IRS Uncollected Tax Debts Rise to $380B as Collection Staff Declines

A new Government Accountability Office report found that the Internal Revenue Service’s uncollected tax debts rose 23% since 2009 to $380 billion while the agency’s collection staff fell 23% during the same period after years of budget cuts.

The report indicates that the IRS lacks adequate internal controls over its tax collection processes. The IRS uses a mostly automated tax collection process. The automated Inventory Delivery System, or IDS, categorizes and routes cases based on many factors, such as type of tax and amount owed. The processes automatically categorize and route unpaid tax or unfiled tax return cases for potential selection. 

Outside of IDS, collection managers set goals for closing cases in priority areas, such as delinquent employer payroll taxes and cases involving certain high-wealth taxpayers. If the goals are at risk of not being met, officials are able to take action to select additional priority cases. In recent fiscal years, the collection program has exceeded nearly all case closure goals for priority cases. However, because the IRS has not identified objectives for the collection program, such as fairness, the GAO said it is difficult to assess the program's overall effectiveness.

Last week, a new compromise package included in a Senate highway funding bill proposed to raise $2.4 billion by handing the job of IRS tax collections to private collection agencies. The bill would require the Treasury Department and IRS to contract with private collection agencies as one of several pay-for provisions of the highway bill, Collections & Credit Risk reported. The first attempt to privatize tax-debt collection was scrapped a year after the program was launched in the mid-1990s, NTEU officials said. Taxpayers lost $17 million and some of the companies selected for the pilot projects were found to have violated the Fair Debt Collections Practices Act. The second attempt began in 2006, when proponents estimated the program would collect up to $2.2 billion in unpaid taxes. That effort was stopped three years later, after the program brought in $4.5 million. The National Treasury Employees Union, which represents IRS workers, said the program failed because the government spent more on administrative fees and commissions to the companies than it recovered. The union denounces the possibility of again contracting with private collection agencies as an offset for some of the costs of extending funding for the Highway Trust Fund. 

GAO Report Highlights

The GAO report identified several areas where the lack of documented objectives and internal control deficiencies for categorizing and routing cases increase the risk that the collection program's mission, including fair case selection, will not be achieved.For example, the IRS collection program's objectives and key terms are not clearly defined, according to the report. Although fairness is specified in the collection mission statement and IDS processes can affect how collection cases are selected, IRS management has not defined fairness or any other program or case selection objectives. IRS collection's management referred to various documents as examples of program objectives. However, the GAO found the documents were not specific enough nor codified in official IRS guidance to ensure proper control over the program. Without clearly defined objectives that can enhance program effectiveness, the GAO said it is difficult for the IRS to ensure it selected collection cases in a fair and unbiased manner.

In addition, case categorization and routing procedures for collection cases are not documented. According to IRS management, case categorization and routing procedures were developed over several years as the result of incremental decisions and system changes. However, the GAO found the system and decisions were not documented, such as the selection of priority areas. Without documentation, the GAO pointed out that it is difficult to determine whether processes are effective or consistently applied.

Nor is the effectiveness of the collection processes routinely monitored, the GAO found. Despite some ad-hoc studies, IRS does not have procedures to periodically monitor IDS, including the dollar thresholds used to identify some cases for collection. IRS management could not provide the GAO with justification for the thresholds because, according to IRS officials, they were set so long ago. Without periodic evaluations, out-of-date collection procedures could result in unnecessary costs or missed collections, the GAO report noted. Unadjusted dollar amounts could also lead to inconsistent treatment of taxpayers over time as the real value of dollar thresholds decline over time due to inflation.

The GAO recommended that IRS take five actions to improve collection controls, such as clearly defining and documenting program objectives and control procedures, and periodically evaluating the effectiveness of controls. In commenting on a draft of the report, the IRS said it generally agreed with all of GAO's recommendations.

"In the collection sphere, the concept of fairness has both a collective and individual component," wrote IRS deputy commissioner for services and enforcement John M. Dalrymple in response to the report. "We take into account the responsibilities and obligations that all taxpayers share, and we pursue those individuals and businesses who fail to fully pay or file their taxes to ensure fairness to those who do; and we do so while taking into account the individual ability of each taxpayer to meet his or her responsibilities."