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entitled 'Tax Debt Collection: IRS Needs to Better Manage the 
Collection Notices Sent to Individuals' which was released on 
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Report to the Committee on Finance, U.S. Senate: 

United States Government Accountability Office: 
GAO: 

September 2009: 

Tax Debt Collection: 

IRS Needs to Better Manage the Collection Notices Sent to Individuals: 

GAO-09-976: 

GAO Highlights: 

Highlights of GAO-09-976, a report to the Committee on Finance, U.S. 
Senate. 

Why GAO Did This Study: 

According to the Internal Revenue Service (IRS), $23 billion in unpaid 
individual income tax debt existed in 2001, its most recent estimate. 
The notice phase is the first of IRS’s three-phase process to collect 
unpaid debt. IRS annually sends notices to millions of individual 
taxpayers about billions of dollars of unpaid tax debt. 

Congress and others have questioned IRS’s collection process’s 
effectiveness. As requested, GAO is reporting on (1) how well IRS has 
established objectives, performance measures, and responsibility for 
reviewing notice-phase performance, and (2) how well IRS’s business 
rules for sending notices to individuals help assure that the 
collection notice phase is achieving desired results at the lowest 
costs. To address these objectives, GAO compared the evidence obtained 
from IRS documents and responsible IRS collection officials to 
applicable guidance for internal control standards. 

What GAO Found: 

Although the notice phase is a key part of IRS’s approach and strategy 
for resolving billions of dollars of individuals’ unpaid tax debt, IRS 
lacks certain internal controls to assure that notices to individuals 
are achieving the most benefits—such as debt collected or unpaid debt 
cases otherwise resolved— with the resources being used. Management 
controls like clearly defined objectives, performance measures, and 
clear responsibility for reviewing program performance help provide 
reasonable assurance that the objectives of an agency are being 
achieved effectively and efficiently. However, IRS has no documented 
objectives for the notice phase and no performance measures to indicate 
how well the phase is performing in resolving debt cases or achieving 
other potential desired results. Further, IRS has not established 
responsibility for reviewing the performance of the complete notice 
phase. 

IRS lacks documentation for and evaluations of its business rules for 
notices to individuals to assure that the collection notice phase is 
achieving desired results. According to IRS officials, to make the best 
use of collection resources, IRS uses its business rules to—based on 
certain dollar thresholds and individual tax debt case characteristics—
vary the number and types of notices sent to taxpayers and determine 
whether unresolved cases will be sent for further collection action or 
further action will be deferred. However, as shown in the table, in 
almost all cases, for the five business rules that IRS identified as 
affecting the most taxpayers, IRS did not have information on the date 
the rules were established, the rationale for the rule, or data 
supporting the rationale. IRS collection officials also lacked 
documentation describing the business rules and how they operate. 
Further, even though IRS officials estimated that the business rules 
had been established for years, IRS had documentation for an evaluation 
of only one of the five business rules. Without relevant evaluations 
IRS lacks assurance that the notice phase achieves desired collection 
results at the least cost. 

Table 1: Available IRS Documentation for Selected Business Rules: 

Business rule[A]: 1. Minimum dollar; 
Date established: No; 
Rationale: No; 
Data supporting rationale: No. 

Business rule[A]: 2. Low dollar; 
Date established: No; 
Rationale: No; 
Data supporting rationale: No. 

Business rule[A]: 3. 
Medium dollar; 
Date established: No; 
Rationale: No; 
Data supporting rationale: No. 

Business rule[A]: 4. Repeater (taxpayer had previous tax debt 
resolved); 
Date established: Yes; 
Rationale: No; 
Data supporting rationale: No. 

Business rule[A]: 5. Repeater (taxpayer currently has other unresolved 
debts); 
Date established: No; 
Rationale: No; 
Data supporting rationale: No. 

Source: GAO analysis of IRS information. 

[End of table] 

What GAO Recommends: 

GAO recommends that the Commissioner of Internal Revenue establish for 
the notice phase: (1) objectives and performance measures, (2) 
responsibilities for reviewing performance, (3) documented rationales 
for the business rules, (4) useful information on what the business 
rules are, and (5) periodic evaluations of the rules. In commenting, 
IRS agreed with the recommendations and said that IRS would make 
related improvements. 

View [hyperlink, http://www.gao.gov/products/GAO-09-976] or key 
components. For more information, contact Michael Brostek at (202) 512-
9110 or brostekm@gao.gov. 

[End of section] 

Contents: 

Letter: 

Background: 

Objectives, Scope, and Methodology: 

IRS Lacks Reasonable Assurance That Collection Notices to Individuals 
Achieve Desired Results: 

IRS Lacks Documentation on the Notice Phase Business Rules and Whether 
They Worked as Intended: 

Conclusions: 

Recommendations: 

Agency Comments and Our Evaluation: 

Appendix I: Data on Dispositions from the Notice Phase for Individual 
Taxpayers, Fiscal Years 1999 to 2008: 

Appendix II: Descriptions of Notice-Phase Business Rules Identified by 
IRS: 

Appendix III: Comments from the Department of the Treasury: 

Appendix IV: GAO Contact and Staff Acknowledgments: 

Table: 

Table 1: Available IRS Documentation for Selected Business Rules: 

Figures: 

Figure 1: Number of Collection Notices Issued to Individuals by Notice 
Type, Fiscal Years 1999 to 2008: 

Figure 2: Dollar Values Associated with Notices Issued to Individuals 
by Notice Type, Fiscal Years 1999 to 2008: 

Figure 3: IRS Units and Functions Involved in Administering Notice 
Phase Processes: 

Figure 4: Primary Types of Dispositions of Unpaid Individual Income Tax 
Debt Cases from the Notice Phase, Fiscal Years 1999 to 2008: 

Figure 5: Dollar Values of Notice-Phase Results for Individual Income 
Tax, Fiscal Years 1999 to 2008: 

Abbreviations: 

BPRS: Business Performance Review System: 

CAR: Collection Activity Report: 

CGC: Collection Governance Council: 

CSCO: Compliance Services Collection Operation: 

FMFIA: Federal Managers' Financial Integrity Act of 1982: 

FSP: Functional Specifications Package: 

IRM: Internal Revenue Manual: 

IRS: Internal Revenue Service: 

MITS: Modernization and Information Technology Services: 

OPERA: Office of Program Evaluation and Risk Analysis: 

PRP: Program Requirements Package: 

SB/SE: Small Business/Self-Employed Division: 

TAP: Taxpayer Advocacy Panel: 

TACT: Taxpayer Communication Taskforce: 

W&I: Wage and Investment Division: 

[End of section] 

United States Government Accountability Office: 
Washington, DC 20548: 

September 30, 2009: 

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

The Internal Revenue Service (IRS) must pursue collection of unpaid tax 
debt to help ensure compliance and confidence in the tax system and 
address the tax gap, which is the estimated difference between tax 
amounts that taxpayers voluntarily and timely pay and those they owe. 
IRS most recently estimated that $23 billion of the gross tax gap ($345 
billion) for tax year 2001 was for nonpayment of known individual 
income tax assessments.[Footnote 1] 

As we previously reported to you, the first phase of IRS's complex, 
three-phase collection process is the notice phase in which taxpayers 
are mailed a series of notices informing them of their tax debts and 
asking for payment.[Footnote 2] The notices provide opportunities for 
taxpayers to pay or otherwise resolve their debts before their cases 
are potentially forwarded to one of the following two phases--the phone 
and in-person contact phases--where IRS may take enforcement action 
such as to levy financial assets or seize physical property. 

The notice phase provides IRS with an opportunity to maximize 
collections while minimizing costs in pursuing individual tax debts. 
Notices are computer-generated and mailed to taxpayers with little 
direct involvement by IRS employees, a process that minimizes costs. To 
the extent that taxpayers then take action to pay or otherwise resolve 
their debts, collections can occur with relatively little additional 
IRS investment. When individuals with tax debt do not respond to 
notices, IRS either takes no action or takes enforcement action through 
the other two phases to collect the tax debts. Such enforcement action 
is more labor-intensive and expensive. 

Even though the notice phase is relatively low cost, opportunities may 
exist to improve tax collections though notices sent to individuals. In 
fiscal year 2008, IRS issued about 22 million notices to individual 
taxpayers, including about 12 million notices involving almost $57 
billion in newly identified unpaid tax debts from multiple tax years. 
[Footnote 3] Putting aside debt amounts that IRS abated or offset with 
refunds during fiscal year 2008,[Footnote 4] IRS sent about $40.6 
billion in tax debt to the more expensive collection phases for 
potential enforcement action compared to around $5.6 billion that IRS 
collected. 

Because of your continued concerns about unpaid tax debt and IRS's 
collection processes for individual taxpayers, you asked us to review 
IRS's procedures for sending notices of unpaid tax debt to individual 
taxpayers. Specifically, this report addresses: 

* How well has IRS established objectives, performance measures and 
responsibility for reviewing notice-phase performance? 

* How well do IRS's business rules for sending notices to individuals 
help assure that the collection-notice-phase is achieving desired 
results at the lowest costs? 

To assess IRS's objectives, performance measures, and responsibility 
for reviewing notice phase performance, we reviewed information on how 
IRS has organized the work flow of the notice phase, including its 
objectives and related measures of performance as well as the 
assignments of responsibility for notice activities such as reviewing 
the results achieved. To assess IRS's business rules, we asked 
responsible IRS collection officials to provide basic information on 
the key rules that affect the most individual taxpayers in terms of 
which notices IRS sends to them. We assessed the information for both 
objectives in light of applicable guidance for federal internal control 
standards. More detailed information on our objectives, scope, and 
methodology are below. 

Background: 

IRS identifies unpaid tax liabilities through its program activities. 
The most common include IRS (1) identifying a taxpayer who files a tax 
return without fully paying the tax claimed to be owed, (2) adjusting 
tax liabilities when filed returns are being processed by IRS by 
checking for obvious errors such as those involving adding or 
subtracting numbers incorrectly or using the wrong social security 
number for a claimed dependent, (3) finding additional tax liabilities 
by auditing a filed tax return or computer matching it to third party 
information on income paid to a taxpayer, (4) assessing a penalty for 
some taxpayer action or inaction, and (5) sending a tax bill to a 
taxpayer who did not file a required tax return after IRS estimates, 
based on available information, how much tax the person should have 
paid. 

IRS's process for collecting identified unpaid debt has three phases. 
Debt goes through these phases until it is determined to be 
uncollectible, is collected, or is otherwise resolved: 

* Notice: IRS sends the taxpayer a series of notices of balances due, 
in part, to prompt a reply and payment by the taxpayer and handles 
responses to those notices. 

* Telephone: IRS uses telephone contacts with the taxpayer to prompt 
payment or takes enforcement action that may include levying financial 
assets or filing a lien against property. 

* In-person: IRS staff contact the taxpayer to prompt payment or to 
take enforcement action, including levies, liens, and seizures of 
property. 

According to IRS officials, the phases and routing of tax debt- 
collection cases result from IRS's designing the collection process to 
effectively and efficiently use resources to resolve taxpayer debt at 
the earliest possible time and using the least costly resources. 
Although data is not readily available to determine the relative costs 
and benefits of the notice phase versus the other phases, given the 
relatively high automation of the notice process and relatively low 
costs of postage compared to the more staff-intensive nature of 
enforcement actions in later collection phases, the notice phase is 
likely the most cost effective way for IRS to resolve unpaid debt 
cases. 

During the notice phase for individual taxpayers IRS's general practice 
is to send up to four notices at 5-week intervals to collect the 
balances due.[Footnote 5] Generally, 6 weeks after the fourth notice, 
IRS either determines that any additional collection actions should be 
deferred or sends cases to be worked potentially in the telephone or in-
person contact phases. IRS has made an administrative decision to 
separately send two notifications in the notice phase that are required 
by law--notifications (1) of the debt due and request for payment 
[Footnote 6] and (2) with regard to a levy of a state tax refund 
[Footnote 7]--in the first and fourth notices, respectively.[Footnote 
8] According to IRS officials, IRS sends the discretionary second and 
third notices because they are successful in resolving some cases at 
relatively low cost. 

However, IRS has developed variations on the practice of sending four 
notices before deciding whether to send any uncollected tax debt to the 
next collection phase. Depending on specific debt-related 
characteristics, IRS may take such actions as: (1) skip the 
discretionary reminder notices to "accelerate" a debt to the next 
collection phase or (2) defer further collection action on debts not 
resolved with notices.[Footnote 9] Based on these characteristics, IRS 
has established "business rules" that are embedded in IRS's computer 
system. These rules are to determine the number and types of notices as 
well as whether IRS defers collection action or sends the debt to other 
phases for further collection action. IRS officials said business rules 
were created in an attempt to make the most effective use of collection 
resources. 

As shown in figure 1, IRS annually has sent millions of notices (across 
the four types) to collect billions of dollars in unpaid debt from 
individual taxpayers. The total number of the notices generally 
increased from fiscal years 2004 through 2008, reaching around 22 
million in 2008, largely because of the number of "first" notices sent. 

Figure 1: Number of Collection Notices Issued to Individuals by Notice 
Type, Fiscal Years 1999 to 2008: 

[Refer to PDF for image: line graph] 

Fiscal year: 1999; 
First notice: 10.1 million; 
Second notice: 2.8 million; 
Third notice: 3.2 million; 
Fourth notice: 3.8 million. 

Fiscal year: 2000; 
First notice: 9.4 million; 
Second notice: 2.4 million; 
Third notice: 2.7 million; 
Fourth notice: 3.7 million. 

Fiscal year: 2001; 
First notice: 9.7 million; 
Second notice: 2.3 million; 
Third notice: 2.5 million; 
Fourth notice: 3.5 million. 

Fiscal year: 2002; 
First notice: 9.4 million; 
Second notice: 2.3 million; 
Third notice: 2.7 million; 
Fourth notice: 4 million. 

Fiscal year: 2003; 
First notice: 8.1 million; 
Second notice: 2.1 million; 
Third notice: 2.5 million; 
Fourth notice: 4.3 million. 

Fiscal year: 2004; 
First notice: 8.2 million; 
Second notice: 2.2 million; 
Third notice: 2.6 million; 
Fourth notice: 4 million. 

Fiscal year: 2005; 
First notice: 9.6 million; 
Second notice: 2.4 million; 
Third notice: 3.3 million; 
Fourth notice: 4.1 million. 

Fiscal year: 2006; 
First notice: 10.2 million; 
Second notice: 2.5 million; 
Third notice: 3.3 million; 
Fourth notice: 3.7 million. 

Fiscal year: 2007; 
First notice: 11.4 million; 
Second notice: 2.9 million; 
Third notice: 4 million; 
Fourth notice: 4.8 million. 

Fiscal year: 2008; 
First notice: 11.7 million; 
Second notice: 2.3 million; 
Third notice: 3.5 million; 
Fourth notice: 4.2 million. 

Source: IRS data. 

[End of figure] 

Figure 2 shows that the total dollar values of these sent notices 
increased overall in comparing fiscal years 2004 and 2008, with a 
decline in 2008, when it reached around $129 billion.[Footnote 10] 

Figure 2: Dollar Values Associated with Notices Issued to Individuals 
by Notice Type, Fiscal Years 1999 to 2008: 

[Refer to PDF for image: line graph] 

Fiscal year: 1999; 
First notice: $26.4 billion; 
Second notice: $3.2 billion; 
Third notice: $12.2 billion; 
Fourth notice: $18.4 billion. 

Fiscal year: 2000; 
First notice: $25.3 billion; 
Second notice: $2.2 billion; 
Third notice: $10.3 billion; 
Fourth notice: $17.6 billion. 

Fiscal year: 2001; 
First notice: $27.9 billion; 
Second notice: $2.2 billion; 
Third notice: $10.4 billion; 
Fourth notice: $18.7 billion. 

Fiscal year: 2002; 
First notice: $30.1 billion; 
Second notice: $2.3 billion; 
Third notice: $11.9 billion; 
Fourth notice: $21.4 billion. 

Fiscal year: 2003; 
First notice: $26.4 billion; 
Second notice: $2.7 billion; 
Third notice: $11.7 billion; 
Fourth notice: $24.8 billion. 

Fiscal year: 2004; 
First notice: $26.7 billion; 
Second notice: $3.7 billion; 
Third notice: $12.4 billion; 
Fourth notice: $25.8 billion. 

Fiscal year: 2005; 
First notice: $40.9 billion; 
Second notice: $7 billion; 
Third notice: $20.9 billion; 
Fourth notice: $31 billion. 

Fiscal year: 2006; 
First notice: $47.1 billion; 
Second notice: $6.8 billion; 
Third notice: $20.3 billion; 
Fourth notice: $29.8 billion. 

Fiscal year: 2007; 
First notice: $60.8 billion; 
Second notice: $9.8 billion; 
Third notice: $28.9 billion; 
Fourth notice: $45.3 billion. 

Fiscal year: 2008; 
First notice: $56.8 billion; 
Second notice: $7.1 billion; 
Third notice: $25.5 billion; 
Fourth notice: $39.3 billion. 

Source: IRS data. 

[End of figure] 

Every year, IRS's notice phase also disposes of debt for millions of 
notices that had been sent. IRS dispositions arise in various ways, 
such as by resolving the debt (including collecting payment from the 
taxpayer, abating all or some of the debt, or offsetting the taxpayer's 
refund with the debt owed), deferring further collection action, or 
sending the case to the next collection phase for potential enforcement 
action. (See appendix I on the trends in volumes and dollar values of 
dispositions from the notice phase for fiscal years 1999 to 2008.) 

Internal control is a major part of managing an organization. It 
comprises the plans, methods, and procedures used to meet missions, 
goals, and objectives and, in doing so, supports performance-based 
management. Internal control also serves as the first line of defense 
in safeguarding assets and in preventing and detecting errors and 
fraud. In short, internal control, which is synonymous with management 
control, helps government program managers achieve desired results 
through effective stewardship of public resources. Internal control 
should provide reasonable assurance that the objectives of the agency 
are being achieved through, among other things, effective and efficient 
use of the agency's resources. 

Federal Law requires that we issue standards for internal control in 
government.[Footnote 11] The standards provide the overall framework 
for establishing and maintaining internal control and for identifying 
and addressing major performance and management challenges and areas at 
greatest risk of fraud, waste, abuse, and mismanagement. In 2001, we 
issued Internal Control Management and Evaluation Tool (GAO-01-1008G, 
August 2001) based upon Standards for Internal Control in the Federal 
Government (GAO/AIMD-00-21.3.1, November 1999), to assist agencies in 
maintaining or implementing effective internal control. This tool is 
not an authoritative part of the standards for internal control, nor is 
it required to be used. Instead, it is intended as a supplemental guide 
that federal managers and others may use in assessing the effectiveness 
of internal control and identifying important aspects of control in 
need of improvement. When used with GAO's standards for internal 
control and the Office of Management and Budget Circular A-123, 
Management's Responsibility for Internal Control, the tool is to 
provide a systematic, organized, and structured approach to assessing 
an agency's internal control structure. 

During the course of our review, in November 2008, IRS separately 
initiated a review of notices sent to taxpayers, including notices sent 
to taxpayers during the collection notice phase. The review was led by 
an IRS team called the Taxpayer Communication Taskforce (TACT.) TACT's 
objectives included simplifying and clarifying notice language; 
instituting effective measures; streamlining and improving business 
processes; and eliminating unnecessary or duplicative notices, letters, 
reminders and inserts. According to its director, TACT is to brief the 
Commissioner on a proposed "road map" for addressing issues identified 
by the team. IRS did not establish a date for the briefing before we 
concluded our work. 

Objectives, Scope, and Methodology: 

Our objectives were to determine: 

* How well has IRS established objectives, performance measures, and 
responsibility for reviewing notice-phase performance? 

* How well do IRS's business rules for sending notices to individuals 
help assure that the collection notice phase is achieving desired 
results at the lowest costs? 

To assess IRS's objectives, performance measures, and responsibility 
for reviewing notice-phase performance, we reviewed information on how 
IRS has organized the work flow of the notice phase, including its 
objectives and related measures of performance as well as assignments 
of responsibility for notice activities such as reviewing the results. 
We reviewed collection program documents including the Internal Revenue 
Manual (IRM), IRS's collectionwide performance measures, and any 
related performance measures in the Wage and Investment Division's 
(W&I) and Small Business/Self-Employed Division's (SB/SE) [Footnote 12] 
periodic business performance review documents. We were to analyze 
whether these measures provided information adequate to assess whether 
the notice phase achieved the desired results laid out in any stated 
objectives. We also interviewed responsible IRS collection officials 
[Footnote 13] on any stated objectives for the notice phase and whether 
and how the officials use available data to assess the performance of 
the notice phase and develop performance measures. We reviewed 
available organization charts and the IRM sections on the managerial 
and reviewing responsibilities for the collection operations. We also 
obtained and reviewed the charter of the Collection Governance Council, 
which includes representatives of collection operations in W&I and 
SB/SE. We reviewed these documents to identify IRS officials 
responsible for managing aspects of the notice process and reviewing 
notice-phase performance and interviewed these officials. 

To determine how well IRS's business rules help assure that the 
collection notice phase achieves desired results at the lowest costs, 
we asked IRS collection officials who were the most knowledgeable about 
the business rules to identify the key business rules that affect most 
individual taxpayers in the notice phase. The five rules IRS identified 
were based on (see appendix II for further descriptions of the five 
rules):[Footnote 14] 

* certain dollar thresholds (minimum-, low-and medium-dollar amounts) 
or: 

* "repeater" characteristics (taxpayers who recently had tax debt 
resolved or currently have other tax debt in collection status). 

For each of the five business rules, we interviewed these knowledgeable 
officials on how the rule operates--i.e., how the rule determines the 
number and types of notices sent--and asked IRS for documentation on 
how the rules operated. We asked for information and documentation on 
when the rule was established, the rationale or purpose for the rule to 
include supporting data that IRS considered in establishing the rule, 
and any evaluations of the rule since its establishment. 

To answer both objectives, we used applicable internal control 
standards in our Standards for Internal Control in the Federal 
Government (GAO/AIMD-00-21.3.1, November 1999), Internal Control 
Management and Evaluation Tool (GAO-01-1008G, August 2001), and the 
Office of Management and Budget Circular A-123, Management's 
Responsibility for Internal Control. To assess IRS's objectives, 
measures, and performance review, we selected the applicable internal 
control standards based upon our report on IRS's collection process in 
which we addressed the complexity, organization, and performance 
measures of the collection process.[Footnote 15] 

The IRS information we relied on for our audit work was descriptive. 
The quantitative data in this report are from an IRS Collection 
Activity Report (CAR) and are for the purpose of providing background 
and context on the notice process. We interviewed IRS officials with 
knowledge about CAR data about the steps taken to ensure data accuracy. 
We determined that the data we use in this report were sufficiently 
reliable for our purposes. We conducted this performance audit from 
July 2008 through September 2009 in accordance with generally accepted 
government auditing standards. Those standards require that we plan and 
perform the audit to obtain sufficient, appropriate evidence to provide 
a reasonable basis for our findings and conclusions based on our audit 
objectives. We believe that the evidence obtained provides a reasonable 
basis for our findings and conclusions based on our audit objectives. 

IRS Lacks Reasonable Assurance That Collection Notices to Individuals 
Achieve Desired Results: 

To assure that programs operate efficiently and effectively, agencies 
must assess the risks that the program will not achieve desired results 
at the least possible cost. A precondition to risk assessment is the 
establishment of clear, consistent goals and objectives at both the 
entity level and at the activity (program or mission) level. Without 
objectives, an agency cannot identify the risks that could impede the 
efficient and effective achievement of program or activity purposes. As 
shown below, guidance for the federal internal control standards states 
that objectives should be established for all key operational 
activities. 

Text box: 

* Objectives have been established for all key operational activities 
and support activities; 
* Activity-level (program or mission-level) objectives flow from and 
are linked with the agency's entitywide objectives and strategic plans. 
The activity-level objectives are relevant to all significant agency 
processes; 
* All levels of management are involved in establishing the activity-
level objectives and are committed to their achievement. 

Source: Excerpts from Internal Control Management and Evaluation Tool 
(GAO-01-1008G, August 2001). 

[End of text box] 

Although the notice phase affects millions of taxpayers and is a key 
part of IRS's strategy for resolving billions of dollars of unpaid 
debt, IRS has not established written objectives for the notice phase. 
Guidance for the internal control standards is clear that such 
objectives should be written and be the product of a process in which 
all levels of management have been involved and have committed to the 
objectives. By not meeting these standards, IRS cannot be assured that 
relevant staff and management commonly understand and pursue the same 
outcomes that are linked to IRS-wide objectives and strategic plans. 

IRS officials said that written objectives are unnecessary because IRS 
officials have widespread agreement on the objectives. However, our 
discussions with IRS W&I and SB/SE executives and managers responsible 
for all parts of the collection process show that they have different 
views about the notice phase in terms of what it is intended to do. For 
example, one official said that the purposes of the notice phase are to 
prompt a response from the taxpayer and get the taxpayer actively 
engaged in resolving the unpaid debt. Among other possible objectives, 
officials said that the notice phase is to resolve unpaid debt cases at 
the lowest possible cost or achieve the most economical resolution of 
the greatest number of debts. Furthermore, IRS officials referred to 
abating certain debts, achieving full payments for debts, or collecting 
as much unpaid debt as possible as other desired outcomes. 

These desirable outcomes strive for different things such as getting 
the taxpayer involved, resolving as many debts as possible, minimizing 
costs, and collecting the unpaid amounts. For example, one could focus 
on minimizing costs or resolving more debt cases--such as through 
abatements or deferring any collection action--but not collect any debt 
in doing so. Without documenting how these different outcomes interact, 
IRS does not have assurance that its staff clearly understand what the 
notice phase should be producing or that they may maximize one type of 
performance while adversely affecting other desired levels of 
performance. 

Without written objectives, IRS cannot move forward to the next step of 
establishing program performance measures that are tied to the desired 
results envisioned in the objectives. Without performance measures 
related to established objectives agencies cannot be assured that a 
program is achieving desired results and, if possible, improving 
results. As shown below, guidance for the federal internal control 
standards states that performance measures should be established for 
government programs and, among other things, be linked to objectives. 

Text box: 

* Activity-level objectives include measurement criteria; 
* Performance measures and indicators have been established throughout 
the organization at the entitywide, activity, and individual levels; 
* Performance measurement assessment factors are to be evaluated to 
ensure they are linked to mission, goals, and objectives and are 
balanced and set appropriate incentives for achieving goals while 
complying with law, regulations, and ethical standards. 

Source: Excerpts from Internal Control Management and Evaluation Tool 
(GAO-01-1008G, August 2001). 

[End of text box] 

As with objectives, IRS has not established performance measures for 
the notice phase. IRS established the Collection Governance Council 
(CGC) in part to establish consistent performance measures that could 
be compared across the divisions and operating units that administer 
parts of the collection process and be rolled up to reflect IRS-wide 
collection performance. However, the three IRS-wide collection process 
measures[Footnote 16] do not provide information necessary to assess 
the notice phase in part because two of the measures reflect telephone 
and in-person contact phase work in addition to notice phase work 
[Footnote 17] and the other measure is specific to the telephone 
contact phase.[Footnote 18] 

Nor do the W&I and SB/SE unit-level performance measures that IRS uses 
to hold managers accountable for performance in these units provide 
information necessary to assess the notice phase in part because they 
reflect work done in addition to notice phase work. For example, the 
measures for the Compliance Services Collection Operations (CSCO) units 
reflect performance not only on handling taxpayer written responses to 
the four collection notices but also post-notice phase work, such as 
taxpayer correspondence on defaulted installment agreements[Footnote 
19].: 

Without performance measures, IRS cannot tell how well the notice phase 
works and helps achieve any objectives that are established. In 
discussing this effect with IRS officials, they cited a percentage-- 
total number of cases disposed by the entire notice phase divided by 
the total number of first notices issued in a given year --as evidence 
that the notice phase is working well. However, IRS has not established 
this percentage as a performance measure or defined how it is to be 
consistently calculated. For example, the official who calculated the 
percentage explained that more than one formula could be used to 
calculate the percentage, such as including or excluding deferred cases 
from the number of cases disposed. Furthermore, establishing this 
measure as the only measure of notice-phase performance would not meet 
IRS's policy of having a set of balanced measures that are linked to 
IRS goals, such as goals for customer satisfaction, employee 
satisfaction, and business results. 

In addition to performance information, IRS would also benefit from 
using cost information to make data-based decisions about notice phase 
effectiveness. Officials in IRS's Office of Chief Financial Officer 
have demonstrated the ability to determine full cost information on 
selected IRS programs through a series of cost studies, but the notice 
phase was not included in them. Even so, IRS has collected some 
information on the cost to produce or mail collection notices to 
taxpayers. For just fiscal year 2006 and just the fourth notice (which 
is sent by certified mail), IRS tracked and maintained postage cost 
data that showed IRS spent $22 million on sending that notice type. 
[Footnote 20] According to IRS's comments on a draft of this report 
(see appendix III), IRS has an effort underway that is intended to 
address the lack of some types of cost information. IRS said that it 
awarded a contract in August 2009, to help develop the Correspondence 
Management Information System (CMIS) to provide, among other things, 
data on the costs of notice printing and postage which will assist in 
determining the full cost of notices. The full costs also include such 
things as labor cost of processing payments or handling taxpayers' 
correspondence or telephone calls in response to notices. 

Related to the establishment of objectives and measurement of 
performance against those objectives, the internal controls also 
envision top management reviews. To ensure that agencies are achieving 
desired program results, it is important to have a chain of performance 
reporting leading to top-level management reviews and accountability 
for program performance. As shown below, guidance for the federal 
internal control standards indicates that performance reporting up 
through higher levels of agency management should create a chain of 
accountability where performance is compared to targets. 

Text box: 

* Top-Level Reviews--Management tracks major agency achievements in 
relation to its plans; 
- Top-level management regularly reviews actual performance against 
budgets, forecasts, and prior period results; 

* Management Reviews at the Functional or Activity Level--Agency 
managers review actual performance against targets; 
- Managers at all activity levels review performance reports, analyze 
trends, and measure results against targets. 

Source: Excerpts from Internal Control Management and Evaluation Tool 
(GAO-01-1008G, August 2001). 

[End of text box] 

Without objectives and performance measures for the notice phase, IRS 
top management cannot review notice-phase performance. IRS's primary 
system for periodically measuring and reviewing performance--the 
Business Performance Review System (BPRS)--focuses on business units 
rather than notice phase performance.[Footnote 21] According to IRS 
collection officials, the performance reporting creates a chain of 
accountability up through IRS for unit performance. 

According to IRS collection officials, other data exist that IRS could 
use to review notice phase performance--data that include notice-phase 
results like full payments that do not involve W&I and SB/SE subunits--
and are contained in the Collection Activity Report. Selected report 
data--such as the number of first notices and the number of notice 
cases disposed--are trended and reported to the CGC. However, the CGC 
is not required to report these data to higher levels of IRS management 
for its review as part of a mechanism for being accountable for notice 
performance. 

IRS faces a challenge in developing objectives, performance measures, 
and related top management reviews for the notice phase, in part, 
because the phase spans across IRS units or functions. As shown in 
figure 3, collection-notice-phase key activities are divided among five 
IRS units or functions. Factors that determine whether a given unit 
will be involved in handling a notice case include, among other things, 
whether the taxpayer is a W&I taxpayer or an SB/SE taxpayer and whether 
the taxpayer chooses to reply at all, pay the debt in full, or respond 
to a notice by telephone or by mail. 

Figure 3: IRS Units and Functions Involved in Administering Notice 
Phase Processes: 

[Refer to PDF for image: illustration] 

Computer system: 
Sends first and following notices based on business rules or handles 
the case; 
Notices or case handling; 
Close case or send to next phase for potential collection action. 

Taxpayer: 
Responses to notice from computer system via telephone to W&I Accounts 
Management. 

W&I Accounts Management: 
Handles all taxpayers’ telephone calls. 

Mail handling system: 
Routes payments and written responses: 
Payments to Computer system; 
Written responses to W&I Compliance Services Collection Operations. 

W&I Compliance Services Collection Operations: 
Handles written responses from W&I taxpayer. 

SB/SE Compliance Services Collection Operations: 
Handles written responses from SB/SE taxpayer. 

Source: GAO analysis of IRS information. 

[End of figure] 

IRS collection officials have recognized that improvements are needed 
that span some of the differing responsible units. Officials have, for 
example, proposed an information system enhancement that would allow 
IRS to analyze unpaid debt cases earlier in the notice phase, reduce 
the amount of time cases spend in the notice phase, and identify cases 
that are less likely to resolve without additional enforcement action 
and move them to the other collection phases earlier in the collection 
process.[Footnote 22] Further, among other reasons, IRS established the 
Collection Governance Council to help coordinate selected activities, 
including work done by the CSCO units that are responsible for parts of 
the notice process. Nevertheless, the Council's stated responsibilities 
do not focus on management and accountability for the entire notice 
process and have not led to the establishment of the other internal 
controls, like documented objectives and performance measures that 
would better ensure the entire process functions well. 

According to TACT's director, the TACT review also found that 
performance measures and clear management responsibility--such as for 
reviewing the effectiveness of notices--were lacking for notices in 
general. The TACT director said that the CMIS database under 
development is to take better advantage of existing data to measure the 
effectiveness of notices, but documentation on specifics like 
milestones for the project was not yet available. TACT was also 
considering a proposal to address aspects of management responsibility. 
According to the TACT director, the proposal was not considered 
finalized because the IRS Commissioner had not yet been briefed on it. 
[Footnote 23] Therefore, documentation was not provided to us in time 
to take it into account in this report. 

IRS Lacks Documentation on the Notice Phase Business Rules and Whether 
They Worked as Intended: 

Written documentation of processes is useful to managers in guiding an 
agency's operations and to those overseeing and analyzing operations. 
As shown below, guidance for the federal internal control standards 
states that there should be complete and accurate documentation of 
transactions and significant events.[Footnote 24] 

Text box: 

* Written documentation exists covering the agency's internal control 
structure and for all significant transactions and events; 
* The documentation is readily available for examination; 
* Documentation, whether in paper or electronic form, is useful to 
managers in controlling their operations and to any others involved in 
evaluating or analyzing operations; 
* Documentation of transactions and other significant events is 
complete and accurate and facilitates tracing the transaction or event 
and related information from authorization and initiation, through its 
processing, to after it is completed. 

Source: Excerpts from Internal Control Management and Evaluation Tool 
(GAO-01-1008G, August 2001). 

[End of text box] 

As noted earlier, IRS officials said that generally business rules were 
established to make the best use of IRS resources. The five business 
rules IRS identified as affecting most taxpayers use certain dollar 
thresholds (minimum-, low-and medium-dollar amounts) or "repeater" 
characteristics (taxpayers who either recently had resolved a previous 
tax debt or currently have other debt in collection status) to 
determine whether certain notices are sent or whether IRS will defer 
further collection in a given case. 

IRS Did Not Have Documentation on When and Why the Business Rules Were 
Established: 

Given the stated purposes of the business rules, the millions of 
taxpayers impacted by them, and the billions of dollars in unpaid debt 
involved, the establishment of a business rule is a significant event 
that should be documented with enough detail to allow IRS managers and 
others to trace the basis for its establishment. Such details could 
include the date the rule was established, the rationale for the rule, 
and any data supporting the rule. However, table 1 shows that IRS 
lacked such basic documentation for four of the five business rules and 
that for the one rule with documentation, IRS only had the information 
on the date it was established. 

Table 1: Available IRS Documentation for Selected Business Rules: 

Business rule[A]: 1. Minimum dollar; 
Date established: No; 
Rationale: No; 
Data supporting rationale: No. 

Business rule[A]: 2. Low dollar; 
Date established: No; 
Rationale: No; 
Data supporting rationale: No. 

Business rule[A]: 3. Medium dollar; 
Date established: No; 
Rationale: No; 
Data supporting rationale: No. 

Business rule[A]: 4. Repeater (taxpayer had previous tax debt 
resolved); 
Date established: Yes; 
Rationale: No; 
Data supporting rationale: No. 

Business rule[A]: 5. Repeater (taxpayer currently has other unresolved 
debts); 
Date established: No; 
Rationale: No; 
Data supporting rationale: No. 

Source: GAO analysis of IRS information. 

[A] See appendix II for descriptions of the rules. The descriptions do 
not provide specifics on the dollar thresholds or case characteristics 
on four of the five rules because IRS considers that information to be 
sensitive because of its potential to be used intentionally to avoid 
IRS collection actions. 

[End of table] 

IRS provided documentation that the repeater rule (for taxpayers that 
had previous tax debt resolved) was established in August 2002. Without 
documentation of when the other four rules were established, IRS lacked 
information for tracking and evaluating events over time that could 
affect how the rules operate. IRS officials' recollections of when the 
four rules were established were imprecise and in one case depended on 
the official's experiences in IRS. For example, an IRS official said 
the minimum dollar rule was established as early as 1978 because the 
rule was in effect when the official began working at IRS. Officials 
speculated that the low dollar rule was established around 1995. 
Officials said the medium dollar rule was established sometime in 1994 
because an official had retained a dated training manual on a related 
program that officials recalled being established at the same time as 
the rule. 

IRS could not provide documentation on the rationales (such as the 
factors considered or reasons for adopting the rule) for any of the 
rules we reviewed. As with the dates that rules were established, we 
had to rely on the recollections of IRS officials to determine why IRS 
had adopted the rule and its purpose. Such sources were of limited use 
because of their reliance on staffs' memories and because officials 
disagreed on some of the rules, thus making it unclear what IRS's 
reasoning was for the rule. For example, officials said that the reason 
IRS established the medium dollar rule to defer sending certain cases 
to ACS was that using automatic offsets of future tax refunds to 
collect these debts was less costly than using ACS. However, another 
official said that the rule was established not so much because of the 
relative costs of ACS but instead to stem the flow of paper because, at 
the time IRS began deferring sending cases, IRS's process for levying 
assets relied on paperwork, which overwhelmed the staffs. The lack of 
documentation for the rationale of the rule--the basic reasoning on why 
the rule exists--made it impossible to determine if the rule achieves 
its intended purpose. 

IRS also lacked data supporting the rationales for the rules. For 
example, for the minimum-, low-, and medium-dollar rules that include 
dollar thresholds for determining notices sent and whether further 
collection action would be deferred, IRS officials were unable to 
provide analyses on why a given dollar amount was chosen as opposed to 
a higher or lower amount. As a further example, for the repeater rule 
for previously resolved debts, IRS had no data to show why it selected 
the time period considered in determining whether a taxpayer was a 
"repeater." 

IRS officials told us that documentation was lacking in most cases 
because the rules were established so long ago. Further, the officials 
said the current rules are not so much designed as a cohesive set of 
rules but instead are the result of numerous decisions made over the 
course of several years. Regardless, without documentation on when the 
rules were established, the rationale for the rules, and data 
supporting those rationales, IRS managers lack basic information to 
help assure that the business rules are working as originally intended. 
Without such documents, IRS has limited ability to determine whether 
the circumstances under which a rule was established have changed in 
such a way that the rationale for the rule is no longer valid and 
therefore it should be revised or abandoned. 

Collection Managers Lack Documentation to Know What the Rules Are and 
How the Rules Operate: 

To exercise control over government operations, managers need to know 
how the programs they are responsible for operate. As shown below, 
guidance for the federal internal control standards states that 
managers should have pertinent information available in forms that are 
useful for them to exercise their responsibilities to ensure efficiency 
and effectiveness of operations. 

Text box: 

* Pertinent information is identified, captured, and distributed to the 
right people in sufficient detail, in the right form, and at the 
appropriate time to carry out their duties and responsibilities 
efficiently and effectively. 

Source: Excerpts from Internal Control Management and Evaluation Tool 
(GAO-01-1008G, August 2001). 

[End of text box] 

We found that collection officials lacked information to know what the 
notice-phase business rules are and how the rules operate. In some 
cases, the officials either did not know or misunderstood these key 
business rules. For example, in a meeting with us, IRS executives and 
managers cited three different amounts for the dollar threshold of the 
low dollar rule, which determines which notices are sent and whether 
further collection action will be deferred or the debt will potentially 
be offset by levying a state refund. For the medium dollar rule, IRS 
managers who we were told were most familiar with the rules originally 
said that a taxpayer under this rule would receive four notices. The 
managers said that sending four notices was to give the taxpayer the 
maximum opportunities to respond given that IRS would not be taking 
further collection action if payment or another response was not 
received. After further review, officials later told us that taxpayers 
receive only three notices in these cases. 

IRS collection officials were able to provide specifics on the 
operations of some of the rules and corrected some of their 
misunderstandings of the rules by using a document called the 
Functional Specifications Package (FSP) and consulting with 
Modernization and Information Technology Services (MITS) staff. 
[Footnote 25] The FSP contains some of the computer commands that 
control the sending of notices. Officials said the FSP and related 
system documents are the only documentation for the existence and 
operation of the rules. According to IRS collection officials, the 
language of the FSP is difficult to understand. Consequently, the 
managers had to consult with MITS staff to explain the rules. One of 
the roles of MITS is to translate operational requirements devised by 
the collection function into computer programming language. 

Furthermore, not all collection notice rules are in the FSP. Some rules 
are in at least one other information system--the program requirements 
package (PRP) of the master file, the information system that sends the 
first collection notice to taxpayers. With more than one system, IRS 
has limited assurance that the business rules are identical because 
changes in one system may not also be made in all the systems. For 
example, the FSP sends a notice for debts of $5 and above, but the PRP 
has a slightly higher dollar threshold for taking further action. IRS 
officials were unaware of this inconsistency, and, after our further 
discussion with them, they agreed that the FSP rules should be amended 
to be consistent with the PRP. 

IRS Does Not Have a Process to Evaluate Whether Its Business Rules Work 
as Intended: 

A critical part of management control is monitoring to ensure that 
programs are working as intended. Agency policies and procedures should 
generally be designed to assure that ongoing monitoring occurs in the 
course of normal operations and that periodic evaluations are part of 
management's continuous monitoring of internal control. As shown below, 
guidance for the federal internal control standards shows that 
monitoring is important as a means to provide a reasonable assurance 
that the objectives of the agency continue to be achieved and to 
determine and improve the quality of the agency's performance over 
time. If deficiencies are discovered, the agency can become quickly 
aware and take prompt action to remedy them. 

Text box: 

* Management's strategy provides for routine feedback and monitoring of 
performance and control; 
* Management has a strategy to ensure that ongoing monitoring is 
effective and will trigger separate evaluations where problems are 
identified, and it is desirable that critical systems are periodically 
tested; 
* Control activities are regularly evaluated to ensure that they are 
still appropriate and working as intended; 
* The strategy includes a plan for periodic evaluation of control 
activities for critical operational and mission support systems; 
* Appropriate portions of the internal controls are evaluated 
regularly; 
* The agency takes appropriate follow-up actions with regard to 
findings and recommendations of audits and other reviews; 
* Management and auditors follow up on audit and review findings, 
recommendations, and the actions decided upon to ensure that those 
actions are taken. 

Source: Excerpts from Internal Control Management and Evaluation Tool 
(GAO-01-1008G, August 2001). 

[End of text box] 

Even though IRS officials estimated that the business rules had been 
established for years, IRS had documentation for an evaluation of only 
one of the five business rules we reviewed (the minimum dollar rule). 
For the remaining four rules we reviewed, IRS officials said that they 
had not evaluated three rules and had evaluated one rule (the medium 
dollar rule) but had no documentation of the evaluation. Without a 
process to evaluate the business rules, IRS officials can not be 
assured that the rules work as intended. 

IRS collection managers were unaware of evaluation of the minimum 
dollar rule and had no documentation on the follow-up action that was 
promised. IRS collection officials had originally told us that no 
evaluation had been done for the minimum dollar rule. During our work, 
we separately learned that IRS had done an evaluation in response to a 
2004 Taxpayer Advocacy Panel[Footnote 26] (TAP) recommendation that the 
$5 threshold be raised to $25. The evaluation report showed that IRS 
had done analyses to consider such factors as the costs of sending and 
handling responses to notices and potential lost revenue. Although the 
report concluded that raising the threshold to the recommended level 
would not be cost-effective, it said that IRS would do further 
evaluation to determine if the threshold should be increased to some 
amount between $5 and $25. However, IRS officials could not provide any 
documentation that a follow-up evaluation had been done[Footnote 27] 
nor did IRS have plans to conduct such an evaluation. Also, IRS 
officials could provide none of the data supporting the report 
conclusions, such as information on the costs of sending and handling 
responses to notices. 

For the medium dollar rule evaluation that IRS officials said was done, 
the age of the evaluation and lack of documentation limited its 
usefulness. The officials said that IRS had evaluated the medium dollar 
threshold in the 1980's and concluded that it was appropriate.[Footnote 
28] As we noted earlier, the intended purposes of all the rules we 
reviewed were undocumented. To the extent that IRS's costs and 
collections may have been considered in establishing the medium dollar 
rule, with changes over time--including possible changes in taxpayer 
behavior and IRS's processes along with the certain change in the value 
of dollars due to inflation--it is unclear how the results of an 
evaluation done over twenty years ago would serve as adequate assurance 
that a current business rule is appropriate. Over time, various changes 
could affect the continued validity of any rationale. For example, 
according to IRS officials, the current medium dollar threshold was set 
in 1994 as part of a program for accelerating debts above a certain 
amount to ACS to make outbound telephone calls to attempt collection. 
According to IRS officials, the acceleration program was dropped after 
one year because future funding was eliminated. Even so, the medium 
dollar threshold has remained unchanged in the computer programming. 

IRS officials said that IRS has no requirement to periodically evaluate 
the business rules. Because the business rules are not being regularly 
evaluated, IRS risks that the rules will result in unnecessary costs or 
missed collections. For example, IRS could defer sending a case for 
collection action based on outdated assumptions about the costs of such 
action. To the extent that evaluations are done, the lack of a system 
to make managers aware of them or to maintain the evaluations and 
supporting data limits their usefulness in making program decisions to 
ensure that desired collection results are achieved at the least costs. 

According to its director, TACT also found that evaluations of business 
rules were lacking and was considering recommending certain actions to 
improve such evaluations. As with the project to build a database for 
measuring notice effectiveness and the proposal on management 
responsibility discussed above, documentation on TACT's evaluation 
recommendation was not available for us to take into account in this 
report. 

Conclusions: 

Given the notice phase's primary position in IRS's collection process, 
its potential to collect or otherwise resolve debts at relatively low 
cost and the significant revenue that it can generate, notice-phase 
performance could be a key indicator of the efficiency of IRS's 
collection enforcement efforts overall. The notice phase may be 
operating well, but given the lack of objectives and performance 
measures for the process, its efficiency and effectiveness are not 
reasonably assured, and opportunities for improving performance may be 
missed. With the high volume of cases the process handles and the 
revenue it generates, modest percentage change improvement could result 
in significant cost savings or improvements in dollars collected or 
cases otherwise resolved. 

Recommendations: 

To better ensure the notice phase is achieving desired results at the 
lowest costs, we recommend that the Commissioner of Internal Revenue: 

* establish objectives and performance measures to reflect the desired 
results for the notice phase; 

* establish responsibilities for reviewing the performance of the 
notice phase to help ensure accountability throughout IRS; 

* document the rationales for the key notice-phase business rules in 
terms of efficiency, effectiveness, or other desired results; 

* provide IRS collection managers and executives accessible, reliable 
information on what the business rules are; and: 

* periodically and regularly evaluate the business rules in terms of 
efficiency and effectiveness or other results and ensure the results 
are available to managers so the data and methodologies can be used or 
considered in future evaluations. 

Agency Comments and Our Evaluation: 

The IRS Deputy Commissioner for Services and Enforcement provided 
written comments on a draft of this report in a September 16, 2009, 
letter, which is reprinted in appendix III. IRS staff also provided 
technical comments. We incorporated these written and other technical 
comments into the report as appropriate. 

IRS agreed with all five of our recommendations and to make related 
improvements. Specifically, IRS agreed to establish and document key 
objectives, measures, and responsibilities. IRS also agreed to 
periodically reevaluate its notice business rules and provide 
appropriate, reliable information to its managers. 

IRS also stated that it closes approximately 80 percent of its notice 
accounts without need for further contact with the taxpayer, and that 
it collected $23.6 billion through the notice process in fiscal year 
2007. IRS did not clarify whether this percentage and this dollar 
amount involved all types of collection notices, closures, and 
taxpayers. In our report, we noted in figure 5 that IRS collected about 
$6 billion during fiscal year 2008. This total includes collections 
directly from notices sent to individual taxpayers only and comes from 
data that IRS provided to us. 

As agreed with your offices, unless you publicly announce its contents 
earlier, we plan no further distribution of this report until 30 days 
after its date. At that time, we will send copies to the Secretary of 
the Treasury, the Commissioner of Internal Revenue, and other 
interested parties. This report will also be available at no charge on 
GAO's Web site at [hyperlink, http://www.gao.gov]. 

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

Signed by: 

Michael Brostek: 
Director, Tax Issues Strategic Issues: 

[End of section] 

Appendix I: Data on Dispositions from the Notice Phase for Individual 
Taxpayers, Fiscal Years 1999 to 2008: 

Every year, IRS disposes of millions of tax debt collection cases 
through its notice phase in various ways. For example, IRS closes cases 
when taxpayers pay the debt in full or enter an installment agreement. 
In other cases, IRS defers further collection action and suspends 
active collection until some later date, which may be triggered by some 
taxpayer action. For example, taxpayers in active combat duty who have 
unpaid tax debts will be put in a deferred status. Also, IRS sends some 
unpaid tax debt cases that have gone through the notice phase to the 
other collection phases for potential enforcement action. 

As shown in figure 4, from fiscal year 1999 through 2008, the most 
frequent way that IRS disposed of tax debt cases that went through the 
notice phase was by the taxpayer's paying the debt in full. 
Specifically, in fiscal year 2008, IRS disposed of 5.8 million (or 46 
percent) unpaid tax debt cases through the notice phase as full paid. 
Another 4.1 million unpaid tax debt cases were deferred or sent to 
other collection phases. 

Figure 4: Primary Types of Dispositions of Unpaid Individual Income Tax 
Debt Cases from the Notice Phase, Fiscal Years 1999 to 2008: 

[Refer to PDF for image: vertical bar graph] 

Fiscal year: 1999; 
Cases disposed, Full paid: 5.1 million; 
Cases disposed, Installment agreement: 2.8 million; 
Cases disposed, Deferred: 0.2 million; 
Cases disposed, Other[A]: 0.2 million; 
Cases disposed, Sent to other collection phases: 2.2 million. 

Fiscal year: 2000; 
Cases disposed, Full paid: 4.9 million; 
Cases disposed, Installment agreement: 2.6 million; 
Cases disposed, Deferred: 1.1 million; 
Cases disposed, Other[A]: 0.2 million; 
Cases disposed, Sent to other collection phases: 2.1 million. 

Fiscal year: 2001; 
Cases disposed, Full paid: 5.6 million; 
Cases disposed, Installment agreement: 2.4 million; 
Cases disposed, Deferred: 0.9 million; 
Cases disposed, Other[A]: 0.2 million; 
Cases disposed, Sent to other collection phases: 2.2 million. 

Fiscal year: 2002; 
Cases disposed, Full paid: 4.6 million; 
Cases disposed, Installment agreement: 2.5 million; 
Cases disposed, Deferred: 0.9 million; 
Cases disposed, Other[A]: 0.3 million; 
Cases disposed, Sent to other collection phases: 2.5 million. 

Fiscal year: 2003; 
Cases disposed, Full paid: 4 million; 
Cases disposed, Installment agreement: 2.7 million; 
Cases disposed, Deferred: 0.9 million; 
Cases disposed, Other[A]: 0.2 million; 
Cases disposed, Sent to other collection phases: 2.8 million. 

Fiscal year: 2004; 
Cases disposed, Full paid: 3.9 million; 
Cases disposed, Installment agreement: 2.7 million; 
Cases disposed, Deferred: 0.9 million; 
Cases disposed, Other[A]: 0.3 million; 
Cases disposed, Sent to other collection phases: 2.9 million. 

Fiscal year: 2005; 
Cases disposed, Full paid: 4 million; 
Cases disposed, Installment agreement: 2.8 million; 
Cases disposed, Deferred: 0.9 million; 
Cases disposed, Other[A]: 0.3 million; 
Cases disposed, Sent to other collection phases: 2.9 million. 

Fiscal year: 2006; 
Cases disposed, Full paid: 4.3 million; 
Cases disposed, Installment agreement: 2.8 million; 
Cases disposed, Deferred: 1.1 million; 
Cases disposed, Other[A]: 0.3 million; 
Cases disposed, Sent to other collection phases: 2.8 million. 

Fiscal year: 2007; 
Cases disposed, Full paid: 4.9 million; 
Cases disposed, Installment agreement: 3 million; 
Cases disposed, Deferred: 0.7 million; 
Cases disposed, Other[A]: 0.3 million; 
Cases disposed, Sent to other collection phases: 3.5 million. 

Fiscal year: 2008; 
Cases disposed, Full paid: 5.8 million; 
Cases disposed, Installment agreement: 2.7 million; 
Cases disposed, Deferred: 0.6 million; 
Cases disposed, Other[A]: 0.3 million; 
Cases disposed, Sent to other collection phases: 3.2 million. 

Source: IRS data. 

[A] For example, this category represents cases that are in litigation 
or are currently not collectible. 

[End of figure] 

On the other hand, when looking at the dollar values of the 
dispositions from notices, IRS sent much more of the unpaid debt 
amounts to other collection phases for potential collection than it 
collected. For example, in fiscal year 2008, IRS sent $40.6 billion in 
unpaid tax debt to other collection phases for potential collection 
enforcement action but collected $5.6 billion during the notice phase, 
as shown in figure 5. The remaining dollar amounts disposed through 
notices in fiscal year 2008 involved $4.4 billion in tax refund claims 
from the taxpayers that were used to offset the debt and $4.6 billion 
that IRS had to abate based on new information. 

Figure 13: Dollar Values of Notice-Phase Results for Individual Income 
Tax, Fiscal Years 1999 to 2008: 

[Refer to PDF for image: vertical bar graph] 

Fiscal year: 1999; 
Collected: $4.5 billion; 
Offset: $0.6 billion; 
Abated: $2.3 billion; 
Sent to other collection phases: $19.1 billion. 

Fiscal year: 2000; 
Collected: $4.7 billion; 
Offset: $0.6 billion; 
Abated: $2.1 billion; 
Sent to other collection phases: $17.9 billion. 

Fiscal year: 2001; 
Collected: $5 billion; 
Offset: $1.9 billion; 
Abated: $2.1 billion; 
Sent to other collection phases: $20.6 billion. 

Fiscal year: 2002; 
Collected: $4.8 billion; 
Offset: $1.1 billion; 
Abated: $2.4 billion; 
Sent to other collection phases: $17.1 billion. 

Fiscal year: 2003; 
Collected: $4.2 billion; 
Offset: $1.1 billion; 
Abated: $2 billion; 
Sent to other collection phases: $23 billion. 

Fiscal year: 2004; 
Collected: $3.9 billion; 
Offset: $1 billion; 
Abated: $1.9 billion; 
Sent to other collection phases: $27.7 billion. 

Fiscal year: 2005; 
Collected: $4.2 billion; 
Offset: $0.9 billion; 
Abated: $3 billion; 
Sent to other collection phases: $31.8 billion. 

Fiscal year: 2006; 
Collected: $4.7 billion; 
Offset: $0.9 billion; 
Abated: $3 billion; 
Sent to other collection phases: $34.5 billion. 

Fiscal year: 2007; 
Collected: $6 billion; 
Offset: $1.4 billion; 
Abated: $4.6 billion; 
Sent to other collection phases: $44.3 billion. 

Fiscal year: 2008; 
Collected: $5.6 billion; 
Offset: $4.4 billion; 
Abated: $4.6 billion; 
Sent to other collection phases: $40.6 billion. 

Source: IRS data. 

[End of figure] 

[End of section] 

Appendix II: Descriptions of Notice-Phase Business Rules Identified by 
IRS: 

Below are descriptions of the five business rules IRS officials 
identified in response to our request for the key rules that affect the 
most individual taxpayers. With the exception of the minimum dollar 
rule, the descriptions do not provide specifics on the case 
characteristics that the business rules consider because IRS considers 
that information to be sensitive. Such information could potentially be 
used by purposefully noncompliant taxpayers to not pay taxes due and 
avoid IRS's collection actions. 

* Minimum dollar rule--if the unpaid debt is below $5 no notice is sent 
and the debt is abated. 

* Low dollar rule--if the debt is below a certain threshold, three 
notices are sent, and if the debt remains unresolved, further 
collection action is deferred. 

* Medium dollar rule--if the debt is above the low dollar rule 
threshold but below a certain higher amount, three notices are sent, 
[Footnote 29] and if the debt remains unresolved and there is no known 
levy source, further collection action is deferred. 

* Repeater rule for previously resolved debts--if a taxpayer had 
previous tax debt resolved in the telephone contact phase, in-person 
contact phase, or in the waiting queue for assignment to a revenue 
officer, for any new debt identified within a selected number of weeks, 
two notices are sent, and the case is sent to the phase that resolved 
the previous debt. 

* Repeater rule for current unresolved debts--if the taxpayer has a 
current debt assigned to the telephone contact phase, in-person contact 
phase, or in the waiting queue for assignment to a revenue officer, for 
any new debt two notices are sent, and the case is sent to the phase 
handling the current debt.[Footnote 30] 

[End of section] 

Appendix III: Comments from the Internal Revenue Service: 

Department Of The Treasury: 
Internal Revenue Service: 
Deputy Commissioner: 
Washington, D.C. 20224: 
	
September 16, 2009: 

Mr. Michael Brostek: 
Director, Tax Issues: 
U.S. Government Accountability Office: 
441 G Street, N.W. 
Washington, D.C. 20548: 

Dear Mr. Brostek: 

Thank you for the opportunity to review your draft report titled: Tax 
Debt Collection: IRS Needs to Better Manage the Collection Notices Sent 
to Individuals (GAO-09-976). 

We are proud of our Collection Notice program. Notices are an integral 
part of the Service's collection strategy because they are highly cost 
effective. We close approximately 80 percent of notice accounts without 
the need for further contact with the taxpayer. In Fiscal Year 2007, we 
collected $23.6 billion dollars through the low-cost notice process. 

Last year I tasked one of my executives with improving the Servicewide 
notice process. This has been an extremely successful effort. When the 
changes are fully implemented, I expect they will transform the notice 
process, addressing many of the concerns mentioned in your report. 

Of particular note is the development of the Correspondence Management 
Information System (CMIS) which expands the functionality proposed for 
its predecessor - the Notice Management Information System (NMIS). The 
CMIS will provide notice effectiveness data as well as data on the cost 
of printing and postage, which will assist in determining the full cost 
of notices. It has been funded and is currently in development. The 
Collection Governance Council continues to closely monitor notice
performance using available statistics and make adjustments to the 
process, when appropriate. 

We agree with your recommendations to improve our documentation and 
monitoring of the Notice Program, including establishing measures, 
delineating responsibilities, and continuing to evaluate our business 
rules to ensure efficiency and effectiveness. 

If you have any questions, or if you would like to discuss this 
response in more detail, please contact Cheryl Sherwood, Director, 
Campus Compliance Services at (202) 283-2518. 

Sincerely, 

Signed by: 

Linda E. Stiff: 

Enclosure: 

[End of letter] 

Enclosure: 

GAO Recommendations and IRS Response to GAO Draft Report: 
Tax Debt Collection: IRS Needs to Better Manage the Collection Notices 
Sent to Individuals (GAO-09-976): 

Recommendation: To better ensure the notice phase is achieving desired 
results at the lowest costs, we recommend that the Commissioner of 
Internal Revenue: 

* Establish objectives and performance measures to reflect the desired 
results for the notice phase; 

* Establish responsibilities for reviewing the performance of the 
notice phase to help ensure accountability throughout IRS; 

* Document the rationales for the key notice phase business rules in 
terms of efficiency, effectiveness, or other desired results; 

* Provide IRS collection managers and executives accessible, reliable 
information on what the business rules are; and; 

* Periodically and regularly evaluate the business rules in terms of 
efficiency and effectiveness, or other results and ensure the results 
are available to managers so the data and methodologies can be used or 
considered in future evaluations. 

Comments: We will make improvements to the Collection Notice program, 
including the establishment and documentation of key objectives, 
measures, and responsibilities. In addition, we agree to periodically 
reevaluate notice business rules and provide appropriate, reliable 
information to our managers. 

[End of section] 

Appendix IV: GAO Contact and Staff Acknowledgments: 

GAO Contact: 

Michael Brostek, (202) 512-9110, brostekm@gao.gov: 

Acknowledgments: 

In addition to the contact named above, Tom Short, Assistant Director; 
Susan Baker; Ray Bush; Bill Cordrey; George Guttman; Ronald W. Jones; 
Veronica Mayhand; Ed Nannenhorn; Karen O'Conor; Cheryl Peterson; Steve 
Sebastian; Jay Smale; and A.J. Stephens made key contributions to this 
report. 

[End of section] 

Footnotes: 

[1] IRS estimated it would collect about $55 billion of the $345 
billion gross tax gap, yielding an estimated $290 billion net tax gap 
for tax year 2001. 

[2] GAO, Tax Debt Collection: IRS Has a Complex Process to Attempt to 
Collect Billions of Dollars in Unpaid Tax Debts, [hyperlink, 
http://www.gao.gov/products/GAO-08-728] (Washington, D.C.: June 13, 
2008). 

[3] The $57 billion is overstated to some unknown extent, in part, 
because IRS has to abate some of the debt amounts for reasons such as, 
for example, errors that overstated the tax amounts owed. 

[4] Although IRS may defer collection action on certain tax debts, IRS 
continues to take systemic action to collect unpaid debt. For example, 
IRS may take no further action in fiscal year 2008 but could collect 
some of the tax debt in later years by offsetting tax refunds or by 
taking enforcement action because the debt had become large enough to 
justify pursuit. The amounts involved with abatements and refund 
offsets are presented in appendix I. 

[5] Business taxpayers receive up to two notices. Business taxpayers 
are outside the scope of this review. 

[6] 26 U.S.C. § 6303(a). 

[7] 26 U.S.C. § 6330(f); 26 C.F.R. § 301.6330-1(a)(2)(i). 

[8] IRS generally sends other required collection notifications in 
later phases of the collection process. For example, IRS separately 
sends a notice of intent to do other levies--such as to seize funds in 
a bank account--in the telephone contact phase, after which, in most 
cases, IRS is required by statute to wait 30 days before levying the 
account 26 U.S.C. § 6330(a). Such later notifications are outside the 
scope of this report. 

[9] Although IRS may defer collection action on certain tax debts, IRS 
continues to take systemic action to collect unpaid debt, such as by 
offsetting the debt amounts with tax refunds claimed when the taxpayer 
files future tax returns. IRS also offsets debt with tax refunds during 
the notice phase. 

[10] When added together for each year, the total dollar values of each 
notice type overstate the amount of unpaid tax to some unknown extent, 
in part, because the totals are based on the value of each notice sent. 
Therefore, to the extent that multiple notices were sent on a single 
debt within a fiscal year, the dollars are overstated. Also, IRS has to 
abate some of the debt amounts for reasons such as, for example, errors 
that overstated the tax amounts owed. 

[11] 31 U.S.C. § 3512(c), commonly referred to as the Federal Managers' 
Financial Integrity Act of 1982. 

[12] These are the IRS divisions that serve individual taxpayers and 
have collection functions. Among other things, SB/SE serves individual 
taxpayers who operate a business as self-employed sole proprietors. W&I 
serves taxpayers whose primary income sources are wages and 
investments. 

[13] As used in this report, IRS the phrase "collection officials" 
includes the W&I and SB/SE executives and managers responsible for 
managing aspects of the collection process, including the collection 
units that administer parts of the notice phase. 

[14] With the exception the minimum dollar rule, this report does not 
provide specifics on the dollar thresholds and case characteristics of 
the business rules because IRS considers that information to be 
sensitive because of its potential to be used intentionally to avoid 
IRS collection actions. 

[15] [hyperlink, http://www.gao.gov/products/GAO-08-728]. 

[16] They are referred to as "IRS-wide" because they reflect 
performance of units across W&I and SB/SE. 

[17] These measures, "collection coverage" and "collection efficiency," 
are the (1) percentage of workload that was available and disposed and 
(2) the number of cases disposed compared to the number of staff 
working cases, respectively. 

[18] The measure, "automated collection system customer accuracy," is 
the percentage of time taxpayers received the correct answers to their 
inquiries, had their cases resolved correctly, or both. 

[19] The primary tasks of the CSCO function involve securing delinquent 
returns that individuals are required to file and securing payment for 
taxes, penalties, and any interest owed. Among other things, the CSCO 
function processes taxpayer installment agreement requests, handles 
correspondence from taxpayers in regard to balance due notices, and 
monitors offer-in-compromise agreements and installment agreements. 

[20] As we were concluding our audit work, in July 2009 IRS's Office of 
Program Evaluation and Risk Analysis (OPERA) issued a report at the 
request of TACT that included estimates of the costs of selected 
notices, including the costs of at least some first notices for fiscal 
years 2005-2008 and costs of other types of collection notices for only 
fiscal year 2008. 

[21] Among other things, IRS uses BPRS meetings to assess all business 
units' progress toward achieving IRS's mission and strategic goals. The 
system includes periodic reviews of strategic and operations issues and 
business unit performance to assess IRS's progress. 

[22] This enhancement, Enhanced Inventory Delivery System, has been 
proposed internally in IRS but as of the issuance of our report its 
funding and implementation was uncertain because such decisions have 
not yet been made. According to an IRS official, the enhancement is 
proposed for fiscal year 2011 and decisions for funding these projects 
will not be made until late 2010. 

[23] The TACT director said the Commissioner would likely be briefed by 
mid-September 2009. 

[24] In regard to financial transactions, although we have reported 
that IRS's financial statements have been fairly presented in all 
material respects since fiscal year 2000, we have also reported a 
material weakness in IRS's internal control over financial reporting. 
Specifically, we reported that IRS cannot generate and report the 
information needed to prepare financial statements directly from its 
financial systems because it does not have an adequate general ledger 
system for tax-related transactions. 

[25] MITS is an information systems support function separate from the 
operating units that deal with collections. 

[26] The Taxpayer Advocacy Panel is an advisory group of volunteers 
established under the authority of the Department of the Treasury to 
identify taxpayers' issues and make suggestions to help IRS improve 
customer service and satisfaction. 

[27] As we were concluding our audit work, at the request of TACT 
rather than as follow-up to the TAP recommendation, in July 2009 IRS's 
OPERA issued a report analyzing the costs and collections of raising in 
increments the dollar thresholds for sending selected account balances 
notices, including at least one of the collection notice-phase notices. 

[28] According to IRS officials, although the current dollar threshold 
was established in 1994, the threshold was the current amount in the 
1980's with at least one intervening change. IRS officials could not 
recall specifics on the change. 

[20] As compared to the low dollar rule, only two of the three notices 
sent are the same. 

[30] This rule was revised effective January 2009 with regard to 
taxpayers with debts assigned to the in-person contact phase. Since the 
change was made after we started our review the revised rule is outside 
the scope of this report. 

[End of section] 

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