Tax Administration: IRS Tax Debt Collection Practices (Testimony,
04/25/96, GAO/T-GGD-96-112).

GAO discussed the Internal Revenue Service's (IRS) tax debt collection
practices. GAO noted that: (1) each year, billions of dollars in taxes
remain unpaid; (2) impediments to improving tax debt collection include
the lack of accurate and reliable accounts receivable data and effective
collection tools and programs, a backlogged receivables inventory,
outdated collection processes, and antiquated computer systems; (3) some
accounts receivable may be overstated, not valid, or owed by deceased or
unlocatable taxpayers and defunct businesses; (4) IRS is modernizing its
information and processing systems, but these actions will not be
completed for several years; (5) although IRS use of private debt
collectors could increase tax collections by locating and encouraging
taxpayers to pay their delinquent taxes, they cannot actually collect
taxes; (6) some states have successfully used private debt collectors to
increase their delinquent tax collections; (7) IRS accounts receivable
have been designated a high-risk area, but IRS cannot make major changes
in its business operations by itself; (8) IRS needs a comprehensive
strategy to guide its efforts to improve tax debt collections, starting
with having accurate and reliable information; and (9) IRS could adopt
private industry practices and use private debt collectors in some
collection-related activities.

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

 REPORTNUM:  T-GGD-96-112
     TITLE:  Tax Administration: IRS Tax Debt Collection Practices
      DATE:  04/25/96
   SUBJECT:  Tax administration systems
             Debt collection
             Delinquent taxes
             Accounts receivable
             Privatization
             Government collections
             Tax nonpayment
             Data integrity
             Collection procedures
             Management information systems
IDENTIFIER:  IRS Enforcement Revenue Information System
             IRS Tax System Modernization Program
             TSM
             IRS Integrated Collection System
             
******************************************************************
** This file contains an ASCII representation of the text of a  **
** GAO report.  Delineations within the text indicating chapter **
** titles, headings, and bullets are preserved.  Major          **
** divisions and subdivisions of the text, such as Chapters,    **
** Sections, and Appendixes, are identified by double and       **
** single lines.  The numbers on the right end of these lines   **
** indicate the position of each of the subsections in the      **
** document outline.  These numbers do NOT correspond with the  **
** page numbers of the printed product.                         **
**                                                              **
** No attempt has been made to display graphic images, although **
** figure captions are reproduced.  Tables are included, but    **
** may not resemble those in the printed version.               **
**                                                              **
** Please see the PDF (Portable Document Format) file, when     **
** available, for a complete electronic file of the printed     **
** document's contents.                                         **
**                                                              **
** A printed copy of this report may be obtained from the GAO   **
** Document Distribution Center.  For further details, please   **
** send an e-mail message to:                                   **
**                                                              **
**                                            **
**                                                              **
** with the message 'info' in the body.                         **
******************************************************************


Cover
================================================================ COVER


Before the Subcommittee on Oversight, Committee on Ways and Means,
House of Representatives

For Release on Delivery
Expected at
10:00 a.m.  EDT
Thursday
April 25, 1996

TAX ADMINISTRATION - IRS TAX DEBT
COLLECTION PRACTICES

Statement of Lynda D.  Willis, Director, Tax Policy and
Administration Issues, General Government Division

GAO/T-GGD-96-112

GAO/GGD-96-112T


(268733)


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

  ERIS - Enforcement Revenue Information System
  ICS - Integrated Collection System
  IRS - Internal Revenue Service
  OMB - Office of Management and Budget
  TSM - Tax Systems Modernization

TAX ADMINISTRATION:  IRS TAX DEBT
COLLECTION PRACTICES
====================================================== Chapter Summary

The Internal Revenue Service (IRS) faces some formidable challenges
in collecting tens of billions of dollars in delinquent taxes.  As
Congress works to balance the federal budget, these unpaid taxes
become increasingly important, as do IRS' efforts to collect them. 
GAO believes that IRS can do more to improve its collection
practices.  A step in that direction could be the lessons learned
from the pilot program testing the use of private debt collectors to
assist in collecting tax debts. 

The challenges facing IRS' improvement efforts include a lack of
accurate and reliable information on either the makeup of its
accounts receivable or the effectiveness of the collection tools and
programs it uses, as well as an aged inventory of receivables,
outdated collection processes, and antiquated technology.  The
results of these long-standing challenges have led GAO, the Office of
Management and Budget, and IRS to recognize IRS' accounts receivable
as a high-risk area.  To address these challenges, IRS needs to make
major changes in the way it does business, but it cannot do it alone. 

GAO believes IRS needs a long-term comprehensive strategy to guide
IRS' efforts to improve collections of tax debts.  This strategy
needs to recognize and address the challenges facing IRS.  The
cornerstone to any improvements lies in having accurate and reliable
information.  Without this type of information, any changes made to
the system may not provide the planned results.  GAO also believes
that private industry may provide some help in collecting tax debts
by assisting in performing some collection-related activities. 


TAX ADMINISTRATION:  IRS TAX DEBT
COLLECTION PRACTICES
==================================================== Chapter Statement

Madam Chairman and Members of the Subcommittee: 

We are pleased to be here today to assist the Subcommittee in its
review of the Internal Revenue Service's (IRS) tax debt collection
practices.  Every year IRS successfully collects over a trillion
dollars in taxes owed the government, yet at the same time tens of
billions more remain unpaid.  As Congress works to balance the
federal budget, these unpaid taxes become increasingly important, as
do IRS' efforts to collect them. 

While most taxpayers voluntarily pay their taxes on time, some are
unable or unwilling to do so.  It is this latter group whom IRS must
deal with in its efforts to collect delinquent taxes.  In doing so,
IRS faces several significant challenges, including a lack of
accurate and reliable information on either the makeup of its
accounts receivable or the effectiveness of the collection tools it
has at its disposal, as well as receivables that are often years old,
out-of-date collection practices, and antiquated technology.  It is
these problems and challenges--and their results--that led us, the
Office of Management and Budget (OMB), and IRS to recognize IRS'
accounts receivable as a high-risk area.  To address these
challenges, significant changes are needed in the way IRS does
business, but IRS cannot do it alone. 

Recently, the IRS Commissioner has compared IRS to financial service
organizations such as banks, credit card companies, and investment
firms.  Like these organizations, IRS processes data, maintains
customer accounts, responds to account questions, and collects money
owed.  We agree with the Commissioner's functional comparison and
believe that, while there are significant differences between IRS and
these private sector businesses, IRS may benefit from using private
collectors as a part of its portfolio of collection programs, and it
is reasonable to assume that IRS could learn from their best
practices as it works to resolve long-standing problems with its debt
collection activities. 

My testimony today, which is based on past reports and ongoing work,
discusses the debt collection challenges facing IRS and the potential
benefits of involving private parties in the collection of tax debts. 


   LONG-STANDING PROBLEMS CONTINUE
   TO UNDERMINE THE EFFECTIVENESS
   OF IRS COLLECTION PROGRAMS
-------------------------------------------------- Chapter Statement:1

A number of long-standing problems have complicated IRS' efforts to
collect its accounts receivable.  Of foremost concern is the lack of
reliable and accurate information on the nature of the debt and the
effectiveness of IRS collection tools. 


      BETTER INFORMATION NEEDED
------------------------------------------------ Chapter Statement:1.1

Access to current and accurate information on tax debts is essential
if IRS is to enhance the effectiveness of its collection tools and
programs to optimize productivity, devise alternate collection
strategies, and develop programs to help keep taxpayers from becoming
delinquent in the first place. 

Without reliable information on the accounts they are trying to
collect and the taxpayers who owe the debts, IRS agents generally do
not know whether they are resolving cases in the most efficient and
effective manner, and may spend time pursuing invalid or unproductive
cases.  Of the approximately $200 billion currently in the IRS
accounts receivable inventory, IRS data shows that approximately $63
billion represents taxes that, although they have been assessed, may
not be valid receivables, but rather are "place markers" for
compliance actions. 

For example, under IRS procedures, when IRS' information return
matching process identifies a taxpayer who received a Form W-2 but
did not file a tax return, IRS creates a return for the taxpayer. 
Generally, this is done using the standard deduction and single
filing status, and often results in the taxpayer owing taxes.  IRS
then sends balance due notices to the taxpayer reflecting the amount
of taxes owed as calculated by IRS--to encourage the taxpayer to file
a return with the correct tax amount owed.  If the taxpayer does not
subsequently file the return, IRS records the amount it calculated as
taxes due and generates a receivable.  However, when contacted by IRS
collection staff, the taxpayer may demonstrate that either no tax or
a lesser amount of tax is actually owed.  To more efficiently account
for and collect money actually owed to the government, IRS would have
to be able to differentiate these IRS-calculated accounts from those
where there is an acknowledged balance due. 

In addition, IRS does not have reliable data on the effectiveness of
its collection activities and programs.  Consequently, it is unable
to target its efforts specifically to the taxpayer and tax debt in
question.  IRS is currently trying to capture this data on its
Enforcement Revenue Information System (ERIS) and other computerized
systems.  However, IRS has noted in the past that there are questions
regarding the accuracy of the data produced by these systems. 


      AGE AND NATURE OF TAX DEBTS
------------------------------------------------ Chapter Statement:1.2

The age of the debts in IRS' accounts receivable inventory is also
problematic.  IRS' inventory of tax debt includes delinquent debts
that may be up to 10 years old.  This is because there is a 10-year
statutory collection period, and IRS generally does not write off
uncollectible delinquencies until this time period has expired.  As a
result, the receivables inventory includes old accounts that may be
impossible to collect because the taxpayers cannot be located, or are
deceased, or the corporations are defunct. 

Of the over $200 billion total receivables inventory as of September
30, 1995, IRS data show that about $38 billion was owed by either
deceased taxpayers or defunct corporations.  Out of a total of 460
accounts receivable cases that we reviewed in our audit of IRS' 1995
financial statements, IRS identified 258 as currently not
collectible; 198 of these cases represented defunct corporations,
while the remaining 60 cases represented entities that either could
not pay or could not be located.  These cases represented $12 billion
of the $26 billion included in accounts greater than $10 million. 

The age of the receivable does not reflect the additional time it
took for IRS to actually assess the taxes in the first place. 
Enforcement tools, such as IRS' matching programs and tax
examinations, may take up to 5 years from the date the tax return is
due until IRS finally assesses the additional taxes.  This reduces
the likelihood that the outstanding amounts will be collected. 

The age factor significantly affects the collectibility of the debt
because, as both private and public sector collectors have attested,
the older the debt, the more problematic collection becomes.  Because
of these and other factors, IRS considers many of the accounts in the
inventory to be uncollectible.  Specifically, IRS has estimated that
only about $46 billion of the $200 billion inventory of tax debt as
of September 30, 1995, was collectible. 

Another factor relating to the collectibility of tax debts owed by
individuals is source of income.  Taxpayers earning their income from
nonwage sources, such as pensions, self-employment, and investments,
are more likely to be delinquent in paying their taxes than wage
earners who have taxes withheld from their wages.  Taxpayers with
nonwage income are required to calculate their projected income and
make estimated tax payments to IRS during the year.  According to IRS
data, the average tax delinquency for taxpayers with primarily
nonwage income was about 4 times greater than that for wage
earners--$15,800 versus $3,600.  IRS data also show that, at the end
of fiscal year 1995, about $75 billion, or 74 percent of the $101
billion in IRS' inventory of tax debts owed by individuals, was owed
by taxpayers whose income was primarily nonwage. 


      OUT-OF-DATE COLLECTION
      PROCESSES
------------------------------------------------ Chapter Statement:1.3

IRS' collection process was introduced several decades ago, and
although some changes have been made, the process generally is costly
and inefficient.  The three-stage collection process--
computer-generated notices and bills, telephone calls, and personal
visits by collection employees--generally takes longer and is more
costly than collection processes in the private sector. 

While the private sector emphasizes the use of telephone collection
calls, a significant portion of IRS' collection resources is
allocated to field offices where personal visits are made by revenue
officers.  IRS has initiated programs and made procedural changes to
speed up its collection process, but historically it has been
reluctant to reallocate resources from the field to the earlier, more
productive collection activities.  IRS' fiscal year 1997 budget
request states that, although "these [revenue officer] positions
still comprise the lion's share of IRS' enforcement efforts, they
also represent on the margin the least efficient use of IRS
resources." Due to budget cuts, however, IRS is in the process of
temporarily reassigning about 300 field staff to telephone collection
sites to replace temporary employees who were terminated. 


      ANTIQUATED COMPUTER SYSTEMS
------------------------------------------------ Chapter Statement:1.4

Upgrading its computer systems is another challenge facing IRS.  IRS
is in the midst of a massive long-term modernization effort-- Tax
Systems Modernization (TSM)--that if successful would, among other
things, help IRS to better collect tax debts by providing its
collectors with on-line access to information they need, when they
need it.  Modernized systems would also help provide the management
information needed to evaluate the effectiveness of collection tools
and the ability to adopt flexible and innovative collection
approaches.  Existing IRS computer systems do not provide ready
access to needed information and, consequently, do not adequately
support modern work processes. 

Although TSM is not expected to be completed any time in the near
future, IRS has started to automate some collection activities.  For
example, IRS is currently developing an automated inventory delivery
system that is intended to direct accounts, based on internally
developed criteria, to the particular collection stage where they can
be processed most efficiently and expeditiously.  This system, which
IRS plans to test in July 1996, is intended to move accounts through
the collection process faster and cheaper than under the current
system. 

Another effort under way involves the automation of certain field
collection tasks.  These tasks, like many in IRS, have for years
involved the manual processing of paper, which has resulted in IRS
field collection employees spending significant amounts of time on
routine administrative duties.  The Integrated Collection System
(ICS) is a computer-based information system that is intended to
automate some of the labor-intensive tasks performed by field revenue
officers.  While this effort is not a major technological
advancement, it will be a step toward helping IRS employees be more
productive by spending their time on more effective and efficient
collection-related activities.  Basic automation is a given in
today's business environment, and if IRS is to operate like a private
sector business as it says, systems that automate basic work
processes are a must. 

According to IRS, implementing this system in two pilot districts has
resulted in increased collections, faster case closings, and less
time spent on each case.  IRS employees using the system were also
very supportive of it and enthusiastic about its benefits.  The
system is currently operating in six districts, and IRS plans to roll
it out in three additional districts this year.  According to IRS,
further implementation is dependent on future funding and final
measurements of productivity. 


   POTENTIAL BENEFITS FROM
   INVOLVING THE PRIVATE SECTOR IN
   TAX DEBT COLLECTION
-------------------------------------------------- Chapter Statement:2

Many private and governmental entities are involved in debt
collection.  We believe that these entities offer the potential for
improving IRS debt collection practices.  For example, as is being
tried currently, there may be a role for private debt collectors in
collecting federal tax debt. 


      POTENTIAL BENEFITS OF USING
      PRIVATE DEBT COLLECTORS
------------------------------------------------ Chapter Statement:2.1

In response to concern about the persistent nature of IRS' accounts
receivable problems, IRS' fiscal year 1996 appropriations legislation
contained provisions that earmarked $13 million for a pilot program
to test the use of private law firms and debt collection agencies to
help collect delinquent tax debts. 

In May 1993, we recommended that IRS test the use of private debt
collectors to support its collection efforts.\1 IRS had looked into
testing the use of private collectors as early as 1991, but had not
carried through with any of its plans. 

IRS issued a request for proposals from prospective participants in
the pilot program on March 5, 1996.  The proposals were due by April
12, 1996, and the pilot is to last 1 year.  Under the pilot, the
private collectors are to attempt to first locate and then contact
delinquent taxpayers,\2 remind them of their tax debt, and inform
them of available alternatives to resolve the outstanding obligation. 

An important limitation of the pilot is that the private collectors
will not be able to actually collect the taxes owed; rather, the
intent is for them to facilitate information exchange and contacts
between IRS and the taxpayer.  There is an OMB policy determination
and IRS Office of Chief Counsel guidance that specify that the
collection of taxes is an inherently governmental function that must
be performed by government employees.  Private collectors, however,
can perform collection-related activities, such as locating taxpayers
and attempting to secure promises to pay. 

In addition, the private collectors will face some of the same
problems in working the pilot cases that IRS employees face.  First,
these are not new cases.  All will have already gone through much of
IRS' collection process, and in some cases, the entire process.  This
means, in effect, that some of the cases may have been in the
accounts receivable inventory for up to 10 years, and some may
involve even earlier tax years.  The cases may also contain some of
the other information problems we discussed previously. 

The pilot could provide useful insight into the effectiveness of the
techniques and technologies used by the private sector in collecting
older accounts.  For example, the pilot calls for 40 percent of the
cases to be those in which IRS has been unable to locate or contact
the taxpayer.  The remaining 60 percent are cases in which IRS has
successfully contacted the taxpayer, but has been unsuccessful in
securing payment.  To the extent that the private collectors can
locate, contact, and arrange for payment on these cases, the
techniques used may be helpful to IRS in its efforts to improve its
collection programs.  The private collectors will be bound by the
same taxpayer rights and disclosure considerations as apply to IRS
employees. 

Other useful information could also be obtained from the pilot.  For
example, IRS could learn what actions are most productive based on
the type of case, type of taxpayer, and age of the account.  For the
information to be useful to IRS and Congress in evaluating the pilot,
however, the sample of cases must be drawn and the data captured in
such a way that the appropriate analyses and tests can be done.  We
have not analyzed IRS' methodologies for selecting its sample of
cases or for evaluating the pilot. 


--------------------
\1 Tax Administration:  New Delinquent Tax Collection Methods for IRS
(GAO/GGD-93-67, May 11, 1993). 

\2 Face-to-face contacts are not allowed. 


      INDUSTRY BEST PRACTICES MAY
      BE HELPFUL TO IRS
------------------------------------------------ Chapter Statement:2.2

IRS faces many challenges in its efforts to improve the management
and collection of its accounts receivable.  The key is to find
solutions to the major problems we previously discussed and their
underlying causes that affect IRS' ability to collect more delinquent
taxes.  Solutions will take time because the problems are pervasive
and may involve all IRS functions and processes. 

Currently, IRS is making some changes to its collection process as a
part of its modernization effort.  We reported in the past that
private collectors and states that are engaged in collection
activities similar to IRS' may provide some best-practice examples
for IRS to use in benchmarking its efforts. 

Many states use private collectors to supplement their own collection
programs, thereby taking advantage of private sector capability in
managing receivables, gaining access to better technology, or
avoiding the expense of hiring permanent staff.  Although many
states--including 33 of the 43 states that responded to our
survey--have used private collectors, their experiences have varied
widely.\3

A majority of the states that responded to our survey used private
collectors to collect delinquent individual income taxes owed by
taxpayers residing outside their borders.  Of the 28 states
responding, 14 said that private collectors were effective in
collecting individual income taxes.  Regarding other types of taxes,
the 12 states expressing an opinion were about evenly split on the
effectiveness of private collectors.  Using these states' experiences
as an indicator, IRS could expect some additional collections from
its proposed pilot, but not necessarily a significant windfall.  IRS
may, however, benefit and learn from the private companies'
collection techniques and use of technology. 


--------------------
\3 Because all states did not respond to all of our survey questions,
our analysis is not necessarily representative of experiences in all
states. 


   NEXT STEPS
-------------------------------------------------- Chapter Statement:3

IRS faces significant challenges in collecting tax debts.  As we have
previously recommended, because the problems are pervasive across all
IRS activities and processes, IRS needs to develop a detailed and
comprehensive long-term plan to deal with the major challenges it
faces and their interrelationships.\4 With such a plan, IRS could
better assure itself and Congress that it is on the right track and
thereby better position itself to obtain the backing and support it
needs. 

Key to improving IRS' collections of tax debt is the need for up-
to-date and accurate information as well as modern equipment and
technology.  IRS also needs to determine the most cost-effective ways
to prevent delinquencies from occurring, as well as what it can do in
its return, payment, and compliance processes to reduce the number of
invalid accounts entering the collection process.  To stay
competitive in today's business environment, IRS must continually
strive to improve collections by testing new and innovative
approaches. 


--------------------
\4 High-Risk Series:  Internal Revenue Service Receivables (GAO
/HR-95-6, February 1995). 


------------------------------------------------ Chapter Statement:3.1

Madam Chairman, this concludes my prepared statement.  I would be
pleased to answer any questions. 

*** End of document. ***