Tax Administration: Little Evidence of Procedural Errors in
Collection Due Process Appeal Cases, but Opportunities Exist to
Improve the Program (06-OCT-06, GAO-07-112).
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.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-07-112
ACCNO: A61945
TITLE: Tax Administration: Little Evidence of Procedural Errors
in Collection Due Process Appeal Cases, but Opportunities Exist
to Improve the Program
DATE: 10/06/2006
SUBJECT: Appeals
Debt collection
Federal taxes
Program evaluation
Program management
Strategic planning
Tax administration
Tax law
Taxpayers
Liens
Policies and procedures
******************************************************************
** This file contains an ASCII representation of the text of a **
** GAO Product. **
** **
** No attempt has been made to display graphic images, although **
** figure captions are reproduced. Tables are included, but **
** may not resemble those in the printed version. **
** **
** Please see the PDF (Portable Document Format) file, when **
** available, for a complete electronic file of the printed **
** document's contents. **
** **
******************************************************************
GAO-07-112
* Results in Brief
* Background
* CDP Appeals Identified Few Errors by Collection, but Some Ta
* Appeals Rarely Found Evidence of Procedural Errors by Collec
* Appeals Upheld the Majority of Liens and Levies, Often Becau
* The Majority of Taxpayers Raised the Same Arguments with Bot
* Most Taxpayers Raised Permissible Arguments, but Some Presen
* In Cases Where Taxpayers Raised the Same Arguments in Appeal
* IRS Initiated Communication with CDP Taxpayers Multiple Time
* Both Individuals and Businesses Used CDP, but Case Character
* Most Taxpayers That Requested CDP Appeal Were Individuals, a
* Businesses with Employment Tax Liabilities Had More Delinque
* Most Individuals Were Lower-Income Taxpayers with Varied Lia
* Appeals Devoted Many Staff Hours to Resolving CDP Cases That
* Concerns about Certain Types of CDP Cases
* Changing the CDP Process Could Free Up a Significant Amount
* IRS Has Taken Some Steps to Improve the CDP Program
* 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
* GAO Contact
* Acknowledgments
* Order by Mail or Phone
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
GAO-07-112
Contents
Letter 1
Results in Brief 3
Background 8
CDP Appeals Identified Few Errors by Collection, but Some Taxpayers
Received a Different Outcome 12
The Majority of Taxpayers Raised the Same Arguments with Both Collection
and Appeals, Received the Same Determination, and Had Multiple Contacts
with IRS 16
Both Individuals and Businesses Used CDP, but Case Characteristics Varied
22
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 26
Conclusions 33
Recommendations for Executive Action 34
Matters for Congressional Consideration 34
Agency Comments and Our Evaluation 35
Appendix I Objectives, Scope, and Methodology 37
Appendix II Comments from the Internal Revenue Service 43
Appendix III GAO Contact and Staff Acknowledgments 49
Tables
Table 1: Reasons Why Appeals Upheld the Lien Filing or Levy for Cases
Closed in Fiscal Year 2004 15
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 18
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 20
Table 4: Type of Taxpayer Requesting CDP Appeal for Cases Closed in Fiscal
Year 2004 22
Table 5: Average and Range of Number of Delinquent Tax Periods by Type of
Tax Liability 24
Table 6: Estimated Median of Total Liability by Type of Tax Liability in
CDP for Cases Closed in Fiscal Year 2004 24
Table 7: Estimated Adjusted Gross Income Level versus Median Tax Liability
for Individual Taxpayers Requesting CDP Appeal for Cases Closed in Fiscal
Year 2004 25
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 32
Table 9: Confidence Intervals for Table 8-Average Number of Additional
Characteristics 41
Table 10: Confidence Intervals for Table 8-Direct Hours Worked by Appeals
41
Table 11: Confidence Intervals for Table 8-Salary Costs 42
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 4
Figure 2: CDP Cases Closed by Appeals, Fiscal Years 1999 through 2005 12
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
This is a work of the U.S. government and is not subject to copyright
protection in the United States. It may be reproduced and distributed in
its entirety without further permission from GAO. However, because this
work may contain copyrighted images or other material, permission from the
copyright holder may be necessary if you wish to reproduce this material
separately.
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)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,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)3 or
offer-in-compromise (OIC);4 or both.
1Pub. L. No. 105-206, 112 Stat. 685 (July 22, 1998).
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)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.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.)
2The 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.
3When 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.
4When 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).
5Collection is responsible for collecting unpaid tax liabilities from
taxpayers that have balances due to IRS.
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.
6To 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.
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
aWe are 95 percent confident that the true value would be between 1
percent and 6 percent.
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- 1/2 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)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.
7Percentages 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.
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.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.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.10 Lien or levy
notices may be issued by IRS's Automated Collection System (ACS) or
Collection Field Function (Field Collection).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.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.
8Senate Committee on Finance Report, S. Rep. 105-174, April 22, 1998, p.
67.
9A 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. S: 6321.
10Levies are issued under IRS's authority to seize delinquent taxpayers'
assets, I.R.C. S: 6331.
11ACS 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.
12The 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.
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 deficiency13 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.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.
13A 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.
14IRS 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.
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
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,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.
15The 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. S: 6201, that a notice and demand for payment was
issued to the taxpayer in accordance with I.R.C. S: 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.
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 Percentage of CDP casesa
Noncompliance in filing, payment, or both 46b
Amount of the liability was not in question 38c
No response from taxpayer 30d
Source: GAO analysis of IRS data.
aPercentages do not add up to 100 percent because the categories are not
mutually exclusive.
bWe are 95 percent confident that the true value would be between 38
percent and 55 percent.
cWe are 95 percent confident that the true value would be between 30
percent and 47 percent.
dWe are 95 percent confident that the true value would be between 22
percent and 39 percent.
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.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.
16IRS 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,
http://www.irs.gov/pub/irs-utl/friv_tax.pdf.
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.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.18
1770 Fed. Reg. 54681, September 16, 2005.
18Prior 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.
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
Percentage of cases
where Appeals reached
Raised in both Collection same conclusion as
and Appeals Collection
Arguments raised by
taxpayer permitted by the Percentage of Number of Number of
Restructuring Act all CDP cases taxpayers Percentage taxpayers
Offer-in-compromise 31 10,075 88a 8,835
Existence of the liability 37 11,780 89b 10,540
Installment agreement 27 8,680 84c 7,285
Appropriateness of the 26 8,525 83d 8,370
lien filing or levy
Innocent spousee - - - -
All arguments permitted by 89 28,676 81 23,251
the Restructuring Act
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.
aWe are 95 percent confident that the true value would be between 77
percent and 95 percent.
bWe are 95 percent confident that the true value would be between 80
percent and 95 percent.
cWe are 95 percent confident that the true value would be between 72
percent and 92 percent.
dWe are 95 percent confident that the true value would be between 72
percent and 91 percent.
eResults are not shown for innocent spouse arguments because of the small
number of cases with this characteristic.
More than half of the taxpayers that requested an IA (about 61 percent)19
or OIC (about 56 percent)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
percent21 of these taxpayers, and an estimated 24 percent22 provided the
form. Appeals also requested supporting financial documents from an
estimated 37 percent23 of these taxpayers, and an estimated 24 percent24
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 percent25 of these cases the
taxpayer provided different information to Appeals than to Collection. In
addition, in an estimated 11 percent26 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.
19We are 95 percent confident that the true value would be between 50
percent and 73 percent.
20We are 95 percent confident that the true value would be between 45
percent and 67 percent.
21We are 95 percent confident that the true value would be between 19
percent and 49 percent.
22We are 95 percent confident that the true value would be between 12
percent and 39 percent.
23We are 95 percent confident that the true value would be between 23
percent and 53 percent.
24We are 95 percent confident that the true value would be between 12
percent and 39 percent.
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 3.2.27 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-initiated Taxpayer-initiated
IRS area Total contacts contacts contacts
Collection 4.6 2.9 1.2
Appeals 6.6 3.5 1.5
Source: GAO analysis of IRS data.
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.
25We are 95 percent confident that the true value would be between 6
percent and 34 percent.
26We are 95 percent confident that the true value would be between 3
percent and 27 percent.
27The 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.
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
Estimated percentage of
Type of taxpayer based on Type of liability population requesting CDP
income reporting requirement appealed in CDP appeal
All individual 87
Individual Incomea 79
Individual Trust fund recovery 8
penaltyb
All businessc Employment and 13
unemployment
Total 100
Source: GAO analysis of IRS data.
aIncludes 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.
bTrust 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.
cIncludes 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.
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 periods28 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.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- 1/2 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- 1/2 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.
28IRS may issue lien and levy notices simultaneously on the same liability
amounts and tax periods to a taxpayer.
29When 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.
Table 5: Average and Range of Number of Delinquent Tax Periods by Type of
Tax Liability
Number of delinquent tax periods
Range
Type of tax liability Estimated average Minimum Maximum
Employment (quarterly) 5.7a 1 26
Unemployment (quarterly) 2.0b 1 8
Trust fund recovery penalty (quarterly) 3.3c 1 9
Individual (annual) 2.6d 1 9
Source: GAO analysis of IRS data.
aWe are 95 percent confident that the true value would be between 3.6 and
7.8 periods.
bWe are 95 percent confident that the true value would be between 0.8 and
3.2 periods.
cWe are 95 percent confident that the true value would be between 1.8 and
4.8 periods.
dWe are 95 percent confident that the true value would be between 2.3 and
2.9 periods.
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 Total median liability (dollars)
Trust fund recovery penalty $44,941
Employment 30,403a
Individual 12,916
Unemployment 1,237b
Source: GAO analysis of IRS data.
aThe relative standard error for this estimate is 38 percent.
bThe relative standard error for this estimate is 46 percent.
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,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)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 Percentage of taxpayers Median tax liability
level (dollars) requesting CDPa (dollars)
Zero or negative (under 3 44,941b
$1)
$1 to $25,000 26 7,935
$25,001 to $50,000 25 15,278
$50,001 to $75,000 15 8,415
$75,001 to $100,000 7 15,224c
$100,001 to $300,000 12 32,835
Over $300,001d - -
Source: GAO analysis of IRS data.
aDoes not total to 100 percent because of exclusion of cases where data
were unavailable.
bThe relative standard error for this estimate is 38 percent.
30Like 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.
31AGI 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.
cThe relative standard error for this estimate is 41 percent.
dThe relative standard error was greater than 50 percent.
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.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 days33 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.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.
32This 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.
33We are 95 percent confident the true value would be between 265 and 363
days.
34The seven cases are presented as descriptive information, not an
inferential statistic. The sample size is not large enough to project this
result.
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 2004.35 Of these taxpayers,
nearly one-quarter raised the existence of the liability issue during
their CDP appeals.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.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.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- 1/2
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- 1/2 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.
35We are 95 percent confident that the true value is between 40 percent
and 53 percent.
36We are 95 percent confident that the true value is between 17 percent
and 35 percent.
37Montgomery v. Commissioner, 122 T.C. 1 (2004).
38GAO, 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).
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.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.
39The 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.
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 $36,000,40 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.)
40The relative standard error for this estimate is 47 percent.
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
Direct
hours
Average number worked Percentage
Selected characteristics of of additional by Salary of CDP
CDP case characteristics Appeals costs caseloada
Frivolous argumentsb 0.75 - - 4
Nonresponsive to Appeals 1.24 45,571 1,308,343 20
Self-reported liabilities 1.13 135,203 3,881,678 47
Existence of the liability 1.09 110,441 3,170,761 38
questioned by taxpayer
Employment/unemployment taxes 1.89 34,140 980,159 13
OIC raised by noncompliant 1.60 63,474 1,822,339 23
taxpayer
IA raised by noncompliant 1.91 58,437 1,677,726 21
taxpayer
Total liability less than 1.43 7,440 213,602 3
$500
Source: GAO analysis of IRS data.
aPercentages do not add up to 100 percent because the categories are not
mutually exclusive.
bResults are not shown for frivolous arguments because of the small number
and large variability in cases with this characteristic.
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
o 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;
o 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
o 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 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
[email protected] . 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.
Michael Brostek
Director, Tax Issues Strategic Issues Team
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.1 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;2 (2) a notice and demand
for payment was issued to the taxpayer;3 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.4 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).5 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
Confidence
intervals
Average number of
additional Lower Upper
Selected characteristics of CDP case characteristics bound bound
Frivolous arguments 0.75 0.20 1.30
Nonresponsive to Appeals 1.24 0.93 1.55
Self-reported liabilities 1.13 0.93 1.33
Existence of the liability questioned by 1.09 0.88 1.30
taxpayer
Employment/unemployment taxes 1.89 1.57 2.21
OIC raised by noncompliant taxpayer 1.60 1.32 1.88
IA raised by noncompliant taxpayer 1.91 1.65 2.17
Total liability less than $500 1.43 0.97 1.89
Source: GAO analysis of IRS data.
Table 10: Confidence Intervals for Table 8-Direct Hours Worked by
Appeals
Confidence intervals
Direct hours
worked by
Selected characteristics of CDP case Appeals Lower bound Upper bound
Frivolous argumentsa - - -
Nonresponsive to Appeals 45,600 30,900 60,200
Self-reported liabilities 135,200 107,700 162,700
Existence of the liability questioned 110,400 87,000 133,900
by taxpayer
Employment/unemployment taxes 34,100 20,200 48,100
OIC raised by noncompliant taxpayer 63,500 44,200 82,800
IA raised by noncompliant taxpayer 58,400 39,100 77,800
Total liability less than $500 7,400 200 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.
aBecause of the wide variation in hours per case, the estimates
for total direct hours and related confidence intervals are not
projectable.
Table 11: Confidence Intervals for Table 8--Salary Costs
Confidence intervalsb
Selected characteristics of CDP case Salary costsa Lower bound Upper bound
Frivolous argumentsc - - -
Nonresponsive to Appeals $1,308,000 $888,000 $1,729,000
Self-reported liabilities 3,882,000 3,092,000 4,671,000
Existence of the liability 3,171,000 2,496,000 3,846,000
questioned by taxpayer
Employment/unemployment taxes 980,000 579,000 1,381,000
OIC raised by noncompliant taxpayer 1,822,000 1,269,000 2,376,000
IA raised by noncompliant taxpayer 1,678,000 1,122,000 2,233,000
Total liability less than $500 214,000 6,000 421,000
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.
aSalary 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.
bConfidence 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.
cBecause of the wide variation in hours per case, the estimates
for salary costs and related confidence intervals are not
projectable.
Appendix II: Comments from the Internal Revenue Service
Appendix III: GAO Contact and Staff Acknowledgments
GAO Contact
Michael Brostek, (202) 512-9110 or [email protected]
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.
GAO�s Mission
The Government Accountability Office, the audit, evaluation and
investigative arm of Congress, exists to support Congress in
meeting its constitutional responsibilities and to help improve
the performance and accountability of the federal government for
the American people. GAO examines the use of public funds;
evaluates federal programs and policies; and provides analyses,
recommendations, and other assistance to help Congress make
informed oversight, policy, and funding decisions. GAO's
commitment to good government is reflected in its core values of
accountability, integrity, and reliability.
Obtaining Copies of GAO Reports and Testimony
The fastest and easiest way to obtain copies of GAO documents at
no cost is through GAO's Web site ( www.gao.gov ). Each weekday,
GAO posts newly released reports, testimony, and correspondence on
its Web site. To have GAO e-mail you a list of newly posted
products every afternoon, go to www.gao.gov and select "Subscribe
to Updates."
Order by Mail or Phone
The first copy of each printed report is free. Additional copies
are $2 each. A check or money order should be made out to the
Superintendent of Documents. GAO also accepts VISA and Mastercard.
Orders for 100 or more copies mailed to a single address are
discounted 25 percent. Orders should be sent to:
U.S. Government Accountability Office 441 G Street NW, Room LM
Washington, D.C. 20548
To order by Phone: Voice: (202) 512-6000 TDD: (202) 512-2537 Fax:
(202) 512-6061
To Report Fraud, Waste, and Abuse in Federal Programs
Contact:
Web site: www.gao.gov/fraudnet/fraudnet.htm E-mail:
[email protected] Automated answering system: (800) 424-5454 or
(202) 512-7470
Congressional Relations
Gloria Jarmon, Managing Director, [email protected] (202) 512-4400
U.S. Government Accountability Office, 441 G Street NW, Room 7125
Washington, D.C. 20548
Public Affairs
Paul Anderson, Managing Director, [email protected] (202)
512-4800 U.S. Government Accountability Office, 441 G Street NW,
Room 7149 Washington, D.C. 20548
1GAO, 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).
2I.R.C. S: 6201.
3I.R.C. S: 6303.
4ACS 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.
5ICS is a computerized system that maintains balance due accounts and
return delinquency investigations for cases that have been assigned to
Field Collection.
(450369)
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
[email protected].
Highlights of GAO-07-112 , a report to the Committee on Finance, U.S.
Senate
October2006
TAX ADMINISTRATION
Little Evidence of Procedural Errors in Collection Due Process Appeal
Cases, but Opportunities Exist to Improve the Program
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 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.
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.
Estimated Percentage of CDP Cases in Which Appeals Found an Improper or
Proper Collection Action, by Type of Appeal Outcome
*** End of document. ***