Tax Administration: Changes Needed to Reduce Volume and Improve
Processing of Undeliverable Mail (Letter Report, 12/07/94,
GAO/GGD-95-44).

This report reviews the Internal Revenue Service's (IRS) processes for
handling undeliverable mail.  GAO identifies the amount of undeliverable
and the reasons why some of the mail IRS sends to taxpayers was
undeliverable and the impact nondelivery of this mail had on taxpayers
and IRS.  GAO focuses on notices IRS sent taxpayers on the assessment
and collection of taxes. GAO also assesses IRS' procedures for
processing undeliverable mail.

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

 REPORTNUM:  GGD-95-44
     TITLE:  Tax Administration: Changes Needed to Reduce Volume and 
             Improve Processing of Undeliverable Mail
      DATE:  12/07/94
   SUBJECT:  Tax administration
             Mail delivery problems
             Taxpayers
             Federal forms
             Tax nonpayment
             Federal taxes
             Debt collection
             Collection procedures
             Centralization
IDENTIFIER:  IRS Tax System Modernization Program
             TSM
             IRS Undeliverable Mail System
             IRS Automated Collection System
             IRS Inventory Delivery System
             IRS Document Processing System
             
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Cover
================================================================ COVER


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

December 1994

TAX ADMINISTRATION - CHANGES
NEEDED TO REDUCE VOLUME AND
IMPROVE PROCESSING OF
UNDELIVERABLE MAIL

GAO/GGD-95-44

Undeliverable Mail

(511293)


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

  ACS - Automated Collection System
  IRC - Internal Revenue Code
  IRS - Internal Revenue Service
  TSM - Tax Systems Modernization
  UMS - Undeliverable Mail System

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


B-258313

December 7, 1994

The Honorable J.J.  Pickle
Chairman, Subcommittee on Oversight
Committee on Ways and Means
House of Representatives

Dear Mr.  Chairman: 

This report responds to your request that we review the Internal
Revenue Service's (IRS) processes for handling undeliverable mail. 
You asked us to identify the amount of undeliverable mail and reasons
why some of the mail IRS sends to taxpayers was undeliverable and the
impact nondelivery of this mail had on taxpayers and IRS.  We focused
on notices IRS sent taxpayers involving the assessment and collection
of taxes.  We also assessed IRS' procedures for processing
undeliverable mail. 


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

Americans are a mobile society and between 15 and 20 percent of them
move annually.  Each year IRS mails millions of pieces of mail to
taxpayers, not all of which is delivered.  IRS estimated that it had
about 15 million pieces of undeliverable mail in fiscal year 1992. 
According to IRS, its undeliverable mail has three principal causes. 
First, taxpayers move and leave no forwarding addresses with the U.S. 
Postal Service or IRS.  Second, the Postal Service may not deliver or
forward mail and mail is returned to IRS as undeliverable.  And
third, when IRS incorrectly records taxpayers' addresses in its
files, mail may be undeliverable. 

It is unlikely that IRS can totally eliminate undeliverable mail
because two of its three principal causes are external to IRS. 
However, IRS needs to give this mail more attention because it
adversely affects taxpayers and IRS.  When mail IRS sends is
undelivered, for whatever reasons, and IRS' subsequent attempts to
contact the taxpayers are unsuccessful, the consequences for
taxpayers can be quite severe.  The amount of taxes owed can grow as
interest and penalties mount, and liquid assets such as bank accounts
may eventually be levied to satisfy the debt. 

Although the exact costs are not determinable, IRS estimated that it
loses millions of dollars annually in revenue and incurs increased
operations costs from undelivered mail.  One projection indicated
that a minimum of $100 million in lost revenue per year may be
attributable to undeliverable mail addressed to business taxpayers
alone.  IRS estimates also showed that the volume of undeliverable
mail rose from 6.5 million pieces in 1986 to about 15 million pieces
in 1992. 

Several IRS studies and projects have discussed the consequences that
undeliverable mail poses for IRS, but thus far IRS has implemented
only a few of their recommendations.  According to an April 1994
draft report by IRS' Taxpayer Ombudsman, there is a feeling within
IRS that the future operational improvements under Tax Systems
Modernization (TSM) will resolve its undeliverable mail problems, and
this has resulted in few changes to date.  However, more changes are
expected in the future because in August 1994 IRS senior management
approved all 25 recommendations in the Taxpayer Ombudsman's report,
and responsible IRS offices were asked to develop action plans to
implement them. 

Under TSM, IRS plans to accept taxpayers' address changes by
telephone and to use better methods to update taxpayers' addresses in
IRS' files.  It may take years for IRS to fully test and implement
changes such as these.  However, one recent change was the
implementation of the Undeliverable Mail System (UMS), an automated
system to search for different addresses by IRS service centers'
Collection functions.  According to Collection officials, this system
should reduce undeliverable mail processing time and lower operations
costs. 

Increasing taxpayers' awareness of the need to provide IRS address
changes is fundamental to developing a strategy to minimize
undeliverable mail.  If taxpayers are unaware of the importance of
notifying IRS of address changes, planned TSM enhancements will not
be much help in resolving the problem of undeliverable mail.  We
believe that taxpayers could be encouraged to provide address changes
if IRS (1) accepted address changes by telephone now, (2) emphasized
the importance of keeping it informed of address changes, and (3)
made the change of address form more conveniently available so that
those taxpayers who prefer to notify IRS of address changes by using
it could do so. 

Beginning in January 1995, IRS' Collection function in the 10 service
centers plans to start processing undeliverable mail after the first
occurrence of this mail as the other service center functions do. 
Under Collection's new procedures, taxpayers would be sent only two
service center notices instead of the four notices currently being
sent.  Because fewer notices are to be sent, this change could lower
Collection's costs associated with sending notices to undeliverable
addresses. 

More efficient processing of undeliverable mail could result if all
service center functions that handle this mail consolidated their
research efforts into one centralized unit at each center. 
Currently, at nine of the service centers, each function processes
its undeliverable mail independently of the others, despite the fact
that a portion of this mail eventually moves from one function to the
other depending on the status of a particular taxpayer's case.  This
results in increased rework and duplicative address searches and
increased operations costs for handling undeliverable mail.  However,
IRS plans to establish centralized units Service-wide. 


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

The Internal Revenue Code (IRC) requires IRS to notify taxpayers of
taxes they might owe and about actions it plans to take to collect
the taxes.  Since the Revenue Act of 1928, IRS has been required to
send such notifications to a taxpayer's last known address.  A
taxpayer's last known address was not defined by the Revenue Act nor
has it been defined by Department of the Treasury regulations. 
However, over the years, courts have generally defined a taxpayer's
last known address as the address shown on the taxpayer's most
recently filed tax return, unless the taxpayer notified IRS of an
address change.  Generally, IRS requires that such notifications be
in writing. 


      IRS' PROCESS FOR HANDLING
      UNDELIVERABLE MAIL
---------------------------------------------------------- Letter :2.1

If IRS' notices cannot be delivered to the taxpayer as addressed, the
Postal Service is supposed to return them to IRS.  The Postal Service
is also supposed to forward mail to taxpayers' new addresses if a
change of address form has been submitted to it.  Also, the Postal
Service is to return mail that is refused or unclaimed by taxpayers. 
However, IRS generally does not consider mail that is refused or
unclaimed to be undeliverable mail.\1

IRS' processing of undeliverable mail involves labor-intensive and
manual procedures at the 10 IRS service centers.  Mail at each
service center is separated into two groups--high and low priority. 
Mail in the high-priority group includes notices such as the final
notices that are sent taxpayers regarding delinquent tax returns and
collection of taxes and notices returned with change of address
information provided by the Postal Service. 

For mail in the high-priority group, IRS' procedures require that
efforts be made to find the taxpayers' current addresses.  To do
this, high-priority undeliverable mail is to be returned to the IRS
service center function that originated it.  For example, those
notices involving proposed assessments for underpayment of taxes are
returned to the Examination or Underreporter functions for
processing.  Similarly, notices involving taxpayers' failures to file
tax returns and pay delinquent taxes are returned to the Collection
function for processing.  All low-priority mail is destroyed without
further processing. 

All service center functions generally use internal IRS sources, such
as W-2 Forms and other types of information returns, as leads to help
them contact taxpayers whose high-priority mail was returned as
undeliverable.  Service center staff may also use forwarding address
information provided on mail returned to IRS by the Postal Service.\2
If a different address is located, IRS is to make an attempt to
contact the taxpayer at that address to request verification of an
address change.  If a taxpayer responds to IRS by confirming a new
address, IRS is to change its master file address record--a
taxpayer's last known address at IRS. 

In situations where verification of a different address is not
received from the taxpayer and the law requires that a notice be sent
to the taxpayer's last known address, IRS' procedures require that
the notification be sent to both the master file address and the
unverified address.  This may be done in situations where IRS is
sending notices of intent to levy taxpayers' liquid assets (e.g.,
bank accounts or wages) that are in the possession of third parties
(e.g., financial institutions and employers) or statutory notices of
tax deficiencies to taxpayers. 

Unresolved cases from service center functions, other than
Collection, may ultimately become collection cases when proposed
taxes are assessed.  After assessments are made against taxpayers,
IRS is to begin sending them collection notices.  If unresolved by
collection notices, cases over a predetermined dollar threshold are
to be sent to the next stage of IRS' collection process--the
Automated Collection System (ACS) call sites, where more detailed
address searches are to be done.  In addition to address sources used
by service centers, ACS uses sources such as state employment
commissions and motor vehicle records to find better addresses for
taxpayers.  ACS may also try to contact taxpayers by telephone to get
taxpayers to file delinquent tax returns or pay taxes owed.  If the
case is not resolved while in ACS and it falls within a certain
dollar range, it may be referred to a revenue officer in a district
office, where the revenue officer is to attempt to contact taxpayers
by conducting field investigations and using local information
sources. 

If a taxpayer does not provide IRS written notification of an address
change, IRS continues to send notices to the master file address,
which is the same as the last known address, even though previous
mail sent to that address has been returned as undeliverable.  When
mail is undeliverable, taxpayers are generally still accountable for
the taxes, interest, and penalties IRS says are owed as long as the
mail was sent to the taxpayer's last known address. 


--------------------
\1 In the case of refused mail, IRS assumes that the taxpayer was at
the address on the notice but chose not to accept the notice.  For
unclaimed mail, IRS assumes the taxpayer chose not to pick up the
mail at a post office. 

\2 Generally, IRS requests that the Postal Service provide it with
forwarding addresses on selected notices, including some of the final
notices sent taxpayers about delinquent tax returns and unpaid taxes. 


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

Our objectives were to obtain information on (1) the number of
undeliverable notices that are returned to IRS, (2) the impact these
notices have on taxpayers and IRS, and (3) the causes for nondelivery
of the mail.  Another objective was to assess IRS' procedures for
processing undeliverable mail. 

To obtain information on the extent of IRS' undeliverable notices, we
reviewed relevant IRS studies and data that estimated the volume of
undeliverable mail.  We did not test or independently verify the data
provided by IRS. 

To gather information on the impact undeliverable notices can have on
taxpayers and IRS, we interviewed staff from IRS' National Office and
all 10 service centers with responsibilities for processing this
mail.  We also reviewed studies and projects on undeliverable mail by
IRS' Internal Audit, service centers, and other groups within IRS. 
Because certain notices are legally required to be sent to taxpayers,
we discussed the impact that undeliverable mail can have on taxpayers
and IRS with representatives of IRS' Chief Counsel's Office. 

To acquire information on the causes of IRS' undeliverable mail, we
reviewed service center policies and procedures for processing
undeliverable mail and for accepting changes of address from
taxpayers.  To help in understanding the possible effects of these
policies and procedures, we interviewed IRS officials in both the
National Office and service centers with responsibilities for
processing undeliverable mail.  Also, to obtain information on
reasons why mail may be undelivered in general, we contacted Postal
Service officials at the National Address Information Center in
Memphis, Tennessee. 

To assess IRS' procedures for processing undeliverable mail, we
reviewed prior IRS studies focusing on ways to better process this
mail.  We contacted staff at the Cincinnati and Fresno Service
Centers to determine (1) how specialized locator services units at
these locations were used to locate taxpayers whose mail was
undelivered and (2) how their procedures may have varied from the
other service centers.  Because IRS recently implemented the
Undeliverable Mail System (UMS) in 9 of its 10 service centers, we
discussed how it affects undeliverable mail with National Office
Collection officials.  We also interviewed Collection staff in the
Southeast Region, where UMS was piloted.  We limited our work to
undeliverable mail at IRS' service centers because the majority of
IRS' mail originates at the centers, and undelivered mail is returned
to its originating location. 

Because other companies have problems with undeliverable mail, we
contacted two large credit card companies to determine whether their
procedures offered methods that IRS could possibly use in handling
its undeliverable mail.  The two companies were judgmentally selected
and are similar to IRS in that they send notices and bills to their
customers regarding account adjustments and delinquent payments. 

We did our work between August 1992 and March 1994 in accordance with
generally accepted government auditing standards.  On October 26,
1994, we met with Collection's Acting Executive Director,
(Operations); the Chief of Document Handling, Taxpayer Services; and
other IRS National Office officials responsible for overseeing
undeliverable mail to obtain their comments on a draft of this
report.  Their comments are summarized and evaluated on pages 16 and
17 and incorporated in the report where appropriate. 


   EXTENT AND CAUSES OF
   UNDELIVERABLE MAIL
------------------------------------------------------------ Letter :4

American society is very mobile.  According to the U.S.  Census
Bureau, between 15 and 20 percent of Americans move annually.  At
that rate, as many as 49 million people may move yearly.  Keeping up
with address changes for such a mobile society presents IRS with a
formidable task.  Current addresses are critical to IRS because it
mails hundreds of millions of pieces of correspondence to taxpayers
yearly. 

IRS does not have precise information on the volume of mail it sends
taxpayers annually that is returned undeliverable.  However, from
time to time various IRS study groups have made estimates of the
undeliverable mail volume.  Estimates made by these groups indicated
that undeliverable mail rose from 6.5 million pieces in 1986 to as
much as 15 million pieces in 1992.  Because IRS often sends more than
one notice to a taxpayer, the number of taxpayers affected by
undeliverable mail was probably less than these estimates, but the
exact number is unknown. 

The volume of IRS' undeliverable mail may continue to rise if its
accounts receivable inventory continues to grow as it has done for
years.  This is because the volume of mail IRS sends to taxpayers
pertaining to their tax cases is directly related to the number of
delinquent accounts in the receivables inventory.  Virtually all
delinquent accounts are sent notices, and some of this mail may be
returned to IRS as undeliverable. 

According to IRS, most undeliverable mail has three principal causes. 

  -- Taxpayers move and leave no forwarding addresses with either the
     Postal Service or IRS.  When this occurs, the taxpayers may
     ultimately bear responsibility for the fact that their mail was
     delayed or undelivered, but IRS still has to process the
     undeliverable mail. 

  -- The Postal Service may not deliver or forward mail, and mail is
     returned to IRS.  This happens even though Postal Service policy
     states that all First-Class Mail, which most IRS notices are, is
     to be forwarded for up to 1 year when a valid forwarding address
     is on file. 

  -- IRS incorrectly records taxpayers' addresses in its databases. 

Of the three principal causes, IRS can completely control only the
one dealing with how its staff records taxpayers' addresses in its
databases.  As discussed later in this report, IRS could do more to
encourage taxpayers to provide it with address changes even though
there is no statute that requires taxpayers to do so.  To some
extent, IRS is depending on TSM to eliminate some of the errors
associated with transcribing taxpayers' addresses in the future.  The
Taxpayer Ombudsman has also recommended adopting procedures to help
ensure that taxpayers' addresses are accurately updated in IRS'
databases.  Such procedures could help address the problems IRS has
disclosed in this area.  According to a 1991 IRS Internal Audit
report, IRS incorrectly input 450,000 new addresses to the master
file when tax returns were filed in 1988.  This resulted in
approximately 300,000 undeliverable notices, which included balance
due notices totaling $49 million. 


   EFFECT OF UNDELIVERABLE MAIL ON
   TAXPAYERS
------------------------------------------------------------ Letter :5

It is very important that IRS' mail reach the intended parties
promptly.  When not paid, taxes grow even higher as interest and
penalties may be added to the tax liability.  In some instances, IRS
may be unsuccessful in contacting taxpayers at their home addresses
but may have information on where they work or bank.  With this
information, IRS may eventually levy their bank accounts or garnish
their wages to satisfy the debt.  Thus, the consequences for
taxpayers can be quite severe when IRS has an incorrect address and
mail is returned to IRS as undeliverable. 

The impact that undeliverable mail has on taxpayers varies depending
on the reason IRS is attempting to contact them.  If IRS is
questioning the amount of taxes owed because information it has shows
that taxpayers might have underreported their tax liabilities, IRS
sends notices containing information about this proposed deficiency
and instructions on how to resolve it.  If the notices are returned
to IRS because they were undeliverable, the taxpayers would be
unaware that IRS is attempting to contact them.  Ultimately, this
lack of information could adversely affect their opportunity to
appeal the proposed assessments.  Even though IRS is unable to
contact taxpayers and obtain current addresses, a proposed tax
deficiency would ultimately be legally assessed against them.  Once
IRS assesses the tax, the taxpayer may be required to pay the tax in
order to appeal the case. 

If IRS is attempting to collect delinquent taxes already assessed
against taxpayers, it sends collection notices to them.  This occurs
when (1) taxpayers file balance due tax returns and do not pay, and
(2) IRS determines that taxpayers owe additional taxes on the basis
of audits and other means.  If the notices are returned to IRS as
undeliverable and IRS is unable to contact the taxpayer and obtain a
written verification of a different address, IRS' computers will
automatically send future notices to the same address, even though
prior notices were returned as undeliverable. 

Taxpayers may face unanticipated enforcement actions by IRS, such as
seizures of assets and garnishment of wages, without first having had
an opportunity to negotiate payment arrangements or show proof that
IRS' records may be incorrect.  Such actions may occur when IRS'
notices are returned as undeliverable even if the taxpayers and IRS
had no contact.  This is because IRS may have information on where
the taxpayer banks or works.  If it has this information, IRS'
procedures state that it may seize funds in the bank accounts and
garnish wages to cover the amount of the taxes.  For some taxpayers
who did not receive IRS notices, enforcement actions such as these
may be their first indication that IRS has been trying to contact
them regarding their tax situations.  In circumstances such as this,
taxpayers' situations would probably worsen since IRS may be required
by law to assess penalties and interest.  In certain instances, IRS
may even seize assets, such as real and personal property, to recover
the total amount owed if the case is considered to be in jeopardy.  A
jeopardy case is one in which IRS feels it must take immediate
distraint action to protect the government's interest versus risking
further losses.  However, IRS officials said that such cases are
infrequent, and IRS' procedures require that field collection staff
make additional attempts to contact the taxpayers prior to seizing
assets. 

When mail is undeliverable, taxpayers may incur added expenses and
time to resolve their tax situations and this could increase their
burden and frustration when dealing with IRS as well as lower their
general perceptions of IRS.  When IRS sends mail to a taxpayer's last
known address, it fulfills its legal obligation of notifying the
taxpayer even if the taxpayer does not receive it.  IRS does not have
the burden of proving that the taxpayer actually received the mail. 


   EFFECT OF UNDELIVERABLE MAIL ON
   IRS
------------------------------------------------------------ Letter :6

In addition to the inconvenience and burden that undeliverable mail
can cause taxpayers, IRS is also adversely affected when its mail
does not reach taxpayers.  The millions of pieces of mail returned to
IRS as undeliverable must be processed, adding to IRS' service center
costs.  In addition to sorting and routing the mail back to the
originating service center functions, attempts are to be made to
contact taxpayers to obtain written notification of their address
changes.  When changes to the taxpayers' addresses cannot be
verified, IRS must send legally required notices to taxpayers at the
addresses on their most recently filed tax returns. 

By mailing statutory notices to taxpayers' last known addresses, IRS
fulfills its legal requirements for notifying taxpayers about their
tax situations.  However, many taxpayers may not receive IRS' notices
because the addresses on their last tax returns are not their current
addresses.  IRS' efforts to collect delinquent taxes may be hampered
if the taxpayers do not receive the notices because the addresses on
the notices were no longer current.  IRS recognizes this problem and
generally attempts to notify taxpayers of their tax obligations by
sending additional notices to addresses it believes may be more
current than the addresses in its records. 

IRS' accounts receivable inventory is also affected to the extent
that collection bills are not delivered to taxpayers for timely
collection.  Not only will the accounts receivable inventory show a
higher balance, the government is denied access to funds it is owed. 
According to IRS staff, as delinquent accounts get older, they are
generally more difficult to collect; thus, any delay in collecting
accounts may pose some risk regarding the ultimate collectibility of
older accounts.  If the collection notices reflect taxpayer or IRS
errors, delays in resolving invalid cases will only result in IRS
wasting time and resources pursuing unproductive cases. 

Although IRS could not provide us precise estimates of the total
costs of undeliverable mail to IRS--either in added costs of
operations or in lost revenues--a few studies have attempted to
measure component parts of the overall cost.  For example: 

  -- A 1991 report by IRS Internal Audit showed that 70 percent of
     the estimated 9 million pieces of undeliverable mail in 1988
     were notices to taxpayers who potentially owed $3.4 billion in
     delinquent taxes or had not filed tax returns.  According to
     that report, IRS spent about $13.9 million to print, mail, and
     process this mail.  In addition, it said these undeliverable
     notices cost IRS millions of dollars in lost revenue and
     increased collection costs. 

  -- In a December 1992 briefing on undeliverable mail for IRS' Chief
     Operations Officer, IRS estimated that for fiscal year 1992, it
     issued 340,000 undeliverable statutory notices valued at $1.7
     billion.  IRS' Chief Counsel estimated that undeliverable
     statutory notices with last known address problems cause losses
     of $5.5 million annually. 

  -- A 1992 National Office quality improvement project reported that
     IRS had at least 1.2 million invalid business addresses in IRS
     computer files, resulting in about 2.25 million pieces of
     undeliverable mail annually.  According to the report, IRS
     incurs increased operating costs of at least $3.6 million
     annually, a minimum revenue loss of $100 million, and decreased
     taxpayer compliance.  This report also noted that the problem of
     undeliverable mail diminishes taxpayers' image of IRS because of
     the undue burdens imposed on them. 


   EFFORTS BY IRS TO REDUCE
   UNDELIVERABLE MAIL
------------------------------------------------------------ Letter :7

IRS has recognized the need to reduce the amount of its undeliverable
mail and has several studies and projects focusing on ways to deal
with it.  One project involved the implementation of UMS in 9 of the
10 service centers by early 1994.  UMS is an automated system
designed to make the Collection function's search for taxpayers'
addresses easier.  In searching for address leads, UMS uses
information from IRS' own databases, such as information returns like
W-2 Forms, and external data from credit bureaus.  If a different
address is located, UMS sends a computer-generated letter to the
taxpayer requesting verification of the address.  If the taxpayer
confirms a different address, IRS changes the taxpayer's master file
address.  However, when a different address is not found or confirmed
by the taxpayer through UMS, the results of UMS' research are to be
electronically transmitted to ACS.  According to Collection
officials, UMS should reduce processing time and lower operations
costs for handling undeliverable mail. 

As currently used, UMS researches undeliverable notices regarding
only delinquent tax returns and payments for the Collection function. 
At one time, IRS' future plans called for adding additional address
sources to the UMS database and allowing all functions that process
undeliverable mail to use it.  However, as we were completing our
work, we learned that UMS will become a part of the new Inventory
Delivery System.  The purpose of the Inventory Delivery System is to
further automate the service center Collection processes.  The
Inventory Delivery System's enhancements include direct interface
with IRS' computer files to update taxpayers' addresses in IRS'
records and an increase in the number of sources used for locating
addresses. 

In January 1995, IRS will implement a program designed to speed the
resolution of tax cases.  The program is referred to as an early
intervention program because IRS staff are to contact taxpayers by
telephone at the same time it sends out collection notices.  To
implement this program, IRS' Collection function in the 10 service
centers is to start processing undeliverable mail after the first
occurrence of this mail as the other service center functions do. 
Under Collection's new procedures, taxpayers will be sent only two
service center notices instead of the four notices currently being
sent.  By sending fewer notices, this program should have a potential
to reduce the amount of Collection's undeliverable mail and lower the
costs associated with sending notices to undeliverable addresses. 

One of IRS' studies on undeliverable mail was a multifunctional study
on last known addresses issues sponsored by the IRS Taxpayer
Ombudsman.  As a starting point, this study looked at the
recommendations made in other studies and projects.  The study was
critical of IRS for not seriously considering prior recommendations
and stated that few changes aimed at better handling undeliverable
mail had occurred because of a feeling within IRS that the future
operational improvements under TSM will resolve the undeliverable
mail problems.  Recommendations from prior IRS studies and projects,
as well as new recommendations, have been summarized in the report by
the Taxpayer Ombudsman.  In total, 25 recommendations aimed at
helping IRS better deal with undeliverable mail have been made.  The
recommendations included (1) developing standardized procedures for
processing undeliverable mail throughout IRS and making the
Collection function's automated systems available to other service
center functions; (2) testing alternative methods for taxpayers to
provide address changes to IRS, such as the use of a tear-off return
stub on notices; and (3) adopting procedures to help ensure that
taxpayers' addresses would be accurately updated in its databases. 
When we were completing this report, we learned that IRS had approved
the report on the Taxpayer Ombudsman's project in August 1994, and
responsible offices were developing action plans to implement its
recommendations. 

TSM, a long-term project to modernize computer operations and enhance
customer service, is to shift IRS from a paper-based environment to
an electronic one.  IRS anticipates that this shift will potentially
reduce the volume of undeliverable mail because more taxpayers are
expected to file tax returns electronically, which should result in
more accurate processing.  This should eliminate errors caused by
manually keying information, and therefore reduce IRS' need to
contact taxpayers to correct mistakes.  Also, under TSM, IRS plans to
make many of its contacts with taxpayers by telephone, and this
should eliminate some of the need to correspond by mail.  In
addition, TSM's new Document Processing System would allow IRS to
enter information into its databases by optically scanning paper
documents sent to IRS by taxpayers and eliminate the need for IRS'
staff to manually transcribe the data as is currently being done. 
This will also result in faster and more accurate processing of tax
information. 


   IRS COULD BETTER ENCOURAGE
   TAXPAYERS TO MAKE ADDRESS
   CHANGES
------------------------------------------------------------ Letter :8

Currently, through tax packages and publications, IRS informs
taxpayers that they should notify it in writing of address changes. 
IRS' instructions tell the taxpayers to use the preaddressed labels
supplied on their tax packages.  If the addresses on these labels are
incorrect, taxpayers are instructed to simply cross out the old
addresses and write in their new addresses.  If a taxpayer's address
changes after the current year's tax return was filed, the
instructions advise taxpayers to notify their service centers or
district offices in writing.  Taxpayers are told that they can use an
IRS change of address form to do this, and they should also notify
the Postal Service of the change if they anticipate receiving a tax
refund. 

If a taxpayer voluntarily calls IRS to report an address change, IRS'
procedures require that the staff accept the new address for the sole
purpose of mailing the taxpayer a change of address form.  According
to IRS officials, it will not change the address in its records until
the taxpayer returns the change of address form.  However, IRS'
procedures allow address changes based on oral statements taken over
the telephone when an IRS employee contacts a taxpayer in connection
with an unresolved tax case and when a taxpayer calls IRS to inquire
about an undelivered income tax refund check. 

Even though IRS' procedures require written notification from
taxpayers to change their addresses, except for the two circumstances
previously mentioned, such notification is not fail-safe because IRS
generally accepts it without verification.  Thus, the acceptance of
address changes over the telephone should pose no greater risk to IRS
than accepting written notifications, since both written
notifications and orally supplied changes of address can be
fraudulently supplied to IRS. 

IRS' TSM plans call for systems that would allow taxpayers to change
their addresses simply by using the keypad on their telephones. 
Since IRS currently accepts changes of address by telephone when its
staff contacts taxpayers regarding unresolved tax cases and when
taxpayers contact IRS about undeliverable income tax refund checks,
it might consider accepting address information over the telephone
now, especially when taxpayers call IRS to provide it.  The general
acceptance of changes of address by telephone should help IRS promote
its one-stop concept of resolving taxpayers' concerns with minimum
contact and effort. 

We contacted two large private sector companies in the collection
business for information on how they handle address changes.  Like
IRS, these companies need accurate addresses to contact customers. 
Officials from these companies told us that they ordinarily do not
require written verifications from customers before they make address
changes because their experiences have shown that information
obtained by telephone was usually reliable. 

We believe that increasing taxpayers' awareness of the importance of
providing address changes to IRS is fundamental to developing a
strategy to minimize the volume of undeliverable mail.  If taxpayers
are unaware of the importance, planned TSM enhancements will not be
much help in resolving the problem of undeliverable mail.  We found
that IRS publications such as tax packages supplied annually to
taxpayers did not discuss the importance of keeping addresses current
with IRS.  Even though the tax packages requested taxpayers to use
the change of address form--Form 8822--to notify IRS of address
changes, the form is not included in the packages.  Taxpayers must
take additional steps to obtain the change of address form, such as
(1) visiting an IRS office, (2) calling a toll-free number, or (3)
using a special order form.  In contrast, many businesses make it
much more convenient for customers to change their addresses.  They
often provide customers a conspicuous means for changing their
addresses, such as on return envelopes, order forms, or change of
address forms accompanying each mailing. 

To raise taxpayers' awareness of IRS' need for current addresses, IRS
could explore ways to make (1) taxpayers more aware of the importance
of keeping their addresses current and (2) the change of address form
more conveniently available.  We believe that such actions could help
IRS reduce the volume of undeliverable mail and improve customer
service. 


   IRS COULD CONSOLIDATE RESEARCH
   EFFORTS
------------------------------------------------------------ Letter :9

The different IRS service center functions that process undeliverable
mail perform similar address searches.  They work independently,
however, and generally do not coordinate or share results despite the
fact that taxpayers' cases may ultimately be referred to and worked
on by the other functions.  As a result, each function may perform
the same research on the same taxpayer.  This duplication of effort
increases IRS' costs and the time associated with obtaining different
addresses for taxpayers whose mail was undeliverable. 

In the Examination function, for example, staff manually maintain a
file for each taxpayer's case that includes information on the
results of efforts to locate and contact the taxpayer.  While these
files are available to all Examination function staff, they are not
shared with other service center functions that may be assigned the
case at some time in the future.  The Inventory Delivery System,
which Collection plans to implement, should give it the means to
automatically maintain results of prior address searches.  However,
the results of address searches would still not be shared among
service center functions. 

We identified attempts by two service centers to consolidate efforts
to locate taxpayers' addresses in order to reduce costs and improve
effectiveness.  In one, the Cincinnati Service Center established a
unit to serve service center functions handling undeliverable mail. 
The purpose of the unit is to (1) search for different addresses for
selected notices and (2) identify the best available address and
provide it to the function responsible for the mail.  However, this
unit did not process all of the service center's undeliverable mail. 
The other consolidation effort at the Fresno Service Center has been
disbanded because of IRS' Chief Counsel's objection to it changing
addresses without taxpayers' confirmation.  Although IRS did not
collect productivity data on these consolidation efforts, staff who
were involved in them told us that the consolidation eliminated some
of the duplicate research at the service centers. 

Collection's experience with UMS and the centralization projects at
the Fresno and Cincinnati Service Centers suggested that a
centralized means of processing undeliverable mail would be more
efficient.  Further, as a result of IRS' Taxpayer Ombudsman's study,
IRS plans to establish centralized units in an effort to standardize
their procedures servicewide.  By using centralized units to process
undeliverable mail, IRS could expect earlier resolution of address
problems, reduced rework and duplicative address searches, and lower
operations costs.  On that basis, IRS could proceed to centralize the
process and, in the future, gather the data necessary to continuously
improve the centralized process. 


   CONCLUSIONS
----------------------------------------------------------- Letter :10

Although it is unlikely that the problem of undeliverable mail can be
totally eliminated, IRS needs to give undeliverable mail more
attention because it adversely affects operations and can cause undue
burden on taxpayers.  IRS is aware of the need to better manage its
undeliverable mail and is considering ways to better deal with this
mail.  Although previous efforts to deal with this mail were
primarily limited to IRS' service center Collection functions, new
efforts are expected to have Service-wide consequences because IRS
agreed in August 1994 to implement the recommendations of the
Taxpayer Ombudsman's study.  The implementation of these
recommendations should have a significant impact on reducing IRS'
undeliverable mail.  One recommendation from this study calls for IRS
to standardize its procedures for processing undeliverable mail
throughout the service centers and expand Collection's initiatives,
such as UMS, for Service-wide use.  The implementation of this
recommendation could help IRS implement its planned centralized unit
in each service center to process all undeliverable mail starting
with the initial occurrence of returned mail.  This would further
ensure that the duplication of effort that currently exists across
service centers would be eliminated and that IRS would resolve the
problem of its undeliverable mail sooner. 

Over time, IRS expects TSM to bring further operational improvements
and eliminate some of the paper correspondence between IRS and
taxpayers.  Ideally, TSM will foster IRS' goal of accepting taxpayer
address changes by telephone and reduce the errors associated with
having staff manually update taxpayers' addresses.  However, to
minimize the amount of undeliverable mail, IRS should also explore
ways to make taxpayers more aware of the importance of keeping it
informed of address changes.  It should allow taxpayers to make
address changes with minimum effort by such means as telephoning IRS
or using the change of address form, which should be conveniently
available. 


   RECOMMENDATIONS
----------------------------------------------------------- Letter :11

To help IRS better manage its undeliverable mail we recommend that
the Commissioner of Internal Revenue take the following actions: 

  -- Better encourage taxpayers to make address changes by (1)
     accepting changes of address over the telephone; (2) making Form
     8822, Change of Address, more conveniently available; and (3)
     emphasizing to taxpayers the importance of keeping their
     addresses current with IRS. 

  -- Proceed with plans to establish a centralized unit within each
     service center to process all service center undeliverable mail
     starting with the initial occurrence of returned mail. 


   AGENCY COMMENTS AND OUR
   EVALUATION
----------------------------------------------------------- Letter :12

Responsible IRS officials, including the Acting Executive Director,
Collection (Operations), and the Chief of Document Handling Services,
Taxpayer Services, reviewed a draft of this report and provided oral
comments in a meeting on October 26, 1994.  The officials agreed that
additional steps should be taken to process undeliverable mail more
efficiently and reduce the volume of such mail.  In this regard, they
said that IRS senior management has approved the recommendations in
the Taxpayer Ombudsman's study and action plans are being prepared to
implement them.  According to the IRS officials, one action plan is
to deal with standardizing procedures for address searches and would
involve centralizing the processing of undeliverable mail in the
service centers as we are recommending. 

The IRS officials explained that several measures that affect how
undeliverable mail is processed are currently being tested or
planned.  They believed that these measures generally address the
issues discussed in our recommendations.  For example, to encourage
taxpayers to make address changes, they said Taxpayer Services is
including a change of address form in notices sent to taxpayers on a
test basis.  The Chief of Document Handling Services, Taxpayer
Services, told us that IRS has several planned studies that could
potentially affect IRS' undeliverable mail.  These include (1) IRS'
participation in a project with the Postal Service and other federal
agencies in which the Postal Service will collect change of address
information and provide it to the participating agencies, and (2)
IRS' use of the Postal Service's National Change of Address database
to contact taxpayers in order to verify addresses.  To encourage
taxpayers to provide IRS address changes, we are recommending that
IRS accept address changes by telephone.  Although Collection
officials agreed with us, they said that IRS' Chief Counsel must
first approve this change. 

In a draft of this report that IRS reviewed, we proposed that IRS
stop sending service center collection notices to known undeliverable
addresses while research for a current address is ongoing, except for
notices that are legally required to be sent to taxpayers.  IRS'
Collection officials disagreed with this proposal.  They said that
the costs of sending notices are negligible and that because some
taxpayers may be located by subsequent mailings to the same
addresses, IRS should not begin searches until these mailings are
returned undeliverable.  Collection officials also said that they
would incur increased staff costs if they were to eliminate some
notices and accelerate processing of undeliverable mail to the next
stage in its collection process.  The IRS officials said that costs
would be higher in the subsequent collection stages because higher
graded staff are used to work unresolved collection cases.  We have
since dropped our proposal because Collection officials later told us
that beginning in January 1995, they will reduce the number of
service center notices sent to taxpayers, which will result in
earlier processing of undeliverable mail.  When this change takes
effect, Collection will be sending taxpayers only two service center
notices.  The effect of IRS' elimination of two of the four service
center notices basically carries out what we had previously proposed. 
However, we question whether IRS would incur increased staff costs by
accelerating a case to the next stage in the collection process.  We
raise this question because all unresolved cases would eventually
move to the next stage of the collection process, and delaying
collections and resolution of such cases may actually cost more. 


--------------------------------------------------------- Letter :12.1

As arranged with the Subcommittee, we are sending copies of this
report to the Commissioner of Internal Revenue and other interested
parties.  We will make copies available to others upon request. 

Major contributors to this report are listed in appendix I.  Please
contact me on (202) 512-9044 if you or your staff have any questions. 

Sincerely yours,

Natwar M.  Gandhi
Associate Director, Tax Policy and
 Administration Issues


MAJOR CONTRIBUTORS TO THIS REPORT
=========================================================== Appendix I


   GENERAL GOVERNMENT DIVISION,
   WASHINGTON D.C. 
--------------------------------------------------------- Appendix I:1

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


   CHICAGO REGIONAL OFFICE
--------------------------------------------------------- Appendix I:2

Thomas D.  Venezia, Regional Management Representative


   KANSAS CITY REGIONAL OFFICE
--------------------------------------------------------- Appendix I:3

Terry Tillotson, Evaluator-in-Charge
Marvin McGill, Evaluator
Kathy Squires, Evaluator

*** End of document. ***