The Internal Revenue Service (IRS) has recognized that each year individuals do not pay billions of dollars of their acknowledged tax debts, which include tax assessments as well as related penalty and interest charges that build up over the years. It is important for the IRS to pursue collection of unpaid tax debt to help ensure compliance and confidence in the tax system as well as to provide needed revenue for government operations.
IRS has a three-phase strategy for resolving billions of dollars of individuals' unpaid tax debt. The first phasereferred to as the notice phaseinvolves mailing tax due notices to the taxpayers. The second and third phasesthe telephone and in-person contact phasesare more labor intensive and expensive.
Used well, notices can help IRS collect or otherwise resolve many tax debts at relatively low cost while generating significant revenue. IRS generally sends up to four notices to solicit payment before taking other collection steps.
The notice phase of IRS's three-phase tax collection approach is the least costly, and achieves billions in results annually but many billions more remain uncollected at the end of the phase. During fiscal year 2008, IRS sent approximately 22 million notices to individuals to try to collect around $129 billion in tax debts that had accumulated over the years. Through the use of notices, IRS obtained full or partial payments of close to $6 billion and moved about $41 billion of unpaid debts to the other, more costly collection phases during fiscal year 2008.
Having clear program objectives linked with performance measures can help agencies identify risks to achieving a program's purpose and, if possible, improve program performance. Given that IRS relies on individual taxpayers to respond to its notices, being clear about what IRS expects and what outcomes are being achieved is especially important in order to gain insights on how to maximize performance.
However, whether the notice phase is achieving optimum results is unclear because of the lack of objectives and performance measures for gauging its effectiveness. IRS has not documented its objectives or developed related measures to indicate how well the notice phase is performing. Nor has IRS documented clear responsibility for reviewing this performance compared to targets. IRS also lacks information on the full costs of collection notices.
To make the best use of collection resources, IRS has developed business rules to dictate actions to be taken on individual tax debts. Based on certain dollar thresholds and other characteristics of individual tax debt cases, the business rules can 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, IRS has not documented the business rules that govern notices sent to individuals. For its major rules, IRS lacks basic information on the rationale when the rules were established, how the rules are to work, and whether the rules work as intended.
Without such information, IRS does not know whether its business rules are working as originally designed or achieve IRS's desired collection results at the least cost. With such controls over the notices sent to individuals that have federal tax debts, IRS would be better able to assure Congress and the taxpayers that it is using this collection phase to the greatest benefit.
As GAO recommended in September 2009, IRS needs to establish objectives and performance measures for the notice phase of its collection process for individual taxpayers as well as management responsibility for reviewing the performance of the notice phase. In addition, IRS needs to better document the business rules and their rationales, and periodically evaluate how well they are working.
IRS has started to implement all of these actions. IRS has made the most progress in assigning responsibility for reviewing performance and documenting rationales for the business rules for some of the frequently issued collection notices. However, IRS must ensure that those with the responsibility for reviewing performance of the collection notice phase use outcome-focused performance measures that are clearly linked to documented objectives. Further, as GAO previously recommended, IRS must ensure that the business rules are not only better documented but are also periodically evaluated on how well they are doing what they were intended to do. GAO expects to evaluate IRS's progress in implementing all these actions.
Better data and a more justifiable basis for sending notices or deciding to implement other enforcement actions will produce better decisions that avoid waste and possibly collect more tax debts sooner. Although data are not now readily available to estimate the revenue to be gained from taking these steps, improved performance in collecting more tax debts sooner could help reduce the tens of billions of dollars that are annually sent to the two more expensive tax debt collection phases; this amount was about $41 billion for fiscal year 2008.
The information contained in this analysis is based on the related GAO products listed under the "Related GAO Products" tab.
For additional information about this area, contact James R. White (202) 512-9110 or firstname.lastname@example.org.
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 effe...
The Internal Revenue Service (IRS) estimated that $33 billion in income tax assessments was not paid in 2001. If not collected, annual unpaid taxes keep accumulating each year along with penalty and interest charges to create an inventory of "tax debts," which approached $300 billion at the end of fiscal year 2007. IRS has shelved or delayed collection of billions of dollars of this tax debt. Cong...