United States. Congress. House. Committee on Ways.

Problems with Internal Revenue Service communications with taxpayers and collection of tax debts : hearing before the Subcommittee on Oversight of the Committee on Ways and Means, House of Representatives, One Hundred Third Congress, fi online

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^ 'ROBLEMS WITH INTERNAL REVENUE SERVICE
COMMUNICATIONS WITH TAXPAYERS AND
COLLECTION OF TAX DEBTS



Y 4, W 36; 103-71

Problens uith lutersal Revenues Ser.



ilNG



BEFORE THE

SUBCOMMITTEE ON OVERSIGHT

OF THE

COMMITTEE ON WAYS AND MEANS
HOUSE OF REPRESENTATIVES

ONE HUNDRED THIRD CONGRESS

FIRST SESSION



NOVEMBER 9, 1993



Serial 103-71



Printed for the use of the Committee on Ways and Means



AUG 1 1 wg^i I

U.S. GOVERNMENT PRINTING OFFICE
79-610 CC WASHINGTON : 1994




For sale by the U.S. Govemment Printing Office
Superintendent of Documents, Congressional Sales Office, Washington, DC 20402
ISBN 0-16-04A520-5



u



'ROBLEMS WITH INTERNAL REVENUE SERVICE
COMMUNICATIONS WITH TAXPAYERS AND
COLLECTION OF TAX DEBTS



Y 4, W 36; 103-71

Problens uith Interual Revenues Ser...



iING



BEFORE THE

SUBCOMMITTEE ON OVERSIGHT

OF THE

COMMITTEE ON WAYS AND MEANS
HOUSE OF REPRESENTATIVES

ONE HUNDRED THIRD CONGRESS

FIRST SESSION



NOVEMBER 9, 1993



Serial 103-71



Printed for the use of the Committee on Ways and Means







AUG 1 1 199*1 i

8UST(j^4r'(ibaULJtiWAgV



U.S. GOVERNMENT PRINTING OFFICE
79-610 CC WASHINGTON : 1994



For sale by the U.S. Govemment Printing Office
Supenntendent of Documents. Congressional Sales Office. Washington, DC 20402
ISBN 0-16-044520-5



COMMITTEE ON WAYS AND MEANS
DAN ROSTENKOWSKI, Illinois, Chairman



SAM M. GIBBONS, Florida
J.J. PICKLE, Texas
CHARLES B. RANGEL, New York
FORTNEY PETE STARK, California
ANDY JACOBS, Jr., Indiana
HAROLD E. FORD, Tennessee
ROBERT T. MATSUI, California
BARBARA B. KENNELLY, Connecticut
WILLIAM J. COYNE, Pennsylvania
MICHAEL A. ANDREWS, Texas
SANDER M. LEVIN, Michigan
BENJAMIN L. CARDIN, Maryland
JIM McDERMOTT, Washington
GERALD D. KLECZKA, Wisconsin
JOHN LEWIS, Georgia
L.F. PAYNE, Virginia
RICHARD E. NEAL, Massachusetts
PETER HOAGLAND, Nebraska
MICHAEL R. McNULTY, New York
MIKE KOPETSKI, Oregon
WILLIAM J. JEFFERSON, Louisiana
BILL K. BREWSTER, Oklahoma
MEL REYNOLDS, Illinois



BILL ARCHER, Texas
PHILIP M. CRANE, Ilhnois
BILL THOMAS, Cahfomia
E. CLAY SHAW, Jr., Florida
DON SUNDQUIST, Tennessee
NANCY L. JOHNSON, Connecticut
JIM BUNNING, Kentucky
FRED GRANDY, Iowa
AMO HOUGHTON, New York
WALLY HERGER, California
JIM McCRERY, Louisiana
MEL HANCOCK, Missouri
RICK SANTORUM, Pennsylvania
DAVE CAMP, Michigan



Janice Mays, Chief Counsel and Staff Director
Charles M. Brain, Assistant Staff Director
Phillip D. Moseley, Minority Chief of Staff



Subcommittee on Oversight

J.J. PICKLE, Texas, Chairman



HAROLD E. FORD, Tennessee
CHARLES B. RANGEL, New York
WILLIAM J. JEFFERSON, Louisiana
BILL K. BREWSTER, Oklahoma
GERALD D. KLECZKA, Wisconsin
JOHN LEWIS, Georgia



AMO HOUGHTON, New York
WALLY HERGER, California
MEL HANCOCK, Missouri
RICK SANTORUM, Pennsylvania



(II)



CONTENTS



Page
Press release of Thursday, November 4, 1993, announcing the hearing 2

WITNESSES

U.S. General Accounting Office, General Government Division, Tax Policy
and Administration Issues, Jennie S. Stathis, Director, David Attianese,
Assistant Director, Charlie W. Daniel, Assignment Manager, and Thomas
Venezia, Assignment Manager, Chicago Regional Office 5

(in;



PROBLEMS WITH INTERNAL REVENUE SERV-
ICE COMMUNICATIONS WITH TAXPAYERS
AND COLLECTION OF TAX DEBTS



TUESDAY, NOVEMBER 9, 1993

House of Representatives,
Committee on Ways and Means,

Subcommittee on Oversight,

Washington, D.C.
The subcommittee met, pursuant to call, at 10:05 a.m., in room
B-318, Raybum House Office Building, Hon. J.J. Pickle (chairman
of the subcommittee) presiding.

[The press release announcing the hearing follows:]



(1)



FOR IMMEDIATE RELEASE
THURSDAY, NOVEMBER 4, 1993



PRESS RELEASE #17
SUBCOMMITTEE ON OVERSIGHT
COMMITTEE ON WAYS AND MEANS
U.S. HOUSE OF REPRESENTATIVES
1135 LONGWORTH HOUSE OFFICE BLDG.
WASHINGTON, D.C. 20515
TELEPHONE: (202) 225-5522



THE HONORABLE J. J. PICKLE (D. , TEXAS), CHAIRMAN,

SUBCOMMITTEE ON OVERSIGHT, COMMITTEE ON WAYS AND MEANS,

U.S. HOUSE OF REPRESENTATIVES,

ANNOUNCES A HEARING ON PROBLEMS WITH INTERNAL REVENUE SERVICE

COMMUNICATIONS WITH TAXPAYERS AND COLLECTION OF TAX DEBTS

The Honorable J. J. Pickle (D., Texas), Chairman, Subcommittee on
Oversight, Committee on Ways and Means, U. S. House of Representatives,
announced today that the Subcommittee will hold a hearing to review
issues contained in six recent U.S. General Accounting (GAO) reports to
the Subcommittee concerning problems with Internal Revenue Service (IRS)
communications with taxpayers and collection of tax debts. The hearing
will be held on Tuesday, November 9, 1993, beginning at 10:00 a.m., in
room B-318 Rayburn House Office Building. The Subcommittee will receive
testimony from representatives of GAO.

In announcing the hearing. Chairman Pickle stated, "More people have
contact with IRS than with any other agency of the Federal Government.
Therefore, it is imperative that IRS communications with taxpayers are
clear, accurate and timely. Too often taxpayers encounter confusing or
inaccurate forms and notices from IRS, or are unable to get timely or
accurate tax assistance from IRS over the telephone. This situation
undermines public confidence in the competence of IRS and the fairness of
our tax system.

"With respect to collecting overdue taxes, IRS is facing a growing
crisis. The IRS accounts receivable inventory is currently $131 billion
and continues to grow, while IRS collections from cases in the inventory
has declined. Further, in some cases, IRS collection practices are not
equitable or consistent throughout the country. Too often taxpayers do
not personally talk to an IRS employee until after an enforced collection
action has taken place. F^irther, IRS decisions on who should be subject
to a collection action and the terms of resulting payment agreements are
not uniform nationwide. We must ensure that IRS collection operations
are fair and consistent in order to maintain the public trust and
increase voluntary compliance with our tax laws."

During the hearing, GAO will discuss issues raised in the following
six reports to the Subcommittee:

TAX ADMINISTRATION; Selected IRS Forms, Publications, and Notices Could
Be Improved (GAO/GGD-93-72) (April, 1993) Highlights the need for changes
to several of the most frequently used IRS forms and notices to improve
their clarity and usefulness.

TAX ADMINISTRATION: IRS Correspondence Needs To Continue Improving
(GAO/GGD-93-XX) (November, 1993) Highlights problems stemming from the
fact that more than half of the interim correspondence IRS sends to
taxpayers prior to making a final tax determination, is confusing,
inaccurate or inappropriate.

TAX ADMINISTRATION: Successful 1993 Filing Season Clouded By Increased
Fraud and Poor Taxpayer Access to IRS (GAO/GGD-93-XX) (November, 1993)
Highlights problems encountered during the most recent filing season,
including the decreasing availability of IRS telephone assistance for
taxpayers, and a decreasing level of voluntary compliance as evidenced by
the decline in the number of individual tax returns filed.



TAX ADMINISTRATION: New Delinquent Tax Collection Methods for IRS
(GAO/GGD-93-67) (May, 1993) Highlights inefficiencies in IRS collections
operations, noting that IRS follows a rigid three-stage collection
process which includes a series of notices over a six-month period and
levies on taxpayer funds before taxpayers are ever contacted personally,
for example by telephone, by IRS.



TAX ADMINISTRATION: Improved Staffing of IRS' Collection Function Would
Increase Productivity (GAO/GGD-93-97) (May, 1993) Highlights how staffing
imbalances in IRS district offices result in some districts pursuing a
broad range of small and large tax delinquencies, while in other
districts the same levels of tax delinquencies go uncollected.

TAX ADMINISTRATION: IRS Can Do More to Collect Taxes Labelled "Currently
Not Collectible" (GAO/GGD-94-2) (October, 1993) Highlights how the lack
of IRS guidelines for writing-off delinquent accounts as "currently not
collectible" results in allowing some taxpayers who earn more than
$70,000 annually to pay nothing toward their tax debt.

DETAILS FOR SDBKISSION OF WRITTEN COMMENTS ;

Persons submitting written comments for the printed record of
the hearing should submit six (6) copies by the close of
business, Friday, December 3, 1993, to Janice Mays, Chief Counsel
and Staff Director, Committee on Ways and Means, U.S. House of
Representatives, Room 1102 Longworth House Office Building,
Washington, D.C. 20515.

FORMATTING REQDIRBtENTS ;

Each jtateiTMnt prasanted for printin( to the Committae by a witness, any written statement or exhibit submitted
for the printed record or any written comments in response to a request for written comments must conform to the
guidelines listed below. Any statement or exhibit not in compliance with these guidelines will not be printed, but will be
maintained in the Committee flics for review and use by the Committee.

1. All statements and any accompanying exhibits for printing must be typed in single space on legal-siie paper
and may not exceed a total of 10 pages.

2. Copies of whoie documents submitted as exhibit material will not be accepted for printing Instead, exhibit
material should be referenced and quoted or paraphrased All exhibit material not meeting these specifications
will be maintained in the Committee Tiles for review and use by the Committee

3. Statements must contain the name and capacity in which the witness will appear or, for written comments,
the name and capacity of the person submitting the statement, as well as any clients or persons, or any
organization for wlwm the witness appears or for whom the statement is submitted.

4. A supplemental sheet must accompany each statement listing the name, full address, a telephone number
where the witness or the designated representative may be reached and a topical outline or summary of the
comments and recommendations in the full statement This supplemental sheet will not be included in the
printed record.

The above restrictions and limitations apply only to material being submitted for printing. Statements and exhibits
or supplenwntary material submitted solely for distribution to the Members, the press and the public during the course
of a public hearing may be submitted in other forms.

*****



Chairman PiCKLE. I would ask the subcommittee to please come
to order.

I have an opening statement and so does Mr. Houghton, and
then we will be glad to hear the statements from Ms. Stathis of the
GAO and any other experts who are here with us today. We are
glad to have all of you here.

Most, if not all, of the people in this room today have had some
personal contact with the Internal Revenue Service. This is true for
almost everyone in the country, unfortunately. Few look forward to
repeating their experience with IRS. Beyond just the pure "excite-
ment" of receiving a letter from the IRS and wondering if you are
going to have to pay more taxes, many face the very real dilemma
of trying to figure out what the IRS is talking about.

Too often taxpayers are faced with confusing or incomplete tax
forms and publications when attempting to file their tax returns.
When they write to IRS, the agency's response is inaccurate or in-
appropriate over half of the time. Even worse, when you try to call
IRS directly to straighten out the whole mess, you get a busy sig-
nal three out of four times.

In addition to the frustration of dealing with IRS bureaucracy,
there is the nagging suspicion that not everyone is paying their
taxes. IRS has an accounts receivable of over $131 billion. This
amount grows larger every year, so it is pretty clear that somebody
is not paying their taxes. And so we ask ourselves, what is IRS
doing to make sure that everybody pays their fair share? And the
answer is, not enough. In some cases, IRS has determined that tax-
payers with high incomes cannot afford to make payments on their
delinquent taxes, yet they have enough to pay for personal lux-
uries, and IRS allows it. Moreover, in some areas of the country,
IRS makes everyone pay their tax debts, while in other areas, large
delinquencies are all but ignored.

Over the past year and a half, the General Accounting Office
[GAO] has conducted extensive field investigations of the Internal
Revenue Service at the specific request of this committee. GAO's
testimony today provides a summary of the most important mat-
ters contained m these 16 different reports. IRS has taken positive
steps in reaction to GAO's findings and recommendations in some
cases; they have disagreed with GAO on other cases; and agreed
to implement some reiorms several years into the future. These are
serious problems that need action now. Taxpayers cannot wait sev-
eral years for better service. Before Congress adioums, this sub-
committee, I hope, will forward specific recommendations to the In-
ternal Revenue Service for their adoption or for their response in
some specific manner. We would expect the IRS to respond with
how and when they will take action to correct many of these prob-
lems.

Now the Chair will recognize Mr. Houghton. Mr. Houghton.

Mr. Houghton. Thank you, very much, Mr. Chairman.

Ladies and gentlemen, it's good to see you here today. I am
pleased to join Chairman Pickle in opening our hearing to consider
GAO reports and analyze the various IRS problems regarding tax-
payer communication.

The GAO, as you know far better than I, has completed more
than a dozen of these reports. They give a very detailed and nar-



row analysis of a variety of different issues. If you look at the re-

f)orts individually, they are interesting and very specific. But if you
ook at them collectively you can appreciate the overall message.
This is one of the things we are trying to do today, to take a look
at least at six of these reports and try to find out where we are
going; to step back a little and get a little perspective.

I used to be in business and I know that even a company with
a good product is going to falter if it has poor operational practices.
The only thing that I ask is that when we look at some of the er-
rors that have been made, as any human agency can make, that
we make sure that Congress has given the IRS the proper re-
sources to deal with the technical advances of today's world, specifi-
cally in the areas of taxpayer communication and collections.

Many of the GAO suggestions appear consistent with the Vice
President's plan of reinventing government. I hope they can be im-
plemented. I thank you very much for coming and look forward to
the testimony.

Chairman Pickle. We will now be glad to hear from the General
Accounting Office, and I presume, Ms. Stathis, you will make your
statement for GAO. Do these other individuals wish to have state-
ments or are they here to accompany you?

Ms. Stathis. No, they do not; they are here to help answer your
questions, Mr. Chairman.

Chairman Pickle. If you will proceed, then. Are you going to be
following your outline; your copy?

Ms. Stathis. I will be following it, moving around through it,
and I will tell you when I am moving to a new section.

Chairman Pickle. Grood, if you will do that, we are glad to have
you.

STATEMENT OF JENNIE S. STATHIS, DIRECTOR, GENERAL
GOVERNMENT DIVISION, TAX POLICY AND ADMINISTRATION
ISSUES, U.S. GENERAL ACCOUNTING OFFICE, ACCOMPANIED
BY DAVID ATTIANESE, ASSISTANT DIRECTOR, CHARLIE W.
DANIEL, ASSIGNMENT MANAGER, AND THOMAS VENEZIA,
ASSIGNMENT MANAGER, (CHICAGO REGIONAL OFFICE)

Ms. Stathis. On my left is David Attianese; on my right is Char-
lie Daniel; and, to his right, is Thomas Venezia from Chicago — the
other two are from Washington — and together they were respon-
sible for much of the work that we will be talking about today.

Chairman Pickle. Glad to have all of you.

Ms. Stathis. The first part of my statement focuses on collecting
tax debts.

The Federal Government has the opportunity to realize substan-
tial revenue from taxes already owed if IRS can more effectively
and efficiently carry out the process of collecting these debts.
Again, this year collection results were disappointing. Collection of
delinquent taxes declined from $24 billion to $23 billion.

At the end of fiscal year 1992, IRS' records show accounts receiv-
able totaling $131 billion. Of that amount, IRS estimated that $22
billion was collectible.

Now, moving to the next section, IRS needs to revisit some of the
accounts for which it has decided taxpayers cannot pay. The single
largest segment of accounts receivable is $52 billion in accounts



deemed "currently not collectible." District office staff now declare
more tax debts "currently not collectible" than they collect. Our re-
port to you on this topic is being released today. In that report, we
say that IRS is forgoing the potential to collect hundreds of mil-
lions of dollars because of poor work and poor performance.

We reviewed a sample of 107 of those accounts. We concluded the
actions taken were inadequate or at least questionable 55 percent
of the time. The more serious problem, in 12 percent of them, in-
volved failure to question living expenses and fully consider in-
come. The outcome is that some taxpayers who reported incomes
of more than $70,000 paid nothing toward their tax debts. And we
show two examples.

In the first one, married taxpayers with no dependents who
earned nearly $80,000 a year, owed $123,000 in back taxes. Their
financial statement showed expenses exceeding income by $275 a
month. IRS allowed as necessary expenses monthly life insurance
payments of $450 and over $900 in monthly payments on debts to
credit card companies and other creditors.

In the second example, married taxpayers with four dependents,
earning almost $80,000 a year, owed $75,000 in taxes. IRS allowed
a monthly mortgage expense of $1,800 and payments for two cars
totaling $950 as necessary and reasonable expenses.

Chairman PiCKLE. In either of those two cases, did they make
payments to the Internal Revenue Service?

Ms. Stathis, None.

Chairman PiCKLE. None.

Ms. Stathis. The collection staff have fairly vague guidance to
help make these decisions and their supervisors did not identify
and correct problems.

Now, the remainder of the "currently not collectible" decisions we
questioned were based on inadequate work or questionable, given
the available information, or did not fully provide for future collec-
tion potential.

In the first example IRS was not able to locate the taxpayer, but
the file indicated that the taxpayer had accounts with a number of
banks. These banks could have served as leads to locate the tax-
payer, but none were contacted for that purpose. The taxpayer
owed $130,000 in back taxes. His income exceeded expenses by
$115 a month. Instead of making an installment agreement, the
revenue officer closed the case as "currently not collectible."

A self-employed single taxpayer claimed living expenses that ex-
ceeded income by $670 a month. The file did not explain how that
could continue; but the case was simply closed as "currently not
collectible."

Chairman PiCKLE. And how much did they pay to the IRS?

Ms. Stathis. In all of these cases, they paid nothing. They were
closed as "currently not collectible."

Chairman Pickle. None.

Ms. Stathis. We also believe that IRS waits too long to follow
up on some cases. IRS puts a 65 week hold on reactivating ac-
counts. During this period, IRS does not review subsequent tax re-
turns.



We are making a number of recommendations in the report. IRS
has commented on the report and agreed, at least in principle, with
most of them.

Congress, too, may be able to influence the number of these
cases. Private firms measure collection success in terms of dollars
collected and a key premise is that incentives based on individual
performance motivate collectors. Tax law prohibits IRS from using
collection performance to evaluate, compensate or reward employ-
ees. Under IRS' evaluation system, accounts classified "currently
not collectible" are given the same weight as dollars collected. This
could have contributed to the growth in these accounts.

Congress, long concerned that collection performance might be
interpreted as quotas that might induce IRS staff to mistreat tax-
payers, added this provision in 1988 to protect taxpayers from such
actions. We believe that taxes collected is a reasonable basis on
which to judge employees whose job it is to collect taxes, as long
as other criteria, such as fair treatment are also evaluated.

Taxpayers who owe back taxes can also receive disparate treat-
ment just by the way IRS assigns staff.

In May 1993, we reported to you that IRS has not allocated staff
to maximize revenues and ensure that taxpayers in all parts of the
country are treated the same. Revenue officer staffing varies dra-
matically among the districts, not always in proportion to the work-
load. As a consequence, wide variations exist in tax debts worked
versus those kept in a queue. The range in fiscal year 1991 was
from one district that worked all cases to another that worked just
27 percent.

While we cannot disclose exact dollar thresholds, we can say that
taxpayers who owe substantial debts will not hear from a revenue
officer in some districts; but in others, IRS has the staff to follow
up on debts that are much smaller. Thus, delinquent taxpayers'
treatment depends on where they live. Such imbalances also affect
productivity. Collections per staff year in 1991 ranged in a low of
$175,000 in one district to a high of $775,000 in another.

IRS needs to quit relying on staff growth and attrition to elimi-
nate these imbalances. Instead, the agency needs a plan to maxi-
mize the collection of tax debts. But more fundamentally, IRS re-
lies too heavily on visits by revenue officers.

In a report to the subcommittee, we said that IRS needs to re-
vamp its collection process. It needs to place more emphasis on ac-
tivities early in the process at service centers and call sites and
less emphasis on district office activities.

Good business practice dictates that after a debt arises, efforts
are to be made to secure some type of payment agn'eement as
quickly as possible. IRS' process, nowever, is not based on this
premise. The IRS process involves three steps: First, the service
centers mail three to five computer generated bills at 30-day inter-
vals. If the taxpayer has not responded to the final notice, IRS lev-
ies any known bank accounts. In step two, IRS telephones the tax-
payer. In step three revenue officers visit the taxpayer.

The process is outdated, costly, and inefficient. A comparison
with private firms shows three ways it could be improved. First,
the process takes too long. Delinquencies in the private sector are



8

usually closed after 180 days. By that time, IRS has probably not
even tried to telephone the taxpayer.

Second, the process is too rigid. IRS follows the same process for
virtually all types of accounts, regardless of the taxpayer's compli-
ance history.

Third, the process relies too heavily on step three, visits by reve-
nue officers. IRS has allocated almost two-thirds of its collection
staff to this step. Private companies avoid personal contact because
of the cost and potential dangers. IRS' own data show that, on av-
erage, call site collectors are more productive. In 1991, each call
site collector averaged $1.5 million in collections while each reve-
nue officer averaged $331,000.

In addition to improving the collection of back taxes, IRS needs
to better communicate with taxpayers who are trying to file and
pay their taxes.

In moving down to filing tax returns, which is the first topic in
this section, at the subcommittee's request, we monitored the 1993
filing season, and 1993 was an unusual year. By April 30, about
2 million fewer taxpayers had filed returns than the year before.
Considering that the number usually grows each year, the number
of filers was about 3.7 million fewer than IRS expected.

The main reason for this appears to be the change in the 1992
withholding tables. That change caused more taxpayers to owe
taxes and fewer to receive refunds. IRS' current analysis shows
that about 1.2 million taxpayers so affected did not file their re-
turns, even though IRS made it much easier to pay by install-
ments.

Now, telephone access was another filing season problem. IRS
data indicated that taxpayers who called had a good chance this


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Online LibraryUnited States. Congress. House. Committee on WaysProblems with Internal Revenue Service communications with taxpayers and collection of tax debts : hearing before the Subcommittee on Oversight of the Committee on Ways and Means, House of Representatives, One Hundred Third Congress, fi → online text (page 1 of 9)