Executive Summary

Objective and Scope

Background

Results

Conclusion

Appendix I – Detailed Objective, Scope, and Methodology

Appendix II – Major Contributors to This Report

Appendix III – Report Distribution List

Appendix IV – Management’s Response to the Draft Report

Executive Summary

According to Internal Revenue Service (IRS) records, businesses incurred more than $11 billion in tax delinquencies (unpaid accounts) during Fiscal Year 1999. Of these new delinquencies, almost $7 billion were for unpaid Employer’s Quarterly Federal Tax Return (Form 941) liabilities. This return reports Social Security, Medicare, and withheld income taxes on wages of employees.

Revenue officers (RO) in the Collection Field function (CFf) first try to collect full payment from delinquent in-business taxpayers. If the taxpayers do not have the cash or other assets to full pay these liabilities, the ROs consider allowing the taxpayers to make periodic payments on their accounts under an "installment agreement." If the IRS accepts an installment agreement, penalties and interest continue to accrue. Because in-business taxpayers may also accrue additional Form 941 liabilities every 3 months while in an installment agreement, IRS procedures require close manual monitoring of this type of case.

The objective of our review was to determine whether the IRS is effectively using installment agreements to resolve in-business taxpayer delinquent accounts.

Installment agreements can be a useful collection tool for the IRS, especially in those cases in which the taxpayer has no other means to resolve his/her liability. For example, in our judgmental sample of 85 in-business installment agreements, 50 (59 percent) did not have sufficient liquid assets to quickly satisfy even 10 percent of their liabilities. However, we identified three areas in which procedures could be improved to help minimize the risk involved in these agreements and to enhance management information to monitor the effectiveness of the program. During our review, the Collection Division began actively drafting revised in-business taxpayer installment agreement guidelines and considered our input during this process.

The IRS did not have adequate guidance to help ensure ROs perform sufficient research to accurately determine the taxpayer’s suitability for installment agreements. Basic financial information regarding these taxpayers is not always verified prior to granting installment agreements. For example, ROs did not review taxpayers’ bank statements to substantiate their claimed cash receipts and disbursements in 59 (69 percent) of the 85 cases we reviewed. Confirmation of taxpayer-provided information helps ensure critical IRS decisions about installment agreement terms are based on accurate and reliable information, especially in cases where the taxpayer is unable to quickly repay his/her liability. In addition, identifying assets early in the process assists ROs to quickly take further collection action if the taxpayers do not make installment payments.

The IRS’ controls over installment agreements with in-business taxpayers did not ensure the agreements were timely and consistently monitored. Thirty-two (38 percent) of the 85 agreements we reviewed were not manually monitored consistently for compliance with the terms of the installment agreements. The cases had unmonitored periods ranging from 3 to 12 months and total agreement amounts ranging from under $2,000 to over $150,000. Periodic and timely monitoring of in-business taxpayer installment agreements is critical to help prevent the accruing of additional new tax liabilities.

The IRS does not have sufficient management information for manually monitored installment agreements with in-business taxpayers. The management information systems do not track the number of agreements, the amount of outstanding liabilities currently covered by agreements, or the overall default rate of agreements with in-business taxpayers. Therefore, management cannot determine how frequently agreements are granted and how many dollars are affected. Without timely, comprehensive, and accurate information, management cannot adequately monitor program effectiveness and make informed program decisions.

We recommend IRS management develop additional guidance to ensure sufficient research is performed to accurately determine in-business taxpayers’ suitability for installment agreements, and revise current agreement monitoring procedures to improve their effectiveness and efficiency. In addition, management should implement a uniform methodology for coding manually monitored installment agreements with in-business taxpayers, so essential management information, such as the default rate or the number of open cases, can be easily obtained and evaluated.

Management’s Response: IRS management agreed with our recommendations and has issued revised procedures addressing the issues we identified. A complete copy of their response is attached to this report in Appendix IV.

Objective and Scope

The objective of our review was to determine whether the Internal Revenue Service (IRS) is effectively using installment agreements to resolve in-business taxpayer delinquent accounts. To accomplish this objective, we evaluated the procedures for ensuring installment agreements given to in-business taxpayers are appropriate and reviewed the methodology used to monitor active agreements. We also reviewed the information available to management to evaluate and monitor the overall effectiveness of this collection tool. Additionally, we reviewed a sample of current collection cases. This audit was initiated in September 1999 and completed in May 2000.

We conducted tests in the National Headquarters and the Delaware-Maryland, Pennsylvania, and Southern California Districts. We also performed selected interviews in the North-South Carolina District. This audit was performed in accordance with Government Auditing Standards.

Details of our audit objective, scope, and methodology are presented in Appendix I. Major contributors to this report are listed in Appendix II.

Background

According to IRS records, businesses incurred more than $11 billion in tax delinquencies during Fiscal Year 1999. Of this, almost $7 billion were for unpaid Employer’s Quarterly Federal Tax Return (Form 941) liabilities. This return is used to report Social Security, Medicare, and withheld income taxes on wages of employees.

Revenue officers (RO) in the Collection Field function (CFf) assigned to work in-business taxpayer accounts, first try to collect full payment. If the taxpayers do not have the cash or other assets to full pay these liabilities, the ROs should consider allowing the taxpayers to make periodic payments on their accounts (i.e., installment agreements). During the course of the agreement, penalties and interest continue to accrue. Because in-business taxpayers may also incur additional Form 941 liabilities every 3 months while in an installment agreement, CFf procedures require close manual monitoring of this type of case. Procedures also prohibit levies of taxpayers’ assets (such as funds in a bank account) during installment agreements, as long as the payments are made timely.

The procedures under which the IRS allows and monitors installment agreements with in-business taxpayers differ from the procedures applicable to individual (non-business) taxpayers in two significant ways. First, while the IRS Restructuring and Reform Act of 1998 (RRA 98) guarantees an installment agreement to an individual taxpayer with certain exceptions, no provision guarantees it for in-business taxpayers. Second, installment agreements with individual taxpayers are generally monitored electronically at the IRS’ service centers, while agreements with in-business taxpayers are manually monitored at the district office level, thus allowing for immediate follow-up by a RO if the agreement terms are not met.

Results

Overall, installment agreements could be a more viable method for resolving in-business taxpayer delinquent accounts. Furthermore, installment agreements may be the only viable method available to resolve in-business taxpayer delinquencies in cases where the taxpayer has no significant assets and, therefore, there is limited or no short-term collection potential. For example, in our judgmental sample of 85 agreements in 3 districts, 50 (59 percent) taxpayers did not have sufficient liquid assets to quickly satisfy even 10 percent of the liability.

However, we identified several areas where procedures for in-business installment agreements can be improved. Specifically, the IRS’ procedures for evaluating in-business taxpayers’ suitability for installment agreements and for monitoring active agreements are inadequate. In addition, the IRS does not have basic management information regarding manually monitored installment agreements with in-business taxpayers. During our review, the Collection Division began actively drafting revised in-business taxpayer installment agreement guidelines and considered our input during this process.

The Internal Revenue Service Does Not Always Verify Basic Financial Information When Allowing Installment Agreements

Current procedures require the RO to analyze income and expenses of the taxpayer. These procedures are primarily oriented toward installment agreements for individual taxpayers and provide very little guidance regarding in-business taxpayers.

ROs do not always verify basic financial information regarding in-business taxpayers prior to awarding installment agreements. For example, ROs did not review taxpayers’ bank statements to substantiate their claimed cash receipts and disbursements in 59 (69 percent) of the 85 installment agreements we reviewed. Over one-half of the agreements where this verification was not completed had terms exceeding 36 months.

In addition, information on taxpayer assets is not regularly verified. For example, ROs did not check records for motor vehicles and real property to identify assets for potential seizure analysis in over 70 percent of the cases we reviewed.

Confirmation of taxpayer-provided information helps ensure critical IRS decisions about installment agreement terms are based on accurate and reliable information, especially in cases where the taxpayer is unable to quickly repay his/her liability. If the taxpayer does default, identifying assets early in the process assists ROs to promptly take further collection action.

1. Collection Division management should develop minimum research and verification guidelines for in-business installment agreements. At a minimum, the guidelines should specify basic research needed if the taxpayer cannot full pay within a short time period.

Management’s Response: On June 20, 2000, the Acting Assistant Commissioner (Collection) signed a memorandum entitled "Monitoring In-Business Trust Fund (IBTF) Installment Agreements." This memorandum (a copy of which is attached) provided specific guidance regarding research and verification guidelines for granting IBTF installment agreements.

The Internal Revenue Service Does Not Consistently Monitor Installment Agreements With In-Business Taxpayers

The IRS’ procedures require the CFf or the Collection Support function to manually monitor all installment agreements with in-business taxpayers for compliance with agreement terms. Based on this monitoring, the IRS may propose termination of the agreement if the taxpayer does not make an installment payment or does not pay another tax liability at the time it is due. The IRS’ procedures preclude termination in cases of non-filing or non-payment of FTDs; however, the CFf can contact the taxpayer if these items are not received.

Of the 85 agreements we reviewed, 32 (38 percent) were not monitored consistently for compliance with the terms of the installment agreements. The cases had unmonitored periods ranging from 3 to 12 months and total agreement amounts ranging from under $2,000 to over $150,000, with an average agreement amount of $46,000.

Unmonitored agreements can quickly accumulate additional delinquencies. For example, during an unmonitored period of only 6 months, an in-business taxpayer could incur 2 periods of additional Form 941 trust fund liabilities, as well as owe for 6 installment payments.

Current procedures provide for similar monitoring for all in-business cases regardless of the amount of the liability or the length of the agreement. This results in an ongoing and potentially long-term expenditure of resources on lower dollar collection cases. However, CFf managers indicated to us they did not monitor agreements because resources were allocated to higher priority work.

Periodic and timely monitoring of in-business taxpayer installment agreements is critical in keeping additional new tax liabilities from accruing. It provides for quick notification to a RO that a tax return or expected tax deposit has not been submitted and allows time for follow-up early in the process. Timely follow-up is also important because the RRA 98 generally requires a 30-day waiting period after an agreement is defaulted before any enforcement action can be initiated.

Recommendations

Collection Division management should:

2. Revise current procedures to allow for tiered monitoring. Monitoring criteria could include the amount of liability, potential amount of new liabilities if the taxpayer does not promptly pay future payroll taxes, and length of the agreement.

Management’s Response: The June 20, 2000, memorandum referenced in Recommendation 1 provided specific guidance regarding the level of monitoring necessary for IBTF installment agreements.

3. Consider using its Integrated Collection System to provide electronic reminder notices that monitoring is due to responsible collection personnel in support of the recommended tiered monitoring approach.

Management’s Response: The June 20, 2000, memorandum referenced in Recommendation 1 provided specific guidance on creating notifications for checking to see if IBTF installment agreement payments were received.

The Internal Revenue Service Does Not Gather Sufficient Data to Monitor the Installment Agreement Program

The IRS does not have basic management information for manually monitored installment agreements with in-business taxpayers. Management information systems do not identify the number of agreements, the amount of outstanding liabilities currently covered by agreements, or the overall default rate of agreements with in-business taxpayers. Appropriate and reliable reported information is an important tool not only for managers of specific organizational elements but for overall program management as well.

Information is unavailable because in-business installment agreements are recorded on computerized systems with a variety of status codes, case codes, and assignment codes depending on local preference. Consequently, the same management information is not available in the same way from district to district, and cannot be summarized at the national level. For example, the IRS presently has no way of reliably determining the number of active installment agreements with in-business taxpayers nationwide. Therefore, management cannot determine how frequently agreements are granted and how many dollars are affected. Without timely, comprehensive and accurate information, management at the national level cannot make informed program decisions.

Recommendation

4. Collection Division management should develop a uniform methodology for coding manually monitored installment agreements with in-business taxpayers so essential management information such as the default rate or the number of open cases is readily available.

Management’s Response: The June 20, 2000, memorandum referenced in Recommendation 1 provided specific guidance for identifying IBTF Installment Agreements on three databases: IDRS, Integrated Collection System, and Entity.

Conclusion

The installment agreement could be a viable collection tool available to help the IRS collect past due taxes from in-business taxpayers. However, current procedures are not specific enough to ensure that ROs verify basic financial information prior to granting long-term installment agreements. In addition, the CFf did not effectively monitor agreements, which further weakens their effectiveness as a collection tool. Finally, the IRS does not have cohesive management information to make strategic program decisions because the management information systems contain inconsistent data.

Detailed Objective, Scope, and Methodology

The overall objective of this review was to determine whether the Internal Revenue Service (IRS) is effectively using installment agreements to resolve in-business taxpayer delinquent accounts.

We used judgmental samples to perform our case reviews. Specific information regarding our sample selection methodology is detailed in sub-objectives II and III below. As a result, although we could identify trends among the specific cases we selected, it inhibited our ability to project the results and trends on a national level.

In order to accomplish our overall objective, we:

1. Determined whether the IRS is monitoring and periodically evaluating the effectiveness of installment agreements with in-business taxpayers.

1. Determined how the utilization of installment agreements in resolving in-business taxpayer delinquent accounts is being monitored nationally, and ascertained what type of management information is gathered and how frequently it is updated.
2. Ascertained what measures are used nationally to evaluate the success of installment agreements in resolving in-business taxpayer delinquent accounts, and determined how often the program is reviewed against these standards.
3. Determined the role, if any, the IRS has assigned in-business taxpayer installment agreements in the Fiscal Year 2000 Compliance Business Plan.
4. Evaluated the methodology employed to determine in-business installment agreement usage and effectiveness in the Delaware-Maryland, Pennsylvania and Southern California Districts.

1. Determined whether the IRS has effective controls in place to ensure installment agreements given to in-business taxpayers are appropriate and in the best interests of the government.

1. Interviewed responsible operations personnel in the Delaware-Maryland, North-South Carolina, Pennsylvania and Southern California Districts regarding in-business installment agreement practices and determined whether the districts are using any local strategies.
2. Obtained a listing of Business Masterfile (BMF) installment agreements currently being manually monitored in the Delaware-Maryland, Pennsylvania and Southern California Districts.
3. From an Integrated Collection System listing, judgmentally sampled 85 installment agreements awarded to in-business taxpayers and analyzed the case files and case histories to determine whether the agreements were appropriate and supported by a detailed review of the taxpayers’ financial information.

1. Ascertained whether the IRS has effective controls in place to ensure installment agreement monitoring is consistently and properly performed.

1. Interviewed responsible operations personnel in the Delaware-Maryland, North-South Carolina, Pennsylvania, and Southern California Districts regarding in-business installment agreement monitoring practices and procedures.
2. Using the 85 sample cases from Step II C above, analyzed the case files and case histories to determine whether they were consistently monitored during the past 12 months to ensure all installment payments were made, all Federal Tax Deposits were made, and all returns were timely filed.
3. From this listing, sampled 85 BMF manually monitored cases; analyzed the case files and case histories; and determined whether they were consistently monitored during the past 12 months. Identified all instances of taxpayer non-compliance with installment agreement terms.

Major Contributors to This Report

Gordon C. Milbourn III, Associate Inspector General for Audit (Small Business and Corporate Programs)

Parker F. Pearson, Director

Gary L. Swilley, Audit Manager

Anthony J. Choma, Senior Auditor

James S. Mills Jr., Senior Auditor

Dale E. Schulz, Senior Auditor

Phillip H. Dearth, Auditor

Rashme Sawhney, Auditor

Report Distribution List

Deputy Commissioner Operations C:DO

Chief Operations Officer OP

Commissioner, Small Business and Self-Employed Division S

Assistant Commissioner (Collection) OP:CO

Office of the Chief Counsel CC

National Taxpayer Advocate C:TA

Director, Office of Program Evaluation and Risk Analysis M:O

Office of Management Controls M:CFO:A:M

Director, Legislative Affairs CL:LA

Director, Delaware-Maryland District

Director, North-South Carolina District

Director, Pennsylvania District

Director, Southern California District

Management’s Response to the Draft Report

The response was removed due to its size. To see the complete response, please go to the Adobe PDF version of the report on the TIGTA Public Web Page.