Tax Administration: Administrative Improvements Possible in IRS'
Installment Agreement Program (Letter Report, 05/02/95, GAO/GGD-95-137).

Pursuant to a congressional request, GAO reviewed the Internal Revenue
Service's (IRS) Installment Agreement Program, focusing on the: (1)
increase in installment agreements since IRS streamlined the processing
and approval of taxpayers' requests for installment agreements; (2)
effects these changes had on IRS collection activities; (3) internal
auditors' concerns regarding these changes; (4) information that IRS
provides taxpayers on their liabilities under installment agreements;
and (5) administrative practices that could improve the installment
agreement program.

GAO found that: (1) the 2.6-million new installment agreements approved
in fiscal year (FY) 1994 represented a 136-percent increase over the
number of FY 1991 installment agreements; (2) the amount of taxes paid
through new installment agreements increased 135 percent between FY 1991
and 1994 and accounted for 33 percent of the delinquent taxes paid in FY
1994; (3) installment agreement program changes have affected IRS
collection activities by reducing Automated Collection System
collections and the routine collection process' workload; (4) internal
IRS auditors have raised concerns about the ease of entering into
installment agreements and IRS failure to instruct taxpayers to amend
their withholding or estimated taxes to prevent future delinquencies;
(5) IRS may be permitting financially capable taxpayers to avoid paying
their tax debts in one on-time payment and to accumulate tax debts by
adding new tax balances to existing agreements; (6) IRS is taking steps
to reduce the problems the auditors identified; and (7) administrative
changes to improve the installment agreement program and reduce costs
include informing taxpayers of the applicable penalties and interest
that will be added to their installment agreements, allowing taxpayers
to make electronic direct debit payments, and sending some default
notices by regular mail instead of certified mail.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  GGD-95-137
     TITLE:  Tax Administration: Administrative Improvements Possible in 
             IRS' Installment Agreement Program
      DATE:  05/02/95
   SUBJECT:  Tax administration
             Delinquent taxes
             Taxpayers
             Installment payments
             Government collections
             Collection procedures
             Information dissemination operations
             Cost control
             Debt collection
IDENTIFIER:  IRS Installment Agreement Program
             IRS Automated Collection System
             
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Cover
================================================================ COVER


Report to the Chairman, Subcommittee on Oversight, Committee on Ways
and Means, House of Representative

May 1995

TAX ADMINISTRATION -
ADMINISTRATIVE IMPROVEMENTS
POSSIBLE IN IRS' INSTALLMENT
AGREEMENT PROGRAM

GAO/GGD-95-137

IRS' Installment Agreement Program


Abbreviations
=============================================================== ABBREV

  ACS - Automated Collection Systems
  IRS - Internal Revenue Service
  TRCAT - Taxpayer Service and Returns Processing Categorization of
     Accounts Receivable

Letter
=============================================================== LETTER


B-259902

May 2, 1995

The Honorable Nancy L.  Johnson
Chairman, Subcommittee on Oversight
Committee on Ways and Means
House of Representatives

Dear Chairman Johnson: 

This report responds to your predecessor's request that we evaluate
the Internal Revenue Service's (IRS) use of installment agreements as
a means for individual taxpayers to pay their tax debts.  IRS changed
the rules for installment agreements in April 1992 to streamline the
process for taxpayers to request installment agreements and for IRS
to approve them.  Our report discusses the (1) increase in
installment agreements following the April 1992 changes, (2) effects
these changes had on IRS' collection activity, (3) concerns raised by
IRS' internal auditors regarding these changes, and (4) information
that IRS provides taxpayers on their liabilities under installment
agreements.  We also note administrative practices that may provide
opportunities to improve the installment agreement program and
provide descriptive information on taxpayers who elected to pay past
due taxes through installment agreement procedures. 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :1

Participation in IRS' installment agreement program grew rapidly
after revised guidelines were implemented in April 1992.  IRS data
show that 2.6 million new agreements were approved for individual
taxpayers in fiscal year 1994.  This was a 136-percent increase from
the 1.1 million new agreements approved in fiscal year 1991.  During
fiscal years 1991 through 1994, the amount of taxes being paid in new
installment agreements increased 135 percent--from $4.0 billion to
$9.4 billion.  Installment agreements accounted for 33 percent ($4.5
billion) of IRS' delinquent tax collections from individual taxpayers
in fiscal year 1994 compared with 14 percent ($1.9 billion) in fiscal
year 1991. 

The changes IRS made to its installment agreement procedures affected
its collection activities in several ways.  First, IRS service center
collection and district office taxpayer service staff approved more
agreements than in the past.  Staff at IRS' Automated Collection
System (ACS) call sites, who previously approved the majority of
installment agreements, are now assigned higher-dollar cases. 
According to IRS collection officials, this shift in workload,
coupled with IRS' raising the dollar threshold for which staff would
actively pursue collection cases, caused a decrease in dollars
collected by ACS staff from fiscal year 1992 to fiscal year 1994.  To
stem further decreases in collections by ACS staff, IRS subsequently
lowered the dollar threshold of cases available for assignment to ACS
staff.  Second, more past due taxes are being paid off in
installments without going through IRS' routine collection process. 
This is due in part because, under IRS' revised procedures, taxpayers
can request an installment agreement when they file a balance due tax
return.  Taxpayers may enter into agreements at any time during IRS'
routine collection process. 

IRS' internal auditors have raised concerns about the ease with which
taxpayers can enter into installment agreements.  In September 1994,
the auditors reported that IRS' new installment agreement procedures
may be allowing taxpayers to (1) choose installment agreements to pay
their taxes when they could have fully paid their taxes on time and
(2) accumulate tax debt because it is easy to add subsequent income
taxes to an existing installment agreement.  In response, IRS
management established a task group to assess the extent to which
these situations were occurring.  The task group made recommendations
aimed at reducing the use of installment agreements to accumulate
debt that could be paid through other methods.  IRS also agreed to
test an internal audit recommendation to obtain information from the
program's participants on the (1) causes of their tax debts and (2)
steps they have taken to preclude the need for an installment
agreement to pay the next year's taxes. 

Currently, IRS informs taxpayers that applicable penalties and
interest charges will be added to their installment agreements;
however, taxpayers are not given dollar estimates for these penalties
and interest.  This process contrasts with installment agreements
made in the private sector, such as those for automobile loans, which
typically disclose information regarding terms, conditions, and
costs.  While IRS is not subject to these same requirements, they may
well serve as a model for IRS to disclose similar information to
taxpayers entering into installment agreements.  If IRS provided
taxpayers with more information on the conditions and financial
consequences for installment agreements, taxpayers would have a basis
to make more informed decisions when electing installment agreements,
agreeing to multiple-year payment terms, or adding other taxes to
existing agreements. 

Because of the rapid growth of the installment agreement program, the
efficient administration of the program becomes increasingly
important.  We identified several changes that could improve the
efficiency of the installment program.  One change would be for IRS
to experiment with encouraging taxpayers to make their monthly
installment payments electronically by direct debit.  This would
reduce IRS costs.  Presently, less than 2 percent of taxpayers with
installment agreements pay by direct debit.  Another administrative
change that would reduce costs would be for IRS to send some default
notices by regular mail instead of certified mail. 


   BACKGROUND
------------------------------------------------------------ Letter :2

IRS expects individual taxpayers to pay the full amount of tax owed
when they file their tax return.  However, Section 6159 of the
Internal Revenue Code provides for taxpayers to pay their taxes in
installments when full payment is not possible. 

Taxpayers who cannot pay their taxes are subject to IRS' collection
process.  IRS' routine collection process can involve three stages,
and taxpayers may enter into an installment agreement during any
stage.  In the first stage, IRS is to send a series of notices to
taxpayers requesting payment.  Cases unresolved by these notices may
be referred to the second stage--ACS telephone call sites.  IRS
employees at these sites are to contact taxpayers to secure payments
and contact banks and employers to identify levy sources.  The
employees are to also answer calls from taxpayers who have been
subjected to collection actions, such as levies and liens.  If ACS
call site employees cannot resolve a case, it may be referred to an
IRS district office--the third stage in the collection process--for
further collection action. 

IRS made changes to its installment agreement program in April 1992
making it easier for taxpayers to obtain agreements.  IRS made the
following changes under the revised program. 

  Staff in all offices with taxpayer contact were delegated authority
     to approve installment agreements of up to $100,000.\1

  The thresholds for which IRS can approve an installment agreement
     without filing a lien increased from $2,000 to $10,000 and
     without requiring taxpayers to provide financial information
     demonstrating the need for an agreement increased from $5,000 to
     $10,000.  IRS refers to these agreements as streamlined
     agreements. 

  IRS allowed taxpayers to request installment agreements when they
     file by attaching a Form 9465, Installment Agreement Request, or
     note to their tax returns (see app.  I).  These agreements,
     called pre-assessed agreements, do not go through IRS' routine
     collection process. 

IRS made these changes to the installment agreement program to (1)
improve voluntary compliance by emphasizing to taxpayers that
installment payments are an option available to them to pay their tax
debts if full payments cannot be made on time; (2) expedite the IRS
collection process by bringing more delinquent accounts into a
current status sooner, thereby increasing collections on such
accounts in the form of installment payments; and (3) enhance its
"one-stop service" concept by allowing staff in all functions with
taxpayer contact to approve agreements. 

In addition, IRS recently developed procedures to implement another
change in the program--charging user fees for installment agreements. 
The Treasury, Postal Service, and General Government Appropriations
Act of 1995 (P.L.  103-329) authorized the Secretary of the Treasury
to supplement IRS' appropriations through the imposition of user fees
for services performed by IRS.  As a result, in March 1995, IRS began
charging a $43 user fee for a new installment agreement and a $24
user fee for amending or reinstating an existing agreement. 


--------------------
\1 Previously, only IRS collection and taxpayer service offices had
authority to grant installment agreements.  Other offices with
authority now include Appeals, Employee Plans and Exempt
Organizations, Examination, Problem Resolution, and Returns
Processing. 


   OBJECTIVES, SCOPE, AND
   METHODOLOGY
------------------------------------------------------------ Letter :3

Our objectives were to review (1) the increase in installment
agreements following changes IRS made in April 1992; (2) the effects
these changes had on IRS' collection activity; (3) concerns raised by
IRS' internal auditors regarding these changes; and (4)
administrative aspects of the program, such as the information IRS
provides taxpayers regarding installment agreements, and
opportunities for improvement.  We also collected descriptive
information on taxpayers who elected to pay past due taxes through
installment agreements. 

To address the four objectives, we did the following: 

  We met with officials in IRS' National Office of the Assistant
     Commissioner for Collections to discuss IRS' objectives for the
     installment program and gather information about the program's
     administration and progress. 

  We met with IRS officials in the Cincinnati Service Center
     (Collections Branch) and the Cincinnati District Office
     (including the Taxpayer Service, Collection, and Examination
     divisions) to obtain information on the experiences of these IRS
     personnel with the revised procedures.  We selected the
     Cincinnati Service Center because we had available experienced
     staff in that area. 

  We discussed the installment agreement program changes with members
     of the American Institute of Certified Public Accountants, the
     Federation of State Tax Administrators, the National Consumer
     Law Center, the Consumer Federation of America, and a
     Cincinnati-based commercial bank. 

  We reviewed IRS internal audit and management reports concerning
     the installment agreement program. 

To accomplish our objective of collecting descriptive information on
taxpayers, we analyzed the 722 useable cases from our random sample
of 900 installment agreements from IRS' Service Centers in Atlanta,
GA; Cincinnati, OH; and Fresno, CA.  The sample was taken from the
inventory of 628,285 agreements at the 3 service centers as of April
23, 1994.  In reviewing the sample, we obtained information about the
agreements, such as (1) the tax periods covered by the agreements;
(2) the original amount and current balance of the agreements; (3)
the agreement payment history; and (4) certain taxpayer financial
characteristics, such as adjusted gross income and source of income. 
The sample results were indicative of the installment agreement
inventory at the three IRS service centers as of April 23, 1994. 
However, the results are not projectable to IRS' total universe of
installment agreements and may not be indicative of the inventory at
any other point in time.  Appendix II describes our sampling
methodology in more detail. 

We did our audit work from January 1994 through November 1994 in
accordance with generally accepted government auditing standards.  On
March 27, 1995, we met with IRS National Office officials to obtain
their comments on a draft of this report.  IRS representatives at
that meeting included the Acting Assistant Commissioner, Collection. 
Their comments are summarized on page 16 and incorporated in this
report where appropriate. 


   INSTALLMENT AGREEMENT PROGRAM
   HAS GROWN RAPIDLY
------------------------------------------------------------ Letter :4

As stated earlier, the installment agreement program grew rapidly
during fiscal years 1991 through 1994.  As shown in table 1,
significant growth took place between fiscal years 1992 and 1993. 
While part of this growth may be attributable to the April 1992
program changes, IRS officials said that changes to federal tax
withholding tables in 1992 caused many taxpayers who would normally
have received refunds to owe taxes when they filed their returns in
1993.  IRS estimated that installment agreement requests would
increase by about 39 percent because of the changes to the
withholding tables. 



                           Table 1
           
            Installment Agreement Activity During
                Fiscal Years 1991 Through 1994

                    (Current year dollars)

Agreement activity        1991      1992      1993      1994
--------------------  --------  --------  --------  --------
New agreements        1,087,03  1,481,37  2,497,29  2,634,55
                             2         4         4         7
Percent increase         N/A\a       36%       69%        6%
Total dollars             $4.0      $5.6      $8.2      $9.4
 (billions)
Percent increase         N/A\a       40%       46%       15%
Active agreements      986,761  1,366,30  2,344,90  2,625,90
 on September 30                       9         1         2
Dollars owed              $3.2      $4.6      $6.9      $8.0
 (billions)
Average dollars         $3,276    $3,399    $2,940    $3,053
 owed
------------------------------------------------------------
\a Not available. 

Source:  IRS' Collection Activity Report 5000-6. 


   INSTALLMENT AGREEMENTS PLAY A
   GREATER ROLE IN IRS COLLECTIONS
------------------------------------------------------------ Letter :5

Since 1992, installment agreements have played an increasing role in
IRS' collection process.  Table 2 shows that installment agreements
have made up an increasing percentage of IRS' accounts receivable
inventory for individual taxpayers since 1992. 



                           Table 2
           
             Installment Agreement Inventory for
             Individual Taxpayers From the End of
                  Fiscal Years 1992 to 1994

                    (Current year dollars)

Inventory                           1992      1993      1994
------------------------------  --------  --------  --------
Accounts receivable\a              $40.4     $45.2     $50.2
 (billions)
Installment agreements\b             4.6       6.9       8.0
 (billions)
Installment agreements               11%       15%       16%
 as a percent of the
 accounts receivable
------------------------------------------------------------
\a Source:  IRS' Electronic Management Support System.  These data
include accrued interest and penalties, but exclude trust fund
recovery assessments and debts that IRS considers currently not
collectible. 

\b Source:  IRS Collection Activity Report (5000-6). 

Table 3 shows that installment agreements have accounted for an
increasing percentage of IRS' total collections.  IRS National Office
collection officials said that the increase in total collections
between fiscal years 1993 and 1994 was a positive result of the
changes made to the installment agreement program. 



                           Table 3
           
             IRS Collections for Individuals For
           Fiscal Years 1991 to 1994 (Current Year
                           Dollars)

                    (Amounts in billions)


Source of collection      1991      1992      1993      1994
--------------------  --------  --------  --------  --------
Balance due notices       $4.1      $3.6      $3.0      $2.8
Collection notices         3.0       2.7       2.4       2.3
Installment                1.9       2.3       3.2       4.5
 agreements
Taxpayer delinquent        4.1       4.3       3.6       3.6
 accounts\b
Deferred accounts\c         .3        .3        .4        .5
============================================================
Total collections\d      $13.3     $13.3     $12.6     $13.8
Installment              14.2%     17.0%     26.0%     33.0%
 agreements
 as a percent of
 total collections
------------------------------------------------------------
\a Includes payments received and credit offsets. 

\b Collections from levies, liens, and other IRS collection actions. 

\c Collections from accounts in which collection action is deferred
except for sending taxpayers periodic notices and applying future
refunds to the balance owed. 

\d Totals may not sum due to rounding. 

Source:  IRS' Reports on Delinquent Accounts Receivable Yield. 

In raising service center and taxpayer service authority to grant
installment agreements from $5,000 to $10,000, IRS wanted to shift
some of the collection work from ACS call sites to service center
collection and district taxpayer service offices.  Some shift in
workload has occurred.  Taxpayer service and service center staffs
originated about 82 percent of all agreements in fiscal year 1994, up
from 43 percent in fiscal year 1991.  Most of the increase was due to
these two staffs granting streamlined agreements.  ACS call sites
granted fewer agreements in fiscal year 1994 (about 381,000 or 15
percent of agreements) than in fiscal year 1991 (about 579,000 or 53
percent of agreements). 

In shifting the installment agreement workload to service center and
taxpayer service staff, IRS hoped to increase ACS collections by
freeing up ACS staff to work on higher dollar cases.  However, the
expectation of increased collections had not materialized since ACS
collections per staff year dropped between fiscal years 1992 and 1994
from $1.71 million to $1.44 million in current year dollars. 
Overall, the amount collected at ACS sites decreased from $4.88
billion to $3.30 billion during the same period. 

IRS collection officials said that the lower ACS collections are due,
in part, to their decision during this same period to increase the
deferral level--the amount under which delinquent accounts are not
pursued beyond the notice stage, except to offset refunds.  According
to IRS officials, this increase reduced ACS workloads more than
expected and contributed to reduced ACS collections.  IRS
subsequently lowered its deferral level in April 1994, a move IRS
officials expect will increase ACS workloads and the resulting
collections. 

Another indication of the greater impact the installment agreement
program is having on collections was the increased number of balance
due accounts that are being resolved earlier in the collection
process.  IRS data show that more balance due accounts are being
favorably resolved by taxpayers paying or arranging to pay the
amounts owed without IRS resorting to collection notices and
subsequent collection actions.  Between fiscal years 1991 and 1994,
accounts favorably resolved before a collection notice rose from 41
percent to 52 percent, with installment agreements accounting for a
growing share of the favorable early resolutions.  In fiscal year
1994, installment agreements accounted for 41 percent of the
favorable early resolutions, up from 14 percent in fiscal year 1991. 


   IRS' INTERNAL AUDIT QUESTIONED
   IMPLEMENTATION OF THE
   INSTALLMENT PROGRAM
------------------------------------------------------------ Letter :6

IRS' internal audit raised several questions regarding the
installment agreement program since IRS implemented the April 1992
changes.  In September 1994, IRS' internal auditors raised concerns
about whether (1) the new procedures for granting installment
agreements were encouraging taxpayers to choose installments when
they could be paying their taxes in full and (2) the program was
leading some taxpayers to accumulate debt they may not be able to
pay. 


      SOME INSTALLMENT PAYERS MAY
      BE ABLE TO PAY IN FULL
---------------------------------------------------------- Letter :6.1

The installment agreement program was established to provide
taxpayers who cannot pay their taxes in full, when they are due, an
opportunity to pay in installments.  Before the program was revised
in April 1992, taxpayers whose agreements were for tax debts above
$5,000 were required to provide financial data to substantiate their
inability to pay in full and on time.  Under its streamlined
procedures, IRS relies on taxpayers to determine for themselves
whether they can pay in full or want to pay in installments, as long
as the amount owed does not exceed $10,000 and the payment period
meets IRS requirements.\2 IRS recognizes that this may result in some
taxpayers opting for installment agreements even though they could
have paid in full and on time.  IRS collection officials told us they
did not know the extent to which this occurs, but they believed the
benefits from streamlining outweigh any unintended negative effects
of making installment agreements available to taxpayers who can pay
in full. 

This issue was raised by IRS' internal auditors in their September
1994 report on using and processing installment agreement requests
received with tax returns.  The auditors reviewed a sample of 2,824
pre-assessed installment agreements--those agreements requested by
taxpayers when they filed their tax returns--granted in 1993 and
found that 22 percent of the taxpayers had paid in full with their
return the previous year, while another 10 percent had fully paid
later during the collection notice process.  The auditors reasoned
that on the basis of the taxpayer's payment history, some of these
taxpayers could have paid their taxes in full in the year they
entered into an agreement.  In addition, to obtain more conclusive
information on whether some taxpayers who entered into installment
agreements could have paid their taxes on time, the auditors
contacted 87 taxpayers who received pre-assessed agreements.  The
auditors were told by 41 percent of these taxpayers that they could
have fully paid their accounts by withdrawing savings, liquidating
assets, or borrowing. 

In response to IRS' internal audit findings, IRS has begun taking
steps to discourage taxpayers who can pay in full from using
installment agreements.  For example, IRS revised Form 9465 to advise
taxpayers to consider other alternatives, such as bank loans, before
requesting an installment agreement when filing a tax return. 


--------------------
\2 The formula for the payoff period is discussed in IRS' Law
Enforcement Manual and is not available to the public. 


      SOME TAXPAYERS MAY BE
      ACCUMULATING DEBT
---------------------------------------------------------- Letter :6.2

IRS' streamlined procedures allow for new tax debt to be added to an
existing installment agreement without a review of a taxpayer's
financial condition or of possible remedies to incurring future debt,
provided the new aggregate balance does not exceed $10,000 and the
payment period meets IRS requirements.  IRS data show that about 16
percent of the agreements granted in fiscal year 1994 were added to
existing installment debt.  In their September 1994 report, IRS
internal auditors expressed concern that IRS procedures allowed
taxpayers to incur tax debts beyond what they could reasonably be
expected to pay.  The auditors stated that allowing taxpayers to add
tax debt beyond what could be paid within a reasonable time would
increase IRS' accounts receivable balance and its costs to collect
taxes. 

According to an IRS official, one explanation for why the practice of
accumulating debt was allowed is that IRS accommodated taxpayers who
had balance due accounts because of 1992 changes in the withholding
tables.  During that period, IRS assumed that many taxpayers would
owe taxes unexpectedly and allowed taxpayers to pay those taxes by
adding debt to existing agreements under streamlined procedures. 

That policy continued through 1994 when, as a result of concerns from
IRS' internal auditors, IRS took several steps to address the issue
for the 1995 tax filing season.  For example, the monthly installment
agreement reminder notices for December 1994 included a special
reminder to taxpayers.  The reminder stated that under the terms of
their existing agreements the taxpayers were not eligible for another
installment agreement while their existing agreements were in effect
and that all federal tax liabilities must be paid in full or they
would be in default.  Also, Form 9465 was revised to inform taxpayers
that they are not to use the form if they were currently making
installment payments and that the agreement would be in default if
all liabilities were not paid in full.  In addition, in January 1995,
IRS issued procedures to field personnel working installment
agreements to prevent taxpayers from adding new tax debt to existing
liabilities.  IRS plans to revisit this issue before the 1996 tax
filing season. 

IRS internal auditors also reviewed whether taxpayers with
installment agreements acted on their own to avoid the need for
future agreements.  In doing so, IRS contacted 87 taxpayers who were
granted pre-assessed installment agreements and found that 39 percent
had not adjusted their withholding or estimated payments to avoid
owing money on successive tax returns.  Although acceptance letters
to taxpayers contain instructions for making such adjustments, no
such instructions appear on Form 9465, which is the initial form
completed by taxpayers who request pre-assessed agreements. 

The auditors recommended that IRS include a section on Form 9465 for
taxpayers to identify the cause of their tax debts and the steps
taken to ensure that the condition does not recur the following year. 
Additionally, IRS' Research Division is studying a group of taxpayers
to determine the cause for their delinquencies and through that study
intends to determine how best to solve the problem of
underwithholding and underestimated payments. 


   IRS COULD IMPROVE CERTAIN
   ADMINISTRATIVE ASPECTS OF THE
   PROGRAM
------------------------------------------------------------ Letter :7

As we discussed earlier, the installment agreement program grew
rapidly during fiscal years 1991 through 1994.  Because of this
growth, we believe the administrative operation and efficiency of the
program has become increasingly important.  In that regard, we
reviewed certain aspects of the program and offer several suggestions
that could lead to more efficient administration.  Specifically, we
are concerned about the (1) lack of information taxpayers receive
about the length and costs of installment agreements, (2) extent IRS
has taken advantage of opportunities to improve program efficiency,
and (3) amount of installment agreement debt by taxpayers with
agreements lasting more than 5 years. 


      IRS COULD PROVIDE TAXPAYERS
      ADDITIONAL INFORMATION ON
      INSTALLMENT AGREEMENT COSTS
---------------------------------------------------------- Letter :7.1

During the term of an agreement, a taxpayer continues to accrue
interest and penalty charges on the unpaid balance of the debt.  IRS
advises taxpayers in its agreement application forms and acceptance
letters that interest and penalties will continue to accrue while
they are making installment payments.  However, IRS does not tell
taxpayers the total estimated cost of the agreement, including
interest and penalty accruals, nor does IRS tell taxpayers how long
it will take to pay off their debt.  The lack of information provided
by IRS contrasts with prevailing private sector practices, which are
governed by truth-in-lending laws. 

Penalty and interest accruals add considerably to the cost and payoff
period of an agreement.  For example, assume a taxpayer agrees to
make $100 monthly payments on a $2,800 tax debt (the median amounts
from our sample).  To pay off interest and penalty accruals, the
taxpayer would need to make 6 additional monthly payments (34
payments versus 28 payments) and pay an additional $544 (assuming the
0.5 percent per month penalty rate and monthly compounding of
interest at 9 percent).  Under the Internal Revenue Code, the rate of
interest is determined on a quarterly basis computed from the federal
short-term rate based on daily compounding. 

Representatives of consumer groups told us that providing taxpayers
with better cost information could lead some taxpayers to consider
and use other options to pay their tax debts before choosing
installment agreements or assuming long payoff periods.  By providing
more information to taxpayers on the cost of agreements, IRS may be
able to limit agreement use more closely to taxpayers who are unable
to pay their taxes on time in a lump sum. 

IRS officials agreed that more information would be a factor in
deterring some taxpayers with other available resources from using
IRS' installment agreement program to pay their taxes.  However, IRS
officials are reluctant to provide specific cost and payoff period
projections to installment agreement applicants.  The officials are
concerned that the estimates they provide at the beginning of an
agreement could be misleading because these estimates could change
over the life of the agreement.  For example, the estimates could be
affected by interest rates that are subject to quarterly adjustment
and by missed taxpayer payments.  A method to alleviate this concern
would be to include revised cost and payoff period projections in the
monthly statements that IRS sends taxpayers during the course of an
agreement.  These notices already include information specific to a
taxpayer's agreement, such as the amount of payment due and the
current unpaid balance. 


      GREATER USE OF DIRECT DEBIT
      PAYMENTS COULD IMPROVE
      EFFICIENCY
---------------------------------------------------------- Letter :7.2

IRS offers taxpayers the option of making installment payments
automatically by directly withdrawing funds from the taxpayer's bank
account.  According to IRS, the advantages to direct debit agreements
are they (1) are cheaper to service than the standard agreement, (2)
eliminate the chance that a taxpayer will forget to make a payment or
send less than the agreed upon payment amount, (3) eliminate the
float time associated with processing paper remittances, and (4) may
reduce default rates. 

Although direct debit agreements offer these advantages to IRS, they
made up less than 2 percent of the agreements in IRS' inventory at
the end of fiscal year 1994.  IRS collection officials explained that
one reason for the low rate of direct debits is that staff who set up
installment agreements view direct debits as additional work because
the processing involves performing more steps and gathering more
information from taxpayers. 

According to IRS data, pre-assessed installment agreements accounted
for almost 31 percent of the 2.6 million new agreements in fiscal
year 1994.  Form 9465, the form used by taxpayers to request
pre-assessed agreements, does not mention the direct debit option
(see app.  I), leaving it up to IRS staff to pursue this option
later.  As noted, however, IRS collections officials indicated that
this reliance on staff has limited the number of direct debits. 
Because of the advantages of the direct debit payment method, it may
be worthwhile for IRS to test a revision of the form to include space
for taxpayers to authorize direct debits and supply the information
necessary to set them up. 


      SENDING SOME DEFAULT NOTICES
      BY REGULAR MAIL COULD REDUCE
      COSTS
---------------------------------------------------------- Letter :7.3

When taxpayers default on their installment agreements, service
center staff must review the taxpayers' accounts and send them a
default notice.  That notice is a statement informing the taxpayer
that the account is not current and, if not corrected, the taxpayer
is subject to levy action.  Depending on how taxpayers respond to
these notices, IRS staff may reinstate the agreement; take some other
collection action, such as a levy or lien filing; or place the
account in a deferred status where only passive collection actions,
such as refund offsets are taken. 

One service center has suggested that some of the costs incurred on
defaulted agreements may be reduced if IRS could send default notices
by regular mail rather than certified mail.  This change would
replace a $1.29 letter with a 23-cent letter (presorted rate) and
also reduce some handling costs.  Since defaults are not uncommon,
the savings in postage costs could be significant.  The service
center estimated its own annual savings would be nearly $150,000. 

Our analysis suggests that the service center suggestion has merit. 
We realize that some default notices may still need to be sent by
certified mail because they are used to give taxpayers notice of
impending levy actions against their assets.  Section 6331(d) of the
Internal Revenue Code requires that IRS inform taxpayers in person or
by certified mail 30 days before taking levy actions.  Other
defaulted installment agreements, however, are placed in deferred
status, and no levy action is pending because collection action is
limited to periodic notices and offsets against future refunds.  Our
review of the October 1 through 7, 1994, listing of 1,933 defaulted
agreements in the Central Region showed that 62 percent of these
agreements were below the deferral level.  IRS officials agreed that
taxpayers in these instances would not need to be sent default
notices by certified mail.  The officials added that notices for
cases subject to levies could continue to be coded to send by
certified mail. 


      PROTRACTED AGREEMENTS
      ACCOUNT FOR A LARGE
      PERCENTAGE OF INSTALLMENT
      DEBT
---------------------------------------------------------- Letter :7.4

According to IRS data, in 1994 the average installment agreement was
paid off in about 9.5 months.  However, a large portion of IRS'
installment debt is for agreements that will run for more than 5
years if payments are made at their current levels.  Such agreements
are costly to administer, and IRS considers them riskier than shorter
term agreements.  IRS' manual states that installment agreements
lasting more than 5 years are not likely to be paid off.  Thus, these
protracted agreements are candidates for other options, such as an
offer in compromise, which is a program that allows taxpayers to
liquidate their tax liability through a lump-sum settlement for less
than the amount owed. 

About 18 percent of the agreements we reviewed from three service
centers were protracted agreements.\3 These agreements accounted for
approximately 53 percent, or $846 million, of the installment debt
owed at the three centers.  For these agreements, the median balance
owed was $5,780, the median monthly payment was $100, and the
projected median payoff period was 7.6 years. 

Some of the protracted agreements in our sample are unlikely to ever
be paid off because current payments were not keeping up with
accruing interest.  These agreements made up about 16 percent of the
protracted agreements we reviewed, with a current unpaid balance
totaling $292 million.  The median monthly payment on these
agreements was $50, and the median unpaid balance was $17,530.  At
IRS' 9-percent annual interest rate as of December 1994, 1 month's
interest on the median unpaid balance amounted to $131. 

IRS officials acknowledged the existence of these types of agreements
in their inventory, adding that sometimes accepting a taxpayer's
installment payment may be its best option.  The officials explained
that these payments often represented amounts that may otherwise not
be collected.  IRS' procedures require staff to periodically review
agreements with terms exceeding 3 years to reevaluate taxpayers'
financial conditions.  Presumably, if the review indicated a better
payment option, IRS would pursue it. 


--------------------
\3 Our estimate of protracted agreements is conservative because we
did not include the additional time taxpayers would need to pay the
failure to pay penalty, which amounts to 0.5 percent per month, up to
a maximum of 25 percent.  The penalty doubles to 1 percent per month
if taxpayers enter into an agreement after receiving an IRS notice of
intent to levy.  We excluded the penalty portion because we could not
accurately project the effect of the penalty on payoff periods.  This
projection could not be done because the agreement amounts we used in
our analysis did not separate the original tax due from accrued
penalties and interest, and the penalty is computed only on the
unpaid original tax.  Therefore, we chose to base our projected
payoff periods just on IRS' interest accruals, which accrued at a
9-percent annual rate in December 1994 and are applied to the total
unpaid balance. 


   CONCLUSIONS
------------------------------------------------------------ Letter :8

Since 1991, taxpayer use of installment agreements has grown
considerably, and installment agreements have accounted for a growing
portion of IRS' collection activity.  The program grew more rapidly
after IRS made changes in April 1992.  IRS internal auditors,
however, reported that some taxpayers are using installment
agreements even though they were able to fully pay their taxes.  This
practice conflicts with IRS' intent to reserve installment agreements
for taxpayers who cannot otherwise pay their taxes in full when they
are due.  The auditors also raised concerns about the ease with which
taxpayers could accumulate additional tax debt by adding new income
tax liabilities to existing agreements.  IRS has acted to address the
internal auditors' concerns. 

Our work surfaced several other concerns about certain administrative
aspects of the program.  For example, IRS does not tell taxpayers the
extent that interest and penalty accruals will add to the costs of
installment agreements and the payoff time.  Providing this
information may influence some installment payers to pay in full or
make larger monthly payments.  In addition, IRS could reduce some of
the administrative costs of servicing agreements by (1) encouraging
more taxpayers to make installment payments by direct debit and (2)
mailing some default notices by regular mail instead of certified
mail. 

Our sample of installment agreements contained a substantial amount
of installment debt associated with agreements having payoff periods
longer than 5 years.  This length of time makes collection of the
debt risky and more expensive to administer, according to IRS.  IRS
reviews agreements every 3 years to explore payment options. 


   RECOMMENDATIONS
------------------------------------------------------------ Letter :9

To improve the information provided to taxpayers and the
administration of the installment agreement program, we recommend
that the Commissioner of Internal Revenue

  notify taxpayers about projected total costs and payoff periods
     when setting up agreements with taxpayers and when mailing
     monthly reminder notices,

  experiment with Form 9465 to test whether having space for
     taxpayers to authorize direct debit installment payments
     increases the frequency with which this option is used, and

  send agreement default notices to taxpayers by regular mail instead
     of certified mail unless an account is being referred for levy
     action. 


   AGENCY COMMENTS AND OUR
   EVALUATION
----------------------------------------------------------- Letter :10

Responsible IRS officials, including the Acting Assistant
Commissioner, Collection, reviewed a draft of this report and
provided oral comments in a meeting on March 27, 1995.  The officials
said that the report was a fair and accurate assessment of the
installment agreement program and that they generally agreed with our
recommendations.  In response to the recommendations, the Acting
Assistant Commissioner said that: 

  IRS will study the feasibility of notifying taxpayers about the
     projected costs and payment periods of installment agreements. 
     If notification is not feasible under its existing computer
     systems, IRS will pursue changes as part of its Tax Systems
     Modernization.  In the interim, IRS plans to modify the monthly
     reminder notice in 1996 to provide taxpayers with a breakdown of
     the current balance due and penalty and interest charges. 

  IRS will consider options, including modification of Form 9465, to
     encourage taxpayers to authorize direct debit payments on their
     installment agreements. 

  IRS will develop methods to identify defaulted installment
     agreement accounts it does not intend to take levy action
     against and send default notices to these taxpayers by regular
     mail. 

We believe the actions that IRS proposes, if properly implemented,
would be responsive to our recommendations. 


--------------------------------------------------------- Letter :10.1

We are sending copies of this report to other congressional
committees; the Secretary of the Treasury; the Commissioner of
Internal Revenue; the Director, Office of Management and Budget; and
other interested parties.  We will make copies available to others
upon request. 

The major contributors to this report are listed in appendix III.  If
you or your staff have any questions, you can reach me at (202)
512-5407. 

Sincerely yours,

Jennie S.  Stathis
Director, Tax Policy and
 Administration Issues




(See figure in printed edition.)Appendix I
IRS FORM 9465 INSTALLMENT
AGREEMENT REQUEST (1995 VERSION)
============================================================== Letter 



(See figure in printed edition.)


PROFILE OF INSTALLMENT AGREEMENTS
FROM GAO SAMPLE
========================================================== Appendix II

To profile characteristics of taxpayers with installment agreements,
we used the active inventory of installment agreements as of April
23, 1994, at three IRS service centers-- Atlanta, GA; Cincinnati, OH;
and Fresno, CA.  We selected these centers because of their larger
inventories and the availability of our staff to review the sample. 
We identified active installment agreements by obtaining IRS'
Taxpayer Service and Returns Processing Categorization of Accounts
Receivable (TRCAT) file for each of the three service centers.  We
isolated installment agreements from the individual master file and
then took a stratified random sample of 900 installment agreements
from the TRCAT file--300 from each service center.  We were able to
analyze 722 of these cases. 

Table II.1 gives information on the total number of cases we sampled
from the three service centers.  Since we used a probability sample
of installment agreements to develop our estimates, each estimate has
a measurable precision or sampling error that may be expressed as an
upper and lower limit.  A sampling error indicates how closely we can
reproduce from a sample the results that we would obtain if we were
to take a complete count of the study population using the same
measurement methods.  The difference between the upper and lower
limits is called a confidence interval.  Sampling errors and
confidence intervals are stated at a certain confidence level--in
this case 95 percent.  For example, a confidence interval at the
95-percent confidence level means that in 95 out of 100 instances,
the sampling procedures we used would produce a confidence interval
containing the population value we are estimating. 



                          Table II.1
           
            Total Number and Sample Size of Active
             Installment Agreements at Three IRS
             Service Centers as of April 23, 1994

               Total                      Estimate     Lower
              number              Sample   d study    limit/
Service     of cases    Sample     cases  populati     upper
center      on TRCAT      size  analyzed        on     limit
----------  --------  --------  --------  --------  --------
Atlanta      214,001       300       246   175,481  166,279/
                                                     184,683
Cincinnati   159,495       300       236   126,001  118,026/
                                                     132,859
Fresno       254,789       300       240   203,831  192,366/
                                                     215,297
============================================================
Total        628,285       900       722   505,313  476,671/
                                                     532,839
------------------------------------------------------------
Source:  GAO sample of installment agreements from three IRS service
centers. 

We attempted to gather profile information from IRS' records on all
900 sample cases.  Due to a 2-month time lag in processing sample
information and obtaining the records from IRS' Integrated Data
Retrieval System, we were unable to obtain profile data for certain
cases.  Therefore, we excluded these cases from our sample analysis. 
We found the majority of the excluded cases involved installment
agreements that had been paid off by the taxpayer during the period
we were gathering our data.  We also excluded installment agreements
cases that had been paid off but a new agreement was created during
the 2-month lag in obtaining IRS records because these new cases were
technically not part of the April 23, 1994, inventory.  We excluded
other agreements granted to pay off trust fund recovery penalties
because these types of debts are not related to payments of personal
income taxes and would have biased our analysis.  Finally, we
excluded cases that IRS was unable to locate in its records.  Table
II.2 gives the reasons for excluding sample cases and the estimate
for each category of excluded cases. 



                          Table II.2
           
            Reasons for Excluding Sample Cases and
            the Estimated Number of Occurrences in
               the April 23, 1994, Installment
                     Agreement Inventory

                                             Lower     Upper
Reasons                         Estimate     limit     limit
------------------------------  --------  --------  --------
Paid off agreement
------------------------------------------------------------
Atlanta                           20,687    13,536    27,838
Cincinnati                        31,367    24,200    38,535
Fresno                            41,616    30,963    52,268
============================================================
Total                             93,670    68,699   118,640

Agreements created after April 23, 1994
------------------------------------------------------------
Atlanta                            8,560     4,930    14,676
Cincinnati                             0         0     2,013
Fresno                             4,246     1,820     9,783
============================================================
Total                             12,806     6,750    26,472

Agreements involved trust fund recovery penalty
------------------------------------------------------------
Atlanta                            6,420     3,396    11,984
Cincinnati                         1,063       292     3,820
Fresno                             3,397     1,325     8,601
============================================================
Total                             10,880     5,013    24,405

Missing data
------------------------------------------------------------
Atlanta                            2,853     1,113     7,224
Cincinnati                         1,595       544     4,619
Fresno                             1,699       467     6,105
============================================================
Total                              6,147     2,124    17,948
------------------------------------------------------------
Source:  GAO sample of installment agreements from three IRS service
centers. 

Table II.3 contains profile information we gathered on the sample
installment agreements taken from the TRCAT file.  This file is a
snapshot of the installment agreements IRS was managing on April 23,
1994.  The sample results may not be indicative of all installment
agreements managed by IRS at the three service centers at any other
point in time. 



                          Table II.3
           
           Confidence Limits for Characteristics of
            Installment Agreements for GAO Sample

                                             Lower     Upper
Characteristics of agreements   Estimate     limit     limit
------------------------------  --------  --------  --------
Median original agreement         $2,803    $2,454    $3,246
 amount
Median current unpaid balance     $1,543    $1,352    $1,894
Median monthly payment              $100       $85      $100
Median age of agreements            10.4      10.0      10.9
 (months)
Median payoff period (months)         32        29        35
Median number of tax periods           2         1         2
 in agreement
Percent of agreements with           42%       35%       51%
 added tax periods

Percent of agreements covering:
------------------------------------------------------------
One tax year                         48%       40%       58%
Two tax years                        34%       28%       42%
Three or more tax years              18%       13%       23%
Percent of agreements that           36%       29%       44%
 have been in default status
 at least once

Reason agreement was added (percent):
------------------------------------------------------------
Insufficient withholdings and        61%       51%       72%
 estimated payments
Previous nonfiler                    14%       10%       19%
Previous underreporter               14%       10%       18%
Previous examination/audit            7%        5%       10%
Other                                 4%        2%        6%

Collection status when entering agreement (percent):
------------------------------------------------------------
Before collection notice             51%       42%       61%
During notice phase                  19%       14%       24%
After notice phase                   28%       22%       35%
Could not determine                   2%        1%        3%
Agreements granted for tax       125,472   103,047   149,389
 year 1992 only
Median adjusted gross income     $34,374   $28,208   $41,294
 of taxpayers
Percent with adjusted gross          27%       15%       44%
 income over $50,000
Percent of total agreements          18%       14%       24%
 made up by protracted
 agreements
Percent of total unpaid              53%       27%       91%
 balance made up by protracted
 agreements
Unpaid balance on protracted        $846      $523    $1,200
 agreements (millions)
Median unpaid balance for         $5,780    $4,192    $7,933
 protracted agreements
Median monthly payment for          $100       $50      $120
 protracted agreements
Median payoff period for             7.6       7.3      11.7
 protracted agreements (years)
Percent of protracted                16%       12%       21%
 agreements made up by
 agreements with monthly
 payments insufficient to keep
 up with accruals
Unpaid balance on agreements        $292      $128      $474
 with insufficient payments
 (millions)
Median unpaid balance for        $17,530   $15,032   $18,667
 agreements with insufficient
 monthly payment amounts
Median monthly payment amounts       $50       $50       $50
 for agreements with
 insufficient monthly payment
 amounts
Percent of agreements                34%       26%       45%
 originating in 1992 and 1993
 that later added tax debts
Percent of agreements with           94%       65%      100%
 added tax debts having a
 majority of wage or self-
 employment income
------------------------------------------------------------
Source:  GAO analysis of IRS data. 


MAJOR CONTRIBUTORS TO THIS REPORT
========================================================= Appendix III

GENERAL GOVERNMENT DIVISION,
WASHINGTON, D.C. 

Joseph E.  Jozefczyk, Assistant Director, Tax Policy and
 Administration Issues
Charlie W.  Daniel, Assignment Manager

CINCINNATI FIELD OFFICE

Robert I.  Lidman, Regional Assignment Manager
Richard C.  Edwards, Evaluator-in-Charge
Donald L.  Allgyer, Evaluator
Jennifer C.  Jones, Evaluator
Mary Jo Lewnard, Technical Advisor
Kenneth R.  Libbey, Evaluator
