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United States General Accounting Office: 
GAO: 

Report to the Chairman, Subcommittee on Oversight, Committee on Ways 
and Means, House of Representatives: 

May 2002: 

Tax Administration: 

Impact of Compliance and Collection Program Declines on Taxpayers: 

GAO-02-674: 

Contents: 

Letter: 

Results in Brief: 

Background: 

Compliance and Collection Programs Showed Declines, with Billions of 
Unpaid Taxes Not Pursued: 

Taxpayers Face Reduced Sanctions for Noncompliance and Reduced 
Incentives to Voluntarily Comply: 

IRS’s New Strategic Assessments Address Tax Noncompliance but Could 
Provide More Quantitative Information: 

Conclusions: 

Recommendation: 

Agency Comments: 

Appendix I: Objectives, Scope, and Methodology 28 Scope and 
Methodology: 

Appendix II: Comments from the Internal Revenue Service: 

Appendix III: GAO Contacts and Staff Acknowledgments: 
GAO Contacts: 
Acknowledgments: 

Tables: 

Table 1: Percentage Changes in Six IRS Compliance Programs, Fiscal 
Years 1996–2001: 

Table 2: Percentage Changes in Two IRS Collection Programs, Fiscal 
Years 1996–2001: 

Table 3: Number of Enforcement Sanctions and Proportion of Sanctions 
Used to Compel Payment of Delinquent Taxes, Fiscal Years 1996–2001: 

Table 4: Description of IRS Compliance and Collection Programs: 

Table 5: Definitions of Performance Indicators: 

Figures: 

Figure 1: Overview of IRS’s Compliance and Collection Process: 

Figure 2: IRS’s Strategic Planning Process: 

Abbreviations: 

ERIS: Enforcement Revenue Information System: 

GAO: General Accounting Office: 

IRS: Internal Revenue Service: 

[End of section] 

United States General Accounting Office: 
Washington, DC 20548: 

May 22, 2002 

The Honorable Amo Houghton: 
Chairman, Subcommittee on Oversight: 
Committee on Ways and Means: 
House of Representatives: 

Dear Mr. Chairman: 

For the last several years, Congress and others have been concerned 
about declines in the Internal Revenue Service’s (IRS) compliance and 
collection programs. Many view these programs—such as audits to 
determine whether taxpayers have accurately reported the amount of 
taxes that they owe and collection follow-up with taxpayers who have 
not paid what is owed—as critical for maintaining the public’s 
confidence in our tax system. Taxpayers’ willingness to voluntarily 
comply with the tax laws depends in part on their confidence that 
their friends, neighbors, and business competitors are paying their 
share of taxes. 

As we previously reported, some declines in compliance and collection 
programs have been dramatic.[Footnote 1] For example, from fiscal year 
1996 to fiscal year 2000, the number of individual tax returns audited 
by IRS declined by over 60 percent. Furthermore, IRS was unable to 
pursue many delinquent taxpayers, deferring collection action on 
billions of dollars in unpaid taxes. 

Because of concerns about declines in IRS’s compliance and collection 
programs, you asked us to assess the declines’ overall impact on 
taxpayers. You asked that in making this assessment, we examine IRS’s 
compliance and collection programs as a whole, recognizing that the 
amount of unpaid taxes identified by the compliance programs largely 
determines the workload of the collection programs. Accordingly, we 
agreed to: 

* describe the changes since 1996 in IRS’s compliance and collection 
programs, including the extent of collection deferrals, and the 
factors contributing to the program changes; 

* determine how the program changes have affected taxpayers, including 
their compliance with tax laws, the buildup of penalties and interest, 
and the length of time before collection actions are initiated; and; 

* determine how IRS addressed the program changes, including their 
effect on taxpayers, in its strategic assessments. 

The preparation of strategic assessments is a first step in IRS’s new 
strategic planning, budgeting, and performance management process. In 
the assessments, IRS’s operating divisions are to provide the 
commissioner and his senior management team with information on 
significant trends, issues, and problems facing the divisions and 
present proposals for addressing them. 

To measure the change in IRS’s compliance and collection programs, we 
focused on the performance of eight major programs from fiscal years 
1996 to 2001. In general, the six compliance programs were designed to 

(1) check for math errors and unpaid balances during returns 
processing, (2) determine taxes due from apparent nonfilers detected 
through computer matching, (3) determine taxes due from apparent 
underreporters detected through computer matching, (4) audit tax 
returns filed by individuals, (5) audit tax returns filed by 
corporations, and (6) audit other tax returns such as estate and gift 
returns. For taxpayers who are delinquent in paying taxes owed, IRS’s 
collection programs pursue collection through (1) telephone contacts 
with the taxpayers and (2) personal visits with the taxpayers by IRS 
field staff. To measure changes across these eight programs, we 
compiled data on performance indicators that were common to the 
programs' operations and that, in the aggregate, would provide an 
overview of the long-term direction of IRS’s compliance and collection 
programs. The indicators show changes in: 

* workload, such as tax returns filed and therefore available for 
audit or tax delinquencies assigned to collection; 

* coverage, such as the proportion of tax returns that were audited; 

* cases closed, such as the number of apparent nonfiler cases in which 
IRS made a determination of taxes due; 

* staff time devoted to a program; 

* productivity, such as the number of collection cases closed per 
staff hour; 

* amount of unpaid taxes identified by compliance programs or 
collected by collections programs; and; 

* percentage of unpaid taxes resolved by full payment or alternative 
arrangement. 

Appendix I contains a detailed discussion of the scope and methodology 
of the assignment, including a detailed description of the performance 
indicators used and random samples selected to analyze taxpayer 
delinquencies and timing of collection actions. Although most data in 
the report describe changes between 1996 and 2001, we reviewed interim-
year data to assure that significant changes were not overlooked. We 
did our work between October 2000 and April 2002 and in accordance 
with generally accepted government auditing standards. 

Results in Brief: 

Our indicators showed large and pervasive declines in 5 of the 6 
compliance programs (the exception was returns processing) and in both 
collection programs between fiscal years 1996 and 2001. For example, 

* coverage for the audit and matching compliance programs declined by 
29 percent to 69 percent; 

* staffing and cases closed declined for the five audit and matching 
programs; 

* unpaid taxes that were identified declined in four of the five audit 
and matching programs; and; 

* coverage by the telephone and field collection programs declined by 
15 percent and 45 percent, respectively. 

The decline in collection coverage reflected the collection programs’ 
inability to work a growing proportion of the delinquent cases 
referred from the compliance programs. In response, by fiscal year 
2001, IRS was deferring collection action on about one out of three 
assigned delinquencies. We estimate that by the end of fiscal year 
2001, IRS had deferred collecting taxes from about 1.3 million 
taxpayers[Footnote 2] who collectively owed about $16.1billion. 
[Footnote 3] IRS officials said that absent significant operational 
change, they had little expectation of reopening many deferred 
collection cases. 

A number of factors contributed to the declines in the programs and in 
collection coverage, including declines in overall IRS staffing (about 
8 percent), increased workload, and increased compliance and 
collection procedural controls mandated by Congress to better 
safeguard taxpayer interests. Also, in response to congressional 
mandates to improve taxpayer service, IRS temporarily reassigned some 
compliance and collection staff to activities such as answering 
taxpayer questions. Additionally, IRS officials said that compliance 
and collection resources were constrained by the need to commit 
resources to process tax returns and issue refunds. 

The declines in IRS’s compliance and collection programs affected 
taxpayers in several ways. 

* The likelihood that taxpayer noncompliance would be detected and 
pursued by IRS declined. For example, coverage in the nonfiler program 
declined by 69 percent by the end of fiscal year 2001. 

* The length of time that taxpayers owed back taxes at the time that 
they were assigned to collection increased between 1996 and 2001, 
although IRS intended that by deferring collection action on some 
older collection cases, it could get to newly assigned cases more 
quickly. 

* The amount of penalties and interest continued to accumulate on 
deferred collection cases, making future payment increasingly 
demanding if subsequently pursued by IRS. 

Taken together, these changes have reduced the incentives for 
voluntary compliance, a concern of IRS senior managers. Also, some 
available, but very limited, data suggest that voluntary compliance 
may have begun to deteriorate. For example, the number of apparent 
individual nonfilers increased about three and one-half times faster 
than the individual tax filing population. 

The strategic assessments, which were prepared to provide a basis for 
IRS senior managers to decide on significant program changes in IRS 
dealings with individual and small business taxpayers, identified the 
risk of declining compliance as a major trend, issue, or problem for 
IRS. These assessments, part of IRS’s new strategic planning, 
budgeting, and performance management process, also proposed a number 
of compliance and collection initiatives to address noncompliance. The 
assessments could not quantify the impact that the initiatives may 
have on taxpayer compliance, because IRS has not yet finished 
implementing a system for measuring taxpayer compliance. However, as a 
partial substitute for such information, the assessments could have 
provided quantitative estimates of the impacts of the initiatives on 
compliance and collection programs and the gap between them. 

To better assure that the assessments promote informed strategic 
decision making, we are recommending that the commissioner of internal 
revenue reexamine the extent to which some quantitative information on 
the impact of proposed program changes should be included in strategic 
assessments. 

In a letter dated May 13, 2002, the IRS commissioner agreed with our 
recommendations. (See page 26 for a discussion of agency comments, 
which are reprinted in appendix II.) 

Background: 

Under our voluntary tax system, taxpayers are responsible for filing 
tax returns that report the full amount of taxes owed (referred to as 
self-assessment of taxes) as well as pay any taxes that are due. IRS 
has established eight major compliance and collection programs to 
check on taxpayer compliance with these responsibilities and to 
initiate collection action if payment is not received. A descriptive 
overview of these compliance and collection programs is shown in 
figure 1. (A detailed description appears in table 4 in appendix I.) 

In general, the compliance programs were designed to assure that 
taxpayers fully and accurately report and pay the amount of taxes that 
they owe to IRS. As shown in figure 1, IRS’s compliance checks begin 
when taxpayers file their tax returns. As returns are received and 
processed, they are checked for errors (e.g., math errors and omitted 
schedules) and unpaid balances. After processing, a tax return may 
also be selected for review by other compliance programs. Two of these 
compliance programs use computers to analyze information available to 
IRS (e.g., earnings on bank deposits) to detect taxpayers who have not 
filed tax returns or taxpayers who have underreported the amount of 
taxes owed. IRS may also audit the tax returns filed by individuals, 
corporations, and others, such as estates, to determine whether the 
correct tax has been reported and paid. At this point in the 
compliance process, taxpayers may be asked for records to substantiate 
their returns. If the compliance programs identify unpaid taxes, IRS 
makes the tax assessments and requests the taxpayers to make the 
appropriate payment.[Footnote 4] If payment is not received, IRS sends 
a series of collection notices to taxpayers demanding payment of the 
assessment. 

If taxpayers become delinquent-—if they do not pay their taxes after 
being sent collection notices—-IRS may initiate collection action 
through its telephone and field collection programs. In addition to 
requesting payment from delinquent taxpayers, these programs research 
the taxpayers’ ability to pay their tax debts and may use sanctions, 
including levies, liens, and seizures, to obtain payment.[Footnote 5] 
More-complex unpaid assessments are referred from telephone collection 
to field collection. 

Figure 1: Overview of IRS’s Compliance and Collection Process: 

[Refer to PDF for image: process illustration] 

Tax return filed: 
on-line, or by mail. 

Compliance programs: Unpaid taxes identified, tax assessments made, 
and payment requested: 

IRS Returns processing: 
Identifies taxpayers who did not make full payment or made errors and 
omissions in computing their tax liabilities. 

Nonfiler: 
Identifies taxpayers who have not, but should have, filed tax returns. 

Underreporter: 
Identifies taxpayers who have filed, but underreported, their tax 
liability. 

Individual audit: 
Examines individual returns for compliance with law. 

Corporate audit: 
Examines corporate returns for compliance with law. 

Other audit: 
Examines excise, employment, estate, and gift tax returns for 
compliance with law. 

Collection programs: If timely payment is not made, IRS follows up 
with taxpayers: 

Telephone collection: 
Pursues collection via phone contacts with delinquent taxpayers. 

Field collection: 
Involves personal visits by IRS staff to delinquent taxpayers and 
in-depth investigations of the taxpayers' ability to pay tax debts. 

Source: GAO analysis of IRS information. 

[End of figure] 

Beginning in fiscal year 2001, IRS reorganized into four operating 
divisions, each responsible for administering tax law for a set of 
taxpayers with similar needs. By reorganizing in this manner, IRS 
sought to establish clearer lines of responsibility and accountability 
for improving service to taxpayers and resolving their tax problems. 
Through such improvements, IRS expected to better enable taxpayers to 
comply with the tax laws. 

The two largest divisions in terms of staff and number of taxpayers 
covered, and the primary focus of this report, are the small business 
division and the wage and investment division. The small business 
division is responsible for individuals who are fully or partially 
self-employed and for businesses with assets up to $10 million. The 
wage and investment division is responsible for individuals who are 
not self-employed (e.g., wage earners). The other two divisions are 
responsible for large and midsized businesses and for tax-exempt and 
government entities. 

In general, the IRS operating divisions are responsible for managing 
the daily operations of the eight major compliance and collection 
programs, as appropriate for their taxpayers. In some instances, 
however, the programs are consolidated in one division or two 
divisions. For example, the field collection program is housed within 
the small business division and the telephone collection program is 
split between the small business division and the wage and investment 
division. 

The operations of the compliance and collection programs differ from 
each other in many respects. Some of the programs (e.g., returns 
processing and underreporter programs) rely on automation and deal 
with millions of taxpayers. Some (e.g., corporate audit) are highly 
labor intensive and deal with far fewer taxpayers. Others (e.g., the 
nonfiler program) are a combination of automated programs and labor 
intensive investigations. 

Although day-to-day management of IRS’s compliance and collection 
programs is the responsibility of the operating divisions, the 
commissioner and his senior management team maintain responsibility 
for making decisions on major operational changes, allocating 
resources within IRS, and developing agencywide strategic plans. The 
process for making these decisions starts with the operating divisions’
 preparing strategic assessments that report on major trends, issues, 
and problems facing the divisions and proposals for dealing with them. 
These decisions are subject to public oversight. The IRS Restructuring 
and Reform Act of 1998[Footnote 6] (IRS Restructuring Act) established 
an IRS oversight board, in part to assist Congress in reviewing and 
approving IRS’s budget and strategic planning decisions. 

Compliance and Collection Programs Showed Declines, with Billions of 
Unpaid Taxes Not Pursued: 

Overall, our analysis showed significant and pervasive declines in 
IRS’s compliance and collection programs, as measured by indicators 
such as those covering staffing, work completed, and work outcomes 
from fiscal year 1996 to fiscal year 2001. Moreover, an increasing gap 
between collection workload, stemming from assessments made by 
compliance programs, and collection case closures has led IRS to defer 
taking action to collect on billions of dollars of tax delinquencies. 
A number of factors have contributed to these declines. These factors 
include decreases in overall staffing, decreases in compliance and 
collection staffing, decreased productivity of the remaining 
compliance and collection staff, increased compliance and collection 
procedural controls to better safeguard taxpayer interests, temporary 
details of compliance and collection staff to taxpayer assistance 
work, and constraints imposed by the need to process returns and issue 
refunds. 

Compliance Programs Showed Declines in Staffing and Case Outcomes: 

From fiscal year 1996 through fiscal year 2001, most compliance 
programs showed significant declines in the amount of staff time 
expended on compliance work, in the number of compliance cases closed, 
and in the proportion of the workload reviewed to determine whether 
additional tax assessments were warranted (i.e., coverage). About half 
of the programs also saw declines in the productivity of the 
compliance staff (i.e., case closures per hour of staff time), in the 
amount of unpaid taxes identified, and in the percentage of unpaid 
taxes resolved (i.e., the proportion of the unpaid taxes collected 
without involving the two collection programs). While the declines 
were not universal, they were pervasive, as illustrated by the shaded 
areas in table 1. The declines occurred over a period when the programs’
workload (e.g., the number of returns filed, apparent nonfilers, or 
apparent underreporters) was increasing, as also shown in table 1. 

Table 1: Percentage Changes in Six IRS Compliance Programs, Fiscal 
Years 1996–2001: 

Performance indicators: Workload; 
Returns processing: +9%; 
Nonfiler: +34%; 
Underreporter: +25[A]%; 
Individual audit: +10%; 
Corporate audit: +14%; 
Other audit: +4%. 

Performance indicators: Coverage; 
Returns processing: n/a[B]; 
Nonfiler: –69%; 
Underreporter: –29%[A]; 
Individual audit: –63%; 
Corporate audit: –60%; 
Other audit: –59%. 

Performance indicators: Cases closed; 
Returns processing: +9%; 
Nonfiler: –58%; 
Underreporter: –10%[C]; 
Individual audit: –59%; 
Corporate audit: –55%; 
Other audit: –58%. 

Performance indicators: Staff time; 
Returns processing: +7%; 
Nonfiler: –57%; 
Underreporter: –20%; 
Individual audit: –41%; 
Corporate audit: –14%; 
Other audit: –18%. 

Performance indicators: Productivity; 
Returns processing: +2%; 
Nonfiler: –1%; 
Underreporter: +13%[C]; 
Individual audit: –31%; 
Corporate audit: –47%; 
Other audit: –48%. 

Performance indicators: Dollars of unpaid taxes identified; 
Returns processing: +21%; 
Nonfiler: –2%; 
Underreporter: +33%; 
Individual audit: –43%; 
Corporate audit: –20%; 
Other audit: –11%. 

Performance indicators: Percentage of unpaid taxes resolved; 
Returns processing: [D]; 
Nonfiler: –12%; 
Underreporter: –2%; 
Individual audit: +68%; 
Corporate audit: +29%; 
Other audit: –23%. 

Note: See appendix I for a description of the trends and data 
compilation. 

[A] Fiscal year data were not available. The trend analysis was based 
on the filing year of underreporting tax returns. 

[B] Since all tax returns must be processed, the coverage indicator is 
not applicable. However, the amount of work done per return processed 
has expanded. During the analysis period, returns processing was 
assigned additional responsibility for dealing with certain types of 
erroneous claims for tax credits that had previously been handled by 
its individual audit staff. Based on available data, we estimate that 
the additional responsibilities increased returns processing error–
related work by about 7 percent. 

[C] The analysis period covers fiscal years 1997 through 2001; data 
for fiscal year 1996 were not available. 

[D] Less than 1 percent. 

Source: GAO review of IRS data. 

[End of table] 

Compliance coverage fell notably for all compliance programs except 
returns processing. The declines ranged from about 29 percent to about 
69 percent in the five audit and matching compliance programs. 
Further, the number of cases closed by these programs declined by 
about 55 percent or more, with the exception of the underreporter 
program, which declined by about 10 percent. 

Also, these five compliance programs generally experienced marked 
declines in the staff time committed to compliance work and, with one 
exception, the productivity of staff in closing cases. According to 
the underreporter program staff, the increased use of automation 
enabled the program to increase productivity but not sufficiently to 
maintain coverage. 

In general, the amount of unpaid taxes identified by these compliance 
programs did not decline as much as the number of cases closed. In two 
of the six compliance programs, the amount of unpaid taxes identified 
increased. The data available to us do not make clear the extent to 
which this increase may represent a change in the type of cases 
worked, increased levels of noncompliance by taxpayers, or other 
factors, including inflation.[Footnote 7] 

For this period, the data also show a mixed picture with respect to 
the percentage of unpaid taxes resolved—that is, the percentage of the 
compliance assessments that the compliance programs collect at the 
conclusion of their work, without referral to telephone or field 
collection.[Footnote 8] The individual audit and corporate audit 
programs tended to collect a greater proportion of the tax assessments 
in fiscal year 2001 than in fiscal year 1996, while the nonfiler, 
underreporter, and other audit programs collected a somewhat reduced 
proportion of the assessments. In general, the table indicates that 
the programs that showed the biggest gains in the proportion of unpaid 
taxes collected also showed the largest declines in the amount of 
unpaid taxes identified. For example, while the individual audit 
program showed a 68 percent increase in its collection rate, it also 
experienced a 43 percent decline in the amount of unpaid taxes 
identified. 

Collection Programs Showed Declines in Workload, Results, and Staffing: 

Overall, there were almost universal declines in the two collection 
programs’ performance between fiscal years 1996 and 2001, as indicated 
by the shaded areas in table 2. While collection workload (i.e., the 
number of delinquencies assigned to collection) declined somewhat as a 
result of the reduced levels of compliance work, the programs’ 
capacity to close collection cases—such as by securing payment or 
completing sufficient analysis to determine that payment cannot be 
made at that time—declined much more. 

Table 2: Percentage Changes in Two IRS Collection Programs, Fiscal 
Years 1996–2001: 

Performance indicators: Workload[A]; 
Telephone collection: –24%; 
Field collection: [B]. 

Performance indicators: Coverage; 
Telephone collection: –15%; 
Field collection: –45%. 

Performance indicators: Cases closed; 
Telephone collection: –36%; 
Field collection: –45%. 

Performance indicators: Direct staff time;
Telephone collection: –12%; 
Field collection: –28%. 

Performance indicators: Productivity; 
Telephone collection: –27%; 
Field collection: –24%. 

Performance indicators: Dollars of unpaid taxes collected; 
Telephone collection: –15%; 
Field collection: –7%. 

Performance indicators: Percentage of delinquencies resolved; 
Telephone collection: 6%; 
Field collection: [B]. 

[A] Cases referred from telephone collection to field collection were 
included as field collection workload. 

[B] Less than 1 percent. 

Source: GAO review of IRS data. 

[End of table] 

Cases closed declined by over 36 percent, reflecting significant 
declines in both staff time and productivity, as shown in table 2. In 
turn, the amount of unpaid taxes collected by the two programs 
declined, but not as steeply as did the number of cases closed. The 
percentage of case closures that resulted in resolution of 
delinquencies, either through immediate payment or through installment 
arrangements, stayed roughly the same, with no change for field 
collections and a 6 percent increase for telephone collections. 

Use of Collection Enforcement Sanctions Decreased: 

Another indicator of the change in the telephone and field collection 
programs is IRS’s decreasing use of enforcement sanctions, both in 
absolute numbers and as a proportion of closed collection cases. The 
number of liens, levies, and seizures dropped precipitously between 
fiscal years 1996 and 2000 and then increased somewhat during fiscal 
year 2001. Even with this change, however, table 3 shows that the 
number of levies and seizures remained 78 and 98 percent below 1996 
levels, respectively. Also, when considered as a proportion of closed 
collection cases, the use of levy and seizure sanctions declined by 64 
and 96 percent between fiscal years 1996 and 2001, as shown in table 
3. The use of liens showed the most significant turnaround, but as of 
2001, the number of lien filings was down 43 percent and as a 
percentage of case closures was down 6 percent. 

Table 3: Number of Enforcement Sanctions and Proportion of Sanctions 
Used to Compel Payment of Delinquent Taxes, Fiscal Years 1996–2001: 

Sanction: Lien; 
Number of enforcement sanctions[A]: 
1996: 750,225; 
2001: 428,376; 
Percentage change: –43%; 
As a proportion of closed cases: 
1996: 15; 
2001: 14; 
Percentage change: –6%. 

Sanction: Levy; 
Number of enforcement sanctions[A]: 
1996: 3,108,926; 
2001: 674,080; 
Percentage change: –78%; 
As a proportion of closed cases: 
1996: 62; 
2001: 22; 
Percentage change: –64%. 

Sanction: Seizure; 
Number of enforcement sanctions[A]: 
1996: 10,449; 
2001: 234; 
Percentage change: –98%; 
As a proportion of closed cases: 
1996: [B]; 
2001: [B]; 
Percentage change: –96%. 

[A] For 2000, the number of liens, levies, and seizures were 287,516; 
219,778; and 74; respectively. 

[B] Less than 1 percent. 

Source: GAO review of IRS compliance and collection program data. 

[End of table] 

Increasing Gap between Compliance and Collection Capacity Has Led IRS 
to Defer Collection Action on Billions of Dollars in Tax Delinquencies: 

By March 1999, collection officials recognized that changes were 
needed. Their case inventory of delinquent accounts was growing and 
aging, and the gap between their workload and their capacity to 
complete work was increasing. They recognized that they could not 
close all collection cases, and they believed that they needed to be 
able to deal with taxpayers more quickly, particularly taxpayers who 
were still in business and owed employment taxes.[Footnote 9] The 
officials believed that getting to these delinquencies quickly, before 
they became unmanageable to the taxpayers, would make collection 
easier and faster. 

In response, collection managers introduced a new collection case 
selection system. The selection system delivered to collection staff 
delinquencies that met newly established collection priorities based 
on delinquency amount and recency, with priority given to employment 
tax over income tax delinquencies and to taxpayers who contacted IRS 
to resolve their delinquencies. The system also periodically reviewed 
cases in telephone collection and field collection backlog and 
automatically purged those that met certain aging criteria as a result 
of having been passed over for more recent delinquencies. The 
automatic purging was accomplished by closing the collection cases as 
not collectible. This had the effect of deferring collection action, 
in that IRS maintained the right to reinitiate collection action. 

Once collection action has been deferred, however, two conditions must 
be met before IRS will consider reopening a collection case, according 
to IRS officials. The two conditions are (1) if the taxpayer becomes 
delinquent again or if IRS receives information indicating that the 
taxpayer had additional assets that could help pay off the delinquency 
and (2) if IRS finds the resources to work the collection cases. The 
taxpayers will, however, be sent annual notices of taxes due and will 
be subject to having any refunds from subsequently filed tax returns 
offset by IRS to cover unpaid taxes. Also, IRS will continue to 
monitor the deferred collection accounts for possible collection 
action until IRS’s statutory right to collect the taxes expires, 
generally 10 years after taxes are assessed. 

Even though IRS has systems for monitoring deferred collection cases, 
the senior IRS officials responsible for managing collection programs 
indicated that, absent significant operational changes, they had 
little expectation that a telephone or field collection case would be 
reopened for these tax debts alone once collection action had been 
deferred. 

On the basis of our random sample of unpaid tax accounts, we estimate 
that by the end of fiscal year 2001, after the deferral policy had 
been in place for about two and one-half years, IRS had deferred 
collection action on the tax debts of an estimated 1.3 million 
taxpayers. We also estimate that these 1.3 million taxpayers owed 
about $16.1 billion[Footnote 10] in unpaid taxes, interest, and 
penalties that originated from assessments by all six compliance 
programs.[Footnote 11] By fiscal year 2001, IRS was deferring 
collection action on tax debts at a rate equal to one of three new 
delinquencies assigned to the collection programs. 

While the amounts owed by these taxpayers were not inconsequential, we 
found that, consistent with IRS’s stated collection deferral 
priorities, these taxpayers owed less and had been delinquent longer 
than other delinquent taxpayers. We estimate that the median amount 
owed by the taxpayers for whom collection action was deferred was 
about $4,500,[Footnote 12] compared with $5,500[Footnote 13] for other 
delinquent taxpayers in the collection population. Also, the taxpayers 
for whom collection action was deferred tended to have been delinquent 
for a longer period of time—-about an estimated 5.6 years versus an 
estimated 3.9 years. 

Declining Staff and Productivity and an Emphasis on Taxpayer Service 
Contributed to Compliance and Collection Declines: 

A number of factors contributed to the decline in compliance and 
collection programs. Generally, IRS faced overall staffing declines 
while it confronted several competing and growing workload demands. 
Overall, 

* aggregate staffing, measured by full-time equivalents, was about 
107,000 in fiscal year 1996 and about 98,000 in fiscal year 2001—about 
an 8 percent decline; 

* individual income tax returns filed increased from about 119 million 
in fiscal year 1996 to about 130 million in fiscal year 2001—about a 9 
percent increase; and; 

* business income returns (corporate and partnership), which are filed 
by taxpayers that have more complex dealings with IRS, increased by 17 
percent, from 6.5 million returns in 1996 to 7.6 million returns in 
2001. 

While overall staffing declined about 8 percent, the impacts on almost 
all of the compliance and collection programs were generally much 
larger, as shown in tables 1 and 2. According to IRS senior officials, 
to assure that the tax returns filed by taxpayers are processed timely 
and that timely payments are made to taxpayers owed refunds, IRS first 
allocated its resources to meet the returns processing program’s 
increasing workload before it funded the other compliance and 
collection programs. Also, the officials provided data that showed 
that at the beginning of the six-year period, IRS was adjusting down 
from compliance and collection staffing increases during the late 
1980s and early 1990s. Comparing IRS data on professional staff levels 
for audit and field collection in fiscal year 2001 with data on the 
pre-1987 buildup shows a decline of about 21 percent. 

Also during this period, the IRS Restructuring Act, enacted in 1998, 
provided additional rights for taxpayers and imposed additional 
administrative responsibilities on IRS’s compliance and collection 
programs. For example, prior to IRS’s using enforcement sanctions to 
collect unpaid taxes, additional notifications and opportunities for 
appeals were required to be provided to taxpayers. Also, compliance 
and collection staff were required to keep records of contacts with 
third parties and to make taxpayers aware of such contacts. Further, 
collection staff were required to prepare additional documentation, 
such as certifications that they had verified that the taxes were past 
due and that the sanctions were appropriate given the taxpayers’ 
circumstances, and to submit that documentation to a higher-level 
manager for review and approval. Deviations from this and other 
requirements of the act may subject compliance and collection staff to 
disciplinary action, including mandatory termination of employment, 
for actions such as willfully not obtaining certain required approval 
signatures or for actions constituting taxpayer harassment.[Footnote 
14] According to some senior officials, the potential for disciplinary 
action has resulted in IRS compliance and collection staff’s working 
more slowly and hesitantly, spending much more time documenting their 
actions. 

In addition, the act mandated that IRS improve service to taxpayers, 
such as telephone assistance; following this mandate, IRS undertook a 
major organizational restructuring and modernization effort. In 
response to these demands, and with a declining pool of staff 
resources, IRS reallocated staff from compliance (other than returns 
processing) and collection programs to provide additional support to 
taxpayer assistance services. Some of the reallocation was 
accomplished by allowing attrition to occur without hiring replacement 
staff for compliance and collection programs, and some was 
accomplished by temporarily detailing compliance and collection staff 
to other IRS programs. For example, from fiscal year 1996 to fiscal 
year 2000, the percentage of field collection professional staff time 
detailed to supplement taxpayer assistance staff during the tax filing 
season-—in large part assisting taxpayers who requested assistance at 
IRS offices—-grew from about 4 percent of collection time in fiscal 
year 1996 to about 14 percent in fiscal year 2000 before dropping to 5 
percent in 2001. Staff time charged to compliance and collection 
programs between fiscal years 1996 and 2001 declined in all but one 
program (i.e., returns processing) and in several instances by 20 
percent or more, as shown in tables 1 and 2. 

According to IRS officials, the demands on resources also affected 
productivity as indicated by the number of cases closed per staff hour 
of compliance and collections staff time. The officials said that some 
of the IRS Restructuring Act requirements, such as suspending 
collection action to provide time for additional notifications and 
appeal hearings, increased the amount of staff time and calendar time 
required to close a case. They also noted that some of the potentially 
available staff time was consumed in training for the new 
requirements. In addition, according to IRS officials, from 1996 
through 2001 the complexity of cases worked by compliance and 
collection staff had changed, requiring more time to complete cases. 
For example, many erroneous claims for tax credits that had been 
handled by audit prior to fiscal year 1997 were reassigned to returns 
processing, which could handle the claims largely on an automated 
basis. 

IRS officials did not provide us with any quantitative analysis that 
distinguished between the effects of the IRS Restructuring Act and 
those of other factors influencing productivity. On the basis of the 
data available to us, we could not discern the extent to which the 
changes in productivity were attributable to the act or to other 
factors. 

Taxpayers Face Reduced Sanctions for Noncompliance and Reduced 
Incentives to Voluntarily Comply: 

The declines in IRS’s compliance and collection programs affected 
taxpayers in several ways. Our analysis showed that noncompliance was 
less likely to be detected by compliance programs and pursued or 
sanctioned by collection programs. Also, the length of time that 
taxpayers had owed back taxes when they were assigned to collection 
increased between fiscal years 1996 and 2001, although IRS intended 
that by deferring collection action on some older collection cases, it 
could get to newly assigned cases quicker. For the deferred cases, 
penalties and interest continue to accumulate, making future payment 
of those assessments increasingly demanding. Taken together, these 
changes have reduced the incentives for voluntary compliance, a 
concern of IRS senior managers. Some available, but very limited, data 
suggest that voluntary compliance may have begun to deteriorate. 

Noncompliance Was Less Likely to Be Detected and Pursued: 

The data presented earlier on the changes in IRS’s compliance and 
collection programs showed that the likelihood that taxpayer 
noncompliance would be detected and pursued by IRS declined between 
fiscal years 1996 and 2001. For example, in situations where IRS had 
information that a tax return was due but not filed, the rate of IRS 
compliance follow-up declined about 69 percent. In situations where 
IRS had information that a tax return understated the amount of taxes 
owed, the decline in follow-up was about 29 percent. Moreover, even 
when compliance follow-up took place and the taxpayers were found to 
owe back taxes, because of IRS’s practice of deferring collection 
action, the taxpayers had about a one in three chance of not being 
pursued by IRS collection staff. And, if pursued, the delinquent 
taxpayers were about 64 percent less likely to experience an enforced 
collection action such as the levying of their assets. These changes 
reduced the incentives to comply with the tax laws. 

Some Increased Time in Initiating Collection: 

Although IRS intended that by deferring collection action on some tax 
debts it would be able to initiate collection action for some higher-
priority cases sooner, our random samples showed that the median 
length of time that taxpayers had owed back taxes at the time they 
were assigned to collection increased between 1996 and 2001. We 
estimate these increases as follows: 

* Taxpayers who were assigned to collection as of the end of fiscal 
year 1996 had owed back taxes for about 1.2 years when they were 
assigned to telephone or field collections. 

* Taxpayers who were assigned to collection as of the end of fiscal 
year 2000 had owed back taxes for about 1.3 years when they were 
assigned to telephone or field collections. 

* Taxpayers who were assigned to collection as of the end of fiscal 
year 2001 had owed back taxes for about 1.6 years when they were 
assigned to telephone or field collections. 

On the basis of our analysis of randomly sampled collection case files 
related to taxpayers who were delinquent at the end of fiscal year 
2000 (2001 case files were not available at the time of our field 
work), we noted that much of this timeframe was attributable to the 
concluding of interim matters—for example, resolving questions on the 
amount of the taxpayers’ tax liability or providing time for the 
taxpayers to make periodic payments. When we factored in the time 
taken to conclude these interim matters, our sample showed that, on 
average, the taxpayers had been potentially eligible for collection 
actions for about 6 months[Footnote 15] when they were contacted by 
collection staff. Also, on comparing the sampled collection cases that 
were initiated before and after IRS started deferring collection 
cases, we found no statistically significant difference in the timing 
of the collection action. 

Accordingly, as shown by our samples, deferring some collection cases 
helped IRS to keep its collection caseload from ballooning but did not 
improve collection timeliness. According to IRS senior officials, some 
recent procedural changes, designed to speed up the assignment of 
priority cases to collection staff, should improve the timing of the 
collection actions that are initiated. 

Taxpayers Face Buildup of Penalties and Interest When IRS Defers Taking 
Collection Action: 

As expected, our random sample of unpaid tax assessments as of the end 
of fiscal year 2001 showed that taxpayers for whom collection action 
was deferred were statistically different from taxpayers who were 
assigned to telephone and field collection. We estimate these 
differences as follows: 

* Taxpayers who were assigned to telephone or field collection were 
about three times as likely to have made payments on their 
delinquencies during the previous year as those for whom collection 
action was deferred. 

* Taxpayers for whom collection action was deferred owed about 7 times 
more in penalties and interest as a percentage of their income (or of 
payroll for businesses) than the taxpayers who were assigned to 
collection.[Footnote 16] 

Not surprisingly, these differences indicate that follow-up by 
telephone or field collections may have a strong impact on generating 
payment on tax liabilities and preventing a buildup of penalties and 
interest. In turn, deferring collection action to a later date would 
make resolution of the delinquencies more demanding on affected 
taxpayers. 

Incentives to Voluntarily Comply Are Reduced: 

Improving voluntary compliance—the percentage of the taxes owed that 
taxpayers voluntarily report and pay—is a major goal of IRS’s 
compliance and collection programs. Although the compliance and 
collection programs may focus on noncompliant taxpayers, IRS believes 
that the deterrent effect of the programs influences the compliance of 
all taxpayers. Currently, IRS does not have a measure of voluntary 
compliance. 

The declines in IRS’s compliance and collection programs that occurred 
from fiscal year 1996 through fiscal year 2001 have reduced some of 
the incentives useful for (1) inducing noncompliant taxpayers to 
become compliant and (2) reassuring compliant taxpayers that they are 
not being disadvantaged by voluntarily reporting and paying the full 
amount of taxes that they owe. Because only a little more than two 
years of data were available for analyzing taxpayers for whom 
collection action was deferred, we were not able to determine whether 
the deferral will have any long-term effects on the taxpayers’ future 
payment compliance and on the amount of interest and penalties owed. 
If no action is taken to collect the delinquent tax, however, the 
motivation to pay the taxes owed is reduced. 

Available, but very limited, data suggest that voluntary compliance 
may have deteriorated. For example, the growth in the number of 
apparent nonfilers (i.e., individuals who have not filed tax returns, 
as identified by IRS document matching over the period fiscal years 
1996 to 2001) increased about three and one-half times faster than the 
tax filing population. Similarly, the number of apparent 
underreporters increased about one and one-half times faster. As 
discussed in the following section, compliance trends are a concern of 
IRS senior managers. 

IRS’s New Strategic Assessments Address Tax Noncompliance but Could 
Provide More Quantitative Information: 

The strategic assessments prepared by the wage and investment and 
small business operating divisions identified the risk of declining 
compliance as a major issue for IRS. These assessments, part of IRS’s 
new strategic planning, budgeting, and performance management process, 
also proposed a number of compliance and collection initiatives to 
address noncompliance. The operating divisions could not quantify the 
impact that their initiatives are expected to have on compliance, 
because IRS is several years away from finishing a system for making 
compliance estimates. However, as a partial substitute for such 
information, the assessments could have provided quantitative 
information on the expected impacts of the initiatives on compliance 
and collection programs. 

Strategic Assessments Are a Key First Step in IRS’s Strategic Planning, 
Budgeting, and Performance Management Process: 

To make decisions for fiscal year 2002 and subsequent year operations, 
IRS implemented a new strategic planning, budgeting, and performance 
management process during fiscal year 2000. The process begins, as 
outlined in figure 2, with the operating divisions’ preparing 
strategic assessments. After receipt and review of the strategic 
assessments, the commissioner provides detailed guidance (step 2) to 
the operating divisions for developing their strategy and program 
plans (step 3). These plans are then incorporated (step 4) into an IRS-
wide performance plan (which sets out measurable objectives such as 
the number of audits to be done). These plans are, in turn, 
incorporated into IRS’s budget justification (which sets out its 
resource requests to Congress). The remaining steps (5 and 6) involve 
allocating resources across IRS divisions and programs and monitoring 
division adherence to the planning and budgeting decisions. 

According to IRS senior management, the strategic assessments are 
intended to provide “big picture” information for making decisions on 
significant operational changes. To obtain that decision-making 
information, senior management instructed the operating divisions to 
prepare brief strategic assessment documents that summarize: 

* important trends, issues, and problems facing the operating 
divisions and IRS and; 

* proposals for dealing with those trends, issues, and problems. 

The operating divisions were instructed to describe the trends, 
issues, and problems, using quantifiable, measurable data when 
possible. Also, in proposing changes, the operating divisions were to 
determine the most critical trends requiring attention by considering 
their impact on the achievement of IRS’s goals. These goals included 
increasing taxpayer compliance and increasing the fairness of the 
compliance programs. 

Figure 2: IRS’s Strategic Planning Process: 

[Refer to PDF for image: process illustration] 

Step 1: Strategic assessment. 

Step 2: Commissioner’s planning guidance. 

Step 3: Strategy and program plan. 

Step 4: Performance plan and budget justification. 

Step 5: Business resource allocation plan. 

Step 6: Execute and review strategy, programs, and budget 
justification. 

Source: GAO review of IRS planning documentation. 

[End of figure] 

The planning process helps IRS to implement the Government Performance 
and Results Act (Results Act).[Footnote 17] The act’s goal was to 
improve the management of federal programs by having federal agency 
decision making focus on impacts (i.e., the measurable results 
achieved by their programs). The agencies were required to 
periodically develop strategic plans, identify measures for assessing 
progress in achieving plan goals, and use the measures to report on 
the progress in meeting plan goals. Operationalizing the act’s mandate 
was left to the agencies. We have reported in the past that IRS’s 
approach, designed to reconcile competing priorities and initiatives 
with the realities of available resources, has helped it to make 
progress in defining its strategic direction.[Footnote 18] 

In addition, IRS’s strategic plans and budgets are reviewed by an 
oversight board before they are submitted to the Congress. The board 
was established by the IRS Restructuring Act as a means of providing 
Congress with advice on IRS’s strategic plans and budget. 

Strategic Assessments Proposed Initiatives to Address Noncompliance 
but Provided No Quantitative Information on the Expected Impact: 

In the strategic assessments that we reviewed, both the wage and 
investment and small business operating divisions recognized that 
declines in their compliance and collection activities created a risk 
that taxpayer compliance could be negatively affected. Some of the 
identified risks included the potential for decreased tax collections, 
potential for increased numbers of nonfilers, and potential for 
increased underreporting of taxes owed. 

To counter declines in both compliance and collection activities and 
to deal with the potential risks, the IRS operating divisions 
identified a number of changes warranting priority attention, 
including the need to: 

* reengineer the audit process, 

* reengineer the collection process, 

* reevaluate the telephone collection selection criteria for 
individuals, 

* use more document matching to identify underreporters,[Footnote 19] 
and, 

* increase audit and underreporter program resources. 

The proposed initiatives have the potential both to increase 
compliance and collection activities and to rebalance those 
activities. For example, if productivity gains result from collection 
process reengineering, the collection staff will be able to close 
additional delinquency cases. Also, according to IRS officials, 
additional delinquencies could possibly be closed by outsourcing some 
collection activities. The officials indicated that outsourcing is an 
issue being studied by the collection reengineering team. 

Because of a lack of information, the operating divisions’ strategic 
assessments could not quantify the impact that their changes may have 
on taxpayer compliance. Currently, IRS lacks reliable data on the 
voluntary compliance rate and information on how IRS’s compliance and 
collection programs influence that rate. In May 2000, IRS established 
a research office to develop a new approach for measuring compliance. 
However, IRS will not have new data on the compliance rate for 
individuals and businesses for several years and could take longer to 
develop estimates of how compliance and collection programs influence 
the rate.[Footnote 20] 

The assessments that we reviewed, however, missed opportunities to at 
least partially compensate for the lack of quantitative estimates of 
the impact that the proposed changes would have on compliance. Some 
examples of the type of quantitative estimates that could be provided 
are suggested by the information that we presented in the first two 
sections of this report. Such quantitative estimates might include the 
impact on compliance and collection workload, coverage, cases closed, 
staffing, productivity, dollars of unpaid taxes identified, and 
percentage of taxes resolved. Other quantitative estimates could 
address the benefits and costs associated with the proposed changes. 
Although such estimates would be only a partial substitute for an 
estimate of the impact on the ultimate result, compliance, they would 
provide quantitative information about the expected impact on the 
declines in compliance and collection programs and the growing gap 
between them. 

Senior managers told us that the strategic assessments were important, 
providing the starting point in the management decision-making chain 
for rationing IRS’s limited resources to the most important 
priorities. The officials also said that even if the basis for some 
aspects of strategic decision making, such as the balance between 
compliance and collection programs, were not explicitly addressed in 
the strategic assessments, they believed that sound decisions had been 
made as a result of IRS’s implementing the new strategic planning 
process. For example, they indicated that the collection reengineering 
effort had the potential to affect the balance between collection and 
compliance activities. They said that as managers gained more 
experience with the process, their strategic assessment reports would 
improve. 

Estimating the impacts of proposed initiatives would have some costs 
and could lengthen a document intended to be “strategic” and therefore 
brief. However, both IRS guidance and the Results Act emphasize the 
value of quantitative information related to performance, especially 
the impact or results that programs were achieving. Some quantitative 
information about the expected impacts of proposed program changes 
could provide IRS senior managers a fuller understanding of the trade-
offs involved in planning the allocation of IRS resources to 
compliance and collections programs. 

In addition, quantitative information might have other benefits. 
Internally, it might provide lower-level managers not directly 
involved in strategic decision making a better understanding of the 
reasons for decisions and expected results. Externally, quantitative 
information from the strategic assessments might facilitate decision 
making by Congress, the oversight board, and others. For example, 
quantitative information from the strategic assessments could be 
incorporated into documents going to Congress, such as the annual 
budget request. 

Conclusions: 

The commissioner and senior managers recognize that the declines in 
IRS’s compliance and collection programs are a strategic problem that 
puts a major part of the agency’s mission, ensuring compliance with 
the tax laws, at risk. Problems of this magnitude, involving the level 
of IRS resources and the allocation of those resources within the 
agency, must be dealt with by top management and external stakeholders 
including Congress and the oversight board. To facilitate such 
decision making, IRS has implemented its new strategic planning, 
budgeting, and performance management process. Strategic assessments 
are the basis for the process and, by extension, are also part of the 
basis for decisions about IRS’s budget and strategy made by Congress 
and others. 

We support IRS’s new approach to strategic planning, an approach that 
seeks to integrate planning and budgeting based on quantifiable 
information with management decision making. We also recognize that IRS’
s strategic assessments, and thus strategic planning, are constrained 
by the absence of data on the impact that IRS operations have on 
taxpayer compliance. Nonetheless, opportunities exist to make the 
strategic assessments more informative. How much quantitative 
information should be provided in strategic assessments is a decision 
for the primary users of the assessments, IRS’s top managers. Making 
the strategic assessments more quantitative will not resolve IRS’s 
strategic problems but could contribute more information to the 
decision-making process. 

Recommendation: 

Based on experience to date using strategic assessments, we recommend 
that the commissioner of internal revenue reexamine the extent to 
which some quantitative information on the impact of proposed program 
changes should be included in strategic assessments. 

Agency Comments: 

The commissioner of internal revenue provided written comments on a 
draft of this report in a May 13, 2002, letter, which is reprinted in 
appendix II. The commissioner agreed with our findings and 
recommendation and described some ongoing efforts to improve 
productivity and to reverse declines in compliance and collection 
programs. He said that steps were being taken to increase the use of 
quantitative data in strategic decision making, including the 
development of a methodology for assessing costs and benefits that 
will be refined as IRS proceeds through future planning cycles. 

As arranged with your office, we plan no further distribution of this 
report until 30 days from its date of issue, unless you publicly 
announce its contents earlier. After that period, we will send copies 
to Representative William M. Thomas, chairman, and Representative 
Charles B. Rangel, ranking minority member, House Committee on Ways 
and Means; Representative William J. Coyne, ranking minority member, 
Subcommittee on Oversight, House Committee on Ways and Means; and 
Senator Max Baucus, chairman, and Senator Charles E. Grassley, ranking 
republican member, Senate Committee on Finance. We will also send 
copies to the Honorable Paul H. O’Neil, secretary of the treasury; the 
Honorable Charles O. Rossotti, commissioner of internal revenue; the 
Honorable Mitchell E. Daniels, Jr., director, Office of Management and 
Budget; and other interested parties. Copies of this report will be 
made available to others on request. In addition, the report will be 
available at no charge on the GAO Web site [hyperlink, 
http://www.gao.gov]. 

If you have any questions, please contact me or Thomas Richards at 
(202) 512-9110. Key contributors to this report are acknowledged in 
appendix III. 

Sincerely yours, 

Signed by: 

James R. White: 
Director, Tax Issues: 

[End of section] 

Appendix I: Objectives, Scope, and Methodology: 

As requested, the objectives of GAO’s review were to 

* describe the changes since 1996 in IRS’s compliance and collection 
programs, including the extent of collection deferrals, and the 
factors contributing to the program changes; 

* determine how the program changes have affected taxpayers, including 
their compliance with tax laws, the buildup of penalties and interest, 
and the length of time before collection actions are initiated; and; 

* determine how IRS addressed the program changes, including their 
effect on taxpayers, in its strategic assessments. 

Scope and Methodology: 

We first identified IRS’s major compliance and collection programs. On 
the basis of our analysis of IRS data system reports and discussions 
with IRS officials, we identified 8 such programs. In general, 
compliance programs are designed to assure that taxpayers fairly and 
accurately report and pay the amount of taxes that they owe. 
Collection programs are to follow up with taxpayers to obtain payment 
and initiate enforcement action if taxpayers become delinquent by not 
paying their tax after being sent notices. Descriptions of the 
compliance and collection programs appear in table 4. 

Table 4: Description of IRS Compliance and Collection Programs: 

Compliance programs: 

Program: Returns processing; 
Description: Designed to identify and correspond with taxpayers who 
did not make full payment with their tax return filing (“balance-due 
returns”) or who filed returns with errors or certain other omissions 
(“math errors”). 

Program: Nonfiler; 
Description: Designed to correspond and, if necessary, make telephone 
or field contacts with taxpayers who according to IRS records have 
not, but should have, filed tax returns. IRS identifies these apparent 
nonfilers by computer-matching information returns, such as those 
filed by banks reporting earnings by taxpayers, with the tax returns 
that are filed with IRS and IRS’s masterfile records on taxpayers. 

Program: Underreporter; 
Description: Designed to correspond with taxpayers whose tax returns, 
according to IRS records, have underreported the amount of taxes owed. 
IRS identifies these apparent underreporters by computer-matching 
information returns, such as those filed by banks reporting earnings 
by taxpayers, with the taxpayers’ tax returns that are filed with IRS. 

Program: Individual audits; 
Description: Designed to examine individual income tax returns for 
compliance with tax law. 

Program: Corporate audits; 
Description: Designed to examine corporate income tax returns for 
compliance with tax law. 

Program: Other audits; 
Description: Designed to examine other tax returns such as those for 
partnerships, estate and trust income, estate tax, employment, and 
excise taxes for compliance with tax law. 

Collection programs: 

Program: Telephone collection; 
Description: If taxpayers become delinquent (i.e., do not pay their 
taxes after being notified of the amount past due), the IRS staff 
assigned to the telephone collection program may initiate collection 
action over the phone or in writing. If the contacted taxpayers are 
not responsive to attempts to resolve their delinquencies, the 
collection staff is authorized, under certain circumstances, to 
initiate enforced collection action. These actions include recording 
liens on taxpayer property and sending notices to levy taxpayer wages, 
bank accounts, and other financial assets held by third parties.a If 
more in-depth analyses are required, telephone collections may refer 
the case to field collections. 

Program: Field collection; 
Description: To collect delinquent taxes, IRS field collection staff 
may visit delinquent taxpayers at their homes or businesses as well as 
contact them by telephone and mail. The staff are responsible for 
making in-depth investigations of taxpayers’ ability to pay their tax 
debts. To compel compliance, the staff are authorized, under certain 
circumstances, to record liens on taxpayer property or levy taxpayer 
wages, bank accounts, and other financial assets held by third parties 
and to seize other assets owned by the taxpayer.[A] 

[A] Under the Internal Revenue Code, “levy” is defined as the seizure 
of a taxpayer’s assets to satisfy a tax delinquency. IRS 
differentiates between the levy of assets in the possession of the 
taxpayer (referred to as “seizure”) and the levy of assets, such as 
bank accounts and wages, that are in the possession of third parties, 
such as banks or employers (referred to as “levy”). A lien is a legal 
claim, filed in accordance with state property law, that attaches to 
property to secure payment of a debt. 

Source: GAO review of IRS data. 

[End of table] 

As indicated by table 4, the separation point between compliance and 
collection programs is the point at which a taxpayer is determined to 
be delinquent. At that point, the taxpayer has not paid taxes after 
being notified by the compliance component of the amount due and after 
being sent collection notices—-usually three or more to individuals 
and two to businesses. 

Changes in Compliance and Collection Programs: 

To measure changes across the eight programs, now managed by four 
divisions, we identified performance indicators that would be common 
to their operations and that, in the aggregate, would provide an 
overview of the long-term direction of IRS’s compliance and collection 
programs. The indicators were not intended to provide a comprehensive 
evaluation of program performance. Rather, the indicators were to 
provide a general overview of changes in compliance and collection 
workload, staff resources committed to dealing with the workload, 
productivity of the resources, work completed, extent of the workload 
addressed, and work outcomes in terms of unpaid taxes identified and 
unpaid taxes resolved. Table 5 provides a general description of the 
seven performance indicators, together with a more detailed 
description of the indicators as they apply to the eight compliance or 
collection programs. 

Table 5: Definitions of Performance Indicators 

Performance indicator: Workload: Comparison of the number of work 
units that were available to be worked in fiscal year 1996 with 
comparable data for fiscal year 2001. 

Program-specific performance indicator: Returns processing: Comparison 
of the numbers of tax returns filed (individual income, individual 
estimated tax, corporation income, partnership, estate and trust 
income, estate tax, employment, excise tax, exempt organizations, 
employee plans, and supplemental filings) for fiscal year 1996 with 
comparable data for fiscal year 2001. 

Program-specific performance indicator: Nonfiler: Comparison of the 
total number of apparent individual nonfilers available for compliance 
follow-up in fiscal year 1996 with comparable data for fiscal year 
2001. IRS identified the population of apparent nonfilers by matching 
information returns against individual return filings on a tax year 
basis. Given that the nonfiler program worked tax year 1994 cases in 
fiscal year 1996 and tax year 1999 cases in fiscal year 2001, this tax 
year data is reported as fiscal years 1996 and 2001 workload data. 
Data on apparent business nonfilers was not available for 1996 and 
therefore cannot be compared with data for fiscal year 2001. 
Accordingly, business nonfilers have not been included as part of 
potential workload. 

Program-specific performance indicator: Underreporter: Comparison of 
the total number of apparent individual underreporters available for 
compliance follow-up in fiscal year 1996 with comparable data for 
fiscal year 2001. IRS identified the population of apparent 
underreporters through matching information returns against individual 
return filings on a tax year basis. Most of the underreporter program 
for fiscal year 1996 involved reviewing tax year 1992 and 1993 
returns, and most of fiscal year 2001 data involved reviewing tax year 
1998 and 1999 tax returns 

Program-specific performance indicator: Individual audit: Comparison 
of the number of individual income tax returns available for 
examination in fiscal year 1996 with comparable data for fiscal year 
2001. We used IRS’s method for determining the number of individual 
income tax returns available for examination, which considers tax 
returns filed in the previous year as those available for examination. 
For fiscal year 1996 workload, we used tax returns filed in calendar 
year 1995, and for fiscal year 2001 workload, we used tax returns 
filed in calendar year 2000. 

Program-specific performance indicator: Corporate audit: Comparison of 
the number of corporate tax returns available for examination in 
fiscal year 1996 with comparable data for fiscal year 2001. We used 
IRS’s method for determining the total number of corporation income 
tax returns available for examination, which considers tax returns 
filed in the previous year as those available for examination. For 
fiscal year 1996 workload, we used tax returns filed in calendar year 
1995, and for fiscal year 2001 workload, we used tax returns filed in 
calendar year 2000. 

Program-specific performance indicator: Other audit: Comparison of the 
number of partnership, estate and trust income, estate tax, 
employment, and excise for tax returns available for examination in 
fiscal year 1996 with comparable data for fiscal year 2001. We used IRS’
s method for determining the total number of tax returns available for 
examination, which considers tax returns filed in the previous year as 
those available for examination. For fiscal year 1996 workload, we 
used tax returns filed in calendar year 1995, and for fiscal year 2001 
workload, we used tax returns filed in calendar year 2000. 

Program-specific performance indicator: Telephone collection: 
Comparison of the number of delinquent accounts assigned (issued) to 
the telephone collection program during fiscal year 1996 with 
comparable data for fiscal year 2001. The totals were adjusted to 
account for the number of modules referred from the telephone program 
to field collection and from field collection to the telephone program 
during the year. 

Program-specific performance indicator: Field collection: Comparison 
of the number of delinquent accounts assigned (issued) to field 
collection, including support components (a backlog holding area 
referred to as the queue and service center collection branch) during 
fiscal year 1996 with comparable data for fiscal year 2001. The totals 
were adjusted to account for the number of modules referred from the 
telephone program to field collection and from field collection to the 
telephone program during the year. 

Performance indicator: Cases closed: Comparison of the number of 
compliance and collection work units closed (i.e., closure represents 
a compliance decision as to the accuracy of the reported tax liability 
or a collection decision on collection of a liability) in fiscal year 
1996 with comparable data for fiscal year 2001. 

Program-specific performance indicator: Returns processing: Comparison 
of the total tax returns processed during fiscal year 1996 with 
comparable data for fiscal year 2001. 

Program-specific performance indicator: Nonfiler: Comparison of the 
number of apparent nonfiler cases closed in fiscal year 1996 with 
comparable data for fiscal year 2001. Nonfiler program case closures 
include dispositions such as those made through correspondence, 
investigations, or examinations but exclude cases closed without being 
worked to a conclusion, such as case deferrals. To avoid double-
counting closures, collection referrals to audit were subtracted from 
collection dispositions because audit closures had been added to the 
total. 

Program-specific performance indicator: Underreporter: Comparison of 
the number of apparent underreporter cases that were closed (a 
determination made as to whether additional taxes were owed) in fiscal 
year 1997 with data for fiscal year 2001. Fiscal year 1997 data were 
used because fiscal year 1996 data on case closures was not available. 

Program-specific performance indicator: Individual audit: Comparison 
of the number of individual examinations closed in fiscal year 1996 
with comparable data for fiscal year 2001. 

Program-specific performance indicator: Corporate audit: Comparison of 
the number of corporate examinations closed in fiscal year 1996 with 
comparable data for fiscal year 2001. 

Program-specific performance indicator: Other audit: Comparison of the 
number of partnership, estate and trust income, estate tax, 
employment, and excise tax return examinations closed in fiscal year 
1996 with comparable data for fiscal year 2001. 

Program-specific performance indicator: Telephone collection: 
Comparison of the number of delinquent accounts worked to closure 
(i.e., excludes deferrals) in fiscal year 1996 with comparable data 
for fiscal year 2001. 

Program-specific performance indicator: Field collection: Comparison 
of the number of delinquent accounts worked to closure (i.e., excludes 
deferrals) in fiscal year 1996 with comparable data for fiscal year 
2001. These data include closures by supporting components, such as 
the service center collections branch. 

Performance indicator: Coverage: Comparison of the proportion of 
workload reviewed in fiscal year 1996 (i.e., cases closed during the 
year as a percentage of cases available to be worked during the year) 
with comparable data for fiscal year 2001. 

Program-specific performance indicator: Returns processing: Comparison 
of the proportion of filed tax returns that are processed by returns 
processing in fiscal year 1996 with comparable data for fiscal year 
2001. Processing all income tax returns in the same year that they are 
received for both fiscal year 1996 and fiscal year 2001 would 
constitute 100 percent coverage in each year and a 0 percent change in 
coverage. 

Program-specific performance indicator: Nonfiler: Comparison of the 
proportion of apparent nonfiler cases that were worked to resolution 
in fiscal year 1996 (i.e., fiscal year 1996 nonfiler closures as a 
percentage of apparent nonfilers cases available to be worked in 
fiscal year 1996) with comparable data for fiscal year 2001. 

Program-specific performance indicator: Underreporter: Comparison of 
the proportion of apparent underreporter cases that were closed in 
fiscal year 1996 with comparable data for fiscal year 2001. IRS 
identified the population of apparent underreporters through matching 
information returns against individual return filings on a tax year 
basis. Most of the underreporter program for fiscal year 1996 involved 
reviewing tax years 1992 and 1993 returns, and most of fiscal year 
2001 data involved reviewing tax years 1998 and 1999 tax returns. 
Coverage for fiscal year 1996 is measured by comparing the number of 
closed returns for tax years 1992 and 1993 with the workload. Coverage 
for fiscal year 2001 is measured by comparing the number of closed 
returns for tax years 1998 and 1999 with the workload. 

Program-specific performance indicator: Individual audit: Comparison 
of the proportion of individual income tax return filings that were 
examined in fiscal year 1996 with comparable data for fiscal year 
2001. Consistent with IRS’s practice in computing audit rates, the 
comparison involved relating audit closures in fiscal years 1996 and 
2001 with returns filed in calendar years 1995 and 2000, respectively. 

Program-specific performance indicator: Corporation audit: Comparison 
of the proportion of corporation income tax return filings that were 
examined in fiscal year 1996 with comparable data for fiscal year 
2001. Consistent with IRS’s practice in computing audit rates, the 
comparison involved relating audit closures in fiscal years 1996 and 
2001 with returns filed in calendar years 1995 and 2000, respectively. 

Program-specific performance indicator: Other audit: Comparison of the 
proportion of partnership, estate and trust income, estate tax, 
employment, and excise tax returns filings that were examined in 
fiscal year 1996 to comparable data for fiscal year 2001. Consistent 
with IRS’s practice in computing audit rates, the comparison involved 
relating audit closures in fiscal years 1996 and 2001 with returns 
filed in calendar year 1995 and 2000, respectively. 

Program-specific performance indicator: Telephone collection: 
Comparison of the proportion of delinquencies assigned to telephone 
collection that were worked to conclusion in fiscal year 1996 with 
comparable data for fiscal year 2001. The comparison involved relating 
the number of delinquencies worked to closure (i.e., excludes 
deferrals) during each fiscal year to the number of new delinquencies 
assigned as workload during the fiscal year. 

Program-specific performance indicator: Field collection: Comparison 
of the proportion of delinquencies assigned to field collection 
(including support units) that were worked to conclusion in fiscal 
year 1996 with comparable data for fiscal year 2001. The comparison 
involved relating the number of delinquencies worked to closure (i.e., 
excludes deferrals) during each fiscal year to the number of new 
delinquencies assigned as workload during the fiscal year. 

Performance indicator: Staff time: Comparison of staff time charged to 
compliance programs for fiscal year 1996 with comparable data for 
fiscal year 2001. 

Program-specific performance indicator: Returns processing: Comparison 
of program staff years for core services needed to process tax returns 
and balance-due and math error notices (processing center receipt and 
control branch, document perfection branch, data conversion branch, 
and data processing division) for which consistent data were available 
for fiscal year 1996 with comparable data for fiscal year 2001. 

Program-specific performance indicator: Nonfiler: Comparison of 
program staff hours charged by compliance program staff in service 
centers, telephone collections, field collection, and audit programs 
to carry out nonfiler programs in fiscal year 1996 with comparable 
data for fiscal year 2001. 

Program-specific performance indicator: Underreporter: Comparison of 
program staff years used for the underreporter program in fiscal year 
1996 with comparable data for fiscal year 2001. 

Program-specific performance indicator: Individual audit: Comparison 
of the number of staff hours charged by examination staff to complete 
audits closed in fiscal year 1996 with comparable data obtained from 
IRS’s Audit Information Management System for fiscal year 2001. 

Program-specific performance indicator: Corporate audit: Comparison of 
the number of staff hours charged by examination staff to complete 
audits closed in fiscal year 1996 with comparable data obtained from 
IRS’s Audit Information Management System for fiscal year 2001. 

Program-specific performance indicator: Other audit: Comparison of the 
number of staff hours charged by examination staff to complete audits 
closed in fiscal year 1996 with comparable data obtained from IRS’s 
Audit Information Management System for fiscal year 2001. 

Program-specific performance indicator: Telephone collection: 
Comparison of the number of staff hours (including administrative 
overhead) charged to delinquent account activities in fiscal year 1996 
with comparable data for fiscal year 2001. 

Program-specific performance indicator: Field collection: Comparison 
of the number of staff hours charged by collection staff to delinquent 
account activities in fiscal year 1996 with comparable data for fiscal 
year 2001. 

Performance indicator: Productivity: Comparison of the number of 
compliance and collection work units (e.g., audits) closed in fiscal 
year 1996 per staff time available that year for compliance work with 
comparable data for fiscal year 2001. 

Program-specific performance indicator: Returns processing: Comparison 
of the number of tax return filings processed and math error and 
balance-due notices issued per staff year that were used to process 
that workload in fiscal year 1996 with comparable data for fiscal year 
2001. Math error and balance-due notices were added to return filings 
to match work outputs to the resources used to process that output. 
The number of math error and balance-due notices processed included 
available data for calendar years 1996 and 2001. 

Program-specific performance indicator: Nonfiler: Comparison of the 
number of case closures per staff hour charged by compliance program 
staff in IRS service centers, telephone and field collection, and 
audit programs to carry the out the nonfiler program in fiscal year 
1996 with comparable data for fiscal year 2001. 

Program-specific performance indicator: Underreporter: Comparison of 
the number of underreporter cases closed per staff year used for the 
underreporter program in fiscal year 1997 with comparable data for 
fiscal year 2001. Fiscal year 1997 data was used because fiscal year 
1996 data on case closures was not available. 

Program-specific performance indicator: Individual audit: Comparison 
of the number of individual examinations closed per staff hour charged 
by examination staff to complete audits closed in fiscal year 1996 
with comparable data for fiscal year 2001. 

Program-specific performance indicator: Corporate audit: Comparison of 
the number of corporation examinations closed per staff hour charged 
by examination staff to complete audits closed in fiscal year 1996 
with comparable data for fiscal year 2001. 

Program-specific performance indicator: Other audit: Comparison of the 
number of partnership, estate and trust income, estate tax, 
employment, and excise tax return examinations closed per staff hour 
charged by examination staff to complete audits that were closed in 
fiscal year 1996 with comparable data for fiscal year 2001. 

Program-specific performance indicator: Telephone collection: 
Comparison of the number of delinquent accounts closed (excluding 
deferrals) per staff hour charged to taxpayer delinquent account 
activities in fiscal year 1996 with comparable data for fiscal year 
2001. 

Program-specific performance indicator: Field collection: Comparison 
of the number of delinquent accounts closed (excluding deferrals) per 
staff hour charged to taxpayer delinquent account activities in fiscal 
year 1996 with comparable data for fiscal year 2001. 

Performance indicator: Dollars of unpaid taxes identified (compliance 
programs) or collected (collection programs): 
* For compliance programs, a comparison of the total amount of tax 
assessments (including assessed interest and penalties) generated by 
the compliance programs in fiscal year 1996 with comparable data for 
fiscal year 2001; 
* For collection programs, a comparison of the amounts collected by 
collection programs in fiscal year 1996 with comparable data for 
fiscal year 2001. Returns processing: Comparison of the amount of tax 
assessments related to unpaid taxes on balance-due and math error 
returns made by returns processing in fiscal year 1996 with comparable 
data for fiscal year 2001. 

Program-specific performance indicator: Nonfiler: Comparison of the 
amount of tax assessments made by the nonfiler program in fiscal year 
1996 with comparable data for fiscal year 2001. 

Program-specific performance indicator: Underreporter: Comparison of 
the amount of tax assessments made by the underreporter program in 
fiscal year 1996 with comparable data for fiscal year 2001. 

Program-specific performance indicator: Individual audit: Comparison 
of the amount of tax assessments made by the individual audit program 
in fiscal year 1996 with comparable data for fiscal year 2001. Data 
include assessments that may be subsequently appealed. 

Program-specific performance indicator: Corporate audit: Comparison of 
the amount of tax assessments made by the corporation audit program in 
fiscal year 1996 with comparable data for fiscal year 2001. Data 
include assessments that may be subsequently appealed. 

Program-specific performance indicator: Other audit: Comparison of tax 
assessments related to the audit of estate and trust income, estate 
tax, employment, and excise tax returns in fiscal year 1996 with 
comparable data for fiscal year 2001. Data include assessments that 
may be subsequently appealed. Assessments related to the audit of 
partnership returns are excluded to eliminate double-counting for pass-
throughs to the partners’ returns. 

Program-specific performance indicator: Telephone collection: 
Comparison of the amount of delinquent taxes collected by telephone 
collection in fiscal year 1996 with comparable data for fiscal year 
2001. 

Program-specific performance indicator: Field collection: Comparison 
of the amount of delinquent taxes collected by field collection in 
fiscal year 1996 with comparable data for fiscal year 2001. 

Performance indicator: Percentage of unpaid taxes resolved: 
* For compliance programs, a comparison of the percentage of the 
fiscal year 1996 tax assessments (including assessed interest and 
penalties) that were collected by the compliance components through 
collection notices during the year with comparable data for fiscal 
year 2001. 
* For collection programs, a comparison of the percentage of 
delinquent assessments fully resolved in fiscal year 1996 with 
comparable data for fiscal year 2001. 

Program-specific performance indicator: Returns processing: Comparison 
of the percentage of unpaid taxes assessed during fiscal year 1996 
that were collected in the year of assessment without involving 
telephone or field collections with comparable data for fiscal year 
2001. 

Program-specific performance indicator: Nonfiler: Comparison of the 
percentage of unpaid taxes assessed during fiscal year 1996 that were 
collected in the year of assessment without involving telephone or 
field collections with comparable data for fiscal year 2001. 

Program-specific performance indicator: Underreporter: Comparison of 
the percentage of unpaid taxes assessed during fiscal year 1996 that 
were collected in the year of assessment without involving telephone 
or field collections with comparable data for fiscal year 2001. 

Program-specific performance indicator: Individual audit: Comparison 
of the percentage of unpaid taxes assessed during fiscal year 1996 
that were collected in the year of assessment without involving 
telephone or field collections with comparable data for fiscal year 
2001. 

Program-specific performance indicator: Corporate audit: Comparison of 
the percentage of unpaid taxes assessed during fiscal year 1996 that 
were collected in the year of assessment without involving telephone 
or field collections with comparable data for fiscal year 2001. 

Program-specific performance indicator: Other audit: Comparison of the 
percentage of unpaid taxes assessed during fiscal year 1996 that were 
collected in the year of assessment without involving telephone or 
field collections with comparable data for fiscal year 2001. 

Program-specific performance indicator: Telephone collection: 
Comparison of the percentage of closures from the telephone collection 
program that fully resolved the tax delinquencies (i.e., full payment 
received or installment agreement arranged) in fiscal year 1996 with 
comparable data for fiscal year 2001. 

Program-specific performance indicator: Field collection: Comparison 
of the percentage of closures from the field collection program that 
fully resolved the tax delinquencies (i.e., full payment received or 
installment agreement arranged) in fiscal year 1996 with comparable 
data for fiscal year 2001. 

[End of table] 

To compile the performance data related to these performance 
indicators, we substantially relied on the data output from various 
IRS information systems. For example, IRS uniformly collects data on 
resources, typically staff hours or staff years used, as program 
input. We did not evaluate the internal controls over the collection 
and processing of this IRS information system data. Because IRS 
managers routinely use the information from these systems to manage 
program operations, we believe that the information is appropriate for 
use in compiling an overview of program changes. 

The routine output from the IRS data systems alone, however, was not 
sufficient to provide data on the following: 

1. The nonfiler program. Because IRS’s nonfiler program involved cases 
managed by several IRS divisions, we worked with IRS managers to 
consolidate data from a number of different sources to compile the 
trend data. In doing this, we obtained data from IRS’s Audit 
Management Information System, collection reports prepared through 
IRS’s Integrated Data Retrieval System, and supplemental data prepared 
by IRS’s Nonfiler Program office in response to internal IRS 
requirements. 

2. The amount of additional tax assessments made by the returns 
processing program. To develop data on compliance assessments made by 
returns processing, we obtained a data extract from IRS’s Enforcement 
Revenue Information System (ERIS). That system was designed by IRS to 
accumulate collection data for assessments that result from IRS’s 
compliance work. From the ERIS data extract, we first derived data to 
indicate the amount of additional tax assessments made by returns 
processing compliance work, such as identifying returns with a balance 
due or making assessments to correct errors or omissions identified on 
the tax returns. To do this, given the manner in which IRS accounts 
for the assessments, we: 

* identified the total assessments made by returns processing, other 
than returns that were filed with full payment or with no errors 
requiring an IRS notice; 

* identified the amount of payment made on the accounts prior to IRS’s 
notifying the taxpayer of the amount due; and; 

* subtracted the prenotification payments from the total assessments. 
We subtracted the prenotification payments from the total assessments 
in order to eliminate taxes that were voluntarily reported and paid by 
taxpayers. 

3. The amount of unpaid tax assessments resolved by the five 
compliance programs. From the ERIS data, we also derived data to 
compute the percentage of unpaid tax assessments that were collected 
by the five compliance programs.[Footnote 21] We included as 
collections any payments made by the taxpayers in response to written 
notices sent to the taxpayers. Data were not available to extend the 
analysis period for collections for fiscal years beyond 2001. 
Therefore, to ensure comparable collection data on the proportion of 
fiscal year 1996 and 2001 assessments collected by the assessing 
compliance program, we limited the collection period to the fiscal 
year of the assessment. 

We also interviewed officials from IRS’s operational divisions 
responsible for wage earners, small businesses, and large and midsized 
businesses to obtain an understanding of compliance and collection 
programs and to discuss reasons for compliance and collection trends. 
We provided our performance trends and supporting computations to IRS 
staff, who reviewed and commented on our analyses. 

Effect of Compliance and Collection Program Changes on Taxpayers: 

To determine how these changes have affected taxpayers, we examined 
two samples of IRS data. The first sample from IRS’s automated 
masterfile records of unpaid tax accounts provided the data to examine 
overall changes in the number of accounts with unpaid balances; 
changes in the characteristics of delinquent taxpayers, such as the 
amounts of interest and penalties owed; and the age of the accounts. 
In order to examine contacts between taxpayers and the IRS and events 
affecting the timeliness of resolution, we examined a sample of 
taxpayer collection case files. 

Accounts Receivable Sample: 

To analyze the delinquent taxpayer characteristics, we selected a 
random sample of taxpayers who had an unpaid tax assessment 
outstanding at the end of fiscal years 1996, 1998, 2000, and 2001. In 
developing this sample, we partitioned the population into different 
groups, or strata, based on the collection status of their modules on 
September 30 of each year and by type of taxpayer (i.e., individuals 
and businesses). We stratified this sample to ensure that taxpayers at 
different stages in IRS’s collection process were represented. Once we 
had selected a sample of taxpayers, we also obtained information on 
recent payments made to IRS by those taxpayers and information from 
recent tax returns filed by the taxpayers and posted to IRS data 
systems. To review this sample, we used analysis software to produce 
statistically reliable estimates of the characteristics of the 
population of taxpayers whom IRS had identified as not having paid 
their taxes as of the end of the four fiscal years. 

Taxpayer Case File Sample: 

To examine data on collection actions taken with respect to taxpayers— 
such as the length of time from when the delinquencies became 
available for assignment to telephone or field collection staff to 
when the taxpayers were contacted by the collection staff-—we used a 
random sample that was taken as part of our audit of IRS’s financial 
statement for fiscal year 2000. This sample consisted of randomly 
selected unpaid tax assessments that were owed by 520 taxpayers. 

From this sample, we reviewed IRS collection case file documentation 
on 108 taxpayers, that is, those taxpayers who had been assigned to 
either telephone or field collection and about whom IRS had sufficient 
collection case file documentation for us to analyze. IRS had limited 
the accumulation of case files to those relevant to estimation of the 
collectibility of its accounts receivable. 

We analyzed these cases with two different data collection 
instruments. The first captured (1) dates that distinct field 
collection phases started and ended, (2) occurrences of IRS collection 
contacts or attempted contacts with taxpayers, and (3) the disposition 
of cases when the collection phases ended. The second data collection 
instrument captured information from IRS’s masterfile records on these 
taxpayers. This information described the number of delinquencies, 
type of taxes owed, and dollar amounts. It also provided a history of 
the collection-related transactions (i.e., payments, defaults on 
installment agreements, or litigation pending) for the taxpayer. 

Sampling Error: 

Because our estimates come from random samples, there is some sampling 
error associated with them. We express our confidence in the precision 
of our results as a 95 percent confidence interval around the 
estimate. For example, for the estimate of 1.3 million taxpayers, the 
actual value would be between 1.25 million and 1.35 million taxpayers. 
All percentage estimates from the samples have sampling errors of ±5 
percentage points or less, unless otherwise shown in footnotes to the 
report text. All numerical estimates other than percentages have 
sampling errors of ±5 percent or less of the value of those numerical 
estimates, unless otherwise shown in footnotes to the report text. 

Strategic Planning: 

With respect to objective 3, we reviewed the strategic assessments 
made by the IRS operating division responsible for individual 
taxpayers other than the self-employed and by the operating division 
responsible for small businesses and self-employed individuals. The 
assessments were made during the first half of fiscal year 2001 for 
consideration by senior management in developing strategy and program 
plans for fiscal year 2002 and 2003. We reviewed the strategic 
assessments along with IRS instructions for preparation of the 
assessments. Our review of these documents focused on identifying how 
the strategic assessments addressed the compliance and collection 
trends and taxpayer impacts that we identified in response to 
objectives 1 and 2. We also interviewed IRS strategic planning, small 
business, and wage and investment officials responsible for developing 
and monitoring strategic plans. We did not evaluate the strategic 
assessment’s selection of IRS’s priorities, proposed improvement 
projects, and resources needed to implement the projects. Evaluating 
the operating division’s plans would require an assessment of IRS’s 
entire strategic planning process, which was outside the scope of this 
assignment. 

We performed our work at IRS’s national office in Washington, D.C.; 
IRS’s Kansas City Submissions Processing Center, Missouri; and IRS’s 
Oakland, California, area office between October 2000 and April 2002 
and in accordance with generally accepted government auditing 
standards. 

We requested comments on a draft of this report from the commissioner 
of internal revenue. We received written comments from the 
commissioner on May 14, 2002. The comments are reprinted in appendix 
II and discussed in our report. 

[End of section] 

Appendix II: Comments from the Internal Revenue Service: 

Department of the Treasury: 
Internal Revenue Service: 
Commissioner: 
Washington, D.C. 20224: 

May 13 2002: 

Mr. James R. White: 
Director, Tax Issues: 
United States General Accounting Office: 
Washington, D.C. 20548: 

Dear Mr. White: 

I reviewed your draft report titled "Tax Administration: Impact of 
Compliance and Collection Program Declines on Taxpayers" and agree 
with your overall assessment and recommendation. Many factors 
contributed to program declines including an overall reduction in 
staffing, loss of the 1995 Compliance Initiative and the resulting 
staffing reduction to Compliance, and the shift of resources from 
Compliance programs to customer service. These factors, as well as the 
legislative changes mandated by the Restructuring and Reform Act of 
1998 that increased administrative and procedural responsibilities, 
have impacted our overall productivity. 

Your report indicates that although there has been a 28% decline in 
direct staff time there was only a 7% drop in dollars collected. This 
is a result of our continuing efforts to provide focus to the most 
productive cases in our inventory. We are hopeful that this focus as 
well as our reengineering efforts will help improve productivity and 
reverse some of the declines. 

Your report also discusses the lack of quantitative information used 
to support the Trends, Issues, and Problems (TIPs) and the subsequent 
operational priorities identified as part of our strategic assessment 
process. We acknowledge the necessity for making use of quantitative 
data in our decision-making processes. Your analysis was based on last 
year's FY 2002-2003 Strategic Assessment Process. I would like to 
share some of our ongoing efforts to develop quantitative data that 
will help with our future strategic assessments. 

For the FY 2003-2004 process, we developed a methodology to include 
costs and benefits as part of the assessment. We used this methodology 
to quantify costs for the proposed operational priorities and 
improvement projects. We also attempted to describe quantifiable 
benefits that would result if the priorities and projects were
implemented. We will continue to refine this methodology for use in 
future strategic assessment cycles. 

Your report also indicates that we are hampered by the lack of data on 
taxpayer compliance. I have charged the National Research Program 
(NRP) with developing Compliance measures that will be valid at the 
Servicewide and operating division level. 

These efforts will provide senior management with cost and benefit 
data for proposed programs. They will also provide a method for 
determining the effectiveness of existing and newly implemented 
programs. 

If you have any questions, please contact me or your staff may contact 
Brady Bennett, Director, Strategy, Research and Performance 
Management, Small Business/Self Employed, at (202) 283-2250 or Joseph 
R. Brimacombe, Deputy Director, Compliance Policy, Small Business/Self 
Employed, at (202) 283-2150. 

Sincerely, 

Signed by: 

Charles O. Rossotti: 

[End of section] 

Appendix III: GAO Contacts and Staff Acknowledgments: 

GAO Contacts: 

James R. White, (202) 512-9110: 
Thomas M. Richards, (202) 512-9110: 

Acknowledgments: 

In addition to those named above, Leon Green, Mary Jankowski, John 
Mingus, Sam Scrutchins, Anjali Tekchandani, Thom Venezia, Wendy Ahmed, 
Cheryl Peterson, Susan Baker, Anne Laffoon, Kristina Boughton, and 
Avram Ashery made key contributions to this product. 

[End of section] 

Footnotes: 

1. See U.S. General Accounting Office, IRS Modernization: Continued 
Improvement in Management Capability Needed to Support Long-Term 
Transformation, [hyperlink, http://www.gao.gov/products/GAO-01-700T] 
(Washington, D.C.: May 8, 2001). 

2. Because our estimates come from random samples, there is some 
sampling error associated with them. We express our confidence in the 
precision of our results as a 95 percent confidence interval around 
the estimate. All numerical estimates other than percentages have 
sampling errors of ±5 percent or less of the value of those numerical 
estimates, unless otherwise shown as footnotes to the report text. All 
percentage estimates from the samples have sampling errors of ±5 
percentage points or less, unless otherwise shown as footnotes to the 
report text. 

[3] The 95 percent confidence interval is $14.8 billion to $17.4 
billion. 

4. In general, IRS sends taxpayers a written notice that additional 
tax will be assessed and provides 90 days for them to respond. The 
proposed tax is automatically assessed if the taxpayer does not 
respond or does not file an appeal. 

5. Under the Internal Revenue Code, “levy” is defined as the seizure 
of a taxpayer’s assets to satisfy a tax delinquency. IRS 
differentiates between the levy of assets in the possession of the 
taxpayer (referred to as “seizure”) and the levy of assets, such as 
bank accounts and wages, which are in the possession of third parties, 
such as banks or employers (referred to as a “levy”). A lien is a 
legal claim, filed in accordance with state property law, that 
attaches to property to secure payment of a debt. 

6. P.L. 105-206. 

7. If adjusted only for inflation (as measured by the price indexes 
for gross domestic product), for an individual underreporting income 
at the same rate on a tax return filed in 1996 compared with one filed 
in 2001, the dollar amount of the unpaid tax would increase by about 9 
percent. 

8. In general, payment is requested at the time that any IRS 
compliance program determines that additional taxes are due. 

9. IRS considers employment tax compliance to be among the most 
challenging issues for small business, since delinquent tax can 
rapidly compound beyond the employer’s ability to pay. See U.S. 
General Accounting Office, Tax Administration: IRS’s Efforts to 
Improve Compliance with Employment Tax Requirements Should Be 
Evaluated, [hyperlink, http://www.gao.gov/products/GAO-02-92] 
(Washington, D.C.: Jan. 15, 2002). 

10. The 95 percent confidence interval is $14.8 billion to $17.4 
billion. 

11. We estimate that about 34 percent of the assessments were 
originated by the nonfiler program, about 34 percent by the returns 
processing program, about 13 percent by the 3 audit programs, about 7 
percent by the underreporter program, and about 11 percent by other 
sources, such as penalties. 

12. We also estimate that the average amount of the tax debts was 
about $12,400, with a 95 percent confidence interval of $11,400 to 
$13,400. 

13. We also estimate that the average amount of the tax debts was 
about $28,300, with a 95 percent confidence interval of $26,900 to 
$29,700. 

14. The act required that the commissioner terminate the employment of 
an IRS employee if there is a final administrative or judicial 
determination that the employee committed any 1 of 10 acts or 
omissions. These acts include the willful failure to obtain the 
required approval signatures on documents authorizing the seizure of a 
taxpayer’s home, personal belongings, or business assets or violations 
of the Internal Revenue Code, Treasury regulations, or IRS policies 
for the purpose of retaliating against or harassing a taxpayer, 
taxpayer representative, or other IRS employee. 

15. The 95 percent confidence interval is 4 to 8 months. 

16. The 95 percent confidence interval is 6.7 to 7.9 times. Analyses 
are based on comparisons of taxpayers whose delinquencies were at the 
median level and whose account data showed that a tax return had been 
filed within the previous two years. For individuals, income was the 
reported adjusted gross income. Given the differences in the ways that 
IRS captured business data, for consistency we used total compensation 
paid (i.e., payroll) as the measurement base. 

17. P.L. 103-62. 

18. See U.S. General Accounting Office, IRS Modernization: Continued 
Improvement in Management Capability Needed to Support Long-Term 
Transformation, [hyperlink, http://www.gao.gov/products/GAO-01-700T] 
(Washington, D.C.: May 8, 2001). 

19. IRS has embarked on a program to match information on income 
distributions from partnerships and certain corporations to their 
owners. 

20. During October 2002, IRS expects to begin a study on the extent to 
which individual taxpayers voluntarily report the full amount of taxes 
that they owe. IRS expects the final report in April 2004. This report 
will be supplemented with an analysis of IRS data on (1) the extent to 
which currently filed returns are accompanied by full payment and (2) 
the extent to which individuals who are required to file tax returns 
actually do so. IRS has already produced data on nonfilers and expects 
to complete a payment analysis shortly, according to IRS senior 
officials. 

21. Data exclude amounts collected by Appeals, because the source of 
assessments was not identified in IRS’s data system. 

[End of section] 

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