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entitled 'Tax Administration: Little Evidence of Procedural Errors in
Collection Due Process Appeal Cases, but Opportunities Exist to Improve
the Program' which was released on November 6, 2006.
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Report to the Committee on Finance, U.S. Senate:
United States Government Accountability Office:
GAO:
October 2006:
Tax Administration:
Little Evidence of Procedural Errors in Collection Due Process Appeal
Cases, but Opportunities Exist to Improve the Program:
Tax Administration:
GAO-07-112:
GAO Highlights:
Highlights of GAO-07-112, a report to the Committee on Finance, U.S.
Senate
Why GAO Did This Study:
As a result of the Internal Revenue Service (IRS) Restructuring and
Reform Act of 1998, taxpayers facing liens or levies can request a
Collection Due Process (CDP) appeal hearing with IRS’s Office of
Appeals (Appeals). By 2005, CDP cases represented about one-quarter of
Appeals’ workload.
GAO was asked to provide information on (1) whether the IRS Collection
function (Collection) erred in processing liens and levies and how
often CDP case results changed after the appeal, (2) the arguments
raised and the communication between IRS and taxpayers, (3) the
characteristics of CDP taxpayers, and (4) potential improvements to the
CDP program. To develop this information, GAO analyzed a random sample
of 208 CDP cases closed by Appeals during fiscal year 2004.
What GAO Found:
GAO estimates that Appeals found Collection did not follow proper
procedures in 2 percent of CDP cases closed during fiscal year 2004.
About 27 percent of taxpayers received a different outcome than the
lien filing or levy after appealing, including those that negotiated
collection alternatives or ended up with no balance due to IRS. For
about 60 percent of taxpayers, Appeals upheld the collection action
often because taxpayers did not file all the required tax returns
necessary to qualify for a collection alternative.
GAO’s estimates show that nearly 90 percent of CDP taxpayers raised
arguments permitted by statute with both Collection and Appeals, such
as requesting a collection alternative. An estimated 5 percent of
taxpayers raised frivolous arguments—arguments without legal basis per
IRS guidance—with either Collection or Appeals. When taxpayers raised
the same argument with Collection and Appeals, Appeals reached the same
conclusion as Collection in more than 80 percent of cases. In general,
the median number of IRS-initiated contacts with taxpayers was twice as
high as the median number of taxpayer-initiated contacts with IRS.
CDP taxpayer characteristics varied among individual and business
filers. Both did not pay taxes for multiple return filing periods.
Total tax liability varied considerably, with trust fund recovery
penalty and employment tax cases having the highest liabilities.
Allowing certain taxpayers like those that offer arguments without a
legal basis to use the CDP program may not be consistent with the
program’s goal of ensuring due process. Also, Appeals resources are not
used efficiently when taxpayers request collection alternatives yet
have not (1) submitted financial documentation with their CDP requests,
(2) worked with specialized Collection units, or (3) filed all required
tax returns needed to qualify for a collection alternative. IRS has
taken steps to revise the CDP regulations and hearing request form, but
has not established responsibility for analyzing program outcome data
to determine if these changes will be effective.
Figure: Estimated Percentage of CDP Cases in Which Appeals Found an
Improper or Proper Collection Action, by Type of Appeal Outcome:
[See PDF for Image]
Source: GAO analysis of IRS data.
[End of Figure]
What GAO Recommends:
GAO makes recommendations to improve the efficiency of the CDP program.
GAO also suggests that Congress consider amending the statute to remove
CDP eligibility for selected categories of taxpayers if those
taxpayers’ inclusion is not consistent with the goal of ensuring due
process. IRS generally agreed with two recommendations but disagreed
that it could require taxpayers seeking a collection alternative to
submit additional information with their hearing requests. GAO then
revised those recommendations to be a matter for congressional
consideration.
[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-07-112].
To view the full product, including the scope and methodology, click on
the link above. For more information, contact Michael Brostek at (202)
512-9110 or brostekm@gao.gov.
[End of Section]
Contents:
Letter:
Results in Brief:
Background:
CDP Appeals Identified Few Errors by Collection, but Some Taxpayers
Received a Different Outcome:
The Majority of Taxpayers Raised the Same Arguments with Both
Collection and Appeals, Received the Same Determination, and Had
Multiple Contacts with IRS:
Both Individuals and Businesses Used CDP, but Case Characteristics
Varied:
Appeals Devoted Many Staff Hours to Resolving CDP Cases That May Not Be
Consistent with Goals of the Program or an Efficient Use of Resources:
Conclusions:
Recommendations for Executive Action:
Matters for Congressional Consideration:
Agency Comments and Our Evaluation:
Appendix I: Objectives, Scope, and Methodology:
Appendix II: Comments from the Internal Revenue Service:
Appendix III: GAO Contact and Staff Acknowledgments:
Tables:
Table 1: Reasons Why Appeals Upheld the Lien Filing or Levy for Cases
Closed in Fiscal Year 2004:
Table 2: Estimated Percentage and Number of Taxpayers Raising
Restructuring Act Arguments in Both Collection and Appeals and Cases
Where Appeals Agreed with Collection for Cases Closed in Fiscal Year
2004:
Table 3: Estimated Median Number of Total and IRS-and Taxpayer-
Initiated Contacts after Lien/Levy Notice Issuance for Cases Closed in
Fiscal Year 2004:
Table 4: Type of Taxpayer Requesting CDP Appeal for Cases Closed in
Fiscal Year 2004:
Table 5: Average and Range of Number of Delinquent Tax Periods by Type
of Tax Liability:
Table 6: Estimated Median of Total Liability by Type of Tax Liability
in CDP for Cases Closed in Fiscal Year 2004:
Table 7: Estimated Adjusted Gross Income Level versus Median Tax
Liability for Individual Taxpayers Requesting CDP Appeal for Cases
Closed in Fiscal Year 2004:
Table 8: Estimated Data on Selected Characteristics of All CDP Cases by
Direct Hours Worked and Percentage of Caseload for Cases Closed in
Fiscal Year 2004:
Table 9: Confidence Intervals for Table 8--Average Number of Additional
Characteristics:
Table 10: Confidence Intervals for Table 8--Direct Hours Worked by
Appeals:
Table 11: Confidence Intervals for Table 8--Salary Costs:
Figures:
Figure 1: Estimated Percentage of CDP Cases in Which Appeals Found an
Improper or Proper Collection Action, by Type of Appeal Outcome for
Cases Closed in Fiscal Year 2004:
Figure 2: CDP Cases Closed by Appeals, Fiscal Years 1999 through 2005:
Abbreviations:
ABA: American Bar Association:
ACDS: Appeals Centralized Database System:
ACS: Automated Collection System:
AGI: adjusted gross income:
CAP: Collection Appeals Program:
CDP: Collection Due Process:
CISO: Centralized Innocent Spouse Operation:
CPA: certified public accountant:
DCI: data collection instrument:
EH: equivalent hearing:
FPLP: Federal Payment Levy Program:
IA: installment agreement:
ICS: Integrated Collection System:
IRS: Internal Revenue Service:
OIC: offer-in-compromise:
PFD: Permanent Fund Dividend:
SITLP: State Income Tax Levy Program:
United States Government Accountability Office:
Washington, DC 20548:
October 6, 2006:
The Honorable Charles E. Grassley:
Chairman:
The Honorable Max Baucus:
Ranking Minority Member:
Committee on Finance:
United States Senate:
In fiscal year 2005, the Internal Revenue Service (IRS) issued more
than 3 million notices of federal tax liens and levies representing
more than $10 million in delinquent taxes owed to IRS. The Internal
Revenue Service Restructuring and Reform Act of 1998 (Restructuring
Act)[Footnote 1] expanded the appeal rights available to taxpayers
facing the filing of notices of federal tax liens or levies for the
collection of delinquent taxes. With the passage of the Restructuring
Act, Congress authorized the right to Collection Due Process (CDP)
appeals, which provides taxpayers with an independent review of filed
liens and levies by IRS's Office of Appeals (Appeals) and by the U.S.
Tax Court or U.S. District Court. By 2005, taxpayers requesting CDP
hearings accounted for more than one-quarter of the workload within
Appeals, about 28,000 cases annually. IRS reported that in fiscal year
2004, Appeals devoted about $8.2 million in salary costs to resolve CDP
cases.
Liens and levies arise when taxpayers fail to pay their taxes and IRS
takes action to collect those outstanding tax liabilities. A lien is a
legal claim against a taxpayer's property as security for the payment
of the delinquent tax. A levy is a legal seizure of a taxpayer's
property to satisfy the tax liability. Liens and levies identify the
amount of tax owed by tax period, and the period varies by the type of
tax. Individuals, for example, file individual income tax returns on an
annual basis, so the period would equal 1 year. Businesses file certain
tax returns, such as employment taxes, on a quarterly basis, so the
period would equal 3 months. When IRS issues a Notice of Federal Tax
Lien, Notice of Intent to Levy, or other notice related to automated
levy programs,[Footnote 2] taxpayers are also informed of their due
process rights, including the right to request a CDP hearing. IRS may
include multiple delinquent tax periods in one notice. In their CDP
appeals, taxpayers may raise issues related to the existence or amount
of the liability; seek a collection alternative to the lien filing or
levy, such as an installment agreement (IA)[Footnote 3] or offer-in-
compromise (OIC);[Footnote 4] or both.
Based on your request, this report's objectives are to provide
information on (1) the extent to which Appeals found the IRS Collection
function (Collection)[Footnote 5] had made errors in processing liens
and levies and how often CDP case results changed after a taxpayer
requested a CDP appeal hearing; (2) the nature of the arguments
presented by taxpayers seeking relief from liens or levies and the
amount of communication between IRS and taxpayers; (3) the
characteristics of the taxpayers that availed themselves of the CDP
appeal process, such as the amount of their total liabilities; and (4)
whether opportunities exist to improve the operations of the CDP
program while protecting taxpayer rights.
To develop the information for these objectives, we analyzed a random
sample of 208 CDP appeal cases, drawn from a population of 32,241 cases
closed by Appeals during fiscal year 2004. For each of the cases in our
sample, we requested the Appeals closed office file and reviewed the
documentation in the files to determine case characteristics, such as
the ultimate outcome of the CDP appeal process. We also requested the
Collection administrative file associated with each of our sample CDP
cases to assess what transpired between the taxpayer and IRS after
Collection issued the notice of a lien filing or levy. We supplemented
the information obtained through documentary case file review with
information from IRS databases. We used the results of our case file
review to make estimates for the entire population of taxpayers whose
CDP appeal cases were closed by Appeals during fiscal year 2004. Since
our estimates are based on a sample, we express our confidence in our
estimates as a 95 percent confidence interval, plus or minus a margin
of error, which is the interval that would contain the actual
population value for 95 percent of the samples we could have selected.
Unless otherwise stated, we express our particular sample's results as
a 95 percent confidence interval, less than plus or minus 8 percentage
points. In some instances, we report our sample estimates as medians.
All medians based upon the results of our sample have a relative
standard error of less than 30 percent unless otherwise
stated.[Footnote 6] In addition, we reviewed IRS program guidance on
the CDP process and interviewed knowledgeable agency officials. We also
interviewed representatives from other external stakeholder
organizations knowledgeable about the CDP appeal process. We conducted
our review from January 2005 through September 2006 in accordance with
generally accepted government auditing standards. (See app. I for a
more detailed description of our scope and methodology.)
Results in Brief:
Our review of CDP cases closed in fiscal year 2004 indicates that
Appeals found evidence in a small percentage of cases that Collection
erred in handling taxpayer cases. As shown in figure 1, we estimate
that in about 2 percent of CDP cases Appeals concluded that Collection
had not followed proper procedures. Although Appeals did not identify
any instances in our sample where the applicable legal and
administrative procedural requirements were not met, our case file
review did identify instances where Appeals detected other types of
procedural errors during the collection phase of the cases, which we
included as evidence of detection of improper procedures. Nevertheless,
even if some taxpayers received a different outcome after appealing to
IRS, Appeals did not necessarily disagree with the lien filing or levy.
In an estimated 27 percent of CDP cases, taxpayers received a different
outcome after they appealed the lien filing or levy, including those
that (1) negotiated collection alternatives, such as IAs (16 percent),
and (2) fully paid their liabilities or no longer had balances due to
IRS (11 percent). In addition, in approximately 11 percent of CDP
cases, taxpayers formally withdrew their CDP appeal requests. Finally,
in an estimated 60 percent of CDP cases, Appeals upheld the lien filing
or levy and did not reach a different result for taxpayers often
because those who sought collection alternatives were not eligible for
an alternative. They were not eligible because they had not filed
required returns, had not paid certain taxes, or both. Other major
reasons for no change upon appeal were that Appeals determined the
amount of the liability to be correct, the taxpayer had not responded
to Appeals' request for information, or both. An estimated 2 percent of
all taxpayers that requested CDP appeals hearings disputed the Appeals
determination and petitioned the U.S. Tax Court or U.S. District Court.
Figure 1: Estimated Percentage of CDP Cases in Which Appeals Found an
Improper or Proper Collection Action, by Type of Appeal Outcome for
Cases Closed in Fiscal Year 2004:
[See PDF for image]
Source: GAO analysis of IRS data.
[A] We are 95 percent confident that the true value would be between 1
percent and 6 percent.
[End of figure]
Taxpayers seeking relief from liens or levies generally raised
allowable arguments to claim they did not owe some or all of the tax or
to seek collection alternatives. More than 90 percent of these
taxpayers had raised one or more legally allowed arguments permitted by
the Restructuring Act for CDP hearings with both Collection and
Appeals. When challenging the lien filing or levy, about 37 percent of
taxpayers questioned the existence of the tax liability. Almost one-
third of taxpayers requested collection alternatives, such as OICs. In
addition, more than one-quarter of taxpayers questioned the
appropriateness of the collection action, for example, raising personal
hardships arguments such as illness or bankruptcy. An estimated 5
percent of taxpayers raised frivolous arguments--arguments without
legal basis per IRS guidance--with either Collection or Appeals. When
taxpayers raised the same arguments with Collection and Appeals,
Appeals reached the same conclusions as Collection that the taxpayers'
argument lacked merit in an estimated 81 percent of the cases. When
Appeals reached a different conclusion it was for reasons such as the
taxpayer not providing requested information or providing different
information to Appeals than to Collection. After IRS issued the lien
filing or levy notice, IRS (Collection and Appeals) had various types
of contacts with the taxpayer in the effort to resolve the liability.
IRS sent a median of 3.6 letters and made a median of 3.2 phone calls.
IRS had face-to-face contact with about 28 percent of taxpayers. In
general, the median number of IRS-initiated contacts with taxpayers was
twice as high as the median number of taxpayer-initiated contacts with
IRS.
Both individuals and businesses that receive lien or levy notices can
exercise their due process rights to CDP appeals. Most taxpayers that
requested CDP appeals--about 87 percent--were individuals, the
remaining 13 percent of taxpayers were businesses. Both business and
individual taxpayers were delinquent (did not pay taxes) on multiple
periods. Businesses with employment tax liabilities were delinquent on
more than twice as many periods--nearly six quarterly periods on
average--while individuals with income tax liabilities were delinquent
for approximately three annual periods on average. In calendar terms,
this means that on average businesses that requested a CDP appeal for
delinquent employment taxes had not paid for nearly 1-½ years, while
individuals were delinquent on paying their income taxes for 3 years.
Total tax liability also varied considerably, with trust fund recovery
penalty cases having the highest median liability amount followed by
employment tax cases. For example, individuals' median total trust fund
recovery penalty tax liability appealed was nearly $45,000, while the
median for total employment tax liability was about $30,000. The total
median liability for individuals with income tax cases was nearly
$13,000. Over half of all individual taxpayers who requested CDP
appeals had most recently reported an adjusted gross income of less
than or equal to $50,000 prior to their appeals. Overall, taxpayers
chose to represent themselves before Appeals about 56 percent of the
time, although individuals represented themselves more often, about 61
percent of the time.
The results of our case file review and interviews with IRS officials
have raised concerns about whether certain types of taxpayers have used
the CDP program in a manner that may be inconsistent with the goal of
ensuring due process. Our case file review enabled us to provide
quantitative estimates on the extent to which these certain situations
were present among CDP cases closed by Appeals during fiscal year 2004.
Neither the law nor the legislative history makes any distinctions with
respect to the type of taxpayer, type of tax liability, or method of
liability determination that was intended to be included in due process
appeal cases. Rather, the Restructuring Act permits any taxpayer who
receives a lien or levy notice to request a CDP hearing. However, since
implementation of the program, some concerns have been expressed
regarding potential abuse. Cases of concern include those where
taxpayers may not have been serious about working with Appeals because
they offered frivolous arguments in their appeals (about 4 percent for
cases closed in fiscal year 2004)[Footnote 7] or did not respond or
responded only initially to Appeals (about 20 percent). Some taxpayers
questioned the existence or amount of the liabilities (about 38
percent) even though the majority did not claim that they were not
properly notified. Other taxpayers self-reported their tax liabilities
and therefore were aware of their outstanding obligations to IRS (about
47 percent). Other taxpayers that contested collection of either
employment or unemployment taxes (about 13 percent) had often failed to
pay their taxes for long periods of time. Because the law makes no
distinctions in this regard, these concerns cannot be addressed through
regulatory changes.
IRS also raised concerns that other types of cases have resulted in an
inefficient use of Appeals' resources. These include cases where
taxpayers that requested OICs or IAs did not submit overdue tax
returns, provide supporting financial information, or provide the OIC
application form (if appropriate) necessary for Appeals to consider
their requests. In these cases, Appeals staff had to devote time to
getting taxpayers to file required returns and obtaining basic
financial information necessary to determine whether the taxpayers were
even eligible for either of these alternatives. One option in these
situations would be to require taxpayers that request only a collection
alternative to provide the necessary supporting financial information
or OIC application form (if appropriate) within a set period and
proceed to make a final case determination at that time on the basis of
the information available. In addition, some taxpayers requesting OICs
from Appeals had not previously worked with IRS's specialized unit that
was established to screen and process OICs quickly and efficiently. IRS
also raised concerns that Appeals spent time attempting to bring
taxpayers into filing compliance--that is, securing delinquent returns
from taxpayers--in order to assist taxpayers in meeting the most basic
eligibility criterion for either an OIC (about 23 percent were
ineligible because of noncompliance) or IA (about 21 percent were
ineligible because of noncompliance). Although the Restructuring Act
does not specifically address this issue, IRS officials said that a
statutory change would be needed to require taxpayers to file all the
required returns before transferring cases to Appeals for review. IRS
has proposed making changes to the CDP hearing request form as well as
to the regulations that govern the CDP program. The proposed changes to
the regulations are intended to clarify processes generally related to
requesting and conducting a CDP appeal hearing, as well as to clarify
what issues or arguments taxpayers may raise. Although these changes
may improve the CDP program, IRS has not established responsibility for
analyzing future CDP program outcome data in order to determine if
these changes will result in achieving the desired objectives.
While the proposed revisions to CDP regulations may improve program
operations, additional operational changes not addressed in the
regulations may help achieve further efficiencies. To that end, this
report includes three recommendations to IRS to help ensure that
Appeals' resources are more efficiently devoted to its mission of
resolving disputes by (1) determining--for taxpayers seeking only a
collection alternative--a reasonable amount of additional time beyond
the current 30-day period for requesting a CDP hearing for these
taxpayers to submit the required supporting financial information
necessary for Appeals to consider the alternative of choice, and the
OIC application form if appropriate; (2) instructing Appeals to
transfer OIC cases to IRS's specialized processing unit for
investigation and evaluation of OICs before consideration by Appeals;
and (3) establishing responsibility for analyzing CDP appeal case
outcome data in order to determine whether revisions to the hearing
request form and program regulations result in meeting their
objectives. This report also includes three matters Congress should
consider to help ensure CDP appeal hearings meet the goal of ensuring
due process to taxpayers while excluding certain specific categories of
taxpayers or issues that Congress may now deem to be inconsistent with
that intent. Specifically, Congress should consider (1) amending the
statute to remove eligibility for CDP appeal for selected categories of
taxpayers if it judges that that taxpayers have characteristics deemed
inconsistent with the Restructuring Act's goal of providing due
process; (2) amending the statute to require taxpayers seeking
collection alternatives such as OICs or IAs and that raise no other
issues to meet the basic eligibility criteria, that is, file all
outstanding tax returns due, before Appeals reviews the case; and (3)
requiring taxpayers that raise only collection alternatives to submit
the supporting financial information needed to consider the alternative
of choice, and the OIC application form if appropriate, within a
reasonable amount of time following the request for a CDP hearing.
In commenting on a draft of this report, the Commissioner of Internal
Revenue agreed that our recommendation on transferring cases where
taxpayers request OICs as a collection alternative to one of IRS's
specialized processing units for consideration before Appeals considers
the cases merited further study. IRS also agreed with the
recommendation to establish responsibility for evaluating CDP outcome
data to assess whether changes to the hearing request form and proposed
regulation changes are effective. IRS did not agree with our draft
recommendations that it should require taxpayers seeking collection
alternatives to submit supporting financial information with their CDP
appeal hearing request or requiring taxpayers seeking an OIC to submit
the OIC application form because it lacks the authority to do so. In
response to IRS's concerns, we revised our recommendations to present
these issues as a matter for congressional consideration. In the event
that Congress decides to take action on this matter, we added a
recommendation to the agency. Specifically, IRS should determine the
reasonable amount of additional time that taxpayers seeking collection
alternatives should be allowed in order to provide the supporting
financial information and OIC application form (if appropriate)
following their CDP hearing requests.
Background:
When Congress passed the Restructuring Act, it created new and expanded
taxpayer rights, including the right to CDP hearings and judicial
review to challenge IRS's liens and levies. IRS's Collection Appeals
Program (CAP), established before the Restructuring Act, allows
taxpayers to appeal several IRS collection actions. However, taxpayers
that do not agree with CAP's determination cannot go to court because
CAP's decisions are not subject to judicial review. According to a
Senate Finance Committee report, CDP was intended to afford taxpayers
with protection from IRS collection methods similar to the protection
they have in dealing with any other creditor. The report stated that
IRS should provide taxpayers with adequate notice of collection
activity and a meaningful hearing.[Footnote 8]
IRS issues several different types of collection notices that also
inform taxpayers of their due process rights, including the right to
request a CDP hearing. IRS issues a Notice of Federal Tax Lien (lien
notice) to establish the priority of the tax lien over other liens
against the taxpayer's assets for the amount of unpaid tax
liability.[Footnote 9] IRS issues a Notice of Intent to Levy (levy
notice) to inform taxpayers that failure to pay their tax liabilities
could result in an IRS levy on the taxpayers' assets held by financial
institutions or other parties.[Footnote 10] Lien or levy notices may be
issued by IRS's Automated Collection System (ACS) or Collection Field
Function (Field Collection).[Footnote 11] Taxpayers may also request
CDP hearings in response to notices received related to automated levy
programs, specifically the State Income Tax Levy Program (SITLP), the
Federal Payment Levy Program (FPLP), or the Alaska Permanent Fund
Dividend (PFD) Program.[Footnote 12] In addition, some taxpayers
request and receive CDP hearings based on multiple due process
collection notices, such as a combination of lien and levy notices.
Taxpayers are given a CDP hearing after a levy on a state income tax
refund, and a levy is issued when the IRS finds collection of the tax
is in jeopardy.
Any taxpayer that receives a lien or levy notice has the right to
dispute the action by filing a written request for a CDP hearing within
30 days of the date of the notice. Taxpayers that file for CDP hearings
within the 30-day period are granted hearings with a right to judicial
review from the U.S. Tax Court or U.S. District Court if they do not
agree with Appeals' determination. Taxpayers that file a request for
CDP hearings after the 30-day period will be given an equivalent
hearing (EH), but have no right to judicial review. Once IRS receives a
CDP hearing request, all tax collection efforts are generally suspended
until Appeals issues its determination to the taxpayer. Under the EH
process, IRS may continue to enforce collection efforts although IRS's
policy is generally to suspend collection during an EH. Interest and
penalties continue to accrue during the hearing period for both EH and
timely CDP hearings.
By statute, during CDP hearings, taxpayers may raise issues related to
(1) the appropriateness of the lien filing or levy; (2) offers of
collection alternatives, such as IAs, OICs, and posting bonds or
substitution of other assets; (3) appropriate spousal defenses; and (4)
challenges to the existence or amount of the tax, but only in cases
where they did not receive statutory notice of deficiency[Footnote 13]
or did not otherwise have an opportunity to dispute the tax liability.
The Internal Revenue Manual allows the taxpayer to raise issues related
to a hardship determination.[Footnote 14] However, a taxpayer may not
raise an issue that was raised previously and considered at a prior
administrative or judicial hearing if the taxpayer participated
meaningfully in that hearing or proceeding.
Once IRS receives a CDP request, Collection attempts to work with the
taxpayer for approximately 45 to 90 days to resolve the issue prior to
transferring the case to Appeals. If Collection is successful in
resolving the case with the taxpayer, the taxpayer can formally
withdraw from CDP. When Collection is unsuccessful in resolving the
case with the taxpayer, it forwards the case file to Appeals for its
independent review. However, in certain situations, Collection
immediately forwards the taxpayer's case to Appeals, such as when
collection alternatives have already been explored and discussions are
at an impasse, the taxpayer raises frivolous or constitutional issues,
the taxpayer appears to be using CDP as a delaying tactic because the
taxpayer is not responding to requests for information, or the taxpayer
does not want to work with Collection after requesting the CDP hearing.
Appeals' mission is to independently resolve tax disputes prior to
litigation on a basis that is fair and impartial to both the government
and the taxpayer. By statute, when Collection forwards the case to
Appeals, Appeals will (1) verify that the requirements of any
applicable law and administrative procedures have been met, (2)
consider any relevant issues relating to the unpaid tax or the levy,
and (3) determine whether any lien filing or levy balances the need for
the efficient collection of taxes with the legitimate concern of the
taxpayer that any collection be no more intrusive than necessary.
Appeals then renders a decision on the case in which it may either
agree that the lien filing or levy is appropriate (that is, "sustain"
or uphold the collection action) or not appropriate (that is, "not
sustain" the collection action). Appeals may also include in its final
determination a description of the terms for any collection alternative
negotiated with the taxpayer, such as an OIC or IA.
As shown in figure 2, the volume of CDP case closures has increased
steadily from the inception of the CDP program from fiscal year 1999
through fiscal year 2004 and then declined in fiscal year 2005. In
fiscal year 2005, CDP cases accounted for more than one-quarter of
Appeals' annual caseload.
Figure 2: CDP Cases Closed by Appeals, Fiscal Years 1999 through 2005:
[See PDF for image]
Source: IRS.
[End of figure]
CDP Appeals Identified Few Errors by Collection, but Some Taxpayers
Received a Different Outcome:
Our case file review indicates that during the CDP review process
Appeals found evidence that Collection had not followed proper
procedures in an estimated 2 percent of the cases closed in fiscal year
2004. For reasons unrelated to an error by Collection, in an estimated
27 percent of cases, taxpayers emerged from the CDP hearing process
with a different outcome than the lien filing or levy action. Of these,
Appeals agreed to a collection alternative for an estimated 16 percent
of all taxpayers, and approximately 11 percent of all taxpayers fully
paid their tax liabilities or no longer had balances due to IRS. In
addition, an estimated 11 percent of all taxpayers withdrew from the
CDP process. Finally, in about 60 percent of cases, Appeals upheld the
lien filing or levy for a variety of reasons, including because
taxpayers did not file required returns, had not paid their taxes for
certain periods, or both.
Appeals Rarely Found Evidence of Procedural Errors by Collection:
As previously shown in figure 1, Appeals found evidence that Collection
had not followed proper procedures in an estimated 2 percent of CDP
cases. Although Appeals did not identify any instances in our sample
where "requirements of applicable law and administrative procedure"
were not met,[Footnote 15] our case file review did identify instances
where Appeals detected other types of procedural errors during the
collection phase of a case. For example, in one case IRS misapplied a
payment to the taxpayer's ex-spouse. Appeals reapplied the payment to
the taxpayer's account and did not uphold the lien filing and levy
because there was no balance due. We included these types of cases in
our estimation of procedures not followed as they represented other
examples of situations where taxpayers utilized the CDP appeal process
consistent with the provisions of the Restructuring Act--that is, as an
opportunity to correct any errors made by Collection.
Of approximately 27 percent of CDP cases that resulted in a different
outcome after taxpayers appealed, Appeals negotiated a collection
alternative with taxpayers in about 16 percent of the cases. However,
when Appeals negotiates a collection alternative, it is not necessarily
disagreeing with the lien filing or levy. Appeals may accept a
taxpayer's collection alternative but sustain the filing of the lien in
order to protect the government's lien priority in the event of
default. In addition, taxpayers may present Appeals with new
information not previously provided to Collection for consideration.
For example, in one of our cases, the taxpayer requested an IA with
both Collection and Appeals. After submitting requested financial
information and a down payment with Appeals, the taxpayer qualified for
an IA. The taxpayer benefited from the CDP process by negotiating a
collection alternative with Appeals. In an estimated 11 percent of all
CDP cases, Collection's lien filing or the levy was no longer
appropriate because the taxpayer had since fully paid the liability or
had no balance due. In these cases, the lien or levy was no longer
necessary because the taxpayer no longer owed any tax to IRS. Appeals
officials stated that some taxpayers file for CDP to delay imminent
collection action while they find revenue sources to pay off their
unpaid liabilities. For example, one taxpayer in our sample obtained a
loan during the hearing process to fully pay the liabilities owed.
In addition, in about another 11 percent of all CDP cases, taxpayers
withdrew from the CDP process after their cases reached Appeals, so
Appeals neither upheld nor overturned the liens or levies. For example,
one taxpayer continued to work with Collection while the case was
transferred to Appeals. Collection negotiated an IA with the taxpayer,
and then the taxpayer withdrew the CDP request from Appeals. We did not
track the final outcome of cases after taxpayers withdrew from the CDP
hearing process.
Of all CDP cases, approximately 6 percent of taxpayers negotiated a
collection alternative while in Collection but failed to formally
withdraw from the CDP program, resulting in their cases being forwarded
to Appeals. According to Appeals officials, in these situations Appeals
will generally agree with the proposed collection alternatives unless
the taxpayers' situations change so much that they can no longer comply
with the agreements reached with Collection. Appeals officials also
said that some professional representatives advise clients not to
withdraw from CDP even though they resolved the issue at the Collection
level because they want to preserve their clients' right to judicial
review.
Appeals Upheld the Majority of Liens and Levies, Often Because of
Taxpayer Noncompliance:
In an estimated 60 percent of cases where Appeals determined the lien
or levy was appropriate, Appeals upheld the lien filing or levy 46
percent of the time because Appeals determined that taxpayers did not
comply with filing requirements, did not pay their liabilities for
certain tax periods, or both, as shown in table 1. For example, to be
eligible for an OIC, a business taxpayer must file all required federal
tax returns, file and pay any required employment taxes on time for the
two quarters prior to filing the OIC, be current with deposits for the
quarter in which the OIC was submitted, pay any required estimated tax
for the current period, and not be a debtor in a bankruptcy case. To be
eligible for an IA, an individual taxpayer must file all required tax
returns currently due and make all required estimated tax payments on
the current period prior to the commencement of the IA.
Table 1: Reasons Why Appeals Upheld the Lien Filing or Levy for Cases
Closed in Fiscal Year 2004:
Reasons Appeals agreed with Collection: Noncompliance in filing,
payment, or both;
Percentage of CDP cases[A]: 46[B].
Reasons Appeals agreed with Collection: Amount of the liability was not
in question;
Percentage of CDP cases[A]: 38[C].
Reasons Appeals agreed with Collection: No response from taxpayer;
Percentage of CDP cases[A]: 30[D].
Source: GAO analysis of IRS data.
[A] Percentages do not add up to 100 percent because the categories are
not mutually exclusive.
[B] We are 95 percent confident that the true value would be between 38
percent and 55 percent.
[C] We are 95 percent confident that the true value would be between 30
percent and 47 percent.
[D] We are 95 percent confident that the true value would be between 22
percent and 39 percent.
[End of table]
In addition to noncompliant taxpayers, Appeals upheld the lien filing
or levy for a variety of other reasons, including when taxpayers
questioned the amount of the tax liability but Appeals determined the
liability to be correct (an estimated 38 percent) and when taxpayers
did not respond to Appeals (an estimated 30 percent). With respect to
nonresponsive taxpayers, Appeals officials stated that they attempt to
communicate with taxpayers at least twice by correspondence before
issuing determination letters.
About 2 percent of all taxpayers that requested CDP appeal hearings
contested the Appeals determination in the U.S. Tax Court or U.S.
District Court. Officials in IRS's Office of Chief Counsel said that
based on their experience with docketed cases, Appeals is upheld a
majority of the time. When the courts overturn the Appeals
determination, IRS Chief Counsel officials said that it does not
necessarily mean that Appeals erred. Some taxpayers provide additional
or new information considered by the courts but not presented to
Appeals, leading to reversed decisions.
The Majority of Taxpayers Raised the Same Arguments with Both
Collection and Appeals, Received the Same Determination, and Had
Multiple Contacts with IRS:
During fiscal year 2004, most taxpayers raised arguments permitted by
statute to Appeals, while we estimated that 5 percent of taxpayers
raised arguments considered frivolous under IRS guidance with either
Collection or Appeals.[Footnote 16] When a taxpayer raised the same
argument in both Collection and Appeals, in an estimated 81 percent of
the cases Appeals agreed with Collection on the merits of the
taxpayer's argument. During the CDP process, Collection and Appeals
initiated multiple communications with the taxpayer, including letters,
telephone discussions, and face-to-face meetings.
Most Taxpayers Raised Permissible Arguments, but Some Presented
Frivolous Arguments:
Taxpayers raised various arguments permitted by the Restructuring Act
in more than an estimated 90 percent of CDP cases. After their cases
were transferred to Appeals, about 41 percent of taxpayers requested an
OIC and about 37 percent of taxpayers requested an IA. Less than 3
percent of taxpayers requested innocent spouse relief as permitted
under the Restructuring Act during their CDP hearings in Appeals.
Approximately 38 percent of taxpayers questioned the existence of the
tax liability. Under the Restructuring Act, a taxpayer may challenge
the existence or dollar amount of the tax liability at the CDP hearing
if the taxpayer did not receive a statutory notice of deficiency for
the liability or did not otherwise have an opportunity to dispute the
tax liability. Seven out of the 80 taxpayers in our sample challenging
the existence of a liability claimed they did not receive the statutory
notice of deficiency. The remaining 73 out of the 80 taxpayers raised
existence of the liability for a variety of other reasons, including
contesting the amount of the liability. One Appeals official suggested
that some taxpayers without professional representation (pro se) may
not understand the definition of questioning "the existence or amount
of the liability" under the Restructuring Act. IRS has drafted a
revised CDP appeal hearing request form in an effort to assist
taxpayers in determining what types of collection alternatives are
available and what types of arguments are allowed. The revised hearing
request form is intended to more clearly explain what it means to
dispute the existence or amount of the liability and the taxpayer's
ability to question the liability under CDP.
While their cases were in Appeals, an estimated 38 percent of taxpayers
questioned the appropriateness of the lien filing or levy and presented
hardship arguments. According to guidance issued by IRS Counsel,
taxpayers may argue that a lien or levy is inappropriate because
payment would cause hardship, for example, if the taxpayer has no
disposable income or assets. The primary hardship issue taxpayers cited
during the CDP process was illness (about 11 percent). Other hardship
issues taxpayers reported included bankruptcy, unemployment, and death
in the family.
An estimated 5 percent of taxpayers requesting a CDP appeal presented a
frivolous argument to either Collection or Appeals. According to IRS,
taxpayers raising frivolous issues consume a disproportionately large
amount of time because Appeals personnel must often read lengthy
frivolous submissions in search of any substantive issue that might be
contained within the case file. In addition, according to IRS, delays
result when taxpayers use face-to-face meetings as a venue for
frivolous oration and harassment of Appeals personnel. IRS has proposed
changes to the CDP regulations, which clarify that Appeals will not
offer face-to-face meetings if the taxpayers or their representatives
raise only frivolous arguments.[Footnote 17] However, representatives
from an external stakeholder group expressed concerns that IRS may
misclassify cases as frivolous and deny face-to-face meetings although
the taxpayer is raising arguments permitted under the Restructuring
Act. For example, one stakeholder suggested that a pro se taxpayer's
argument may be misclassified as frivolous if the taxpayer uses the
word protest on the CDP request form. Prior to the Restructuring Act
IRS could designate certain taxpayers, such as those using arguments
that had been repeatedly rejected by the courts, as "illegal tax
protesters." As a result, taxpayers using the term protest might be
equated with taxpayers offering frivolous arguments. The act prohibited
IRS from using this or any similar designation.[Footnote 18]
In Cases Where Taxpayers Raised the Same Arguments in Appeals as in
Collection, Appeals Agreed with Collection the Majority of the Time:
Nearly 90 percent of taxpayers raised the same argument permitted by
the Restructuring Act with both Collection and Appeals. IRS encourages
taxpayers to discuss the issues they want to appeal with Collection
because the matter may be resolved without the need for Appeals'
involvement. As shown in table 2, Appeals agreed with Collection that a
taxpayer's argument lacked merit in more than an estimated 80 percent
of the cases where taxpayers raised the same argument in both
Collection and Appeals. For example, taxpayers argued that they
qualified for collection alternatives but were not in compliance with
requirements for filing tax returns for prior periods, paying taxes for
certain periods, or both.
Table 2: Estimated Percentage and Number of Taxpayers Raising
Restructuring Act Arguments in Both Collection and Appeals and Cases
Where Appeals Agreed with Collection for Cases Closed in Fiscal Year
2004:
Arguments raised by taxpayer permitted by the Restructuring Act: Offer-
in-compromise;
Raised in both Collection and Appeals: Percentage of all CDP cases: 31;
Raised in both Collection and Appeals: Number of taxpayers: 10,075;
Percentage of cases where Appeals reached same conclusion as
Collection: Percentage: 88[A];
Percentage of cases where Appeals reached same conclusion as
Collection: Number of taxpayers: 8,835.
Arguments raised by taxpayer permitted by the Restructuring Act:
Existence of the liability;
Raised in both Collection and Appeals: Percentage of all CDP cases: 37;
Raised in both Collection and Appeals: Number of taxpayers: 11,780;
Percentage of cases where Appeals reached same conclusion as
Collection: Percentage: 89[B];
Percentage of cases where Appeals reached same conclusion as
Collection: Number of taxpayers: 10,540.
Arguments raised by taxpayer permitted by the Restructuring Act:
Installment agreement;
Raised in both Collection and Appeals: Percentage of all CDP cases: 27;
Raised in both Collection and Appeals: Number of taxpayers: 8,680;
Percentage of cases where Appeals reached same conclusion as
Collection: Percentage: 84[C];
Percentage of cases where Appeals reached same conclusion as
Collection: Number of taxpayers: 7,285.
Arguments raised by taxpayer permitted by the Restructuring Act:
Appropriateness of the lien filing or levy;
Raised in both Collection and Appeals: Percentage of all CDP cases: 26;
Raised in both Collection and Appeals: Number of taxpayers: 8,525;
Percentage of cases where Appeals reached same conclusion as
Collection: Percentage: 83[D];
Percentage of cases where Appeals reached same conclusion as
Collection: Number of taxpayers: 8,370.
Arguments raised by taxpayer permitted by the Restructuring Act:
Innocent spouse[E];
Raised in both Collection and Appeals: Percentage of all CDP cases: --;
Raised in both Collection and Appeals: Number of taxpayers: --;
Percentage of cases where Appeals reached same conclusion as
Collection: Percentage: --;
Percentage of cases where Appeals reached same conclusion as
Collection: Number of taxpayers: --.
Arguments raised by taxpayer permitted by the Restructuring Act: All
arguments permitted by the Restructuring Act;
Raised in both Collection and Appeals: Percentage of all CDP cases: 89;
Raised in both Collection and Appeals: Number of taxpayers: 28,676;
Percentage of cases where Appeals reached same conclusion as
Collection: Percentage: 81;
Percentage of cases where Appeals reached same conclusion as
Collection: Number of taxpayers: 23,251.
Source: GAO analysis of IRS data.
Notes: The arguments do not sum to 100 percent because some taxpayers
raised more than one argument permitted by the Restructuring Act. In
addition, the percentage of cases where Appeals reached the same
conclusion as Collection for all arguments permitted by the
Restructuring Act is lower than the percentages for individual argument
categories as it includes innocent spouse category data. This category
had a lower percentage of cases where Appeals agreed with Collection on
the merits of the argument.
[A] We are 95 percent confident that the true value would be between 77
percent and 95 percent.
[B] We are 95 percent confident that the true value would be between 80
percent and 95 percent.
[C] We are 95 percent confident that the true value would be between 72
percent and 92 percent.
[D] We are 95 percent confident that the true value would be between 72
percent and 91 percent.
[E] Results are not shown for innocent spouse arguments because of the
small number of cases with this characteristic.
[End of table]
More than half of the taxpayers that requested an IA (about 61
percent)[Footnote 19] or OIC (about 56 percent)[Footnote 20] in Appeals
were not compliant for tax periods in addition to the period under CDP
review. Appeals officials added that when a taxpayer requests an OIC in
Appeals, Appeals staff often spend a lot of time developing the case by
requesting and reviewing documentation needed to determine the
taxpayer's compliance and eligibility. Our review of the case files for
the estimated 31 percent of taxpayers that asked both Collection and
Appeals for an OIC indicated that Appeals staff spend time building
cases. Appeals requested the OIC form from an estimated 33
percent[Footnote 21] of these taxpayers, and an estimated 24
percent[Footnote 22] provided the form. Appeals also requested
supporting financial documents from an estimated 37 percent[Footnote
23] of these taxpayers, and an estimated 24 percent[Footnote 24] of
taxpayers that requested an OIC in both Collection and Appeals provided
the requested information. IRS voiced concerns that many taxpayers are
raising the same issues with Appeals that were rejected by Collection
in what appeared to be efforts to delay collection of the liabilities.
In an approximately 19 percent of the cases where taxpayers raised
arguments permitted by the Restructuring Act, Appeals reached a
different conclusion than Collection on the merits of the taxpayer's
argument, but may have upheld the lien filing or levy. For example, in
one case Appeals approved an IA rejected by Collection but upheld the
lien to protect the government's interests in case the taxpayer
defaulted. Appeals differed from Collection on the merits of the
taxpayer's arguments for a variety of reasons, including a change in
the taxpayer's circumstances or information. When Appeals differed from
Collection on the merits of the taxpayer's argument, in an estimated 20
percent[Footnote 25] of these cases the taxpayer provided different
information to Appeals than to Collection. In addition, in an estimated
11 percent[Footnote 26] of the cases when Appeals reached a different
conclusion than Collection it was because the taxpayer did not provide
requested information to Collection, but provided the information to
Appeals.
IRS Initiated Communication with CDP Taxpayers Multiple Times,
Primarily by Telephone and Letter:
After sending the lien or levy notice, IRS (Collection and Appeals)
contacted the taxpayer multiple times using different methods. The
range of communication between IRS and the taxpayers in our sample
varied. For example, the maximum number of phone calls in a single case
was 34 and the maximum number of letters was 17. The estimated median
number of letters IRS sent to the taxpayers was 3.6 and the estimated
median number of phone calls was 3.2.[Footnote 27] As shown in table 3,
in general the median number of IRS-initiated contacts with taxpayers-
-letters, telephone conversations, and formal meetings--was twice as
high as the median number of taxpayer-initiated contacts with IRS.
Table 3: Estimated Median Number of Total and IRS-and Taxpayer-
Initiated Contacts after Lien/Levy Notice Issuance for Cases Closed in
Fiscal Year 2004:
IRS area : Collection;
Total contacts: 4.6;
IRS-initiated contacts: 2.9;
Taxpayer-initiated contacts: 1.2.
IRS area : Appeals;
Total contacts: 6.6;
IRS-initiated contacts: 3.5;
Taxpayer-initiated contacts: 1.5.
Source: GAO analysis of IRS data.
[End of table]
After IRS sent the lien or levy notice, about 28 percent of taxpayers
had at least one face-to-face contact, including meetings and drop-in
visits, with Collection or Appeals. Most external stakeholders we
interviewed stated that face-to-face CDP hearings were preferable,
although a few representatives favored telephone conferences. Members
of the National Association of Enrolled Agents, for example, said they
preferred face-to-face meetings because they could review all documents
and reach agreement in writing. In contrast, members of the American
Institute of Certified Public Accountants stated that teleconferences
were the most efficient way to handle CDP hearings.
The September 2005 proposed changes to the CDP regulations describe
specific circumstances under which Appeals will not offer a face-to-
face conference to taxpayers or their representatives because it
determines that a conference will not serve a useful purpose. Under the
proposed changes, a face-to-face conference will not be granted if the
taxpayer does not provide the required information in the written
request for a CDP hearing or if the taxpayer proposes collection
alternatives that would not be available to other taxpayers in similar
circumstances. For example, because IRS does not consider OICs from
taxpayers that have not filed required returns or made certain required
deposits of tax, face-to-face conferences will not be offered to
taxpayers that request an OIC but have not fulfilled those obligations.
In addition, a face-to-face conference will not be held at the location
closest to the taxpayer's residence or principal place of business if
all Appeals officers or employees at that location are considered to
have prior involvement with the taxpayer.
The National Taxpayer Advocate (Advocate) and American Bar Association
(ABA) expressed concern about the potential reduction in face-to-face
hearings that may result from the proposed changes in the CDP
regulations. The Advocate noted that certain taxpayers may need a face-
to-face meeting with an Appeals officer who is familiar with local
economic conditions, such as a business's payroll provider that went
bankrupt. In our sample, an estimated 2 percent of taxpayers requested
that Appeals transfer the CDP hearing to another location and Appeals
accommodated all of these requests. However, we did not collect data on
whether the relocation was to accommodate a face-to-face hearing. The
Advocate also expressed concern that the centralization of Appeals
activities to IRS campuses will result in only certain taxpayers
receiving face-to-face hearings, such as those with representation. ABA
representatives stated that the proposed regulations will grant Appeals
more ability to deny face-to-face hearings, which would adversely
affect pro se CDP taxpayers. They also said that Appeals cases can be
more quickly resolved in person than through correspondence and phone
hearings.
Both Individuals and Businesses Used CDP, but Case Characteristics
Varied:
Individuals constituted the majority of taxpayers that requested a CDP
appeal hearing, although business entities also exercised their right
to request an appeal hearing. When compared to individual taxpayers
with income tax liabilities, businesses with employment taxes
liabilities had more delinquent periods. The majority of individuals
requesting a CDP appeal were lower-income taxpayers.
Most Taxpayers That Requested CDP Appeal Were Individuals, although
Businesses Also Used the Program:
Individuals constituted about 87 percent of all taxpayers that
exercised CDP appeal rights. Of these individuals, approximately 79
percent filed a CDP appeal related to individual income tax liability.
Business entities constituted the remaining 13 percent of all taxpayers
that requested CDP appeals, with business-related liabilities such as
employment and unemployment tax. See table 4 for more detail on the
types of taxpayers requesting CDP appeal.
Table 4: Type of Taxpayer Requesting CDP Appeal for Cases Closed in
Fiscal Year 2004:
Type of taxpayer based on income reporting requirement: All individual;
Type of liability appealed in CDP: [Empty];
Estimated percentage of population requesting CDP appeal: [Empty];
Estimated percentage of population requesting CDP appeal: 87.
Type of taxpayer based on income reporting requirement: Individual;
Type of liability appealed in CDP: Income[A];
Estimated percentage of population requesting CDP appeal: 79;
Estimated percentage of population requesting CDP appeal: [Empty].
Type of taxpayer based on income reporting requirement: Individual;
Type of liability appealed in CDP: Trust fund recovery penalty[B];
Estimated percentage of population requesting CDP appeal: 8;
Estimated percentage of population requesting CDP appeal: [Empty].
Type of taxpayer based on income reporting requirement: All
business[C];
Type of liability appealed in CDP: Employment and unemployment;
Estimated percentage of population requesting CDP appeal: [Empty];
Estimated percentage of population requesting CDP appeal: 13.
Type of taxpayer based on income reporting requirement: Total;
Type of liability appealed in CDP: [Empty];
Estimated percentage of population requesting CDP appeal: [Empty];
Estimated percentage of population requesting CDP appeal: 100.
Source: GAO analysis of IRS data.
[A] Includes sole proprietors. A sole proprietor is an unincorporated
business that is owned by one individual. Although the majority of sole
proprietors had income liability issues in CDP, there were also a small
number that had business-related liabilities.
[B] Trust fund recovery penalties may be assessed against any person
who is responsible for collecting and paying withheld income and
employment taxes, or for paying collected excise taxes, and willfully
fails to collect and pay them to IRS.
[C] Includes corporations, S corporations, and a small number of other
"flow-through" entities, such as partnerships and trusts, and cases
where a taxpayer appealed the collection of multiple types of
liabilities, such as a business appealing both an employment tax and
excise tax liability. An S corporation is a flow-through entity that
distributes net income--as well as losses--to shareholders who are
subsequently required to report the net income or loss on their
individual tax returns and to pay any applicable taxes. Although flow-
through entities do not generally pay taxes on income, they may still
incur other types of tax liabilities, such as employment or
unemployment taxes.
[End of table]
Both the ACS and Field Collection areas of IRS generate lien and levy
notices, which may lead to eventual CDP appeals. ACS issued the vast
majority of notices related to individual cases, about 88 percent. Our
sample data suggest that Field Collection issued the majority of
notices related to business cases, about 78 percent. However, because
of a small sample size we cannot conclude that this observed level of
notice issuance is statistically different from the level of notices
issued to individuals. IRS procedures specify that simpler cases are
usually handled by ACS. Field Collection handles complex, high-risk,
high-dollar, and certain other types of collection cases.
Although taxpayers are afforded CDP appeal rights for lien and levy
notices, about 64 percent of all CDP appeals resulted from a levy
notice. ACS issued levy notices for an estimated 49 percent of all
cases, while Field Collection issued levy notices for about 15 percent
of all CDP cases. Lien notices, which may be issued by either ACS or
Field Collection, accounted for about 29 percent of all cases. For the
remaining estimated 7 percent of cases, taxpayers either received both
a lien and levy notice on the same liability amount and tax
periods[Footnote 28] or a different type of levy notice, such as SITLP
or FPLP.
Businesses with Employment Tax Liabilities Had More Delinquent Periods
Than Individuals with Income Tax Liabilities:
Business entities that appealed proposed collection of quarterly
employment tax liabilities had on average over twice as many delinquent
periods included in their appeals as individual taxpayers with income
tax liabilities.[Footnote 29] As shown in table 5, these businesses had
on average nearly 6 delinquent periods included in their appeals. In
calendar terms, this means that on average businesses that requested a
CDP appeal for failure to pay employment tax liabilities were
delinquent for nearly 1-½ years. The number of delinquent periods
included in the CDP appeal for these taxpayers ranged from a low of 1
to a high of 26 quarters, or in calendar terms, from 3 months to 6-½
years. In contrast, individuals who appealed the lien filing or levy on
income tax liabilities in CDP had on average 2.6 delinquent periods, or
years, included in their appeals. For individual income tax liabilities
the number of multiple periods involved ranged from a low of 1 to as
many as 9 years per case.
Table 5: Average and Range of Number of Delinquent Tax Periods by Type
of Tax Liability:
Type of tax liability: Employment (quarterly);
Number of delinquent tax periods: Estimated average: 5.7[A];
Number of delinquent tax periods: Range: Minimum: 1;
Number of delinquent tax periods: Range: Maximum: 26.
Type of tax liability: Unemployment (quarterly);
Number of delinquent tax periods: Estimated average: 2.0[B];
Number of delinquent tax periods: Range: Minimum: 1;
Number of delinquent tax periods: Range: Maximum: 8.
Type of tax liability: Trust fund recovery penalty (quarterly);
Number of delinquent tax periods: Estimated average: 3.3[C];
Number of delinquent tax periods: Range: Minimum: 1;
Number of delinquent tax periods: Range: Maximum: 9.
Type of tax liability: Individual (annual);
Number of delinquent tax periods: Estimated average: 2.6[D];
Number of delinquent tax periods: Range: Minimum: 1;
Number of delinquent tax periods: Range: Maximum: 9.
Source: GAO analysis of IRS data.
[A] We are 95 percent confident that the true value would be between
3.6 and 7.8 periods.
[B] We are 95 percent confident that the true value would be between
0.8 and 3.2 periods.
[C] We are 95 percent confident that the true value would be between
1.8 and 4.8 periods.
[D] We are 95 percent confident that the true value would be between
2.3 and 2.9 periods.
[End of table]
Similarly, the estimated amount of the tax liability associated with
CDP appeals varied widely and was associated with the type of tax
liability involved. The highest median tax liability was associated
with trust fund recovery penalty cases, followed by employment tax
liabilities, as shown in table 6.
Table 6: Estimated Median of Total Liability by Type of Tax Liability
in CDP for Cases Closed in Fiscal Year 2004:
Type of tax liability: Trust fund recovery penalty;
Total median liability (dollars): $44,941.
Type of tax liability: Employment;
Total median liability (dollars): 30,403[A].
Type of tax liability: Individual;
Total median liability (dollars): 12,916.
Type of tax liability: Unemployment;
Total median liability (dollars): 1,237[B].
Source: GAO analysis of IRS data.
[A] The relative standard error for this estimate is 38 percent.
[B] The relative standard error for this estimate is 46 percent.
[End of table]
In general, taxpayers represented themselves more than half of the time
in CDP appeal cases, an estimated 56 percent of the time. Individual
taxpayers represented themselves even more frequently, about 61 percent
of the time. Individuals engaged the services of a professional
representative, such as a tax attorney, certified public accountant
(CPA), or enrolled agent,[Footnote 30] during CDP about 30 percent of
the time. Our sample data suggest that 50 percent of businesses
retained professional representation; however, because of our small
sample size we cannot conclude that this observed level of
representation is statistically different from the level of
professional representation for individuals.
Most Individuals Were Lower-Income Taxpayers with Varied Liability
Amounts:
More than an estimated 50 percent of individual taxpayers who requested
a CDP appeal had most recently reported an adjusted gross income
(AGI)[Footnote 31] of less than or equal to $50,000 prior to their CDP
appeals. The estimated median tax liability associated with these cases
varied somewhat when compared to income level, as shown in table 7.
Table 7: Estimated Adjusted Gross Income Level versus Median Tax
Liability for Individual Taxpayers Requesting CDP Appeal for Cases
Closed in Fiscal Year 2004:
Adjusted gross income level (dollars): Zero or negative (under $1);
Percentage of taxpayers requesting CDP[A]: 3;
Median tax liability (dollars): 44,941[B].
Adjusted gross income level (dollars): $1 to $25,000;
Percentage of taxpayers requesting CDP[A]: 26;
Median tax liability (dollars): 7,935.
Adjusted gross income level (dollars): $25,001 to $50,000;
Percentage of taxpayers requesting CDP[A]: 25;
Median tax liability (dollars): 15,278.
Adjusted gross income level (dollars): $50,001 to $75,000;
Percentage of taxpayers requesting CDP[A]: 15;
Median tax liability (dollars): 8,415.
Adjusted gross income level (dollars): $75,001 to $100,000;
Percentage of taxpayers requesting CDP[A]: 7;
Median tax liability (dollars): 15,224[C].
Adjusted gross income level (dollars): $100,001 to $300,000;
Percentage of taxpayers requesting CDP[A]: 12;
Median tax liability (dollars): 32,835.
Adjusted gross income level (dollars): Over $300,001[D];
Percentage of taxpayers requesting CDP[A]: --;
Median tax liability (dollars): --.
Source: GAO analysis of IRS data.
[A] Does not total to 100 percent because of exclusion of cases where
data were unavailable.
[B] The relative standard error for this estimate is 38 percent.
[C] The relative standard error for this estimate is 41 percent.
[D] The relative standard error was greater than 50 percent.
[End of table]
Appeals Devoted Many Staff Hours to Resolving CDP Cases That May Not Be
Consistent with Goals of the Program or an Efficient Use of Resources:
The results of our case file review and interviews with IRS officials
have raised concerns that certain types of taxpayers have used CDP in a
manner that may be inconsistent with the goal of the Restructuring Act
to ensure due process. IRS also raised concerns that taxpayers have
used CDP in a manner that resulted in an inefficient use of Appeals'
resources. Our case file review enabled us to develop quantitative
estimates of the extent to which cases with selected characteristics of
concern were present among cases closed by Appeals during fiscal year
2004. IRS devotes a significant amount of its resources to resolving
CDP appeals cases. Changing the CDP process could release a significant
amount of Appeals' resources for other purposes. In operating the CDP
program, IRS must balance efficient resource utilization against the
goal of protecting taxpayer rights.
Concerns about Certain Types of CDP Cases:
The Restructuring Act permits any taxpayer who receives a lien or levy
notice to request a CDP appeal hearing. The act makes no distinction
with respect to the type of taxpayer, type of tax liability, or whether
the liability is self-reported or asserted by IRS. According to the
legislative history, the Senate Committee on Finance believed that
following procedures designed to afford taxpayers due process in
collections would increase fairness to taxpayers. However, the results
of our case file review and interviews with IRS officials raised
concerns that certain taxpayers are using CDP in ways that may be
inconsistent with the goal of the Restructuring Act to ensure due
process. These would include the following:
Frivolous arguments: As discussed earlier, an estimated 5 percent of
taxpayers requesting a CDP appeal presented a frivolous argument to
either Collection or Appeals. An estimated 4 percent of CDP taxpayers
raised a frivolous argument to Appeals alone. IRS has publicized those
arguments that are considered frivolous and that will not be considered
as a basis for contesting tax liabilities. IRS officials said that
taxpayers that submit frivolous arguments may simply be delaying
collection efforts. In the budget submissions for fiscal years 2005 to
2007, the administration submitted a legislative proposal that would
increase the penalty for filing frivolous income tax returns from $500
to $5,000. The proposal would permit IRS to dismiss requests for CDP
hearings (as well as IAs and OICs) if they are based on frivolous
arguments or are intended to delay or impede tax administration. In
2005, IRS's Office of Chief Counsel also issued guidance encouraging
Counsel staff to coordinate with Collection staff in order to file a
motion to levy during CDP proceedings where a taxpayer raises solely
frivolous arguments.
Nonresponsive taxpayers: About an estimated 20 percent of taxpayers
requesting a CDP hearing in fiscal year 2004 did not respond at all or
responded initially and then became nonresponsive to attempts by
Appeals to contact them for additional information.[Footnote 32] IRS
officials questioned whether taxpayers that requested CDP hearings but
did not respond to Appeals' efforts to contact them were serious about
resolving a lien or levy. According to Appeals' procedures, taxpayers
are provided at least two opportunities by correspondence to schedule
the CDP hearing or discuss the case. While it is possible that
nonresponsive taxpayers may no longer reside at the most recent address
on file with IRS, Appeals makes efforts to contact the taxpayers using
the most recent information it has available. In addition, the taxpayer
can initiate contact with IRS to inform it of a new address and
continue the CDP hearing. If the taxpayer does not respond, Appeals
will issue a final determination on the lien or levy. For cases closed
during fiscal year 2004, nonresponsive taxpayers that requested a CDP
hearing experienced an estimated average cycle time of 314 calendar
days[Footnote 33] from the time they requested a CDP hearing until the
time the final determination was issued by Appeals. As previously
discussed, IRS generally suspends all collection efforts during CDP
until the final determination is issued.
Basis for questioning the existence of the liability: As discussed
earlier, taxpayers challenged the existence or amount of the liability
with both Collection and Appeals about 37 percent of the time. An
estimated 38 percent of taxpayers raised the issue with Appeals alone.
In addition, Appeals agreed with Collection's evaluation of the merits
of the argument an estimated 89 percent of the time. However, as
discussed earlier, in only 7 of 80 cases in our sample where the
taxpayer raised the existence of the liability with Appeals during CDP
was the taxpayer claiming not to have received a statutory notice of
deficiency from IRS.[Footnote 34] The remaining 73 out of the 80
taxpayers raised existence of the liability for a variety of other
reasons, including contesting the amount of the liability. IRS intends
to clarify the circumstances under which a taxpayer may appropriately
dispute the existence or amount of the liability in CDP when it revises
the hearing request form.
Self-reported liabilities: Taxpayers that self-reported their
liabilities accounted for nearly an estimated 50 percent of Appeals'
total CDP caseload for cases closed during fiscal year 2004.[Footnote
35] Of these taxpayers, nearly one-quarter raised the existence of the
liability issue during their CDP appeals.[Footnote 36] The
Restructuring Act states that taxpayers can use the CDP process to
appeal the underlying tax liability in limited circumstances. IRS
initially interpreted the language as meaning an additional tax
assessment by IRS, not a liability reported by the taxpayer on the
return. In 2004, the U.S. Tax Court rejected this interpretation and
concluded that the term underlying tax liability referred to self-
assessed amounts as well as amounts assessed under deficiency
procedures. The U.S. Tax Court held that petitioners generally could
dispute their self-reported tax liability because they had not received
a notice of deficiency and had no other opportunity to challenge the
merits of the disputed tax liability.[Footnote 37]
Employment and unemployment taxes: In previous reports GAO has
discussed the unique problems associated with ensuring business
taxpayers comply with their employment tax deposit
requirements.[Footnote 38] IRS also expressed concern about business
taxpayers who use CDP to appeal collection action for employment and
unemployment taxes because many of them continue to incur additional
liabilities by not filing subsequent returns or paying related taxes,
often referred to as "pyramiding." As previously discussed, businesses
that requested CDP appeal for employment taxes were on average
delinquent for 6 quarterly periods, or behind on their payments for 1-
½ years. For example, in one case the business requested a CDP appeal
hearing to contest collection of employment taxes dating back over 26
quarterly periods, or 6-½ years. The administration has submitted a
legislative proposal with its fiscal year 2007 budget to amend CDP
procedures for employment tax liabilities. In contrast to most other
CDP cases, the proposal would allow IRS to levy businesses with
delinquent employment tax liabilities first, and then provide the
taxpayer with the opportunity for a postlevy CDP appeal hearing within
a reasonable period of time. This proposal is similar to the postlevy
hearing established by the Restructuring Act for levies issued to
collect a federal tax liability from state tax refunds under SITLP and
for levies where IRS has made a finding that the collection of tax is
in jeopardy.
IRS also raised concerns that other types of cases result in an
inefficient use of Appeals' resources. These include the following:
Offers-in-compromise: In 2001, IRS established two centralized OIC
processing centers to reduce inventory, processing times, and costs.
IRS officials said that some taxpayers fail to work with these
specialized units and instead go directly to Appeals to seek OICs. In
addition, when making its determination about the acceptability of an
OIC, Appeals in most cases does not refer the OIC to the specialized
processing units or a Field Collection offer specialist for
investigation or for a recommendation on acceptance or rejection. In
contrast, Appeals refers CDP cases involving innocent spouse issues to
either IRS's Centralized Innocent Spouse Operation (CISO) or a field
examination office for investigation and evaluation. Appeals will delay
its ruling on any other issues or collection alternatives until the
CISO or field examination area issues a preliminary determination on
the innocent spouse issue. As a result of taxpayers that seek OICs
directly from Appeals instead of working with the specialized
processing centers, Appeals deviates from its mission of settling
disputes between taxpayers and Collection and instead spends time doing
original case-building work, such as trying to get taxpayers to file
overdue returns for prior periods, an important eligibility criterion
for OICs.
IRS also said that many taxpayers who apply for a collection
alternative do not (1) meet the basic requirement of having filed all
necessary tax returns or (2) provide with their CDP requests the
necessary supporting documentation or a completed OIC application for
Appeals to consider, causing further delay and consuming more staff
resources. As discussed earlier, for those taxpayers that asked both
Collection and Appeals for an OIC, Appeals requested the OIC
application form and other supporting financial documentation from
about an estimated one-third of the taxpayers.
One option for ensuring that taxpayers timely provide overdue tax
returns, supporting financial information, or a completed OIC
application with their requests for a collection alternative would be
to require taxpayers to provide this information before IRS accepts the
request for a CDP hearing. However, according to officials from IRS's
Office of Chief Counsel, under the current statute IRS may not deny a
taxpayer's request for a CDP hearing even if the taxpayer only wants a
collection alternative and has not met basic filing compliance
requirements.[Footnote 39] Similarly, IRS said that it also lacks
authority to deny a request for a CDP hearing to taxpayers seeking an
alternative that fail to submit the supporting financial information or
OIC application form. IRS also stated that most taxpayers would be
unable to provide this information within the 30 days they have to
request a CDP hearing.
Another option would be to require taxpayers to provide the information
within a reasonable time following the request for the CDP hearing and
for IRS to proceed to make a final determination at that time on the
basis of whatever information the taxpayer had provided. This would be
similar to IRS's current practice of proceeding to make a final
determination when taxpayers have not been responsive to IRS's request
for information. At the time we completed our review, however, IRS had
not determined whether it could do this without a statutory change.
Installment agreements: As with OIC cases, IRS also said that many
taxpayers do not provide the necessary documentation for Appeals to
even consider an IA with their CDP requests. Instead of concentrating
on dispute resolution, Appeals officers instead must attempt to bring
noncompliant taxpayers into filing compliance in order to meet the
basic eligibility criteria for the alternative, and then develop the
IAs, including requesting application forms and the necessary financial
information from the taxpayers.
Low liability cases: For cases closed during fiscal year 2004, about 3
percent of the taxpayers, or approximately 1,100, requested a CDP
hearing for liabilities totaling less than $500. One Appeals official
stated that small liability cases may not be the most efficient use of
Appeals' resources. However, establishing a dollar threshold would deny
some taxpayers the right to appeal the lien filing or levy at the
judicial level while taxpayers with perhaps slightly higher liabilities
would retain that right. In addition, for some lower-income taxpayers,
an improperly assessed liability of $500 may represent a significant
amount of money. The median for the most recently reported AGI for
taxpayers in our sample with a liability of less than $500 was
estimated at approximately $36,000,[Footnote 40] with a range from as
low as about $11,000 a year to a high of more than $200,000 a year.
Changing the CDP Process Could Free Up a Significant Amount of Appeals'
Resources:
Restricting CDP appeals rights for certain kinds of taxpayers or
implementing other processing changes, such as requiring taxpayers to
submit documentation for collection alternatives following the CDP
hearing request, could release a significant amount of Appeals'
resources for other purposes. According to IRS records, in fiscal year
2004, Appeals allocated more than 285,000 direct staff hours, or about
23 percent of all direct case time charges, to resolve about 32,000 CDP
cases. We estimate that this cost was approximately $8.2 million.
Table 8 shows the resources devoted to selected types of CDP cases.
However, the data on direct case time charges and salary costs for each
type of CDP cases may overstate the potential resource savings of
changing the CDP process. First, the table represents the resources
devoted to cases that exhibited the specific characteristic, but other
characteristics could also be present, so the categories are not
mutually exclusive. A case with a self-reported liability may also be
an employment/unemployment tax case, and the resources devoted to that
case would be included in each category. As a result, the potential
staff hour savings to be realized from excluding more than one category
of cases from CDP cannot be estimated by totaling the salary costs
associated with each category. For example, suppose taxpayers with self-
reported liabilities and employment/unemployment taxes were deemed
ineligible for the CDP process. The table shows that Appeals devoted
about 135,000 staff hours to cases with self-reported taxes and about
34,000 hours to cases with employment/unemployment taxes. However, the
total staff hours that would be released by deeming both categories
ineligible would not be the sum of those two categories (169,000 staff
hours) because some of employment/unemployment taxes are also self-
reported. The actual total would be less. Second, although we obtained
the total direct time charges involved in resolving each case in our
sample, we could not isolate the amount of direct time Appeals expended
in requesting and obtaining documentation in order to develop
collection alternatives. (For more detail on the confidence intervals
associated with the estimated hours and salary costs shown in table 8,
see app. I.)
Table 8: Estimated Data on Selected Characteristics of All CDP Cases by
Direct Hours Worked and Percentage of Caseload for Cases Closed in
Fiscal Year 2004:
Selected characteristics of CDP case: Frivolous arguments[B];
Average number of additional characteristics: 0.75;
Direct hours worked by Appeals: --;
Salary costs: --;
Percentage of CDP caseload[A]: 4.
Selected characteristics of CDP case: Nonresponsive to Appeals;
Average number of additional characteristics: 1.24;
Direct hours worked by Appeals: 45,571;
Salary costs: 1,308,343;
Percentage of CDP caseload[A]: 20.
Selected characteristics of CDP case: Self-reported liabilities;
Average number of additional characteristics: 1.13;
Direct hours worked by Appeals: 135,203;
Salary costs: 3,881,678;
Percentage of CDP caseload[A]: 47.
Selected characteristics of CDP case: Existence of the liability
questioned by taxpayer;
Average number of additional characteristics: 1.09;
Direct hours worked by Appeals: 110,441;
Salary costs: 3,170,761;
Percentage of CDP caseload[A]: 38.
Selected characteristics of CDP case: Employment/unemployment taxes;
Average number of additional characteristics: 1.89;
Direct hours worked by Appeals: 34,140;
Salary costs: 980,159;
Percentage of CDP caseload[A]: 13.
Selected characteristics of CDP case: OIC raised by noncompliant
taxpayer;
Average number of additional characteristics: 1.60;
Direct hours worked by Appeals: 63,474;
Salary costs: 1,822,339;
Percentage of CDP caseload[A]: 23.
Selected characteristics of CDP case: IA raised by noncompliant
taxpayer;
Average number of additional characteristics: 1.91;
Direct hours worked by Appeals: 58,437;
Salary costs: 1,677,726;
Percentage of CDP caseload[A]: 21.
Selected characteristics of CDP case: Total liability less than $500;
Average number of additional characteristics: 1.43;
Direct hours worked by Appeals: 7,440;
Salary costs: 213,602;
Percentage of CDP caseload[A]: 3.
Source: GAO analysis of IRS data.
[A] Percentages do not add up to 100 percent because the categories are
not mutually exclusive.
[B] Results are not shown for frivolous arguments because of the small
number and large variability in cases with this characteristic.
[End of table]
IRS Has Taken Some Steps to Improve the CDP Program:
IRS has taken some steps to improve the CDP program. IRS has drafted a
revised CDP hearing request form in an effort to assist taxpayers in
determining what types of collection alternatives are available. In
addition, in 2005, IRS issued proposed revisions to the CDP program
regulations intended to allow Appeals to effectively and fairly handle
the cases of taxpayers that raise issues of substance. Included in
these proposed changes is a provision stating that Appeals will not
offer a face-to-face meeting with a taxpayer when Appeals staff
determine that the conference would not serve a useful purpose, such as
with a taxpayer that offers only frivolous arguments. Further, the
proposed changes state that a face-to-face conference need not be
granted if a taxpayer does not provide the reasons for disagreeing with
the lien filing or levy on the written CDP request. As previously
discussed, stakeholder groups, including the Advocate and the ABA,
voiced concerns about whether Appeals would have the ability under the
proposed revised regulations to deny face-to-face hearings to taxpayers
in need of assistance and thereby adversely affect taxpayer rights.
In issuing the proposed regulatory changes for the CDP program, IRS
asserted as its goal to increase efficiency without compromising the
quality and fairness of review. Appeals anticipates collecting detailed
information on CDP case outcomes as a result of planned enhancements to
its information management system. IRS guidance lays out a seven-step
process for data collection and analysis, the last of which is that
managers should use data to follow up and monitor the effectiveness of
a course of action. However, we found that IRS has not clearly assigned
responsibility for analyzing future CDP outcome data to assess whether
the revised hearing request form or updated program regulations achieve
their objectives or whether further corrective actions will be
necessary.
Conclusions:
Providing taxpayers with the ability to appeal unfair lien filings or
levies is an important consideration in ensuring IRS continues to
respect taxpayer rights as it collects tax revenue. However, Appeals
devotes a significant amount of resources to CDP cases and decision
makers need to weigh the value of the existing program against the
value of potentially redirecting those resources to serve other
taxpayers better.
The results of our case file review and interviews with IRS officials
raised concerns about whether Appeals is devoting a large share of its
resources to providing temporary relief from collection action to
taxpayers that Congress may not have intended to benefit from the CDP
process. The statute currently affords all taxpayers the protection of
due process appeal, even those that raise frivolous arguments or that
do not respond to Appeals after requesting a hearing and may not be
serious about working with IRS. For those taxpayers, which collectively
may represent as much as approximately 24 percent of the total CDP
workload, the delay in collection activity until Appeals issues its
final determination may be an incentive to request an appeal, even
though penalties and interest continue to accrue during the time the
case is with Appeals. Other types of CDP cases represent those that may
involve an inefficient use of Appeals' resources, such as taxpayers
that are seeking OICs or IAs but are not in compliance with basic tax
return filing requirements.
IRS has taken some steps that may improve CDP program operations.
Appeals anticipates collecting more detailed CDP case outcome data as a
result of planned enhancements to its information system. However, IRS
has not established responsibility for analyzing future program outcome
data to determine if these changes will be effective. Given the
significant share of Appeals staff resources dedicated to resolving CDP
cases, balancing the need to employ these resources efficiently versus
the goal of protecting taxpayer rights as required by the Restructuring
Act has been, and will likely continue to be, a challenge for IRS.
Recommendations for Executive Action:
We are making three recommendations to the Commissioner of Internal
Revenue to ensure that Appeals uses its resources in line with its
mission as well as more efficiently. Specifically, we recommend that
the Commissioner:
* determine--for taxpayers seeking only a collection alternative--a
reasonable amount of additional time beyond the current 30-day period
for requesting a CDP hearing for these taxpayers to submit the required
supporting financial information necessary for Appeals to consider the
alternative of choice, and if seeking an OIC, to submit the OIC
application form;
* instruct Appeals to transfer CDP cases where taxpayers seek an OIC as
a collection alternative and raise no liability issues to IRS's
specialized processing units for investigation and evaluation of OICs
before consideration by Appeals; and:
* establish responsibility for analyzing future CDP appeal case outcome
data in order to determine whether revisions to the hearing request
form and program regulations will result in meeting their objectives.
Matters for Congressional Consideration:
Since the Restructuring Act permits any taxpayer who receives a lien or
levy notice to request a CDP hearing, Congress should consider amending
the statute to remove eligibility for CDP appeal for selected
categories of taxpayers or types of cases if it judges that they have
characteristics that are inconsistent with the Restructuring Act's goal
of ensuring due process. These categories may include self-reported tax
liabilities, including employment and unemployment taxes, or other
categories deemed inconsistent with the goal of the Restructuring Act
provisions. In order to leverage IRS resources more efficiently,
Congress should consider requiring taxpayers that seek collection
alternatives, such as OICs or IAs, and that raise no other allowable
issues to comply with the basic eligibility criteria, that is, file all
required tax returns before Appeals reviews their cases. In addition,
Congress should consider requiring taxpayers that raise only collection
alternatives to submit the supporting financial information needed to
consider the alternative of choice, and if seeking an OIC without
raising any liability issues, to submit the OIC application form within
a reasonable time following their CDP request.
Agency Comments and Our Evaluation:
The Commissioner of Internal Revenue provided written comments on a
draft of this report in a September 20, 2006, letter, which is
reprinted in appendix II. The Commissioner agreed that our findings
would assist IRS in its effort to improve CDP program operations, and
provided technical comments and clarifications that we have
incorporated throughout this report where appropriate.
With regard to our recommendation on transferring cases where taxpayers
request OICs as a collection alternative to one of IRS's specialized
processing units for consideration before Appeals considers the cases,
IRS agreed that our recommendation merited consideration, although IRS
concluded that additional study is needed to assess the advantages and
disadvantages of such a change in order to achieve the proper balance
between agency resource allocation and imposing unnecessary delays in
processing OICs. IRS also agreed with our recommendation regarding
establishing responsibility for evaluating CDP outcome data in order to
determine if the changes to the hearing request form and proposed
regulatory changes will achieve desired objectives. IRS expressed
support for our matter for congressional consideration related to
suggesting that Congress consider amending the statute to remove
eligibility for CDP appeal for selected categories of taxpayers or
types of cases, noting that IRS has submitted several legislative
proposals in past years aimed at limiting taxpayer access to CDP.
In our draft report we recommended that IRS require taxpayers seeking a
collection alternative to submit supporting financial information with
their requests for a CDP hearing in order to consider the alternative
of choice. We also recommended that IRS require each taxpayer seeking
an OIC that raises no liability issues to submit the OIC application
form with the hearing request. IRS disagreed with both of these
recommendations. While IRS agreed that having this information would be
desirable to facilitate consideration of taxpayers' requests for
collection alternatives, IRS believes that most taxpayers would be
unable to provide this information within the 30-day period taxpayers
are provided to request a CDP appeal hearing. Further, IRS stated that
it does not currently have statutory authority to deny CDP hearings to
taxpayers who fail to submit financial information forms or the OIC
application form. IRS believes that congressional action would be
required to enable it to impose these requirements on taxpayers. We
incorporated this information into the body of our report. Given IRS's
concerns, we revised our report to say that taxpayers should be given a
reasonable amount of time after filing a CDP request to provide
supporting financial information and OIC applications. If taxpayers do
not provide the materials within that time, IRS would proceed to make a
final determination on the basis of available information. Further,
because at the time we completed our review IRS had not decided if this
could be done without a statutory change, we made this a matter for
congressional consideration. Finally, we also added a recommendation
that IRS should determine what a reasonable amount of additional time
would be for taxpayers to assemble and submit this information since
IRS would be in a position to make this determination.
As agreed with your offices, unless you publicly announce its contents
earlier, we plan no further distribution of this report until 30 days
after its date. At that time, we will send copies of this report to the
Secretary of the Treasury, the Commissioner of Internal Revenue, and
other interested parties. Copies will be made available to others upon
request. This report will also be available at no charge on GAO's Web
site at [Hyperlink, http://www.gao.gov].
If you or your staff have any questions, please contact me at (202) 512-
9110. I can also be reached by e-mail at brostekm@gao.gov. Contact
points for our Offices of Congressional Relations and Public Affairs
may be found on the last page of this report. Key contributors to this
report are listed in appendix III.
Signed by:
Michael Brostek:
Director, Tax Issues Strategic Issues Team:
[End of section]
Appendix I: Objectives, Scope, and Methodology:
Our objectives were to provide information on (1) the extent to which
the Internal Revenue Service's (IRS) Office of Appeals (Appeals) found
the IRS Collection function (Collection) had made errors in processing
liens and levies and how often Collection Due Process (CDP) case
results changed after a taxpayer requested a CDP appeal hearing; (2)
the nature of the arguments presented by taxpayers seeking relief from
a lien filing or levy and the amount of communication between IRS and
taxpayers; (3) the characteristics of the taxpayers that availed
themselves of the CDP appeal process, such as the amount of their total
liability; and (4) whether opportunities exist to improve the
operations of the CDP program while protecting taxpayer rights.
To develop information addressing our objectives, we interviewed
stakeholder groups with an interest in CDP, both within and outside of
IRS. Within IRS we interviewed officials in Appeals as well as from the
Collection area of the compliance divisions where CDP appeal cases
originate. We also interviewed officials in the Office of Chief Counsel
and the Office of the National Taxpayer Advocate. Outside of IRS, we
met with representatives from organizations whose members provide
professional representation to taxpayers during CDP appeals, including
the American Institute of Certified Public Accountants, the American
Bar Association, and the National Association of Enrolled Agents.
We reviewed the Appeals Centralized Database System (ACDS) to determine
whether it contained sufficient case results information to address our
objectives. In conjunction with another GAO study addressing the
operations of IRS Appeals, we tested the reliability of the data in
ACDS. Based on this assessment, we found that data in ACDS were not
sufficiently reliable for our use.[Footnote 41] Therefore, we collected
data through a random probability sample of CDP cases closed by Appeals
during fiscal year 2004 using IRS case files. The sample of 208 cases
was drawn from a population of 32,241 cases. Results from this sample
are generalizable to all cases closed in the CDP program in fiscal year
2004.
For each of the cases in our sample, we requested the Appeals closed
office file and reviewed the documentation in the files to determine
case characteristics, such as the ultimate outcome of the CDP appeal
process, including whether a case was "sustained" or "not sustained."
We reviewed documents available in the file, including the taxpayer's
Request for CDP Hearing, the Case Activity Record (documented notes on
the case history recorded by the Appeals officer), and the Appeals Case
Memorandum (a summary memorandum outlining the Appeals officer's
findings at the conclusion of the hearing process). Based on the
documents available, we determined the nature of the arguments raised
by each taxpayer, including whether the taxpayer sought a collection
alternative, such as an offer-in-compromise (OIC) or installment
agreement (IA).
Through our case file review we also determined whether Appeals
identified any evidence of improper procedures or errors that occurred
during the Collection phase of the case. Based on the Internal Revenue
Service Restructuring and Reform Act of 1998, as part of each case
determination, Appeals is legally required to verify that the
requirements of any applicable law or administrative procedure have
been met. Specifically, Appeals will verify that Collection met legal
and procedural requirements by reviewing whether (1) an assessment was
made in accordance with the Internal Revenue Code, which requires IRS
to make inquiries, determinations, and assessments of taxes;[Footnote
42] (2) a notice and demand for payment was issued to the
taxpayer;[Footnote 43] and (3) the taxpayer had a balance due at the
time the notice of lien or levy was issued. In addition to reviewing
cases to determine if Appeals found any instances where Collection did
not comply with these requirements, we also identified cases where all
of these legal conditions may have been met, but Appeals identified
some other type of procedural error or problem. We used this broader,
more inclusive definition of improper procedures when compiling and
reporting our results.
We also requested access to the Collection administrative file
associated with each of our sample CDP cases in order to assess what
transpired between the taxpayer and IRS during the collection phase of
the case prior to the CDP appeal. We sought access to these files so we
could develop additional case characteristics, such as the nature of
the arguments raised by the taxpayer with IRS Collection, as well as
the extent to which the taxpayer and the IRS employee working the
collection case actively initiated communication with each other to
resolve the collection dispute. Of the 208 cases in our sample, 162
originated from the Automated Collection System (ACS) area.[Footnote
44] When documents were missing from the Collection administrative
files for ACS cases, we supplemented the file information by reviewing
the ACS history transcript for the case. The remaining 46 cases in our
sample originated in the Field Collection area of IRS. IRS Field
Collection officials were concerned that providing GAO with access to
the complete case file for our sample cases would be burdensome and
potentially disruptive in cases where collection enforcement was
ongoing. In response to this concern, we agreed to consider using case
history information stored in the Integrated Collection System
(ICS).[Footnote 45] We tested the reliability of ACS and ICS history
transcripts by comparing the information on issues raised and
communication contacts documented in the collection administrative file
to the information in ICS for a subsample of cases. We found that the
information in both systems generally agreed with the administrative
case file data and was therefore sufficient for our data-gathering
purposes. While we relied on ACS transcripts as a supplement to the
collection case file documentation, for CDP cases that originated in
the Field Collection area, we relied exclusively on reviewing the
detailed ICS case history transcript.
To record the descriptive data obtained from case file review for our
sample cases, we developed a detailed data collection instrument (DCI).
We refined this DCI through extensive pretesting, and also shared an
interim draft of the instrument with officials from both IRS Appeals
and Office of Chief Counsel to ensure that it was technically accurate.
To ensure that the data entered on the DCI conformed to GAO's data
quality standards, each completed DCI was subject to secondary review
by at least one other GAO analyst. Reviewers compared the data recorded
on the DCI to the data in the case files to determine whether they
concurred with the interpretation of the case files and the way the
data were recorded on the DCI. When there were differing perspectives,
the analysts met and reconciled them.
We input the data recorded on the DCIs into a computer data collection
program. To ensure the accuracy of the transcribed data, each
electronic DCI entry was compared to its corresponding paper DCI by
analysts other than those who electronically entered the data. If the
reviewers found any errors, changes were made to the electronic
entries, and the entries were reviewed again to ensure that all data
were transcribed accurately.
To tabulate and analyze the results of the compiled DCI information, we
used a standardized statistical software package. All cross-tabulation
analyses of case file characteristic data were based on computer
programs that were reviewed by a second independent data analyst.
Because we followed a probability procedure based on random selection,
our sample is only one of a large number of samples that we might have
drawn. Since each sample could have provided different estimates, we
express our confidence in the precision of our particular sample's
results as a 95 percent confidence interval, less than plus or minus 8
percentage points unless otherwise noted. This is the interval that
would contain the actual population value for 95 percent of the samples
we could have drawn. In some instances, we report our sample estimates
as medians. The median, or midpoint in a series of numbers, was
selected in certain instances because the total number of observations
for a given characteristic varied greatly across the population. To
determine the reliability of median estimates, we calculated the
relative standard error associated with each estimate by dividing the
standard error of the median by the median and multiplied by 100 to get
a percentage. All medians based upon the results of our sample have a
relative standard error of less than 30 percent unless otherwise
stated. In instances where our sample estimate included a fraction, we
rounded the estimate up if the fraction was greater than or equal to
0.50.
To estimate the salary costs associated with selected types of CDP
cases with specific characteristics shown in table 8, we estimated the
total direct hourly time charges based on the sample cases that had the
characteristic of interest. We multiplied direct hourly time charges by
a weighted hourly salary rate that was based on Appeals data for time
charged to working CDP cases during fiscal year 2004. Each of the
figures for direct hours worked and salary costs, as well as the
average number of additional case characteristics present for each
category, have their own confidence intervals, which are shown in
tables 9, 10, and 11.
Table 9: Confidence Intervals for Table 8--Average Number of Additional
Characteristics:
Selected characteristics of CDP case: Frivolous arguments;
Average number of additional characteristics: 0.75;
Confidence intervals: Lower bound: 0.20;
Confidence intervals: Upper bound: 1.30.
Selected characteristics of CDP case: Nonresponsive to Appeals;
Average number of additional characteristics: 1.24;
Confidence intervals: Lower bound: 0.93;
Confidence intervals: Upper bound: 1.55.
Selected characteristics of CDP case: Self-reported liabilities;
Average number of additional characteristics: 1.13;
Confidence intervals: Lower bound: 0.93;
Confidence intervals: Upper bound: 1.33.
Selected characteristics of CDP case: Existence of the liability
questioned by taxpayer;
Average number of additional characteristics: 1.09;
Confidence intervals: Lower bound: 0.88;
Confidence intervals: Upper bound: 1.30.
Selected characteristics of CDP case: Employment/unemployment taxes;
Average number of additional characteristics: 1.89;
Confidence intervals: Lower bound: 1.57;
Confidence intervals: Upper bound: 2.21.
Selected characteristics of CDP case: OIC raised by noncompliant
taxpayer;
Average number of additional characteristics: 1.60;
Confidence intervals: Lower bound: 1.32;
Confidence intervals: Upper bound: 1.88.
Selected characteristics of CDP case: IA raised by noncompliant
taxpayer;
Average number of additional characteristics: 1.91;
Confidence intervals: Lower bound: 1.65;
Confidence intervals: Upper bound: 2.17.
Selected characteristics of CDP case: Total liability less than $500;
Average number of additional characteristics: 1.43;
Confidence intervals: Lower bound: 0.97;
Confidence intervals: Upper bound: 1.89.
Source: GAO analysis of IRS data.
[End of table]
Table 10: Confidence Intervals for Table 8--Direct Hours Worked by
Appeals:
Selected characteristics of CDP case: Frivolous arguments[A];
Direct hours worked by Appeals: --;
Confidence intervals: Lower bound: --;
Confidence intervals: Upper bound: --.
Selected characteristics of CDP case: Nonresponsive to Appeals;
Direct hours worked by Appeals: 45,600;
Confidence intervals: Lower bound: 30,900;
Confidence intervals: Upper bound: 60,200.
Selected characteristics of CDP case: Self-reported liabilities;
Direct hours worked by Appeals: 135,200;
Confidence intervals: Lower bound: 107,700;
Confidence intervals: Upper bound: 162,700.
Selected characteristics of CDP case: Existence of the liability
questioned by taxpayer;
Direct hours worked by Appeals: 110,400;
Confidence intervals: Lower bound: 87,000;
Confidence intervals: Upper bound: 133,900.
Selected characteristics of CDP case: Employment/unemployment taxes;
Direct hours worked by Appeals: 34,100;
Confidence intervals: Lower bound: 20,200;
Confidence intervals: Upper bound: 48,100.
Selected characteristics of CDP case: OIC raised by noncompliant
taxpayer;
Direct hours worked by Appeals: 63,500;
Confidence intervals: Lower bound: 44,200;
Confidence intervals: Upper bound: 82,800.
Selected characteristics of CDP case: IA raised by noncompliant
taxpayer;
Direct hours worked by Appeals: 58,400;
Confidence intervals: Lower bound: 39,100;
Confidence intervals: Upper bound: 77,800.
Selected characteristics of CDP case: Total liability less than $500;
Direct hours worked by Appeals: 7,400;
Confidence intervals: Lower bound: 200;
Confidence intervals: Upper bound: 14,700.
Source: GAO analysis of IRS data.
Note: Estimates and confidence intervals have been rounded up to the
nearest 100 and are expressed at the 95 percent level of confidence.
[A] Because of the wide variation in hours per case, the estimates for
total direct hours and related confidence intervals are not
projectable.
[End of table]
Table 11: Confidence Intervals for Table 8--Salary Costs:
Selected characteristics of CDP case: Frivolous arguments[C];
Salary costs[A]: --;
Confidence intervals[B]: Lower bound: --;
Confidence intervals[B]: Upper bound: --.
Selected characteristics of CDP case: Nonresponsive to Appeals;
Salary costs[A]: $1,308,000;
Confidence intervals[B]: Lower bound: $888,000;
Confidence intervals[B]: Upper bound: $1,729,000.
Selected characteristics of CDP case: Self-reported liabilities;
Salary costs[A]: 3,882,000;
Confidence intervals[B]: Lower bound: 3,092,000;
Confidence intervals[B]: Upper bound: 4,671,000.
Selected characteristics of CDP case: Existence of the liability
questioned by taxpayer;
Salary costs[A]: 3,171,000;
Confidence intervals[B]: Lower bound: 2,496,000;
Confidence intervals[B]: Upper bound: 3,846,000.
Selected characteristics of CDP case: Employment/unemployment taxes;
Salary costs[A]: 980,000;
Confidence intervals[B]: Lower bound: 579,000;
Confidence intervals[B]: Upper bound: 1,381,000.
Selected characteristics of CDP case: OIC raised by noncompliant
taxpayer;
Salary costs[A]: 1,822,000;
Confidence intervals[B]: Lower bound: 1,269,000;
Confidence intervals[B]: Upper bound: 2,376,000.
Selected characteristics of CDP case: IA raised by noncompliant
taxpayer;
Salary costs[A]: 1,678,000;
Confidence intervals[B]: Lower bound: 1,122,000;
Confidence intervals[B]: Upper bound: 2,233,000.
Selected characteristics of CDP case: Total liability less than $500;
Salary costs[A]: 214,000;
Confidence intervals[B]: Lower bound: 6,000;
Confidence intervals[B]: Upper bound: 421,000.
Source: GAO analysis of IRS data.
Note: Estimates and confidence intervals have been rounded up to the
nearest 1,000 and are expressed at the 95 percent level of confidence.
[A] Salary costs for each category were estimated by multiplying the
direct hours worked (table 10) by a weighted hourly salary rate based
on Appeals workload data.
[B] Confidence interval boundaries were estimated by multiplying the
confidence intervals for direct hours worked (table 10) by the weighted
hourly salary rate based on Appeals workload data.
[C] Because of the wide variation in hours per case, the estimates for
salary costs and related confidence intervals are not projectable.
[End of table]
[End of section]
Appendix II: Comments from the Internal Revenue Service:
Commissioner:
Department Of The Treasury:
Internal Revenue Service:
Washington, D.C. 20224:
September 20, 2006:
Mr. Michael Brostek:
Director, Tax Issues Strategic Issues Team:
United States Government Accountability Office:
Washington, DC 20548:
Dear Mr. Brostek:
Thank you for the opportunity to review and comment on the draft
Government Accountability Office (GAO) report entitled "Tax
Administration: Little Evidence of Procedural Errors in Collection Due
Process Appeal Cases, but Opportunities Exist to Improve the Program,"
(GAO-06-1060). The findings of the GAO will prove to be a valuable
resource as we continue our efforts to improve the Collection Due
Process (CDP) program.
The report includes a recommendation that taxpayers seeking a
collection alternative be required to submit financial information with
the request for a CDP hearing, Similarly, it also recommends that
taxpayers seeking an offer-in-compromise (OIC) be required to submit
the application form with the hearing request. While we agree that it
would be beneficial to secure this information early in the process,
most taxpayers seeking a collection alternative would be unable to
provide this information within the current 30-day period they are
given under Internal Revenue Code §§ 6320 and 6330 to submit a request
for a hearing.
We are studying the draft report's recommendation to have Appeals
transfer OIC cases to one of the centralized OIC processing units for
investigation and evaluation prior to Appeals consideration. Now that
section 7122 has been amended to provide that an OIC is deemed accepted
if not rejected within 24 months of being submitted, we need to ensure
that any shift in the handling of OICs submitted during CDP hearings
does not result in unnecessary delay.
We agree with the recommendation to establish responsibility for
analyzing future CDP case outcomes to determine whether proposed
revisions to the hearing request form and proposed changes to the CDP
regulations will meet our objective of increasing efficiency without
compromising the quality and fairness of review. We are still in the
process of determining the office responsible for analyzing the
effectiveness of these changes and expect the assignment to be made in
the near future.
Finally, the draft report recommends that Congress consider amending
the CDP statutory provisions to remove eligibility for CDP appeal for
selected categories of taxpayers or cases. As you know, the Department
of the Treasury supports the enactment of certain legislative proposals
designed to exclude or limit access of certain taxpayers to the CDP
hearing process.
More detailed comments on the draft report's recommendations are
enclosed. If you have any questions, please contact me or Karen Ammons,
Deputy Chief, Appeals at {202 435-5600.
Sincerely,
Signed by:
Mark W. Everson:
Enclosure:
Our comments on the report's specific recommendations follow:
Recommendations 1 and 2(a): Require taxpayers seeking a collection
alternative to submit with their CDP request form the supporting
financial information needed to consider the alternative of choice; and
require taxpayers who are seeking an offer-in-compromise (OIC} and who
have raised no liability issues to submit an OIC application form with
their initial CDP request.
While desirable, most taxpayers seeking a collection alternative would
be unable to provide this information within the current 30-day period
taxpayers are given under Internal Revenue Code §§ 6320 and 6330 to
submit a request for a hearing. Also, there are limits on the authority
of the IRS under those sections. Therefore, as discussed further below,
we cannot agree with these recommendations.
The IRS, including the Office of Appeals, requires, in most instances,
the submission of financial information as a condition to its
consideration of a collection alternative, such as an installment
agreement or OIC. This information must be provided on a completed Form
433-A, Collection Information Statement for Wage Earners and Self-
Employed Individuals, or Form 433-B, Collection Information Statement
for Businesses. Each of the Forms 433-A and B is six pages long with at
least 39 individual questions (45 for Form 433-B) requiring detailed
answers about the taxpayer's assets, liabilities and expenses. Each of
the forms also requires the submission of documentation substantiating
the assets and liabilities reported, such as financial account
statements for the past three months and statements from secured
lenders. If a taxpayer is seeking an OIC, a Form 656, Offer in
Compromise (the OIC application form), must also be submitted.[Footnote
46] The IRS must have the information required by these forms to
determine the acceptability of the requested collection alternative.
Our experience over the last seven years is that many taxpayers have
difficulty providing the minimal information currently required by the
regulations to be included in the CDP hearing request. Based on this
experience, and because of the detailed information required by Forms
433-A or B and 656, we do not believe taxpayers realistically will be
able to submit these completed forms within the 30-day period for
requesting a CDP hearing.
There are also limits under sections 6320 and 6330 on the authority of
the IRS to require through regulations that these forms be submitted as
part of the CDP hearing request. The CDP regulations could be amended
to impose this requirement but the regulations could not provide that
the failure to provide this information would prevent the taxpayer from
receiving a CDP hearing, even if the taxpayer is only seeking a
collection alternative. Section 6330(c)(2)(A) gives taxpayers the
unqualified right to submit collection alternatives, such as an
installment agreement or OIC, during the CDP hearing. In addition, the
CDP statutory provisions, as currently written, require Appeals to do
more than consider a taxpayer's request for a collection alternative.
Appeals must verify that all legal and administrative procedural
requirements for the collection action have been satisfied and must
balance the government's need for efficient tax collection with the
taxpayer's legitimate concern that the collection action be no more
intrusive than necessary. Similarly, the CDP regulations cannot be
amended to require taxpayers seeking collection alternatives to file
all required tax returns as a condition to receiving a CDP
hearing.[Footnote 47] Congressional action would be required to permit
the IRS to deny a CDP hearing to taxpayers who fail to submit Form 433-
A or B, and where applicable Form 656, or who fail to file all required
tax returns.
Recommendation 2(b): Authorize Appeals to transfer OIC cases to one of
the Internal Revenue Service's two specialized Centralized Offer in
Compromise (COIC) processing units for investigation and evaluation
prior to consideration by Appeals.
The IRS is concerned that complete adoption of this recommendation
could delay Appeals in making a determination about the acceptability
of OICs during CDP hearings. The prevention of such delays is now
receiving renewed priority due to the newly-enacted amendment to
section 7122, which provides that an OIC is deemed accepted if not
rejected within 24 months of being submitted. For certain categories of
cases, the investigation and evaluation of an OIC by a COIC processing
unit or Collection Field function prior to Appeals consideration could
reduce the delay in the ultimate determination by Appeals about the
acceptability of an OIC.[Footnote 48] On the other hand, there are many
cases in which referral of an OIC to a COIC processing unit or Field
Collection for investigation and evaluation could lengthen the time it
would take Appeals to make a determination. Appeals and Collection will
continue to discuss this recommendation to determine how best to
achieve the proper balance between effectively allocating Appeals'
resources and preventing delay in making determinations about the
acceptability of OICs.
Recommendation 3: Establish responsibility for analyzing CDP appeal
case outcome data in order to determine whether revisions to the
hearing request form and program regulations will result in meeting
with their stated objective.
We agree with the third recommendation to establish responsibility for
analyzing future CDP case outcomes to determine whether proposed
revisions to the hearing request form, Form 12153, and proposed changes
to the CDP regulations will meet our objective of increasing efficiency
without compromising the quality and fairness of review.[Footnote 49]
The IRS is still in the process of determining the office responsible
for analyzing the effectiveness of these changes and expects the
assignment to be made in the near future.
The draft report also recommends that Congress consider amending the
CDP statutory provisions to remove eligibility for CDP appeal for
selected categories of taxpayers or cases. As you know, the Department
of the Treasury supports the enactment of the following three
legislative proposals designed to exclude or limit access of certain
taxpayers to the CDP hearing process.
First, Congress should enact legislation to curb frivolous submissions
and filings made to impede or delay tax administration by increasing
the fines for such actions and giving the IRS the authority to
disregard such submissions and filings.[Footnote 50] Taxpayers who
submit CDP hearing requests making only frivolous arguments or who are
otherwise attempting to delay collection should be denied a hearing.
Second, Congress should amend section 6330 to allow the IRS to levy on
payments to Federal contractors without first issuing a notice of the
right to a CDP hearing. Payments to Federal contractors would be
treated in the same manner as state tax refunds, with the taxpayer
having the right to a hearing after a levy is made.[Footnote 51]
Currently, Federal contractor payments are part of the Federal Payment
Levy Program {FPLP) and are subject to levy only after the contractor
has been given an opportunity for CDP hearing. This pre-levy hearing
right diminishes the effectiveness of the FPLP with respect to those
federal contractors who are able to receive payment before their
challenge to the proposed levy action can be resolved.
Third, Congress should amend section 6330 to permit levy to collect
Federal employment tax liabilities prior to issuing a notice of the
right to a hearing.[Footnote 52] Taxpayers owing employment tax
liabilities would be offered a post-levy CDP proceeding, treating them
in a manner similar to the current procedures applicable to levies
issued to collect a State tax refund. Employment taxes represent nearly
one-fifth of the IRS's total inventory of unpaid taxes. Frequently, an
employer that fails to satisfy its payroll tax liability for one period
will also fail to satisfy its ongoing employment tax liabilities for
successive periods, resulting in a "pyramiding" of unpaid taxes. As
your draft report emphasizes, pyramiding taxpayers make frequent use of
the CDP hearing process. The existing framework for CDP procedures
compounds the pyramiding problem by allowing these employers to
continue operating without meeting their Federal employment tax
obligations. For this reason, taxpayers with employment tax liabilities
should be afforded post-levy hearing opportunities.
[End of section]
Appendix III: GAO Contact and Staff Acknowledgments:
GAO Contact:
Michael Brostek, (202) 512-9110 or brostekm@gao.gov:
Acknowledgments:
In addition to the contact named above, Jonda Van Pelt, Assistant
Director; Carl Barden; Keira Dembowski; Evan Gilman; Shirley Jones;
Laurie King; Edward Nannenhorn; Bryan Rogowski; Ellen Rominger; Susan
Sato; Sam Scrutchins; and Michael Trujillo made key contributions to
this report.
FOOTNOTES
[1] Pub. L. No. 105-206, 112 Stat. 685 (July 22, 1998).
[2] The State Income Tax Levy Program (SITLP) matches a master file
database of delinquent taxpayers eligible to be levied against a
database of state tax refunds for each state participating in SITLP.
The Federal Payment Levy Program interfaces with the Treasury Offset
Program as a means for IRS to collect delinquent taxes by levying
federal payments disbursed or administered through Treasury's Financial
Management Service.
[3] When taxpayers are unable to pay their tax liabilities in a single
payment, IRS and taxpayers can enter into IAs that allow the taxpayers
to pay their outstanding liabilities over time, generally through equal
monthly payments.
[4] When taxpayers are unable to fully pay their tax liabilities, they
can request OICs from IRS to pay what they can afford. IRS writes off
the rest of the liability. In 2005, IRS wrote off about $1 billion
associated with OICs. See GAO, IRS Offers in Compromise: Performance
Has Been Mixed;
Better Management Information and Simplification Could Improve the
Program, GAO-06-525 (Washington, D.C.: Apr. 20, 2006).
[5] Collection is responsible for collecting unpaid tax liabilities
from taxpayers that have balances due to IRS.
[6] To measure the relative standard error associated with median
values, we divided the standard error of the median by the median and
multiplied by 100 to get a percentage.
[7] Percentages cited in this paragraph indicate the portion of cases
that exhibited each specific characteristic. However, cases could
include multiple characteristics, so these categories are not mutually
exclusive. As a result, the percentages do not add to 100 percent.
[8] Senate Committee on Finance Report, S. Rep. 105-174, April 22,
1998, p. 67.
[9] A federal tax lien arises upon the taxpayer's failure to pay tax
liabilities after a demand for payment and attaches to all of the
taxpayer's property, I.R.C. § 6321.
[10] Levies are issued under IRS's authority to seize delinquent
taxpayers' assets, I.R.C. § 6331.
[11] ACS is a computerized system that maintains balance due accounts
and return delinquency investigations. With some exceptions, balance
due accounts and return delinquency investigations are sent to ACS at
the conclusion of normal collection notice routines. Examples of
exceptions, which are available for assignment to the Field Collection
area, include complex cases, "high-risk" cases, and high-dollar cases.
[12] The Alaska PFD Program matches a master file database of
delinquent taxpayers against a database of PFD applicants. PFD is
provided to eligible Alaska residents and is the result of the state's
oil wealth investment, which belongs to all residents of the state of
Alaska.
[13] A statutory notice of deficiency is IRS's determination of a
taxpayer's income, estate, gift, or certain excise tax deficiencies
sent to the taxpayer by certified or registered mail. The notice of
deficiency consists of a letter explaining the purpose of the notice,
the amount of the deficiency and the taxpayer's options, a waiver if
the taxpayer should decide to agree to the additional tax liability, a
statement showing how the deficiency was computed, and an explanation
of the adjustments. A taxpayer that does not agree with the adjustments
may file a petition with the U.S. Tax Court within 90 days of the
notice date.
[14] IRS can classify an account as Currently Not Collectible if the
taxpayer cannot be located or contacted, payment would cause
significant financial hardship to the taxpayer, the taxpayer is
bankrupt, a business taxpayer no longer exists, or an individual
taxpayer is deceased.
[15] The Restructuring Act requires Appeals to verify that the
requirements of any applicable law or administrative procedure have
been met. In conjunction with this, Appeals will verify that an
assessment was made in accordance with I.R.C. § 6201, that a notice and
demand for payment was issued to the taxpayer in accordance with I.R.C.
§ 6303, and that a balance due existed at the time the lien was filed
or the CDP levy notice was issued. Appeals will also verify that other
pre-lien/levy requirements were met.
[16] IRS has published detailed guidance on 39 different types of
frivolous arguments that IRS will not accept. This guidance includes a
section specifically devoted to frivolous arguments prevalent in CDP
cases. See "The Truth About Frivolous Arguments" available on IRS's
Internet site, [Hyperlink, http://www.irs.gov/pub/irs-
utl/friv_tax.pdf].
[17] 70 Fed. Reg. 54681, September 16, 2005.
[18] Prior to the Restructuring Act, taxpayers could be designated in
the IRS master file and other records as illegal tax protesters when
their tax returns or other correspondence with IRS contained certain
specific indicators of noncompliance with the tax laws, such as the use
of arguments that had been repeatedly rejected by the courts.
[19] We are 95 percent confident that the true value would be between
50 percent and 73 percent.
[20] We are 95 percent confident that the true value would be between
45 percent and 67 percent.
[21] We are 95 percent confident that the true value would be between
19 percent and 49 percent.
[22] We are 95 percent confident that the true value would be between
12 percent and 39 percent.
[23] We are 95 percent confident that the true value would be between
23 percent and 53 percent.
[24] We are 95 percent confident that the true value would be between
12 percent and 39 percent.
[25] We are 95 percent confident that the true value would be between 6
percent and 34 percent.
[26] We are 95 percent confident that the true value would be between 3
percent and 27 percent.
[27] The median, the midpoint in a series of numbers, was selected to
represent the typical amount of contact initiated by IRS, the taxpayer,
or both, because the total amount of contacts varied greatly among
taxpayers. All medians based upon the results of our sample have a
relative standard error of less than 30 percent unless otherwise
stated.
[28] IRS may issue lien and levy notices simultaneously on the same
liability amounts and tax periods to a taxpayer.
[29] When issuing a lien or levy notice, IRS may include multiple
delinquent tax periods in one notice. As a result, taxpayers may appeal
the lien or levy on not just one but several delinquent periods.
Individuals file returns and pay their income taxes on an annual basis,
so the tax period is a calendar year. Businesses file returns and pay
employment taxes on a quarterly basis, or a tax period of 3 months.
Unemployment taxes are also paid on a quarterly basis unless the amount
due is less than $500, in which case unemployment taxes may be paid
annually.
[30] Like attorneys and CPAs, an enrolled agent is an individual who
has earned the privilege of practicing, or representing taxpayers,
before IRS. To become an enrolled agent, a person must demonstrate
technical expertise with tax matters by either passing a written
examination or through past service and technical experience with IRS.
[31] AGI is defined as the sum of total income less certain types of
allowed expense deductions, such as moving expenses, alimony, or
student loan interest expenses. Negative AGI indicates taxpayers whose
reported deductions exceeded their total income.
[32] This includes both taxpayers that were completely nonresponsive to
all attempts at contact by Appeals as well as taxpayers that may have
responded initially to Appeals, but in whose final case determination
Appeals cited overall taxpayer nonresponsiveness as one of the deciding
factors.
[33] We are 95 percent confident the true value would be between 265
and 363 days.
[34] The seven cases are presented as descriptive information, not an
inferential statistic. The sample size is not large enough to project
this result.
[35] We are 95 percent confident that the true value is between 40
percent and 53 percent.
[36] We are 95 percent confident that the true value is between 17
percent and 35 percent.
[37] Montgomery v. Commissioner, 122 T.C. 1 (2004).
[38] GAO, Financial Management: Some DOD Contractors Abuse the Federal
Tax System with Little Consequence, GAO-04-95 (Washington, D.C.: Feb.
12, 2004). See also GAO, Financial Management: Thousands of Civilian
Agency Contractors Abuse the Federal Tax System with Little
Consequence, GAO-05-637 (Washington, D.C.: June 16, 2005).
[39] The Restructuring Act does not specifically address this issue.
However, the statute as currently written permits taxpayers to submit
collection alternatives, such as an IA or OIC, during the CDP hearing.
In addition, Appeals is required to do more than consider a taxpayer's
request for a collection alternative during the CDP hearing. Appeals
must verify that all legal and administrative requirements have been
satisfied and must balance the government's need for efficient tax
collection with the taxpayer's legitimate concern that the collection
action be no more intrusive than necessary. Therefore, IRS believes
that where a taxpayer raises no other allowable arguments to the lien
filing or levy except a collection alternative, IRS may not
administratively require that taxpayer to comply with the same basic
eligibility requirements that are imposed on non-CDP taxpayers before
the case can be forwarded to Appeals for review of its acceptability.
[40] The relative standard error for this estimate is 47 percent.
[41] GAO, Tax Administration: Opportunities to Improve Compliance
Decisions and Service to Taxpayers through Enhancements to Appeals'
Feedback Project, GAO-06-396 (Washington, D.C.: Mar. 24, 2006).
[42] I.R.C. § 6201.
[43] I.R.C. § 6303.
[44] ACS is a computerized system that maintains balance due accounts
and return delinquency investigations. With some exceptions, balance
due accounts and return delinquency investigations are issued to ACS at
the conclusion of normal service center notice routines. Examples of
exception cases, which are available for assignment to the Field
Collection area, include complex, "high-risk," and high-dollar cases.
[45] ICS is a computerized system that maintains balance due accounts
and return delinquency investigations for cases that have been assigned
to Field Collection.
[46] Although Form 9465, Installment Agreement Request, is available
for taxpayers to request payment of tax liabilities in installments, it
is not required.
[47] As you highlight in your draft report, the IRS will not consider a
collection alternative unless a taxpayer has filed all returns required
to be filed on or before the date the alternative is submitted.
[48] For example, under current procedures, the Collection Field
function assists Appeals in investigating and evaluating OICs in which
the taxpayer's financial information is complex.
[49] The proposed regulations have not become final and the revised
form has not yet been issued.
[50] This legislative proposal was part of the Administration's Fiscal
Year 2006 Revenue Proposals.
[51] This amendment was recommended in an October, 2004 report by the
Federal Contractor Tax Compliance Task Force to the Permanent
Subcommittee on Investigations of the Senate Committee on Homeland
Security & Government Affairs.
[52] This legislative proposal was part of the Administration's Fiscal
Year 2007 Revenue Proposals.
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