Tax Policy and Administration:

Opportunities to Improve Timeliness of IRS Lien Releases

GAO-05-26R: Published: Jan 10, 2005. Publicly Released: Jan 10, 2005.

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Among the Internal Revenue Service's (IRS) many tools to collect outstanding taxes is its ability to use the property of a taxpayer as security for an outstanding tax debt. IRS exercises this power when it files a federal tax lien against the property of a taxpayer. As part of its tax collection activities, IRS reported filing more than 548,000 tax liens against taxpayer property in fiscal year 2003. Since a lien encumbers taxpayer property, IRS's ability to file a lien is a powerful tool in enforcing the tax laws. With this power, however, comes the responsibility to ensure that liens are released timely once taxpayers satisfy their tax debt. The Internal Revenue Code (IRC) addresses timeliness by requiring IRS to release liens within 30 days of the tax debt's satisfaction. If IRS fails to timely release federal tax liens, taxpayers can suffer undue hardship and burden. Because federal tax liens appear on commercial credit reports, (1) businesses may be unable to obtain necessary credit because lenders may assume they are bad credit risks, (2) individuals may miss an opportunity to buy a home or an automobile because they are unable to obtain financing, and (3) individuals may be unable to sell their home because of the presence of a tax lien on their property. Failure to timely release liens this conflicts with IRS's mission of providing top-quality service to the nation's taxpayers. This report discusses deficiencies we identified in IRS's use of exception reports.

We found problems with IRS's use of three types of exception reports. First, IRS produces a weekly exception report for lien filings that fail to post to taxpayer accounts. The key is to timely resolve any items on the exception report so that the lien can be released. As of May 21, 2004, IRS had more than 8,500 liens that could not post to taxpayer accounts, 74 percent of which predated 2004. IRS produces a second exception report weekly when taxpayer accounts with liens have been fully satisfied and identified for lien release but the taxpayer accounts do not match accounts in IRS's lien system. We found that IRS was also not timely resolving these "unmatched exception reports" and, as a result, the number of unresolved lien cases from these reports had increased, from almost 1,800 at the end of 2003 to 3,180 by mid-June 2004. A third weekly exception report lists all taxpayer accounts identified for lien release that have manually calculated interest or penalties. We found that IRS was also not timely resolving items on this exception report. In addition to untimely resolution of lien cases on these exception reports, all of which ultimately affect the timely release of tax liens, we found that one report had a serious design flaw in that it was not cumulative, meaning that accounts from one week's report that were not resolved did not carry over to the following week's report. This flaw in the design of the unmatched exception report contributed significantly to the fact that 99 percent of the taxpayer accounts listed on the report at the end of 2003 were still unresolved as of the end of June 2004. We were unable to definitively quantify the extent to which IRS's failure to resolve cases showing up on these exception reports contributed to the overall number of liens IRS failed to timely release. Based on the nature of IRS's delays in releasing liens that we found in our fiscal year 2004 sample, however, we estimate that about 30 percent of the delayed releases likely resulted from IRS's failure to effectively resolve exception reports. IRS's inability to promptly resolve the lien exception reports has contributed to its inability to ensure that tax liens are timely released. This condition can negatively affect taxpayers, adversely affect IRS's mission of providing top-quality customer service, and result in noncompliance with the legal requirement that liens be released within 30 days after satisfaction of the related tax debt. Although IRS has begun to take steps to address untimely resolution of lien exception reports, critical steps remain to be taken and backlogs of unresolved exception reports remain to be resolved.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: GAO verified that IRS had resolved the backlog of unpostable liens. IRS's Centralized Case Processing/Lien Processing Unit at the Cincinnati Campus is researching and resolving unpostable liens weekly. GAO reviewed IRS's report of unpostable liens from February and March 2006 and determined there was no current backlog. IRS agreed with this recommendation when provided the draft report.

    Recommendation: To improve the effectiveness of controls over posting liens to taxpayer accounts, the Commissioner of IRS should direct the Cincinnati lien unit managers to expedite efforts to resolve the backlog of unpostable liens, releasing liens as appropriate.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  2. Status: Closed - Implemented

    Comments: Although IRS has not formally documented procedures in the IRM for weekly resolution of unpostable liens, IRS officials of the Centralized Case Processing/Lien Processing Unit informed GAO that they research and resolve unpostable liens weekly. GAO reviewed six weekly reports of unpostable liens from February through March 2006 and determined that IRS was keeping current on new unpostable liens. IRS agreed with this recommendation when provided the draft report.

    Recommendation: To improve the effectiveness of controls over posting liens to taxpayer accounts, the Commissioner of IRS should direct the Cincinnati lien unit managers to keep current on all new unpostable liens.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  3. Status: Closed - Implemented

    Comments: IRS stated that all backlogs of unresolved unmatched exception reports were resolved the week ending May 12, 2006, and a computer extract was run to verify that all entries had been resolved. Its Centralized Case Process/Lien Processing Unit at the Cincinnati Campus researched and resolved its backlog of unresolved unmatched exception reports. In February 2007, we verified that there was no backlog of unresolved unmatched exception reports. IRS agreed with this recommendation when provided the draft report.

    Recommendation: To improve the effectiveness of controls over taxpayer accounts rejected from the automated lien release process, the Commissioner of IRS should direct lien unit managers to research and resolve the current backlog of unresolved unmatched exception reports.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  4. Status: Closed - Implemented

    Comments: IRS notified GAO that lien unit managers at its Centralized Case Process/Lien Processing Unit at the Cincinnati Campus now ensure that the unmatched exception report is pulled and resolved weekly, within 5 business days. As an additional control, a subsequent extract report is produced to identify any potentially unresolved modules in order to ensure all accounts are worked. Beginning in September 2006, the extract was no longer necessary because the weekly report became cumulative. Existing inventory is now captured weekly on local monitoring reports. In February 2007, GAO visited the lien unit and observed that IRS was researching and resolving unmatched exception reports weekly. IRS agreed with this recommendation when provided the draft report.

    Recommendation: To improve the effectiveness of controls over taxpayer accounts rejected from the automated lien release process, the Commissioner of IRS should direct lien unit managers to research and resolve unmatched exception reports weekly.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  5. Status: Closed - Implemented

    Comments: IRS provided training to managers and employees on the resolution of the restricted interest portion of the Satisfied Module (SATMOD) reject report. GAO verified that IRS had provided this training to designated staff on resolving exception reports. IRS agreed with this recommendation when provided the draft report.

    Recommendation: To improve the effectiveness of controls over taxpayer accounts rejected from the automated lien release process, the Commissioner of IRS should direct lien unit managers to provide training to designated staff on how to resolve exception reports.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  6. Status: Closed - Implemented

    Comments: IRS notified GAO that its Centralized Case Process/Lien Processing Unit at the Cincinnati Campus completed researching and resolving its backlog of unresolved manual interest or penalties reports. This was verified by a computer extract report showing no such inventory. In February 2007, GAO visited the lien unit and verified that there was no backlog of unresolved manual interest or penalties reports. IRS agreed with this recommendation when provided the draft report.

    Recommendation: To improve the effectiveness of controls over taxpayer accounts rejected from the automated lien release process, the Commissioner of IRS should direct lien unit managers to research and resolve the current backlog of unresolved manual interest or penalties reports.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  7. Status: Closed - Implemented

    Comments: IRS notified GAO that it decided to systematically release liens in cases where there was restricted interest or penalty because the remaining tax due balances were typically very small. In its review of 300 satisfied modules, IRS identified only five cases with additional restricted interest or penalty. The remaining amounts due after computation were for amounts less than $10. ALS now receives a master file data extract listing modules where liabilities have been fully paid and a lien exists. The data extract that is matched against information in the ALS system automatically releases liens when there is a match. GAO visited the lien unit in February 2007 and verified that accounts containing manual interest or penalty are no longer held up from automated lien release. IRS agreed with this recommendation when provided the draft report.

    Recommendation: To improve the effectiveness of controls over taxpayer accounts rejected from the automated lien release process, the Commissioner of IRS should direct lien unit managers to research and resolve exception reports containing liens with manually calculated interest or penalties weekly, as called for in the Internal Revenue Manual and the ALS User Guide.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  8. Status: Closed - Implemented

    Comments: IRS created a special unit within the Centralized Case Processing/Lien Processing Unit at the Cincinnati Campus to resolve accounts containing restricted interest and penalties. GAO verified that IRS had provided training to staff in this unit for resolving exception reports containing accounts with manually calculated interest and penalties. IRS unit staff that GAO interviewed understood these procedures. IRS agreed with this recommendation when provided the draft report.

    Recommendation: To improve the effectiveness of controls over taxpayer accounts rejected from the automated lien release process, the Commissioner of IRS should direct lien unit managers to provide training to designated staff on how to resolve exception reportscontaining accounts with manually calculated interest or penalties.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  9. Status: Closed - Implemented

    Comments: IRS notified GAO that it had improved its unmatched exception report. Effective July 21, 2006, the unmatched exception report became a cumulative report. Rejected releases are listed and remain on the report until resolved. In February 2007, we visited the lien unit and verified that IRS had improved the current unmatched exception report by changing it to a cumulative list of all unmatched taxpayer accounts that have not been resolved to date. IRS agreed with this recommendation when provided the draft report.

    Recommendation: To better ensure that taxpayer accounts rejected from the automated lien release process are timely reviewed and resolved, the Commissioner of IRS should improve the current unmatched exception report by including a cumulative list of all unmatched taxpayer accounts that have not been resolved to date.

    Agency Affected: Department of the Treasury: Internal Revenue Service

 

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