			  
			  In agreeing with this recommendation, IRS noted that it has
           structured the study so that data can be analyzed with and without
           the PCA fees. In discussing the draft report with IRS officials,
           the officials said that the study will include an analysis of the
           PCA fees as costs, not as a reduction of gross revenue, and the
           study will project what IRS would have collected had those costs
           been used to fund IRS's collection program. We look forward to
           receiving more information on IRS's study approach and the study
           results as IRS begins the first study iteration in September 2006.

           As agreed with your offices, unless you publicly announce its
           contents earlier, we plan no further distribution of this report
           until 30 days from its date. At that time, we will send copies to
           the Chairman and Ranking Minority Member, House Committee on Ways
           and Means; the Secretary of the Treasury; the Commissioner of
           Internal Revenue; and other interested parties. Copies will be
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           available at no charge on GAO's Web site at http://www.gao.gov.

           If you or your staff have any questions, please contact me at
           (202) 512-9110 or [email protected]. Contact points for our Offices
           of Congressional Relations and Public Affairs may be found on the
           last page of this report. Key contributors to this report are
           listed in appendix VI.

           Michael Brostek
			  Director, Tax Issues Strategic Issues Team

           Appendix I: Briefing on the IRS Private Debt Collection Program
			  
			  Appendix II: Scope and Methodology
			  
			  To determine to what extent the Internal Revenue Service (IRS)
           addressed the critical success factors before turning over
           collection cases to the private collection agencies (PCA) we
           reviewed program documents and interviewed IRS officials. IRS
           agreed with the critical success factors we identified. We
           identified the approaches/methods IRS intended to use to address
           the factors and related subfactors and identified any steps IRS
           had remaining to address each factor before turning over cases to
           PCAs. We analyzed interviews and documents to identify any gaps in
           IRS's approach, such as factors for which IRS lacked intended
           approaches/methods to address a factor, documented plans for
           completing steps, or details on how intended approaches/methods
           would be implemented. For selected subfactors related to areas for
           which we had related expertise and readily available criteria
           (government acquisition, information technology development and
           security, and financial management), we analyzed IRS's program
           documents and compared IRS's approach for addressing the subfactor
           to the criteria. For example, our information security staff
           reviewed IRS's approach for addressing information security issues
           in light of Federal Information Security Management Act and
           National Institute of Standards and Technology requirements. We
           did not attempt to analyze how well IRS addressed the factors or
           whether IRS made the right decisions on issues such as PCA
           employees' training or taxpayer protections.

           To determine how IRS will use the lessons learned from the limited
           implementation phase to assess the critical success factors and
           program performance before full program implementation, we
           interviewed IRS officials and reviewed available agency documents
           and plans. We focused on when and how, if at all, IRS would
           determine whether its approaches/methods for addressing the
           factors worked as intended; if program performance warrants
           program expansion; and what changes, if any, should be made before
           fully implementing the program.

           To determine whether IRS's planned approach to study using PCAs
           will provide useful information with which to determine if
           contracting is the best use of federal funds for achieving tax
           collection goals, we reviewed program documents and interviewed
           officials from IRS supported by contractor staff assisting them in
           developing the study.

           We used data only as background for reporting and did not formally
           assess their reliability. To the extent possible, we corroborated
           information from interviews with documentation and, where not
           possible, we report the information as attributed to IRS
           officials. Although we obtained documentation that IRS had
           completed steps to address the critical success subfactors, we did
           not do detailed verification of the documents, in part due to the
           limited time we had between IRS completing and documenting some
           steps taken in preparation for turning the cases over to PCAs on
           September 7, 2006, and the due date of this report.

           We did our work from August 2005 to September 2006 in accordance
           with generally accepted government auditing standards.

           Appendix III: Selected Data Related to IRSï¿½s Expectations for
			  Elements of the Private Debt Collection Program 
			  
                                                              In full program 
                                                 implementation (inclusive of 
                                 In the limited        limited implementation 
Element                implementation phasea                       phase)b 
Revenue collected       $55.8 million to $92                 $1.4 billionc 
                                        million 
Number of IRS staff        Referral Unit: 33             Referral Unit: 70 
                                                                              
                             Oversight Unit: 15            Oversight Unit: 35 
                                                                              
                                      Other: 17                     Other: 15 
Costsd                       $61.16 millione               $77.58 millionf 
PCAs contracted                            3                     Up to 12g 
Case placements                      158,000                Not availableh 
Dollar value of case $615.6 million to $1.01                Not availableh 
placements                           billion 
			  
			  Source: IRS.

           Note: The data are based on IRS's expectations. We did not verify
           the data.

           aUnless otherwise noted, date range is from September 2006 (date
           of turning over cases to PCAs) through December 2007.

           bUnless otherwise noted, date range is from September 2006 (date
           of turning over cases to PCAs) through September 30, 2009.

           cThis is a 10-year estimate with no date range provided. According
           to IRS officials, this is a Department of Treasury estimate. IRS
           did another estimate based on a different methodology for its
           information systems investment document which is being revised.

           dThis includes information systems acquisition, maintenance, and
           IRS staff costs.

           eCosts are from IRS's information systems investments document,
           which includes costs that precede case rollout and data organized
           by information system subrelease with a date range from October 1,
           2004, through May 30, 2007, and is being revised with changes that
           may affect program costs.

           fCosts are from IRS's information systems document, which has cost
           data organized by information system subrelease with a date range
           from October 1, 2004 through September 30, 2009 and is being
           revised with changes that may affect program costs.

           gNo date range was provided. However, IRS officials said they
           expect to increase the number of PCAs beginning in January 2008.

           hIRS officials said that inventory estimates for full
           implementation cannot be made until decisions are made about
           information system releases.

           Appendix IV: Proposed Private Debt Collection Program
			  Performance Measures and Goals for Fiscal Year 2007			  
			  
                               Proposed private debt collection               
IRS category                program performance measure               Goal
Operations                                                       
Cases placed                Number of cases placed with PCAs in    100,000 
                               first 12 months                      
Resolutions                 Percentage of cases placed with PCAs        63 
                               that are resolved                    
Recalls                     Number/percentage of PCA cases               a 
                               recalled to IRS                      
Not collectible             Number/percentage of PCA cases that          a 
                               are deemed currently not collectible 
Bankruptcies and decedents  Number/percentage of cases involving         b 
                               bankruptcies or decedents            
Cycle time                  PCA time to close the case                   a 
Financial                                                        
Dollars placed              Amount of unpaid tax debts that are          b 
                               placed with PCAs                     
Collections                 Amount of unpaid tax debts that are          b 
                               collected                            
Collection percent          Percentage of unpaid tax debts               6 
                               placed with PCAs that is collected   
Collections retained by IRS Amount of PCA collections that IRS           b 
                               retains to fund collection           
                               enforcement activities               
Full payments               Cases closed as fully paid                   a 
3-5 year installment        Cases closed with an agreement to            a 
agreements                  satisfy the taxpayer's unpaid tax    
                               debt in 3 to 5 years                 
5-year installment          Cases closed with an agreement to            a 
agreements                  satisfy the taxpayer's unpaid tax    
                               debt in more than 5 years            
Quality                                                          
Taxpayer satisfaction       Percentage of surveyed taxpayers          67.5 
                               responding that they were satisfied  
IRS employee satisfaction   Satisfaction score for IRS employees 3.72 of 5 
                               in PDC program                       
PCA employee satisfaction   Satisfaction score for PCA employees to be set 
                               working cases                        
Accuracy                    Accuracy score for PCA cases                 c 
Timeliness                  Timeliness score for PCA cases               c 
Professionalismd            Professionalism score in PCA cases           c 
Complaints                  Verified major complaints against            0 
                               PCA employeese                       
Case quality                Overall percentage quality score for       90f 
                               cases worked by PCAs                 
			  
			  Source: IRS information as of September 15, 2006.

           aGoals will be determined using experiences with PCA cases over
           the first year.

           bGoals will be developed using IRS's revenue projection model.

           cGoals will be based on those used in the IRS telephone collection
           function.

           dIncludes various types behavior of when interacting with
           taxpayers, such as promoting a positive image by using effective
           communication techniques.

           eThese major complaints could be reported by taxpayers and
           government employees and include intimidation, heavy-handed
           behavior, or similar activity by a PCA employee (type 2 complaint)
           or statutory violations by a PCA employee, such as those of the
           Taxpayer Bill of Rights, Fair Debt Collection Practices Act,
           Privacy Act, taxpayer information disclosure statutes, or other
           applicable laws (type 3 complaint).

           fPDC program officials said this is an approximate goal that could
           be revised based on experience in IRS's telephone collection
           function.

           Appendix V: Comments from the Internal Revenue Service
			  
			  Appendix VI: GAO Contact and Staff Acknowledgments
			  
			  GAO Contact
			  
			  Michael Brostek, (202) 512-9110 or [email protected]

           Acknowledgments
			  
			  In addition to the contact named above, Tom Short, Assistant
           Director; John Davis; Charles Fox; Timothy Hopkins; Ronald Jones;
           Jeffrey Knott; Veronica Mayhand; Edward Nannenhorn; Cheryl
           Peterson; and William Woods made key contributions to this report.

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Highlights of GAO-06-1065 , a report to the Committee on Finance, U.S.
Senate

September 2006

TAX DEBT COLLECTION

IRS Needs to Complete Steps to Help Ensure Contracting Out Achieves
Desired Results and Best Use of Federal Resources

In 2005, the inventory of tax debt with collection potential had grown to
$132 billion. The Internal Revenue Service (IRS) has not pursued some tax
debt because of limited resources and higher priorities. Congress has
authorized IRS to contract with private collection agencies (PCA) to help
collect tax debts. IRS has developed a Private Debt Collection (PDC)
program to start with a limited implementation in September 2006 and
fuller implementation in January 2008. As requested, GAO is reporting
whether (1) IRS addressed critical success factors before limited
implementation, (2) IRS will assess lessons learned before fuller
implementation, and (3) IRS's planned study will help determine if using
PCAs is the best use of federal funds.

What GAO Recommends

GAO recommends that IRS complete establishing for the PDC program: (1)
results-oriented goals and measures; (2) reliable, verifiable costs, (3)
evaluation plans, and (4) criteria and processes for assessing the program
before deciding whether to expand it. GAO also recommends that IRS ensure
that its study reports all PDC costs and the best use of those federal
funds.

In commenting on a report draft, IRS agreed with GAO's recommendations and
outlined some actions it has initiated to respond to some of them.

IRS made major progress in addressing the 5 critical success factors and
17 related subfactors for the PDC program before sending cases to PCAs.
GAO reviewed program documents and interviewed officials to identify IRS's
approaches and steps taken to address the factors. Taken together, IRS's
actions were intended to ensure that the PCAs will be able to do the job
and work the range of cases assigned, IRS will have the necessary
resources and caseload ready, and taxpayer rights and data will be
protected. Even with this progress, IRS has not completed work for three
subfactors-setting results-oriented goals and measures, determining all
PDC program costs, and evaluating the program based on the
results-oriented goals and measures, once they are established. As a
result, IRS risks not providing complete information that decision makers
would find useful. Finishing work on the factors could help achieve but
cannot guarantee program success, which also depends, in part, on how IRS
addresses the factors and identifies and resolves any problems in the
limited implementation phase.

Although IRS officials indicated that a purpose of the limited
implementation phase is to assure readiness for full implementation to up
to 12 PCAs, IRS has not yet documented how it will identify and use the
lessons learned to ensure that each critical success factor is addressed
before expanding the program starting in January 2008. Because program
success will be affected by how well IRS makes adjustments, assessing the
lessons learned in limited implementation is critical. Also, IRS has not
documented criteria that it will use to determine whether the limited
implementation performance warrants program expansion. IRS officials
indicated that they are considering criteria that could trigger a go/no go
decision, such as the amount of taxes collected and indications of PCAs
abusing taxpayers or misusing taxpayer data. IRS has not decided on
whether these targets will include comparing the taxes collected to
program costs, which was a key reason for canceling a 1996 PCA pilot
program. Finally, IRS will have a little more than a half year to identify
the lessons learned before incorporating them into the next contract
solicitation, which IRS intends to release in March 2007.

Related to such decisions on expansion is IRS's planned comparative study
of using PCAs. That study is to compare using PCAs to investing IRS's
PDC-related operating costs into having IRS staff work IRS's "next best"
collection cases. Under the documented study design, IRS would exclude the
fees paid to PCAs from the costs and subtract those fees from the tax
debts collected by PCAs. While such a study might produce useful
information, it will not compare the results of using PCAs with the
results IRS could get if given the same amount of resources, including the
fees to be paid to PCAs, to use in what IRS officials would judge to be
the best way to meet tax collection goals. Adequately designing and
implementing the study is important to ensure policymakers are aware of
the true costs of contracting with PCAs and know whether PCAs offer the
best use of federal funds.
*** End of document. ***