Tax Administration:

IRS Can Do More to Collect Taxes Labelled 'Currently Not Collectible'

GGD-94-2: Published: Oct 8, 1993. Publicly Released: Nov 9, 1993.

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Pursuant to a congressional request, GAO reviewed the Internal Revenue Service's (IRS) currently-not-collectible (CNC) accounts, focusing on whether IRS: (1) classification of certain CNC accounts is appropriate; and (2) efforts to monitor these accounts for future collection are adequate.

GAO found that: (1) IRS is losing the potential to collect millions of dollars in delinquent taxes because of its weak controls over its CNC accounts; (2) IRS does not provide its employees with specific guidance to make CNC determinations; (3) IRS has failed to challenge some taxpayers' claims of necessary living expenses, include some income in its computations, and follow asset and address leads; (4) IRS does not adequately provide for future collection because it sometimes fails to file liens on delinquent taxpayers' property or establishes excessively high reactivation income levels; (5) IRS sometimes does not require payments from taxpayers whose income exceeds its maximum $30,000 reactivation level; (6) IRS has maintained collection action suspensions on CNC accounts that should have been reactivated because of its 65-week reactivation hold period; (7) IRS tracks only one taxpayer when monitoring a joint CNC account and fails to reactivate the account if the other taxpayer can pay the delinquent taxes; (8) IRS does not consider asset sales and interest- and dividend-generating monies in determining its future collection of delinquent taxes; (9) IRS collection practices for reactivated CNC accounts are inefficient, particularly when it treats reactivated CNC accounts as new delinquencies or does not provide its staff with the original case file; and (10) supervisory reviews and postreviews are inadequate and do not provide information to eliminate inappropriate CNC determinations.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: On April 4, 1994, the IRS Director of Operations (Collection) issued a memorandum to the field entitled, "Determining Proper Reaction Codes for Hardship CNC Cases and Requesting Prior CNC Files." As part of new financial analysis procedures implemented in September 1995, IRS will now require payments from taxpayers earning over national standard expense levels unless the taxpayer can substantiate unusual additional expenses. Further, IRS improved its guidance for Revenue Officers on classifying accounts as CNC based on the above allowable expenses.

    Recommendation: The Commissioner of Internal Revenue should establish specific guidelines for selecting the income level at which unable to pay CNC accounts will be reactivated.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  2. Status: Closed - Not Implemented

    Comments: IRS plans to issue new guidelines which will establish ranges or amounts for necessary living expenses, depending on the geographic area of the country and income level of the taxpayer. IRS also plans to provide extensive training to its staff on the new guidelines. IRS believes its new procedures equitably address this recommendation. IRS agreed with GAO that hardship situations should be exempted from minimum payments but it otherwise did not fully address the issue in the new guidelines which are to take effect in summer 1995.

    Recommendation: The Commissioner of Internal Revenue should require, except in extraordinary situations, at least minimum payments from delinquent taxpayers with incomes above a specified level.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  3. Status: Closed - Not Implemented

    Comments: IRS did not agree with eliminating the 65-week reactivation hold. The Commissioner felt that given the size of accounts-receivable inventories, continuing to revisit older accounts with reduced collection potential would adversely impact IRS' ability to service newer, revenue-productive accounts. GAO continues to believe that some change is necessary to ensure the timely reactivation of cases based on future income that was not considered during the CNC investigation.

    Recommendation: The Commissioner of Internal Revenue should eliminate the automatic 65-week reactivation hold period and allow employees to determine when each CNC account should be considered for reactivation purposes.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  4. Status: Closed - Not Implemented

    Comments: IRS claims that the reprogramming of its master file computers to implement this recommendation would be costly and would impair its ability to achieve Tax System Modernization goals. The agency plans no action to implement this recommendation.

    Recommendation: The Commissioner of Internal Revenue should track both taxpayers with joint delinquencies to ensure that each taxpayer's ability to pay or status is considered in the reactivation decision.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  5. Status: Closed - Implemented

    Comments: An IRS internal audit report, as well as Collection's management reviews of cases, found that other income was not the best indicator of collectibility. Revenue officers are instructed to consider other assets at the time a case is classified as currently not collectible and should request mandatory followup if proceeds from a sale of assets is likely in the near future. This is a closed recommendation.

    Recommendation: The Commissioner of Internal Revenue should study the benefits of using other pertinent information, such as interest and dividend income and proceeds from the sale of assets, in addition to total income as reactivation criteria.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  6. Status: Closed - Not Implemented

    Comments: On April 4, 1995, the Director of Operations (Collection) issued a memorandum containing instructions on retrieving prior CNC case files. IRS implemented an early intervention program in January 1995 which reduced the number of notices sent to delinquent taxpayers. IRS plans other enhancements to its collection process in late 1996 including the use of delinquency characteristics to determine the most appropriate collection enforcement action to resolve cases.

    Recommendation: The Commissioner of Internal Revenue should expedite the processing of reactivated cases by reducing the number of notices and making prior case files readily available for IRS employees working reactivated cases.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  7. Status: Closed - Implemented

    Comments: Effective October 1, 1993, the CNC Post-Review Process was incorporated into the Collection Quality Management System. Management anticipates that the centralized site review will result in better quality products. Checklists were established for review operations. IRS management is negotiating with the National Treasury Employees Union for further changes in the supervisory review of CNC cases. The completion date is not known at this time.

    Recommendation: The Commissioner of Internal Revenue should reinforce with supervisors and postreviewers the need to thoroughly review CNC determinations.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  8. Status: Closed - Implemented

    Comments: Effective October 1, 1993, the CNC Post-Review Process was incorporated into the Collection Quality Management System, which will establish review samples. Checklists were designed for review operations. These actions are to ensure that the proper number of CNC post reviews are thoroughly done.

    Recommendation: The Commissioner of Internal Revenue should establish processes that will ensure that the proper number of CNC postreviews are thoroughly done.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  9. Status: Closed - Implemented

    Comments: IRS issued new guidelines on September 1, 1995 establishing ranges and amounts for necessary living expenses, depending on the geographic area and income level of the taxpayer. The guidelines establish national standards for reasonable amounts for six necessary expenses: food, utilities, housekeeping supplies, apparel and services, personal care products and services, and miscellaneous. Except for the miscellaneous category, the standards are derived from the Bureau of Labor Statistics (BLS) Consumer Expenditure Survey, and will be updated yearly. The miscellaneous standard has been established by IRS. Local standards will be established for housing and transportation, and a local standard for utilities will be optional. Other expenses may be allowed if they meet the necessary expense test of providing for the health and welfare of the taxpayer, or taxpayer's family, or the production of income.

    Recommendation: The Commissioner of Internal Revenue should establish specific guidelines for determining taxpayers' ability to pay delinquent taxes, including criteria for determining dollar ranges for reasonable and necessary expenses.

    Agency Affected: Department of the Treasury: Internal Revenue Service

  10. Status: Closed - Implemented

    Comments: IRS has identified key CNC data and incorporated them in the Quality Management Post Review Process. At the end of 1994, IRS revised its system and is now able to develop national reports on CNC quality.

    Recommendation: The Commissioner of Internal Revenue should establish requirements for postreview reports that will ensure that they provide meaningful information that can be used in determining whether changes are needed.

    Agency Affected: Department of the Treasury: Internal Revenue Service

 

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