Tax Administration: Opportunities to Improve Compliance Decisions
and Service to Taxpayers through Enhancements to Appeals'	 
Feedback Project (24-MAR-06, GAO-06-396).			 
                                                                 
Taxpayers disagreeing with Internal Revenue Service (IRS)	 
compliance decisions can request an independent review by IRS's  
Appeals Office (Appeals). In 2004 the Commissioner requested that
Appeals establish a feedback program to share the results of	 
Appeals' reviews with the compliance programs. GAO was asked to  
assess whether (1) information on Appeals results would provide  
useful feedback to IRS operating divisions to benefit compliance 
programs, Appeals, and taxpayers through better case resolution  
and (2) the feedback project is being effectively managed to	 
maximize its potential to improve IRS's performance and thereby  
reduce disputes with taxpayers. 				 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-06-396 					        
    ACCNO:   A49898						        
  TITLE:     Tax Administration: Opportunities to Improve Compliance  
Decisions and Service to Taxpayers through Enhancements to	 
Appeals' Feedback Project					 
     DATE:   03/24/2006 
  SUBJECT:   Appeals						 
	     Customer service					 
	     Data collection					 
	     Income taxes					 
	     Internal controls					 
	     Noncompliance					 
	     Program evaluation 				 
	     Program management 				 
	     Tax administration 				 
	     Taxpayers						 
	     Program goals or objectives			 

******************************************************************
** This file contains an ASCII representation of the text of a  **
** GAO Product.                                                 **
**                                                              **
** No attempt has been made to display graphic images, although **
** figure captions are reproduced.  Tables are included, but    **
** may not resemble those in the printed version.               **
**                                                              **
** Please see the PDF (Portable Document Format) file, when     **
** available, for a complete electronic file of the printed     **
** document's contents.                                         **
**                                                              **
******************************************************************
GAO-06-396

     

     * Report to the Chairman and Ranking Minority Member, Committee on
       Finance, U.S. Senate
          * March 2006
     * tax administration
          * Opportunities to Improve Compliance Decisions and Service to
            Taxpayers through Enhancements to Appeals' Feedback Project
     * Contents
          * Results in Brief
          * Background
               * The Appeals Process
               * Strategic Approach
          * Feedback Information Could Be Useful for Improving Performance
               * Feedback on Appeals Results Could Be Useful
               * Improved Decision Making Would Benefit Compliance Programs,
                 Appeals, and Taxpayers
               * More Systematic Data Analysis Would Help to Identify Useful
                 Feedback
          * Appeals Can Build on Existing Efforts to Improve the Feedback
            Project
               * Appeals Is Providing Some Feedback Based on Officials'
                 Initial Judgments of Its Needs
               * Partnership with Compliance Programs Could Help Ensure That
                 Feedback Information Will Be Used to Achieve Desired Program
                 Results
               * Project Is Correcting Flaws in Data, but Sufficient Internal
                 Controls to Monitor and Verify Data Not Yet Developed
          * Conclusions
          * Recommendations
          * Agency Comments and Our Evaluation
     * Objectives, Scope, and Methodology
          * Data Reliability
     * Appeals Workstreams
     * Appeal Rates
     * Comments from the Commissioner of Internal Revenue
     * Related GAO Products

                 United States Government Accountability Office

Report to the Chairman and Ranking Minority Member, Committee on Finance,
U.S. Senate

March 2006

TAX ADMINISTRATION

 Opportunities to Improve Compliance Decisions and Service to Taxpayers through
                   Enhancements to Appeals' Feedback Project

                                       a

GAO-06-396

TAX ADMINISTRATION

Opportunities to Improve Compliance Decisions and Service to Taxpayers
through Enhancements to Appeals' Feedback Project

  What GAO Found

Appeals' case result information has the potential to help compliance
programs improve taxpayer service, but realizing improvements requires
investments in data collection and analysis that must be considered in
light of the likely benefits. Based on a review of 153 Appeals cases, GAO
estimates that 41 percent of the 102,623 cases closed in fiscal year 2004
were not fully sustained. Of these, about half were not sustained because
Appeals applied a law or regulation differently than the programs. Lacking
such information, officials could not assess whether actions like
additional guidance were needed. However, identifying specific provisions
that were interpreted differently would require data gathering and
analysis. Because the differences span a host of laws and regulations,
corrective action may only affect a small number of cases. Improved
decision making, however, can benefit compliance programs, Appeals, and
taxpayers. An initial data analysis, such as identifying programs with
high nonsustention rates due to differences in applying laws or
regulations, would help to target areas most likely to benefit from
feedback.

Appeals has taken several initial steps to launch the feedback project.
During 2005, for example, Appeals and the compliance programs began to
identify additional information needs. In addition, Appeals and the
compliance programs could refine the feedback project's objectives to
target the results-oriented improvements that are logical benefits of
information sharing. Obtaining agreement between Appeals and the programs
on objectives may not be easy because their perspectives differ on the
steps needed to improve operations, but is necessary. Also, Appeals' plans
to update its information system to provide additional data on case
results will be hindered by inaccurate data. We found that several
important data fields had error rates up to 14 percent. Appeals staff
cited several reasons for this, including weak data verification
procedures.

                 United States Government Accountability Office

Contents

Letter                                                                   1 
                            Results in Brief                                2 
                            Background                                      4 
                            Feedback Information Could Be Useful for       
                            Improving                                      
                            Performance                                     8 
                            Appeals Can Build on Existing Efforts to       
                            Improve the Feedback                           
                            Project                                        16 
                            Conclusions                                    22 
                            Recommendations                                22 
                            Agency Comments and Our Evaluation             23 
Appendixes                                                              
                Appendix I: Objectives, Scope, and Methodology             25 
               Appendix II: Appeals Workstreams                            30 
              Appendix III: Appeal Rates                                   33 
              Appendix IV:  Comments from the Commissioner of Internal     36 
                            Revenue                                        

  Related GAO Products

Table 1:

  Tables

Table 2:

Table 3:

Table 4: Table 5: Table 6: Table 7: Table 8:

Reasons Appeals Did Not Fully Sustain Compliance               
Decisions, Percentage of Nonsustained Cases in GAO's           
Sample by Reason, and Illustrative Examples, Fiscal Year       
2004.                                                                   10 
Comparison of the Composition of Appeals Workload,             
Rate of Compliance Cases Appealed, Percentage of               
Appeals Workload, and Cases Not Fully Sustained                         12 
Reasons that Appeals Did Not Fully Sustain Compliance          
Program Decisions, Percentage of Cases Not Fully               
Sustained, Sample of Cases Closed in Fiscal Year 2004                   15 
Confidence Intervals for Table 1                                        27 
Confidence Intervals for Table 2                                        27 
Confidence Intervals for Table 3                                        28 
Description of Appeals Workstreams                                      31 
Appeal Rates by Workstream, Fiscal Year 2004                            34 

                         Figure 1: IRS's Appeals System

  Figure

Contents

                                 Abbreviations

ACDS               Appeals Centralized Database System                     
ACM                Appeals Case Memorandum                                 
CIC                Coordinated Industry Case                               
CDP                Collection Due Process                                  
DCI                Data Collection Instrument                              
EITC               Earned Income Tax Credit                                
IC                 Industry Case                                           
IS                 Innocent Spouse                                         
IRS                Internal Revenue Service                                
LMSB               Large and Mid-Sized Business Division                   
OIC                Offer-In-Compromise                                     
SB/SE              Small Business/Self-Employed Division                   
TE/GE              Tax-Exempt and Government Entities Division             
W&I                Wage and Investment Division                            

This is a work of the U.S. government and is not subject to copyright
protection in the United States. It may be reproduced and distributed in
its entirety without further permission from GAO. However, because this
work may contain copyrighted images or other material, permission from the
copyright holder may be necessary if you wish to reproduce this material
separately.

A

United States Government Accountability Office Washington, D.C. 20548

March 24, 2006

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

To help maintain the public's confidence in the tax system, the Internal
Revenue Service (IRS) believes it needs to ensure that taxpayers receive a
fair, impartial, and uniform resolution of tax disputes. If taxpayers
disagree with IRS decisions to assess additional tax or take collection
action, they can bring their cases before the IRS Appeals function
(Appeals), which independently reviews whether compliance decisions
correctly reflect the facts as well as applicable law, regulations, and
IRS procedures.1 With a staff of about 1,900 employees and a budget of
about $193 million in fiscal year 2005, Appeals annually closes over
100,000 cases where taxpayers disputed IRS's compliance decisions.

Our prior reports have found that results-oriented organizations use
performance information to continuously identify performance gaps and put
that information to work to improve their operations. One possible source
of this information in IRS is the results of Appeals cases. Using this
information, IRS compliance programs may possibly identify whether Appeals
would agree that the case decision represents the best result for IRS and
the taxpayer. Then, using Appeals case results information, compliance
program managers may possibly be able to identify weaknesses in their
programs and improve operations, providing better service to taxpayers,
and possibly resolving more cases before an appeal. In line with this
concept, the Commissioner recently requested that Appeals establish a
feedback project intended to maximize the benefits of sharing Appeals
decisions with the compliance programs.

Based on your request, this report's objectives are to determine whether

(1) information on Appeals results would provide useful feedback to IRS

1Compliance programs include numerous IRS examination programs, which may
assess additional taxes, and its collection programs, which may take
enforcement actions (e.g., liens, levies, seizures) to collect delinquent
taxes. Each IRS operating division manages multiple compliance programs.

                                Results in Brief

operating divisions to benefit compliance programs, Appeals, and taxpayers
through better case resolution and (2) the feedback project is being
effectively managed to maximize its potential to improve IRS's performance
and thereby reduce disputes with taxpayers.

To make determinations in both areas, we reviewed Appeals and compliance
program documents and our prior work on performance management, and
interviewed Appeals and compliance program officials. To determine whether
information on the results of Appeals cases has the potential to provide
useful feedback, we reviewed a random sample of Appeals cases closed in
fiscal year 2004 to determine whether the cases contained information that
could be useful for improving case results. Principally, we collected data
on whether Appeals sustained or overturned the compliance program's
decision in each case and identified the main reasons for the Appeals
decision. The results from that sample have related confidence intervals
and precision estimates that are presented in this letter and in appendix
I. We conducted our review from October 2004 through October 2005 in
accordance with generally accepted government auditing standards.

As an independent reviewer of IRS compliance program's cases, Appeals'
case results information has the potential to help those programs improve
their service to taxpayers, but realizing improvements requires
investments in data collection and analysis that must be considered in
light of the likely benefits to the compliance programs, Appeals, and
taxpayers. Based on our review of 153 compliance program cases closed in
fiscal year 2004, we estimate that 41 percent of the 102,623 cases closed
in that year (42,075 cases) were not fully sustained by Appeals.2 Of these
cases, Appeals did not sustain 52 percent (21,879 cases) because, at least
in part, it applied a law or regulation differently than the compliance
programs.3 Because they have not received this type of information, the
compliance programs could not assess whether additional guidance,
training, or other initiatives were needed. However, identifying more
specifically which laws or regulations

2This estimate is based on our random sample. We are 95 percent confident
that the actual proportion is between 33 percent and 49 percent.

3Fifty-two percent of the cases in our sample were not fully sustained for
this reason. We are 95 percent confident that the actual proportion is
between 40.0 percent and 64.8 percent.

    Page 2 GAO-06-396 Appeals Feedback

were interpreted differently by the programs would require an investment
to gather and analyze additional data. Because these differing
applications span a host of laws and regulations across all of IRS's
compliance programs, in many cases the corrective action that might be
taken may only affect a relatively small number of cases. Improved
decision making, however, can benefit compliance programs, Appeals, and
taxpayers. Systematic data analysis, such as identifying programs with
high nonsustention rates due to differences in applying laws or
regulations, would help identify those programs most likely to benefit
from feedback.4 This analysis would also help to focus attention on the
costs of developing the feedback data and benefits to be obtained.
Currently, IRS does not have plans for these analyses.

Appeals has taken several initial steps to launch the feedback project
requested by the IRS Commissioner. During 2005, several informationsharing
and cooperative projects (e.g., providing copies of case memorandums and
basic summary data) were established with some compliance programs on
Appeals case results. Appeals and compliance managers can take further
steps to build upon those efforts. For example, Appeals plans to update
its information system to provide additional information on case results,
such as the reasons for Appeal's decisions. In addition, Appeals developed
the feedback project's objectives and measures with limited input from the
compliance programs. Appeals and the compliance programs can partner on
further developing resultsoriented objectives that take into account
compliance programs' diverse circumstances and clearly articulate the
feedback project's expected outcomes and associated performance measures.
Obtaining agreement between Appeals and the compliance programs on
objectives and performance measures may not be easy because their
perspectives differ on the steps needed to improve IRS operations, but it
is a necessary step because the programs themselves must play active roles
in the project to make any changes that will improve their case results.
However, the program will be hindered by inaccurate data. For example, we
found that several important data fields related to Appeals case results
had error rates up to 14 percent.5 Appeals staff cited several reasons for
the errors

4Sustention rate is the proportion of cases sent to Appeals that are not
changed following review.

5Of the cases in our sample, 14.1 percent identified errors in the revised
tax field (Appeals' determination of the tax liability). We are 95 percent
confident that the actual proportion is between 7.7 percent and 23.0
percent.

    Page 3 GAO-06-396 Appeals Feedback

including a lack of attention to complete and accurate data, confusion
about the results of the appeal by those entering the data, and weak data
verification procedures.

In order to maximize the opportunities for the Appeals feedback project to
improve IRS's compliance decisions and service to taxpayers, we are
recommending that IRS analyze feedback data to identify areas most likely
to benefit from feedback projects; further investigate the most promising
areas and assess whether additional actions, such as new guidance or
training, are needed to improve the consistency of decisions; further
develop results-oriented objectives and associated performance measures
for feedback projects; and build upon its current efforts to improve
Appeals information for the feedback projects by establishing internal
controls to verify, on an ongoing basis, the accuracy of information on
case outcomes. In written comments on a draft of this report, the
Commissioner of Internal Revenue agreed with our recommendations and said
they will help IRS develop a much stronger feedback program.

America's tax system is based on taxpayers voluntarily filing tax returns

  Background

that report the full amount of tax owed and paying any taxes that are due.
IRS has four operating divisions:

     o Wage and Investment Division (W&I) serves the vast number of
       individual taxpayers including those who file jointly and only have
       wage and investment income.
     o Small Business/Self-Employed Division (SB/SE) serves about 45 million
       small business, individual taxpayers with rental properties and
       farming businesses, and individuals investing in businesses, such as
       partnerships. SB/SE also serves corporations and partnerships with
       less than $10 million in assets and provides field collection services
       for the other three IRS divisions.
     o Large and Mid-Size Business Division (LMSB) serves corporations,
       subchapter S corporations, and partnerships with assets greater than
       $10 million. These businesses have a large number of employees, have
       complicated tax and accounting issues, and often conduct business
       globally.
     o Tax-Exempt and Government Entities Division (TE/GE) serves three very
       distinct customer segments. Employee Plans serves private and

                              The Appeals Process

public retirement plan customers. Exempt Organizations serves

customers that are exempt from income taxes, such as charities, civic

organizations, and business leagues. Government Entities serves

customers from federal, state, and local governments; Indian tribal

governments; and tax-exempt bond issuers.

These divisions are responsible for providing a full range of services to
these taxpayers. Typically, these services would include assisting
taxpayers with filing returns, processing those returns and maintaining
their accounts, and examining suspected inaccurate returns. Taxpayers who
are assessed additional tax and penalties or who have a pending
enforcement action to collect delinquent taxes, such as a proposed levy or
lien,6 have the right to request a hearing through an administrative
appeal before the assessment or collection actions are final.7 IRS
notifies the taxpayers in writing of these pending actions and explains
their appeal rights. Generally, the taxpayer has 30 days from this
notification to request an appeal.

Appeals' mission is to independently resolve tax disputes prior to
litigation on a basis which is fair and impartial to both the government
and the taxpayer. To assure their independence, Appeals' staff cannot
discuss substantive case issues with compliance staff unless taxpayers or
their representative are present. Generally, compliance staff does not
directly participate in an appeal or learn about the resulting decision.
To identify whether the proposed compliance action should be sustained,
Appeals staff review the case file prepared by IRS's compliance program
and determine whether that evidence demonstrates that the taxpayer and
compliance staff have followed the applicable law, regulation, and IRS
procedure. If requested, the taxpayer may meet with Appeals staff and
provide additional evidence to support their appeal. To close an
examination case, Appeals may (1) agree with the examination program and
fully sustain its recommended assessment, (2) disagree and reduce the
recommended assessment to partially sustain the assessment, or (3) fully
concede to the taxpayer's position and not sustain the assessment. For a

6Under the Internal Revenue Code, "levy" is defined as the seizure of a
taxpayer's assets to satisfy a tax delinquency. A "lien" is a legal claim,
filed in accordance with state property law that attaches to property to
secure payment of a debt.

726 CFR 601.106 and Internal Revenue Code sections 6320 and 6330.

Page 5 GAO-06-396 Appeals Feedback

collection case, Appeals may (1) agree with and sustain the proposed
enforcement action or (2) not sustain the proposed enforcement action by
modifying the proposed action (e.g., propose an installment agreement
rather than a levy), deferring collection, or fully conceding to the
taxpayer's position. If the taxpayer and IRS cannot reach agreement on the
outcome of the case through the Appeals process, the taxpayer may have the
case reviewed by the U.S. Tax Court, U.S. Court of Federal Claims, or a
U.S. district court.

In line with its mission to resolve cases prior to litigation, Appeals is
also authorized to review the facts of the case in light of the hazards
that would exist if the case were litigated.8 Appeals is the only IRS
organization authorized to consider hazards of litigation when deciding
whether to allow taxes and penalties.9 This means that Appeals may
recommend a fair and impartial resolution somewhere between fully
sustaining or fully conceding the examiner's proposal that reflects the
probable result in the event of litigation.

If taxpayers do not reach agreement with IRS examiners on the proposed
deficiency, or if they choose not to contact Appeals, IRS will issue a
notice of deficiency. This notice describes the deficiency and states that
the taxpayer has 90 days to file a petition with the court for a
redetermination of the deficiency. However, even though Appeals may be
initially bypassed, it still has an opportunity to settle these cases.10
Under IRS procedures designed to encourage resolution of cases at the
lowest possible level, the attorney from the local IRS District Counsel's
office handling the court case is required to refer the case to Appeals
for possible settlement before it is scheduled for trial.11 Figure 1
summarizes IRS's appeals system.

8Hazards of litigation are a substantial uncertainty (1) as to how the
courts would interpret and apply the law, (2) about the court's likely
factual findings, or (3) about the admissibility or weight that would be
given to a specific item of evidence. 26 CFR 601.106(f)2 and Internal
Revenue Manual section 8.6.1.3.1. Hazards of litigation are not considered
for collection cases.

9Appeals is the only IRS administrative function with the authority to
consider settlements of tax controversies and as such has the primary
responsibility to resolve these disputes without litigation to the maximum
extent possible. Internal Revenue Manual section

1.2.1.8.4.

10Collection Due Process cases must be considered by Appeals before review
by a court.

1126 CFR 601.106(d) 3(iii) and Internal Revenue Manual section 8.4.1.2.

Figure 1: IRS's Appeals System

Source: GAO and PhotoDisc (images).

Appeals' workload is organized into eight "workstreams" that reflect
similarities in the case workload rather than which of IRS's four
operating divisions initiated the case. Two of the eight workstreams
relate to collection issues and generally originate in two of IRS's four
operating divisions responsible for collection issues (Collection Due
Process and Offer-in-Compromise workstreams). Three of the eight
workstreams include a wide range of generally smaller examination and
returns-processing-related penalty cases (Innocent Spouse, Penalty
Appeals, and Exam/TEGE). The three other workstreams (Coordinated Industry
Case, Industry Case, and Other) cover a small number of complex
examinations from IRS's LMSB programs as well as cases that do not fit
into other workstreams.12 Appendix II includes definitions of Appeals
workstreams,

12Generally these include requests for abatement of interest, Trust Fund
Recovery Penalty cases, the Collection Appeals program, and Disclosure
issues.

Page 7 GAO-06-396 Appeals Feedback

                               Strategic Approach

identifies the related operating divisions for the workstream, and the number of
            cases closed in each workstream during fiscal year 2004.

Results-oriented organizations consistently strive to improve their
performance through strategic planning. As part of this approach, agencies
set objectives and measure performance to evaluate whether performance has
improved. Specifically,

     o goals or objectives are the results that a program is expected to
       achieve, and
     o performance measures are selected after goals or objectives are
       developed, logically related to these goals or objectives, and used to
       gauge progress toward them.

Other federal agencies have previously decided that developing and sharing
information on the results of appeals may help them measure performance or
at least serve as an indicator of whether their decisions are legally
correct. For example, the Merit Systems Protection Board, an independent
quasi-judicial agency established to protect merit systems in the federal
workplace, has set a performance goal of maintaining or reducing its low
percentage of appealed decisions that are reversed or sent back to board
judges for a new decision. The board's performance plan for fiscal year
2005 contains an array of case-specific data to measure this performance
goal.

  Feedback Information Could Be Useful for Improving Performance

Appeals overturned about 41 percent of the fiscal year 2004 cases we
reviewed and in about half of those cases Appeals disagreed with the way
compliance programs applied the law or regulations. This suggests that
providing information on Appeals decisions could help compliance program
managers improve case results by fostering more proper and consistent case
decisions. However, finding the source of possible inconsistencies will
require gathering and analyzing additional information and systematic
analysis. Improved decision making, however, can benefit compliance
programs, Appeals, and taxpayers.

Feedback on Appeals Based on our case review, for cases closed in fiscal
year 2004, we estimate that Appeals did not sustain about 41 percent of
compliance cases (about

    Results Could Be Useful

Page 8 GAO-06-396 Appeals Feedback

42,075 of the 102,623) that year. We identified six principal reasons for
those nonsustentions. As shown in table 1, we estimate that Appeals did
not sustain compliance decisions in 52 percent of the cases not sustained
(21,879 cases) at least in part because Appeals disagreed with compliance
staff's application of tax law or IRS regulations.13 Providing feedback on
such disagreements could help compliance managers improve case results by
taking action to foster the proper and consistent application of tax laws
and regulations. For example, compliance managers could assess whether
guidance or manuals, supervision, quality control, or other management
tools should be revised to ensure that cases are properly closed.
Identifying more specifically which laws or regulations were applied
differently by the compliance programs would require an investment to
gather and analyze additional data. For instance, in table 1 we identified
the handling of a state tax refund as an example of differing applications
of tax laws and regulations. To determine whether this is a common problem
or an isolated instance, officials would have to investigate the issue by,
for example, drawing a random sample of cases or questioning first-line
managers and staff. Because these differing applications span a host of
laws and regulations across IRS's compliance programs, the corrective
action that might be taken may only affect a relatively small number of
cases. In complex cases, Appeals and the compliance managers may need to
work together to develop a mutual understanding of how laws and
regulations should be applied.

13Cases may have multiple reasons for closing because a case may include
more than one possible instance of noncompliance. Generally, each issue is
analyzed separately on its merits and the appeals determination may be
based on separate reasons for each issue.

Page 9 GAO-06-396 Appeals Feedback

Table 1: Reasons Appeals Did Not Fully Sustain Compliance Decisions,
Percentage of Nonsustained Cases in GAO's Sample by Reason, and
Illustrative Examples, Fiscal Year 2004

Percentage of        
Reason Appeals did   cases not fully
not fully sustain    sustained based
compliance decision  on the reason Illustrative case examples              
                                  a,b 
Application of laws                Examination revised taxable income to   
or                              52 include the state refund for the prior  
                                      year.                                   
regulations                        Appeals determined that the taxpayer    
                                      had not itemized on his or her federal  
                                      return for                              
                                      the prior year and received no tax      
                                      benefit. Therefore, examination should  
                                      not have                                
                                      included the refund in taxable income.  
Additional                         Examination disallowed a taxpayer's     
information                     44 dependency exemptions and Earned Income 
                                      Tax                                     
provided by the                    Credit (EITC) in a correspondence       
taxpayer                           examination of the tax return. On       
                                      appeal, the                             
or not accepted by                 taxpayer presented supporting           
                                      documentation, including birth          
                                      certificates and school                 
compliance                         records, to substantiate the claim.     
Original audit work                The taxpayer contended that he or she   
or                              14 was not liable for a tax assessment     
                                      since the                               
significant rework                 taxpayer had lost his or her wallet and 
by                                 someone else used the taxpayer's Social 
Appeals                            Security Number to file the return. The 
                                      taxpayer filed in Tax Court. Since the  
                                      case had                                
                                      not been reviewed by Appeals, Chief     
                                      Counsel forwarded the case to Appeals   
                                      for review.                             
                                      Appeals determined that the taxpayer    
                                      was not liable for the deficiency since 
                                      the                                     
                                      taxpayer was the victim of identity     
                                      theft.                                  
Taxpayer not                       Examination determined that a taxpayer  
responsive                      13 had not filed a tax return and thus     
                                      incurred a                              
to compliance                      tax deficiency. Both compliance and     
                                      Appeals requested the tax return. The   
                                      taxpayer                                
                                      did not submit the tax return until the 
                                      case was sent to Chief Counsel to       
                                      prepare for a                           
                                      Tax Court hearing. Once the tax return  
                                      was processed, the taxpayer was due a   
                                      refund.                                 
Hazards of                         Failure to file and related penalties   
litigation                      13 imposed against the taxpayer were       
                                      abated when the                         
                                      taxpayer presented unique and           
                                      sympathetic facts (e.g., the            
                                      corporation was a nonprofit             
                                      organization primarily using volunteer  
                                      workers) that would be a hazard if the  
                                      case                                    
                                      proceeded to litigation.                
                                      Taxpayer requested a Collection Due     
Appeals changed                 11 Process hearing because he or she       
                                      wanted an                               
collection                         alternative method of collection other  
alternative                        than the levy proposed by compliance.   
                                      During                                  
                                      the appeal, the taxpayer requested and  
                                      entered into an installment agreement   
                                      that                                    
                                      allowed the taxpayer to pay the         
                                      delinquent tax over time through        
                                      periodic payments.                      

Source: GAO sample of Appeals cases.

a These percentages are based on a subset of 63 nonsustained cases. The
margin of error for these estimates is larger than for the sample as a
whole. Confidence intervals are shown in appendix I.

bSince a case can have multiple reasons why it is not sustained, the
percentage of cases not fully sustained does not total to 100 percent.

As also shown in table 1, we estimate that Appeals did not sustain
compliance decisions in 44 percent of the cases because the taxpayer
provided additional information to Appeals. For cases in this category,
officials would need to investigate whether compliance staff could have
done more to obtain the information needed to resolve the tax before the
case was appealed. For example, compliance managers might assess whether
staff clearly articulated the type and extent of information needed,

    Improved Decision Making Would Benefit Compliance Programs, Appeals, and
    Taxpayers

gave the taxpayer sufficient time to respond, or received the information
but did not use it appropriately to resolve the case.

Similar data gathering and analysis would be needed for the other reasons
we identified for Appeals not sustaining cases in order for the
information to be useful in improving compliance's decision making. For
example, for cases where Appeals had to perform original audit work or
significant rework, compliance managers would need to identify why their
staff did not perform the necessary work while the case was still their
responsibility. For cases where Appeals accepted a collection alternative,
compliance managers might assess whether it was because the taxpayer had
not requested an alternative, the taxpayer's financial circumstances had
changed since compliance worked on the case, or a request for an
alternative was inappropriately rejected by compliance staff. For cases
where taxpayers did not respond to compliance, compliance managers might
assess whether staff had made sufficient attempts to contact the taxpayer.

As shown in table 2, the appeal rate--the percentage of cases
appealed--varies across Appeals' workstreams from 29 percent for LMSB's
Coordinated Industry Case program (CIC) cases to one-tenth of 1 percent
for cases in the Penalty Appeals and Other workstreams.14 Managers of
programs with high appeal rates told us that they would benefit from
Appeals feedback information in improving decision making. For example,
with relatively high appeals rates and complex tax issues frequently
considered in both the Industry Case (IC) and CIC programs, LMSB managers
believe that Appeals case result information is important for managing
their programs to update policies and procedures, modify or assess new
training needs, or identify needed changes in the tax law.15 Similarly,
Offer-in-Compromise program managers say they have benefited from working
with Appeals staff on studies analyzing why cases were not sustained by
Appeals. One study indicated that compliance managers and Appeals needed
to reevaluate or reinforce some of their policies as well as be more
consistent in following established procedures for assessing

14The CIC program examines the largest corporate taxpayers in the United
States using a team of revenue agents rather than a single agent.

15The IC program examines corporations with $10 million or more in assets
that are not in the Coordinated Industry program.

Page 11 GAO-06-396 Appeals Feedback

financial information, such as calculating transportation expenses,
establishing the value of cars, and estimating future income.

Table 2: Comparison of the Composition of Appeals Workload, Rate of
Compliance Cases Appealed, Percentage of Appeals Workload, and Cases Not
Fully Sustained

                                                                   GAO sample
               Number of appeals              Percentage   Number  percentage 
                                              of cases                     of 
                 cases closed in   Percentage compliance    of      cases not 
                                           of closed       cases        fully 
                                                            in    
Appeals workstreams    fiscal Appeals       that are    GAO's    sustained 
                       year 2004 workload      appealed   sample  
Coordinated               653          0.6          29    N/Aa        N/Aa 
Industry                                                       
Case                                                           
Offer-in-Compromise    17,887         17.2          13      28         14b 
(OIC)                                                          
Industry Case (IC)        670          0.6          14    N/Aa        N/Aa 
Innocent Spouse         4,713          4.5           8       7         57c 
(IS)                                                           
Collection Due         32,226         31.0           1      53         19a 
Process                                                        
(CDP)                                                          
Exam/TEGE              28,592         27.5         0.4      40         73b 
Penalty Appeals        14,647         14.1         0.1      16         69c 
Other                   4,558          4.4         0.1       9         56c 
Total                 103,946          100         0.3     153          41 

Source: GAO sample of Appeals cases closed during fiscal year 2004, IRS
Data Book 2003, and IRS data.

aN/A means not applicable. IC and CIC workstreams are not included in our
sample because these cases are very complex and the supporting
documentation is voluminous. See appendix I.

bGAO's sample results for three workstreams--Collection Due Process,
Exam/TEGE, and Offer-in-Compromise--are statistically generalizable to the
specific workstream population. The rate of cases not fully sustained for
Exam/TEGE differs from Collection Due Process and from Offer-in-Compromise
cases. The margin of error for these estimates is larger than for the
sample as a whole due to the smaller sample sizes when looking at each
workstream separately. Confidence intervals are shown in appendix I.

cGAO's sample results for Innocent Spouse, Penalty Appeals, and Other are
not statistically generalizable because the sample sizes were not large
enough. Consequently, these workstream results apply only to cases in our
sample.

Managers of programs with low appeal rates may not see as much benefit in
obtaining feedback from Appeals. With an appeal rate of less than onehalf
of 1 percent, managers in W&I, the source of many cases in the Exam/TEGE
workstream, explained that they had limited interest in devoting resources
to analyzing Appeals feedback information, although they would review any
analysis Appeals provided to them. Managers told us that, given the
challenges facing W&I, they needed to focus resources on other issues.

However, although managers might not see much direct benefit for their
programs, reducing the appeal rate for compliance programs could benefit
Appeals. As shown in table 2, the Exam/TEGE, Penalty Appeals, and Other
workstreams have appeal rates of less than 1 percent, but the cases from
these three workstreams make up about half of Appeals' workload. In
addition, the cases that are appealed are generally not fully sustained.
The percentage of cases in our sample that were not sustained ranged from
73 percent for Exam/TEGE to 56 percent for the Other workstream.16 From
Appeals' perspective, improving case results in these workstreams could
represent a target of opportunity for reducing its case load and
increasing its efficiency. Analysis of our sample found that across all
workstreams, Appeals cases that are fully sustained require about half of
the staff hours of cases that are not fully sustained.

If providing feedback to compliance programs improved their decision
making, taxpayers would benefit as well. For example, if compliance
programs used feedback information to improve their understanding of how
to apply tax laws and regulations, they could reduce the number of
taxpayers requesting an appeal and therefore resolve cases more quickly
and with more uniform decisions. Further, since Appeals managers said some
taxpayers decide not to pursue an appeal even though they disagree with a
compliance decision, more consistent application of the tax laws or
regulations could also improve the fairness and accuracy of their
outcomes.

The Exam/TEGE workstream can be used as a hypothetical example of the
potential effect of these benefits. If the quality of compliance case
decisions were to improve and as a result the percentage of cases fully
sustained in Appeals were to increase from 28 percent to 38 percent,
Appeals would save an estimated 7 staff years.17 Another potential cost
saving would result if fewer taxpayers appealed because the quality of
compliance case decisions improved. For example, if the number of cases

16Our sample results for Innocent Spouse, Penalty Appeals, and Other are
not statistically generalizable because the sample sizes were not large
enough. Consequently, these workstream results apply only to cases in our
sample.

17Estimate is based on our sample of Appeals cases closed in fiscal year
2004. We estimate the savings would be 6.7 staff years and are 95 percent
confident that the savings would be between 1.1 and 12.3 staff years.

Page 13 GAO-06-396 Appeals Feedback

    More Systematic Data Analysis Would Help to Identify Useful Feedback

from the Exam/ TEGE workstream that are appealed fell by 10 percent,
Appeals would save an estimated 17 staff years.18

Identifying which compliance programs would benefit most from feedback is
important given that Appeals hears a wide variety of cases, the cases are
spread across the operating divisions, and Appeals does not fully sustain
cases for a variety of reasons. This dispersion means that in some
situations the costs IRS would incur to analyze Appeals data and devise
and implement improvements in operations may not be justified given how
few cases could be affected.

When analyzing our case sample, we found that overall (1) about half of
all not fully sustained cases cited either the application of laws and
regulations or additional information as the reason for nonsustention and

(2) certain workstreams have significantly higher nonsustention rates than
others. As shown in table 3, by considering these two facts in
combination, we found that two workstreams-Penalty Appeal and
Exam/TEGE-had a large percentage of cases that were not sustained for
these two reasons. Other information already available might also be used
to identify the most promising areas in which to conduct feedback
projects. For example, those cases that are most costly to Appeals to work
on, measured for instance by staff hours per case, may yield the most
savings to Appeals if the cases could be resolved in the compliance
programs without an appeal being made. Appeals and compliance programs
have been selecting their projects more on the basis of manager judgment
than through data analysis, such as those cases described above.

18Estimate is based on our sample of Appeals cases closed in fiscal year
2004. We estimate the savings would be 16.7 staff years and are 95 percent
confident that the savings are between 12.4 and 21.1 staff years.

Page 14 GAO-06-396 Appeals Feedback

Table3: Reasons that Appeals Did Not Fully Sustain Compliance Program
Decisions, Percentage of Cases Not Fully Sustained, Sample of Cases Closed
in Fiscal Year 2004

                     Percentage of issues cited in cases not fully sustaineda
Reason Appeals did not fully            Innocent Penalty Exam/
sustain                                                  
compliance decisionb            CDP OIC  Spouse  Appeals TEGE  Other Total 
Application of laws or          3.2 2.2      4.3     9.7 12.9   3.2   35.5 
regulations                                                          
Additional information provided                                      
by the                                                               
taxpayer or not accepted by     4.3   1.1      0.0   1.1  20.4  3.2   30.1 
compliance                                                           
Original audit work or                                               
significant rework by                                                
Appeals                         2.2   0.0      0.0   1.1  5.4   1.1    9.7 
Taxpayer not responsive to      3.2   0.0      0.0   0.0  5.4   0.0    8.6 
compliance                                                           
Hazards of litigation           0.0   0.0      1.1   3.2  3.2   1.1    8.6 
Appeals changed collection      5.4   1.1     N/Ac   N/Ac N/Ac  1.1    7.5 
alternative                                                          
Total                                                                  100 

Source: GAO sample of Appeals cases.

aThe 63 cases not fully sustained from the sample of 153 cases cited 93
reasons for nonsustained cases. Totals many not add due to rounding.

bConfidence intervals for the Penalty Appeals and Exam/TEGE application of
laws and regulations and additional information provided by the taxpayer
or not accepted by compliance for Exam/TEGE are presented in appendix I.
Confidence intervals for the other cells are not provided because the
sample size is not large enough to project results.

CN/A means not applicable. These cells are not applicable because Innocent
Spouse, Penalty Appeals, and Exam/TEGE are Appeals workstreams related to
tax assessments, and the alternatives for the collection of delinquent tax
do not apply.

As discussed earlier, Appeals and compliance program managers will need to
sort through possible reasons why some areas appear to have high levels of
nonsustained cases. This may require several iterations of data analysis,
discussion, and manager judgment.

Once officials have identified the areas with the greatest potential for
improvement, Appeals and compliance programs can explore low-cost avenues
for using feedback information. For example, in two of the three
workstreams with the highest percentage of appealed cases, Appeals and
compliance programs have completed some projects based on Appeals case
results. The joint study on Offer-in-Compromise cases not sustained by
Appeals was conducted by a small team of compliance and Appeals staff and
involved the review of 113 cases in 1 week. In contrast, Appeals and LMSB
concluded that jointly reviewing fully conceded issues in the CIC program
was too expensive because these cases can involve numerous complex issues.
Rather, Appeals has started to provide to LMSB all Appeals Case
Memorandums (ACM) as a low-cost solution for providing

  Appeals Can Build on Existing Efforts to Improve the Feedback Project

the information to target possible areas needing improvement.19 However,
Appeals has not yet explored potential avenues for using feedback
information in other large worksteams, such as Penalty Appeals.

Appeals has taken several steps to launch and begin expanding the feedback
project. As Appeals and compliance managers gain experience in analyzing
and using feedback information, Appeals, in partnership with compliance
managers, can build upon those efforts by identifying the additional
feedback information that needs to be shared and further developing
results-oriented objectives. In addition, potentially useful feedback data
contain errors that undermine their usefulness.

    Appeals Is Providing Some Feedback Based on Officials' Initial Judgments of
    Its Needs

Appeals has taken several steps to launch and expand the feedback project.
For example, officials are sending ACMs to certain compliance programs.
During 2005, Appeals started to send ACMs to

     o LMSB Industry Case and Coordinated Industry Case programs,
     o W&I for the Innocent Spouse and EITC programs,
     o SB/SE for the Collection Due Process, Offer-in-Compromise, and
       International Examination programs, 20 and
     o TE/GE for some Exempt Organizations cases.

The Collection Due Process program also receives some summary-level
information on whether the taxpayer and Appeals agreed on the outcome of
an appeal as well as the Appeals inventory level. Appeals and the
compliance programs are working together to determine which additional
programs should receive specific feedback information.

19ACMs document Appeals' decision in a case and explain why Appeals
decided to either sustain or overturn compliance decisions. ACMs typically
include an analysis of the facts and the applicable tax laws and
regulations for the case.

20The EITC is a refundable tax credit originally intended to offset the
burden of Social Security taxes and provide a work incentive for
low-income taxpayers. The IC, CIC, Innocent Spouse, Collection Due
Process, and Offer-in-Compromise programs are described in appendix II.

    Partnership with Compliance Programs Could Help Ensure That Feedback
    Information Will Be Used to Achieve Desired Program Results

In addition, Appeals and compliance programs' staff meet regularly through
advisory board meetings. The advisory boards were created to focus on
important cross-functional issues, solve problems, identify new issues
arising in the compliance programs, and generally maintain close working
relationships. For example, as previously discussed, Appeals and the SB/SE
collection staff jointly worked on a review of Offer-In-Compromise cases
to determine why Appeals accepted some offers that the compliance program
rejected and are considering similar efforts with other compliance
programs.

Generally, decisions on what information to initially share with the
compliance programs have grown out of discussions between Appeals and
compliance staff and reflect their best judgment about the information
that likely will help the compliance programs improve case results.
Appeals and the compliance programs are still determining what additional
feedback information should be shared. Appeals, in coordination with the
compliance programs, is revising its case closing documents to provide
additional information describing the basis for the resolution of a case.
For example, Appeals is working with the compliance programs to provide
information on whether additional information was considered by Appeals,
cases were closed based on hazards of litigation, or taxpayers did not
respond or delayed their responses. Compliance program managers told us
that providing more detailed information tailored to their needs will help
them to improve their results. Appeals plans to implement a revised
Appeals case closing system during 2006. Appeals managers believe, and we
agree, that the compliance programs will likely identify additional
information needs in the future as they begin to analyze and use the
information. For example, some compliance managers have told us that
information on sustention rates would be useful. However, Appeals' has no
plans to develop this information.

Although Appeals has worked with the compliance programs on many aspects
of the feedback project, Appeals developed the objectives and performance
measures for the feedback project with relatively little input from the
compliance programs. After initially developing the objectives and
measures, Appeals distributed them to compliance program representatives
for comment but received little response. Appeals officials therefore
concluded the compliance programs agreed with the objectives and measures.

Best practices in strategic planning, of which setting objectives is a
part, call for the involvement of stakeholders.21 In the case of the
feedback project, involving the compliance programs in establishing the
project objectives is particularly important because the programs
themselves must play active roles in the project to make any changes that
will improve their case results. Appeals officials acknowledge that
mutually agreed upon objectives and measures would increase the likelihood
that compliance programs would use the feedback information provided.

However, gaining consensus may not be easy. The following illustrates the
importance of involving the compliance programs in these decisions and of
the potential difficulties that could arise. Appeals could adopt an
objective for the feedback project of improving the sustention rate for
compliance program cases that go to Appeals. That is, if the quality of
compliance decisions is improved through feedback of Appeals case results,
more appealed cases should be upheld. However, some of the compliance
program officials we interviewed do not want improvement in the sustention
rate to be an objective for a variety of reasons. For example, officials
note that Appeals can change a case result for reasons that are out of
their control. As discussed before, Appeals is authorized to close cases
based on hazards of litigation and compliance programs are not. As a
result, compliance managers are concerned that including cases closed
based on hazards of litigation as part of a sustention rate would be
unfair. Other managers do not agree that Appeals always makes the correct
decisions on compliance cases. Thus, the active involvement of compliance
program officials in the selection of objectives would be important to
determining the strengths and weaknesses of potential objectives.

Further, the involvement of compliance programs in establishing objectives
and project measures may better ensure that the feedback project is
focusing on desired results. As defined by Appeals in April 2005, the
objectives of the case feedback project are to

     o build strong relationships between Appeals and operating divisions and
       functions,
     o capture and share trend data,

21GAO, Executive Guide: Effectively Implementing the Government
Performance and Results Act, GAO/GGD-96-118 (Washington, D.C.: June 1996),
p. 13.

Page 18 GAO-06-396 Appeals Feedback

     o analyze trend data-and provide meaningful commentary to the operating
       divisions and functions, and
     o influence operating division policy and procedure.

Although these objectives indicate some of the activities that are
integral to feedback sharing and a desired outcome--influence on operating
divisions' policies and procedures--involving the operating divisions in
considering program objectives would provide an opportunity to build on
these objectives to more fully define the results intended for the
feedback project. The Commissioner did not specify the benefits that he
thought should result from sharing of Appeals case information with the
operating divisions and their compliance programs. However, as discussed
earlier, sharing this information has the potential to improve the
operations of the divisions and, consequently, the quality of their case
decisions, potentially increasing the case sustention rate and taxpayer
satisfaction with the Appeals process while also decreasing the time to
complete an appeal. In addition, sharing information may also improve
Appeals' decision making by, for example, clarifying IRS's interpretation
of new or particularly complex tax laws so that both Appeals and
compliance managers apply them consistently. By working with the
compliance programs, Appeals would have the opportunity to further refine
the project objectives to more specifically identify which of these
possible results-oriented improvements are being sought by the project.
For example, as mentioned earlier, the Merit Systems Protection Board has
set a performance goal of maintaining or reducing its low percentage of
appealed decisions that are reversed or sent back to the board. To the
extent that new objectives are identified, Appeals and the compliance
programs would need to ensure that appropriate performance measures are
developed to track progress toward those objectives.

Project Is Correcting Flaws When we compared data in Appeals' Centralized
Database System in Data, but Sufficient (ACDS)22 to documentation in
closed Appeal case files, we found Internal Controls to Monitor
significant error rates related to data that would be used for a case and
Verify Data Not Yet feedback project. The highest error rates in the
fields were related to the

    Developed

22ACDS is a computer-based system used to control and track cases
throughout the appeal process. It generates Appeals management statistics
and reports.

Page 19 GAO-06-396 Appeals Feedback

results of an appeal, such as in the revised tax, revised penalty amounts,
or case-closing code field.23 For example, 14 percent of the cases
contained errors in the revised tax field. These errors related to the
outcome data that likely would be included as part of any feedback
information provided to the compliance programs and would diminish the
information's usefulness to compliance program managers. Further, 12 of
165 cases (7 percent) could not be analyzed because the files could not be
located or essential Appeals documents were not available.24

On the basis of error rates identified, we reviewed internal controls25
for processing case results data and identified several internal control
weaknesses that may have contributed to inaccurate data in ACDS. For
example, we were informed by Appeals that some appeals officers, who are
responsible for working the taxpayers' case, did not verify that ACDS
data, such as the amount of tax or penalty owed by the taxpayer, was
entered into ACDS accurately. Appeals policy requires that the appeals
officers verify the key data in ACDS, such as the statute of limitations
date, when a case is received. When a case is completed, Appeals
procedures require the case manager, who supervises the appeals officer,
to review and sign case-closing documents, which include data such as the
amount of proposed tax or penalty and case-closing code. The closed-case
data are then entered into the ACDS information system by the Appeals
Processing Services staff. According to Appeals, once the case is sent to
Processing Services for data entry, the appeals officer and case manager
generally do not see the case again and do not know whether the closing
data have been entered into ACDS accurately. Appeals guidance does not
require that the appeals officer or Processing Services staff verify
whether the data were accurately entered.

According to Processing Services staff, appeals officers may not ensure
that case-closing documents are complete. For example, data, such as the
amount of revised tax or penalty (the amount of tax or penalty as
determined by Appeals) or the closing code, may not be entered on the

23The case-closing field primarily describes whether the taxpayer agreed
or disagreed with Appeals' determination and whether the case was appealed
to court. For some workstreams, closing codes also describe whether
Appeals sustained the case.

24Another ongoing assignment also has not located a significant percentage
of Appeals files. A subsequent study will more fully analyze the issues
related to unavailable case files.

25Agencies establish internal controls to prevent and detect errors and
fraud.

Page 20 GAO-06-396 Appeals Feedback

closing document by the appeals officers. Processing Services staff said
that in these cases, they must review the case file to determine the
correct closing data and enter that data into ACDS. The staff stated that
identifying the correct data may be difficult in complex cases.

Other internal controls only partly compensate for the lack of data entry
verification. Appeals performs an annual Inventory Validation Listing
process for open cases where critical fields in ACDS are verified and
errors identified are corrected in ACDS. Since only open cases are
reviewed, fields with closing data, such as revised tax, revised penalty,
and closing code, are not reviewed. These closing fields are critical to
the feedback loop process and without verification inaccurate data could
be sent to the compliance programs.

Appeals is making efforts to improve the accuracy of the data in ACDS.
Appeals, for the first time, completed a data reliability study of ACDS in
2005. This study consisted of a random probability sample of 1,568 Appeals
cases where data fields that were considered critical or were used daily
were tested. From the study, Appeals identified data accuracy and internal
control issues that were consistent with our findings. Appeals found that
some fields in ACDS had lower than expected accuracy rates. For example,
the revised tax field for the Innocent Spouse workstream had an accuracy
rate of 71.9 percent, while the revised penalty field for the Other
workstream was 78.1 percent.26 Appeals also identified that improvements
were needed in (1) internal controls including training of Processing
Services staff on ACDS input procedures, (2) ACDS data fields with lower
than expected accuracy rates, and (3) Appeals' section of the Internal
Revenue Manual, which includes guidelines for standard data accuracy
reviews.

Appeals has been revising its database and related data entry procedures
to improve the accuracy of the data in ACDS. Case-closing documents are
being redesigned in a computer-based format so that only data which are
appropriate to the case under appeal could be selected, thus reducing the
potential for errors. Although Appeals is making efforts to improve the
accuracy of the data in ACDS, it has not completed plans to address all of
the identified data accuracy issues. Appeals will likely continue to

26Appeals is 95 percent confident that for the revised tax field, the
actual proportion is between 65.0 and 78.7 percent, and for the revised
penalty field, the actual proportion is between 71.9 and 84.3 percent.

Page 21 GAO-06-396 Appeals Feedback

                                  Conclusions

  experience data accuracy issues unless it improves its internal controls to
verify, on an ongoing basis, the accuracy of case data entered into ACDS.

Using the results of Appeals case outcomes has the potential to improve
compliance programs' case results and service to taxpayers with benefits
that could accrue to the divisions, Appeals, and taxpayers. Nevertheless,
given the scope of Appeals' work, careful targeting of investments to use
Appeals information is needed to ensure that the benefits will be
significant enough to justify the costs IRS incurs to collect and analyze
Appeals data and make changes in policies, procedures, or practices based
on those analyses. Because relatively few compliance program cases may be
affected by the use of some Appeals feedback information, officials need
to be judicious in selecting topical areas to study. Opportunities exist
to move beyond professional judgment in selecting these areas to a more
datadriven approach.

However, to maximize the benefits of sharing Appeals information, as
intended by the Commissioner, the officials need to better define what the
program is intended to achieve and how results will be measured. Appeals
and the compliance programs need to enter into an active partnership to
develop results-oriented objectives and associated performance measures
for the feedback project. Finally, the feedback project must be built on
reliable data, which requires that better internal controls be instituted
to drive down the error rates in key data that will be provided to the
compliance programs.

We are making recommendations to the Commissioner of Internal Revenue

  Recommendations

to ensure that the feedback project reaches its maximum potential in
improving case results. Specifically, we recommend that the Commissioner
direct Appeals

     o in partnership with the compliance programs, to analyze Appeals
       caseresults data, such as the workstream sustention rates, reasons for
       nonsustention, or staff hours spent per case, to identify areas in
       which improvements are likely to generate the greatest benefits to the
       compliance programs, Appeals, and taxpayers;
     o in partnership with the compliance programs, to further investigate
       the most promising areas and assess whether actions, such as
       additional

  Agency Comments and Our Evaluation

guidance or training, are needed to improve the quality of compliance
programs' case decisions;

     o in partnership with the compliance programs, to further develop
       resultsoriented objectives and associated performance measures for the
       feedback project; and
     o to build upon its current efforts to improve the quality of Appeals
       information for the feedback project by establishing internal controls
       to verify, on an ongoing basis, the accuracy of the data entered into
       Appeals information systems on case results.

The Commissioner of Internal Revenue provided written comments on a draft
of this report in a March 6, 2006, letter which is reprinted in appendix

V. The Commissioner agreed with our recommendations and said they will
help IRS develop a much stronger feedback program.

With regard to the first recommendation, the Commissioner said IRS would
continue quarterly meetings between the operating divisions and Appeals
and report national-level feedback data at least annually to identify
specific compliance programs where shared benefits would be realized. We
agree that these actions would be a first step toward implementing the
recommendation. However, as discussed in the report, more systematic data
analysis would help Appeals and the compliance programs identify areas
more likely to realize the benefits of using feedback data. As discussed
in the Commissioner's comments, this may involve reviewing external data,
such as the National Taxpayer Advocate's reports, as well as other data to
identify areas that may yield the most savings to IRS if the cases were
resolved in the compliance programs without appeals. The analysis of
existing data is a necessary step toward tailoring analyses to each of
IRS's compliance programs.

As agreed with your offices unless you publicly announce its contents
earlier, we plan no further distribution of this report until 30 days
after its issue date. At that time, we will send copies of this report to
the Secretary of the Treasury, The Commissioner of Internal Revenue, and
other interested parties. Copies will be made available to others upon
request. This report is 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 Jonda Van Pelt, Assistant Director, at (415) 904-2186. We can
also be reached by e-mail at [email protected] or [email protected],
respectively. 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 were Carl Barden, Evan Gilman, Leon Green,
Shirley Jones, Laurie King, Ellen Rominger, and Michael Rose.

Michael Brostek Director, Tax Issues Strategic Issues Team Appendix I

                       Objectives, Scope, and Methodology

Our objectives were to determine whether (1) information on Appeals
results has the potential to provide useful feedback to the Internal
Revenue Service (IRS) operating divisions to benefit compliance programs,
Appeals, and taxpayers through better case resolution and (2) the feedback
project was being effectively managed to maximize its potential to improve
IRS's performance and thereby reduce disputes with taxpayers.

To determine whether information on the results of Appeals cases has the
potential to provide useful feedback and whether the feedback project is
being effectively managed, we interviewed 24 Appeals executives, managers,
and staff who work with compliance program staff on feedback issues,
coordination, or information systems issues. We also interviewed 58
compliance program executives, managers, and staff selected by operating
division liaisons to represent their compliance programs because of their
familiarity with Appeals issues. We discussed with these officials the
type of feedback data that are being collected by Appeals and sent to the
compliance program officials as well as the type of feedback data
compliance program officials would like to receive from Appeals. We
reviewed documents provided by Appeals on the feedback project.

We reviewed the Appeals Centralized Database System (ACDS) to determine
whether it contained sufficient case results information. We found that it
did not contain sufficient information for our analyses, such as whether
Appeals agreed with the compliance decision. Therefore, to develop this
information, we selected a random probability sample of case files to
review. The sample was drawn from an initial population of 103,946 Appeals
cases closed in ACDS for fiscal year 2004. However, since Industry Case
(IC) and Coordinated Industry Case (CIC) cases, which originate from IRS's
Large and Mid-Size Business Division (LSMB), are complex and the
supporting documentation is voluminous, we excluded these 1,323 cases from
the population. Therefore, the final population size was 102,623 cases.

Of the 165 cases selected in our sample, we reviewed 153 cases to
determine the results of the cases. The remaining 12 cases could not be
analyzed because the files could not be located or essential Appeals
documents were not available. We assessed the known characteristics of the
12 cases not received against those of the 153 received for potential
systematic differences. Based on this nonresponse bias analysis, we
concluded that it was acceptable to treat the 12 cases as missing at
random.

Appendix I Objectives, Scope, and Methodology

We reviewed documents, such as the Appeals Case Memorandum and the Case
Activity Record, and determined whether the cases were fully sustained,
partially sustained, or not sustained. In determining the extent to which
a case was sustained, we based our decision on the determination made by
Appeals in the Appeals Case Memorandum using the following scale: "fully
sustained" indicated that in our judgment Appeals agreed with compliance
on all issues appealed by the taxpayer; "partially sustained" indicated
that Appeals agreed with at least one but not all of the issues; and "not
sustained" indicated that Appeals did not agree with any of the issues. We
also reviewed the cases to determine the reasons the cases were not
sustained by Appeals. Since cases could include several compliance issues,
there may have been multiple reasons why a case was not sustained. We
recorded each decision and the reason for the decision cited in the
Appeals case file for a case not being sustained on a data collection
instrument (DCI) that we developed. The analysts who participated in
reviewing the case files and recording the information on the data
collection instrument were knowledgeable about the appeals process and how
to interpret the information in the case files.

To ensure that the data entered on the DCIs conformed to GAO's data
quality standards, each completed DCI was reviewed by at least one other
GAO analyst. The reviewer compared the data recorded on the DCI to the
data in the case files to determine whether he or she concurred with the
interpretation of the case files and the way the data were recorded on the
DCI. When there were differing perspectives, the analysts met and
reconciled them.

Tabulations of the DCI items were automatically generated using a
statistical software package to develop case outcome information. For
these analyses, the computer programs were checked by a second,
independent analyst.

We developed case outcome information for each of the Appeals workstreams
except IC and CIC. For the CDP, Exam/TEGE, and OIC workstreams, our sample
sizes were large enough to generalize the results separately for each
workstream, or to have a margin of error small enough to produce
meaningful workstream estimates.

Because we followed a probability procedure based on random selection, our
sample is only one of a large number of samples that we might have drawn.
Since each sample could have provided different estimates, we express our
confidence in the precision of our particular sample's results as

                 Appendix I Objectives, Scope, and Methodology

a 95 percent confidence interval, plus or minus 8 percentage points. This
is the interval that would contain the actual population value for 95
percent of the samples we could have drawn. For example, Appeals did not
sustain 41 percent of the cases in the sample, which has a 95 percent
confidence interval of 33 percent as a lower bound and 49 percent as an
upper bound. Workstream estimates come from subsets of the sample. Thus
workstream-specific estimates have larger confidence intervals due to the
smaller sample size. Tables 4, 5, and 6 present the confidence intervals
for sample data presented in the report.

                   Table 4: Confidence Intervals for Table 1

                                           Percentage of Confidence intervals
                                         cases not fully 
Reason Appeals did not fully sustain        sustained Lower bound    Upper
compliance decision                                                  bound
Application of laws or regulations                 52         40.0    64.8
Additional information provided by the             44         32.1    56.8
taxpayer or not accepted by                                        
compliance                                            
Original audit work or significant rework          14      6.7        25.5 
by Appeals                                                           
Taxpayer not responsive to compliance              13      5.6        23.6 
Hazards of litigation                              13      5.6        23.6 
Appeals changed collection alternative             11      4.5        21.7 

Source: GAO.

Note: Based on a subset of 63 cases not sustained by Appeals.

                   Table 5: Confidence Intervals for Table 2

                           GAO sample:                  Confidence intervals
                 percentage of Appeals Number of cases  
                                       in the           
                       cases not fully sample for this  
Appeals workstreams       sustained       workstream   Lower         Upper 
                                                          bound         bound 
Offer-in-Compromise              14               28          4         33 
Innocent Spouse                  57                7         18         90 
Collection Due Process           19               53          9         32 
Exam/TEGE                        73               40         56         85 
Penalty Appeals                  69               16         41         89 
Other                            56                9         21         86 
Total                            41              153         33         49 
                          Source: GAO.                  

                 Appendix I Objectives, Scope, and Methodology

                   Table 6: Confidence Intervals for Table 3

                                  Penalty Appeals          Exam/TEGE
                              Confidence interval         Confidence interval
Reasons Appeals did   Percentage   Lower Upper Percentage not Lower  Upper
not fully                                                            
sustain compliance   not sustained bound bound   sustained    bound  bound
decision                                                             
Application of laws                                                  
and                                                                  
regulations                    9.7  4.5   17.6           12.9    6.8  21.5
Additional                                     
information provided                           
by the taxpayer or                             
not accepted                                   
by compliance                     1.1 N/A  N/A              20.4 12.8 30.1 

Source: GAO.

Note: N/A means not applicable because the confidence interval was not
computed.

To determine how effectively the feedback project was being managed, we
reviewed documents supplied by Appeals and compliance program officials,
such as meeting minutes for the advisory boards and strategic planning
documents. We also interviewed these officials and reviewed our prior work
on best practices for developing information that can be used to improve
agency performance.

To compute appeal rates, we compared compliance cases closed in fiscal
year 2003 by worksteam to the Appeals cases closed in fiscal year 2004.
Since Appeals typically required about a year to complete a case, the 2004
Appeals closings were cases that were most likely closed by compliance
programs during 2003. Further, IRS uses a similar approach to compute
audit rates. To identify the number of compliance cases by worksteam, we
used data published in IRS's fiscal year 2003 Databook. Data on cases
closed for the Innocent Spouse and Offer-in-Compromise workstreams was not
available in the Databook and was provided by IRS staff.

Data Reliability We assessed whether the case results data contained in
ACDS were sufficiently reliable for our use. We selected the first 100
cases from our random sample of 165 cases to make this determination. We
interviewed knowledgeable Appeals officials about the data, performed
electronic testing of relevant data fields for obvious errors in accuracy
and completeness, and collected and reviewed documentation about the data
and the system. We also reviewed prior Treasury Inspector General for Tax
Administration reports.

Appendix I Objectives, Scope, and Methodology

Of the 100 cases selected for our sample, we reviewed 92 cases from all of
the Appeals workstreams except as mentioned earlier, the IC and CIC
workstreams. The remaining 8 cases could not be analyzed because essential
Appeal documents were not available. We compared documents in closed
Appeals cases, such as the Appeals Case Memorandum, to data in ACDS.
However, Appeals did not always provide documentation for the basis of the
compliance determination; therefore, in some cases, we were unable to
determine if data, such as the amount of tax proposed by compliance, were
accurate.

We had Appeals verify data errors in fields that were specific to case
results information, such as the amount of revised tax and penalty, as
well as the closing code. Due to the high error rate of some data fields
in our sample, we reviewed internal controls used in the processing of
case results data at one Appeals area office. This review consisted of
observation and inquiry of Appeals officials on Appeals' case processing
procedures and review of Appeals documentation. We also spoke to officials
in Appeals headquarters concerning weaknesses identified in Appeals'
internal controls.

On the basis of our data reliability review of ACDS, we determined that
data in ACDS were not sufficiently reliable for our use. Instead of
relying on that data, we used data developed from our sample of Appeals
cases and continued our analyses of Appeals' internal controls.

We conducted our review at Appeals headquarters in Washington, D.C., and
one Appeals area office from October 2004 through October 2005 in
accordance with generally accepted government auditing standards.

Appendix II

Appeals Workstreams

Appeals' workload is organized into eight workstreams. These workstreams
include cases that have similar characteristics rather than reflecting the
IRS operating division where they originated. For example, cases in the
Collection Due Process workstream include only appeals by taxpayers under
provisions of the IRS Restructuring and Reform Act 1998, which authorizes
an independent review by Appeals of proposed levies and filed liens. These
cases could originate in either the Wage and Investment Division or the
Small Business and Self-Employed Division, since either division could
propose a levy or file a lien. Other workstreams include a wide range of
cases from across IRS operating divisions. The Exam/TEGE workstream
includes appeals for compliance actions, including recommended assessments
and proposed penalties originating from much of IRS's reporting and filing
compliance program, with the exclusion of LMSB cases. These appeals can
include diverse issues, such as recommended assessments related to the
Earned Income Tax Credit or large charitable organizations, such as
universities or hospitals. During fiscal year 2004, Appeals completed
nearly 104,000 cases. Table 7 describes these workstreams and the IRS
operating divisions where these cases where proposed.

Appendix II Appeals Workstreams

                  Table 7: Description of Appeals Workstreams

                                                        Appeals               
                                                          cases               
                                                      closed in 
Appeals                           Originating IRS     fiscal Percentage of
workstream     Definition         division (s)     year 2004 total cases
Collection Due The IRS            SB/SE W&I           32,226          31.0 
Process (CDP)  Restructuring and                             
                  Reform Act of 1998                            
                  authorized an                                 
                  independent review                            
                  by Appeals and by                             
                  the courts of                                 
                  proposed levies                               
                  and filed liens.                              
                  The taxpayers,                                
                  under some                                    
                  circumstances,                                
                  could have the                                
                  original                                      
                  assessment                                    
                  reviewed and can                              
                  request an appeal                             
                  for liens and                                 
                  levies that are                               
                  past the 30- day                              
                  period.                                       
Exam/TEGE This workstream includes appeals for tax disputes originating
with three of four IRS operating divisions' examination functions. The
workstream does not include cases originating in LMSB's Industry Case and
Coordinated Industry Case programs. This workstream includes cases from a
wide range of major IRS compliance programs, including the campus
compliance, field examination, exempt organization examinations, employee
plans examinations, international issues examinations, tax shelters, and
examinations of excise, employment, and estate and gift tax returns. W&I
SB/SE TE/GE 28,592 27.5 Offer-in- Compromise (OIC) The Internal Revenue
Code authorizes the Secretary of the Treasury to compromise tax debts
prior to reference to the Department of Justice for prosecution or
defense. Under current regulations, debts may be compromised if there is
doubt as to liability, doubt as to collectibility, and for effective tax
administration. Appeals cases in this workstream are primarily reviewed by
SBSE's centralized OIC collection functions at the Brookhaven and Memphis
campuses since offer cases may include taxpayers from each of IRS's four
operating divisions. SB/SE LMSB W&I TE/GE 17,887 17.2

Penalty Appeals Most of the requests in this workstream  W&I   14,647 14.1 
                   relate to requests                                    
                   for abatement of penalties for a         SB/SE        
                   taxpayer's failure to file,                           
                   failure to pay, and failure to deposit.  TE/GE        
                   Typically, these are                                  
                   penalties generated through automated    LMSB         
                   compliance tests.                                     
Innocent Spouse Under the Innocent Spouse program, one   W&I   4,713   4.5 
                   spouse requests                                       
                   relief from a joint tax liability after               
                   assessment because                                    
                   (1) a joint return had an understatement              
                   of tax due to                                         
                   erroneous items of the nonrequesting                  
                   spouse, (2) the                                       
                   requesting spouse did not know and had                
                   no reason to know                                     
                   there was a tax understatement at the                 
                   time the return was                                   
                   signed, and (3) taking into account all               
                   facts and                                             
                   circumstances, holding the requester for              
                   relief liable for the                                 
                   tax would be unfair. Appeals reviews                  
                   determinations after                                  
                   rejection by W&I.                                     

Appendix II Appeals Workstreams

(Continued From Previous Page)
                                                        Appeals               
                                                          cases               
                                                      closed in 
Appeals                          Originating IRS fiscal year Percentage of
workstream     Definition        division (s)           2004 total cases
Other          These include     W&I SB/SE LMSB        4,558           4.4 
                  appeals for       TE/GE                       
                  several other tax Disclosure                  
                  disputes that are                             
                  not included in                               
                  other Appeals                                 
                  workstreams.                                  
                  These cases                                   
                  include the                                   
                  Collection                                    
                  Appeals program                               
                  cases, trust fund                             
                  recovery penalty                              
                  cases, requests                               
                  for abatement of                              
                  interest, and tax                             
                  disclosure cases.                             
Coordinated    These are appeals LMSB                    653            .6 
Industry Case  related to the                                
                  recommended                                   
                  assessment of                                 
                  additional tax                                
                  and penalties for                             
                  the largest                                   
                  corporate                                     
                  taxpayers in the                              
                  United States.                                
                  These taxpayers                               
                  have been audited                             
                  by a team of                                  
                  revenue agents                                
                  rather than a                                 
                  single agent.a                                
Industry Case  These are appeals LMSB                    670            .6 
                  related to the                                
                  recommended                                   
                  assessment of                                 
                  additional tax                                
                  and penalties for                             
                  corporations with                             
                  $10 million or                                
                  more in assets                                
                  that are not in                               
                  the Coordinated                               
                  Industry Case                                 
                  program.a                                     
Total cases closed by Appeals                        103,946           100 

Source: GAO.

aAppeals cases from the Coordinated Industry Case and Industry Case
program were not included in our sample.

Appendix III

Appeal Rates

Taxpayers in each workstream requested Appeals of recommended assessments
or other compliance actions, such as proposed levies and filed liens, at
widely differing rates. To compute the appeal rate for each workstream, we
compared the number of compliance cases closed for each workstream to the
number of cases Appeals closed. We compared fiscal year 2003 compliance
case closings to fiscal year 2004 Appeals case closings because Appeals
averaged 260 calendar days during fiscal year 2004 to complete its work on
a case.1 For example, as reported in table 16 of the IRS Databook for
2003, during fiscal year 2003, IRS filed 548,683 notices of federal tax
liens, served 1,680,844 notices of levy, and made 399 seizures for a total
of 2,229,926 compliance actions. Each of these actions could be the basis
for a CDP appeal. During fiscal year 2004, Appeals completed work on
32,226 CDP cases, for an Appeal rate of 1.445 percent or 1 percent.

1This computation also follows the approach that IRS uses to compute audit
rates. For that computation, IRS compares the number of returns filed to
the number of audits closed in the following year.

Page 33 GAO-06-396 Appeals Feedback Appendix III Appeal Rates

             Table 8: Appeal Rates by Workstream, Fiscal Year 2004

                                                              Number of cases
                             Number of compliance          closed by  
                           cases closed in fiscal Appeals in fiscal   
Appeals workstream                   year 2003       year 2004 Appeal rate
CIC                                      2,287                 653      29 
IC                                       4,769                 670      14 
OICa                                   136,822              17,887      13 
ISb                                     57,606               4,713       8 
CDPc                                 2,229,926              32,226       1 
Exam/TEGEd                           6,926,956              28,592      .4 
Penalty Appealse                    17,827,467              14,647      .1 
Otherf                               6,078,884               4,558      .1 
Total                               33,264,717       103,946            .3 

Sources: GAO analysis of IRS data.

Note: Compliance cases closed in fiscal year 2003 are most likely to have
been closed by Appeals during fiscal year 2004.

aOffers received in 2003; offer closing data not available.

b Case closing data provided by IRS.

cNumber of liens filed and levy notices issued, rather than cases closed.

dTotal examinations, less IC and CIC examinations, plus Information
Returns program cases, EP/EO examinations, and EITC notices.

eExcluding employment tax penalties.

fTotal employment tax penalties. Total compliance cases closed in fiscal
year 2003 does not include disclosure appeals and abatement of interest.
Data on these compliance actions would not have a material effect on the
computation of the appeal rate.

Other approaches could be used to compute appeal rates. Our analysis used
compliance cases closed as the basis for measuring appeal rates because
(1) a uniform, published source of data was available and provided data on
six of the eight Appeals workstreams and (2) it broadly compares IRS
compliance programs to the Appeals program. Another approach for measuring
appeal rates, for example, could use only cases closed where IRS
recommended an additional tax assessment and not include cases where no
tax was proposed, because taxpayers would not have a basis for requesting
an appeal. In some programs this difference may be substantial. For
example, in the Offer-in-Compromise program, according to unpublished data
provided by IRS, 58 percent of fiscal year 2003 Offer-in-Compromise cases
were closed by Compliance because the offer was not processable or was
returned to the taxpayer. Accordingly, the taxpayer did not have a basis
for an appeal. Eliminating these cases from the Offer-In-

Appendix III Appeal Rates

Compromise cases closed in 2003 would more than double the appeal rate
from 13 percent to 31 percent.

However, limited data are available to use other approaches for computing
appeal rates. For example, about 30 percent of the cases closed in
Appeals' second largest workstream, Exam/TEGE, originated from the Earned
Income Tax Credit and the Automated Underreporter programs. Data were not
published on the proportion of these cases that were closed with
recommended assessments.

Appendix IV

Comments from the Commissioner of Internal Revenue

Appendix IV Comments from the Commissioner of Internal Revenue Appendix IV
Comments from the Commissioner of Internal Revenue Appendix IV Comments
from the Commissioner of Internal Revenue

Related GAO Products

Tax Administration, Planning for IRS's Enforcement Process Changes
Included Many Key Steps but Can Be Improved. GAO-04-287 . Washington,
D.C.: January 20, 2004.

Tax Administration, IRS Needs to Further Refine Its Tax Filing Season
Performance Measures. GAO-03-143 . Washington, D.C.: November 22, 2002.

IRS Modernization: IRS Should Enhance It's Performance Management System.
GAO-01-234 . Washington, D.C.: February 23, 2001.

Standards for Internal Control in the Federal Government. GAO/AIMD-
00-21.3.1 . Washington, D.C.: November 1999.

Executive Guide: Measuring Performance and Demonstrating Results of
Information Technology Investments. GAO/AIMD-98-89 . Washington, D.C.:
March 1998.

Executive Guide: Effectively Implementing the Government Performance and
Results Act. GAO/GGD-96-118 . Washington, D.C.: June 1996.

  GAO's Mission

The Government Accountability Office, the audit, evaluation and
investigative arm of Congress, exists to support Congress in meeting its
constitutional responsibilities and to help improve the performance and
accountability of the federal government for the American people. GAO
examines the use of public funds; evaluates federal programs and policies;
and provides analyses, recommendations, and other assistance to help
Congress make informed oversight, policy, and funding decisions. GAO's
commitment to good government is reflected in its core values of
accountability, integrity, and reliability.

The fastest and easiest way to obtain copies of GAO documents at no cost
is through GAO's Web site (www.gao.gov). Each weekday, GAO posts GAO
Reports and newly released reports, testimony, and correspondence on its
Web site. To

have GAO e-mail you a list of newly posted products every afternoon, go to
www.gao.gov and select "Subscribe to Updates."

                             Order by Mail or Phone

The first copy of each printed report is free. Additional copies are $2
each. A check or money order should be made out to the Superintendent of
Documents. GAO also accepts VISA and Mastercard. Orders for 100 or more
copies mailed to a single address are discounted 25 percent. Orders should
be sent to:

U.S. Government Accountability Office 441 G Street NW, Room LM Washington,
D.C. 20548

To order by Phone: Voice: (202) 512-6000 TDD: (202) 512-2537 Fax: (202)
512-6061

Contact:

To Report Fraud, Web site: www.gao.gov/fraudnet/fraudnet.htm

  E-mail: [email protected]

Federal Programs Automated answering system: (800) 424-5454 or (202)
512-7470

Gloria Jarmon, Managing Director, [email protected] (202) 512-4400 U.S.
Government Accountability Office, 441 G Street NW, Room 7125 Relations
Washington, D.C. 20548

Paul Anderson, Managing Director, [email protected] (202) 512-4800

  Public Affairs

U.S. Government Accountability Office, 441 G Street NW, Room 7149
Washington, D.C. 20548
*** End of document. ***