oversight

Federal Tax Debts: Factors for Considering a Proposal to Report Tax Debts to Credit Bureaus

Published by the Government Accountability Office on 2012-09-10.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                 United States Government Accountability Office

GAO              Report to Congressional Requesters




September 2012
                 FEDERAL TAX
                 DEBTS
                 Factors for
                 Considering a
                 Proposal to Report
                 Tax Debts to Credit
                 Bureaus




GAO-12-939
                                              September 2012

                                              FEDERAL TAX DEBTS
                                              Factors for Considering a Proposal to Report Tax
                                              Debts to Credit Bureaus
Highlights of GAO-12-939, a report to
congressional requesters




Why GAO Did This Study                        What GAO Found
Millions of individual and business           At the end of fiscal year 2011, individuals and businesses owed a total of about
taxpayers owe billions of dollars in          $373 billion in federal unpaid tax debts—$258 billion in individual debt and $115
unpaid federal tax debts, and the IRS         billion in business debt. How much of this debt would be suitable to report to
expends substantial resources trying to       credit bureaus could depend on the purpose of the reporting proposal, such as to
collect these debts. Other federal            collect more debts or simply to inform other potential creditors of the existence of
agencies that are owed nontax debts           tax debts. Most of debts were relatively small in size. Well over half of individuals
report such debts to credit bureaus, in       and businesses with tax debts owed less than $5,000. However, much of the
part as a tool to encourage debtors to        aggregate debt is concentrated among those owing relatively large amounts.
pay. However, IRS is not allowed to
                                              Debts over $25,000 add up to a total of $310 billion. Some debts were in the
directly report tax debts to credit
                                              collection process where the Internal Revenue Service (IRS) notifies the taxpayer
bureaus because long-standing federal
law protects the privacy of taxpayers’
                                              of the debt and were subject to dispute by the taxpayer, while other debts were
information. IRS is only authorized to        covered by installment agreements—about $60 billion of the debts owed were in
disclose personally identifiable              these two categories. About $110 billion of the total debt was classified by IRS as
information reported to or developed          uncollectable. IRS files tax liens on some tax debts and these liens are public
by IRS in limited circumstances as            records that credit bureaus routinely pick up and add to their data. Over half of
specified by law. IRS is, however,            the total amount owed was subject to liens, cutting across the above categories.
allowed to file tax liens on some tax
debts, and such liens are public              Subject matter experts commented that issues surrounding data accuracy,
records that are picked up by credit          alternatives, and expected benefits would be among the important factors that
bureaus and included in the credit            Congress might wish to consider in regards to any possible future proposal to
history information they compile.             report tax debts to credit bureaus. One key factor discussed was the need to
GAO was asked to describe (1) IRS's           ensure that any reported tax debt data is accurate and current as this would be
inventory of tax debts and the                important to both credit bureaus and the affected taxpayers, who could be denied
characteristics that may be relevant to       credit, employment, or housing based on inaccurate negative information in their
a potential proposal to report tax debts      credit histories. Some subject matter specialists GAO spoke to said that it would
to credit bureaus and (2) factors that        be important to consider IRS’s current use of tax liens, which are already known
experts believe could be useful to            to credit bureaus, as an alternative to reporting debts directly. Another important
consider in the evaluation of any             consideration would be the expected benefits of direct tax debt reporting. These
proposal to report tax debts to credit        experts suggested that such reporting could yield benefits such as increased
bureaus. To conduct this work, GAO            revenue collected or reduced tax debt inventory. However, the National Taxpayer
reviewed IRS data on tax debts and            Advocate cautioned that such reporting could cause some taxpayers to choose
held discussions with selected experts,       not to file or file inaccurately if they know they owe money to IRS.
including government and
nongovernment officials with
experience in tax policy and
administration, taxpayer and privacy
interests, and the credit reporting
industry. GAO does not make
recommendations in this report.




View GAO-12-939. For more information,
contact James R. White at (202) 512-9110 or
whitej@gao.gov.

                                                                                       United States Government Accountability Office
Contents


Letter                                                                                     1
               Background                                                                  3
               Of the Overall Billions of Dollars in Federal Tax Debts, Some Debts
                 are Small, Subject to Dispute or Change, Not Considered
                 Collectible, or Already Known to Credit Bureaus                           7
               Experts Suggested That Data Accuracy, Alternatives, and Expected
                 Benefits Are among the Important Factors to Consider                    13
               Agency Comments                                                           18

Appendix I     External Parties Contacted                                                20



Appendix II    List of Threshold and Policy Factor Questions and Subquestions
               That Guided Our Discussions with Subject Matter Specialists               22



Appendix III   GAO Contact and Staff Acknowledgments                                     25



Tables
               Table 1: Key Differences Between the Tax Debt Inventory and the
                        Tax Gap                                                            3
               Table 2: IRS Collection Process Status Definitions for Tax Debts            5
               Table 3: Tax Debt Inventory by Collection Process Status, as of
                        End of Fiscal Year 2011                                          10
               Table 4: Tax Debt Inventory by Financial Reporting Classification,
                        as of the End of Fiscal Year 2011                                12
               Table 5: Tax Debt Inventory for Individuals and Businesses for
                        Which Liens Had or Had Not Been Filed by Collection
                        Process Status, as of the End of Fiscal Year 2011                13


Figures
               Figure 1: Tax Debt Inventory in Ranges of Total Debt Owed by an
                        Individual, as of the End of Fiscal Year 2011                      8
               Figure 2: Tax Debt Inventory in Ranges of Total Debt Owed by a
                        Business, as of the End of Fiscal Year 2011                        9




               Page i                                           GAO-12-939 Tax Debt Reporting
Abbreviations

FCRA              Fair Credit Reporting Act
IRS               Internal Revenue Service




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Page ii                                                    GAO-12-939 Tax Debt Reporting
United States Government Accountability Office
Washington, DC 20548




                                   September 10, 2012

                                   The Honorable Max Baucus
                                   Chairman
                                   The Honorable Orrin G. Hatch
                                   Ranking Member
                                   Committee on Finance
                                   United States Senate

                                   The Honorable Charles E. Grassley
                                   Ranking Member
                                   Committee on the Judiciary
                                   United States Senate

                                   Millions of individual and business taxpayers owe billions of dollars in
                                   unpaid federal tax debts—$373 billion as of the end of fiscal year 2011—
                                   and the Internal Revenue Service (IRS) expends substantial resources
                                   trying to collect these debts. Unlike many other debts owed to the federal
                                   government, tax debts are not directly reported to credit bureaus—
                                   companies that collect and sell information about the credit history of
                                   individuals and businesses. IRS is not allowed to directly report tax debt
                                   information to credit bureaus because long-standing federal law protects
                                   the privacy of any personally identifiable information reported to or
                                   developed by IRS. 1 IRS is, however, allowed to file tax liens on some tax
                                   debts, and such liens are public record, which can be picked up by credit
                                   bureaus and included in the credit history information they compile.

                                   Among the potential reasons for directly reporting tax debt information to
                                   credit bureaus are the possibility that it could increase revenue by
                                   encouraging tax debtors to pay off their debts and the possibility that it
                                   could give the users of credit bureau information a more complete picture
                                   of the indebtedness of tax debtors. A proposal could conceivably
                                   encompass all tax debts or specify types of tax debts for such reporting.
                                   However, the tradeoffs that directly reporting tax debts to credits bureaus
                                   would entail are not well understood, and you asked us to provide
                                   information about such tradeoffs by applying our recently published guide



                                   1
                                     This information, which is known as federal tax information, can be disclosed only in
                                   limited circumstances specified in 26 U.S.C. § 6103.




                                   Page 1                                                      GAO-12-939 Tax Debt Reporting
for assessing proposals to authorize disclosures of tax information. 2 In
response to your request, this report describes (1) the inventory of tax
debts owed to IRS and the characteristics that may be relevant to a
potential proposal to report tax debts to credit bureaus, such as IRS
determinations of the likelihood that particular debts may ever be
collected and the extent to which debts are the subject of tax liens, and
(2) factors that subject matter specialists believe could be useful to
consider in the evaluation of any proposal to report tax debts to credit
bureaus.

To describe the characteristics of the tax debt inventory, we obtained and
reviewed data from IRS’s Chief Financial Officer Accounts Receivable
Dollar Inventory Management System and Compliance Data Warehouse
databases, including information on the amounts, collection process
status, financial classifications of the debts, and extent to which IRS had
filed federal tax liens on the debts. We determined that the data were
sufficiently reliable for our purposes. 3 To identify factors that subject
matter specialists believe could be useful to consider in regard to
potential tax debt credit bureau reporting proposals, we first selected
specialists based on their government and nongovernment experience in
tax policy and administration, taxpayer and privacy interests, and the
credit reporting industry. (See app. I for the list of the 22 federal offices
and other parties we contacted.) We then based our discussions with
these specialists on the questions found in the guide we issued in
December 2011 to assist policymakers in assessing proposals to
authorize disclosures of tax information (see app. II for the list of
questions in our guide). 4

We conducted our work from February 2012 to September 2012 in
accordance with all sections of GAO’s Quality Assurance Framework that


2
 GAO, Taxpayer Privacy: A Guide for Screening and Assessing Proposals to Disclose
Confidential Tax Information to Specific Parties for Specific Purposes, GAO-12-231SP
(Washington, D.C.: Dec. 14, 2011).
3
 To assess reliability we reviewed such information as on IRS’s data collection and quality
control procedures for the IRS Chief Financial Officer Accounts Receivable Dollar
Inventory Management System and Compliance Data Warehouse databases and inquired
how IRS queried the databases to assure accuracy. In addition, we compared the unpaid
assessments data with data we audited as reported in Financial Audit: IRS’s Fiscal Years
2011 and 2010 Financial Statements, GAO-12-165 (Washington, D.C.: Nov. 10, 2011).
4
GAO-12-231SP.




Page 2                                                     GAO-12-939 Tax Debt Reporting
                                             are relevant to our objectives. The framework requires that we plan and
                                             perform the engagement to obtain sufficient and appropriate evidence to
                                             meet our stated objectives and to discuss any limitations in our work. We
                                             believe that the information and data obtained, and the analysis
                                             conducted, provide a reasonable basis for any findings and conclusions in
                                             this product.


                                             The inventory of tax debts is comprised of tax assessments that are not
Background                                   collected along with related penalty and interest charges. The inventory of
                                             tax debts and the concept of the tax gap—the difference between the tax
                                             amounts that taxpayers voluntarily and timely pay and those they owe—
                                             are related but distinct. 5 Key differences between the two are summarized
                                             in table 1.

Table 1: Key Differences Between the Tax Debt Inventory and the Tax Gap

Tax debt inventory                                                    Tax gap
•   Sum of all tax debts owed to IRS at a particular point in time,   •   Estimate of total tax liability not timely paid for a single year
    including debts from the current year and debts from
    previous years that fall within the 10-year statute of
    limitations on collections
•   Debts based on known assessments on filed returns or              •   Composed of known assessments as well as estimates of
    through IRS enforcement activities                                    other taxes not timely paid that were not identified by IRS
                                                                          through audits or other enforcement programs
•   Includes taxes, penalty, and interest                             •   Only includes tax
                                             Source: GAO.


                                             Federal taxes that are owed become tax debts when the tax is assessed
                                             but not paid. Generally, taxes are either self-assessed by taxpayers
                                             based on information they report on their tax returns or by IRS through its
                                             enforcements programs. For example, when a taxpayer files a return
                                             showing a balance due without a payment to cover it, the self-assessed
                                             tax becomes a tax debt. Alternatively, IRS may determine a taxpayer’s
                                             tax liability through its enforcement programs, such as audits and
                                             automated comparisons of return information to information reported by
                                             third parties. Another IRS enforcement program, known as the Automated



                                             5
                                              In January 2012, IRS estimated that the gross tax gap—the difference between taxes
                                             owed and taxes paid on time—was $450 billion in tax year 2006. IRS estimated that it
                                             would eventually recover about $65 billion of this amount through late payments and
                                             enforcement actions, leaving a net tax gap of $385 billion.




                                             Page 3                                                         GAO-12-939 Tax Debt Reporting
Substitute for Return program, estimates a taxpayer’s tax liability when a
taxpayer has failed to file a return. The Automated Substitute for Return
program estimates the tax liability based on information reported by third
parties but does not include exemptions or deductions to which the
taxpayer may be entitled, so it may overstate the amount due. The intent
of this estimate is to provide incentive for the taxpayer to file an accurate
return showing the actual tax liability, among other things. To ensure the
validity of debts and provide due process to taxpayers, enforcement
programs are required by law to provide a taxpayer with multiple notices
and opportunity to provide information before the estimates become
assessed tax debt. 6

As we have previously reported, IRS has a complex process to attempt
the collection of tax debts. 7 As a first stage, IRS sends a series of notices
to notify the debtor of the debt owed and to prompt payment or other
debtor response, such as to dispute the debt or request to enter into an
installment payment agreement. If the debt is not resolved by notices, IRS
may then initiate contact with the taxpayer by telephone or in-person.
After the notice phase, IRS can also take enforcement action, such as
levying or seizing assets. IRS categorizes a tax debt into one of 10
collection process statuses, including (1) the debt is in the notice or other
collection phases, (2) the taxpayer is paying off the debt in installments,
(3) IRS has suspended active collection efforts, or (4) IRS has determined
the debt is currently not collectible. Table 2 describes IRS’s collection
process statuses for tax debts.




6
  For example, the taxpayer has 90 days after receipt of a notice of deficiency (150 days if
the taxpayer lives outside the United States) to file a petition with the Tax Court for a
redetermination of the deficiency. The deficiency may not be assessed until the expiration
of the 90-day period if no appeal is filed, or until the decision of the Tax Court has become
final.
7
 GAO, Tax Debt Collection: IRS Has a Complex Process to Attempt to Collect Billions of
Dollars in Unpaid Tax Debts, GAO-08-728 (Washington, D.C.: June 13, 2008).




Page 4                                                       GAO-12-939 Tax Debt Reporting
Table 2: IRS Collection Process Status Definitions for Tax Debts

Collection process status           Definition
Notice                              The collection phase where IRS sends a series of notices of balances due to the taxpayer to, in
                                    part, prompt a reply by the taxpayer and payment.
Automated Collection System         The collection phase where IRS makes telephone contact with the taxpayer to secure payment or
(ACS)                               takes other action, including filing a Notice of Federal Tax Lien or enforced collection by levying
                                    financial assets.
Queue                               In a waiting status for assignment to a revenue officer in the Collection Field Function for in-person
                                    contact.
Collection Field Function (CFF)     The collection phase where IRS attempts in-person contact with the taxpayer to secure payment or
                                    takes other action, including enforced collection by levying financial assets or seizing property.
Shelved                             Suspended indefinitely from active collection efforts due to a lack of IRS resources in ACS and
                                    CFF.
Installment agreement               The taxpayer has agreed to pay the debt in installments.
Adjustments                         Pending due to a taxpayer claim or other inquiries where the account is frozen from collection
                                    actions for potential adjustments to the assessment.
Currently not collectible           Have no current collection potential because of the taxpayer’s economic or financial condition but
(hardship)                          where future collection potential may exist if a taxpayer’s financial condition improves.
Currently not collectible (other)   No current collection potential exists and collection is unlikely in the future due to taxpayer’s
                                    financial condition or IRS’s inability to locate the taxpayer (including cases such cases as insolvent
                                    or defunct businesses and deceased taxpayers).
Other                               The taxpayer is involved in an administrative or court action suspending normal collection action
                                    (e.g., bankruptcy, insolvency, offers in compromise, and criminal investigations) or where the
                                    balance is below IRS’s established tolerance for active collection efforts.
                                             Source: IRS.


                                             If a tax debtor does not pay after IRS’s initial contact to collect an
                                             assessed tax debt, IRS has the authority to protect the government’s
                                             interests by filing a Notice of Federal Tax Lien. A taxpayer must be given
                                             notice and an opportunity for a hearing when a federal tax lien is filed.
                                             Such a lien attaches a claim to all of the debtor’s property, both real and
                                             personal, for the amount of unpaid tax, including any interest and
                                             penalties. Unlike IRS’s authority to levy or seize assets, a lien does not
                                             authorize IRS to take possession of an asset or deprive the taxpayer of
                                             use of an asset. Instead, a lien publicly records the debt owed by the
                                             taxpayer as a notice to possible future creditors and to establish priority
                                             rights against certain other creditors that may also hold liens or secured
                                             rights against a taxpayer’s assets. IRS files liens in local recording offices,
                                             such as courthouses, as determined by the laws of each state. Liens
                                             identify the taxpayer and the amount owed at the time the lien was filed,
                                             but do not reflect subsequent changes in the amount owed. A lien may
                                             prevent tax debtors from selling assets with clear title or obtaining
                                             additional financing without payment of their tax debts. Circumstances do



                                             Page 5                                                        GAO-12-939 Tax Debt Reporting
not warrant a lien being filed in all cases, such as when the amount of the
debt is in dispute or when IRS determines that filing a lien would hamper
collection of the debt because the debtor is trying to obtain a loan to pay it
off. However, for cases in which IRS has not filed a lien, the government’s
interest in the tax debtor’s property is not protected.

Credit bureaus are companies that collect individual consumer and
commercial credit information, compile it, and sell credit reports to parties
legally authorized to obtain such information. The Fair Credit Reporting
Act (FCRA) governs credit bureaus and the reporting of consumer credit
information. FCRA details the rights of consumers, and puts limits on who
may access a credit report and for what reasons. 8 Credit bureaus also
sell credit scores, which are calculated based on the information
contained in a credit report. Lenders rely on credit reports and credit
scores when deciding whether to offer credit to an individual or business,
and at what interest rate and other terms. Also, some employers,
insurance underwriters, and landlords use credit reports to assess
applicants’ creditworthiness. Credit bureaus regularly gather credit
information from creditors, collection agencies, and public records such
as records of bankruptcy, foreclosure, garnishments, and other civil
judgments, as well as publicly available tax lien information (federal,
state, or local). Federal agencies owed nontax debts are among the
furnishers of debt information to credit bureaus, in part to encourage
debtors to pay off their debts. 9




8
 FCRA, 15 U.S.C. § 1681 – 1681x, applies only to consumer reporting and does not apply
to commercial credit reporting. FCRA provides consumers with rights and protections,
including the right to be told if information in a consumer report has been used to take
adverse action against a consumer; to see the contents of the report; to dispute inaccurate
or incomplete information with the credit bureau; to have inaccurate information corrected
or deleted; to dispute inaccurate items with the furnisher or source of the information; and
to have outdated information excluded from a consumer report. FCRA also puts limitations
on access to consumer reports, including a requirement for consumer consent to furnish
reports to employers or to furnish reports containing medical information.
9
 The Debt Collection Improvement Act of 1996, Pub. L. No. 104-134, § 31001,110 Stat.
1321 (Apr. 26, 1996), as codified at 31 U.S.C. § 3711(e) requires federal agencies to
report information on all delinquent federal consumer debts to credit bureaus. Federal
agencies have been required, as a matter of policy, to report all (current and delinquent)
commercial debts since September 1983.




Page 6                                                      GAO-12-939 Tax Debt Reporting
                          Evaluation of a proposal to report tax debts to credit bureaus would
Of the Overall Billions   necessarily involve decisions about which particular debts should be
of Dollars in Federal     reported. One key consideration could be whether debts of all sizes
                          should be reported, or only those above a certain threshold. To the extent
Tax Debts, Some           that policymakers consider credit bureau reporting to have potentially
Debts Are Small,          serious negative consequences for taxpayers, they may determine that
Subject to Dispute or     smaller debts do not warrant reporting. If, however, a primary purpose of
                          such reporting were to be to provide the users of credit bureau
Change, Not               information with information about all tax debts, smaller debts might be
Considered                reported along with larger ones. The aggregate amount of outstanding tax
                          debt at the end of 2011 was $373.2 billion. As shown in figures 1 and 2,
Collectible, or Already   tax debts ranged from very small to over $100 million. For example, in
Known to Credit           2011, 8.3 million individuals and 1.9 million businesses (well over half of
                          all tax debtors) owed a total of $15.7 billion on debts of less than
Bureaus                   $5,000. 10 Fewer taxpayers had larger debts but the aggregate amount
                          was larger. For debts of $25,000 or greater, 2.1 million taxpayers owed a
                          total of $310 billion.




                          10
                            The data presented for individuals and businesses are from, respectively, IRS’s
                          Individual Master File and Business Master File databases. The Individual Master File
                          data include some taxes based on business income (such as when a taxpayer is self-
                          employed) and the Business Master File data include some taxes on individuals (for
                          example, estate and gift taxes).




                          Page 7                                                    GAO-12-939 Tax Debt Reporting
Figure 1: Tax Debt Inventory in Ranges of Total Debt Owed by an Individual, as of the End of Fiscal Year 2011




                                         Note: Numbers may not add to total due to rounding.




                                         Page 8                                                 GAO-12-939 Tax Debt Reporting
Figure 2: Tax Debt Inventory in Ranges of Total Debt Owed by a Business, as of the End of Fiscal Year 2011




                                         Note: Numbers may not add to total due to rounding.

                                         The status of tax debts would also likely be an important consideration.
                                         One reason for this is that tax debts in the “notice” status are generally
                                         still in the phase where IRS is notifying the taxpayer of the debt and the
                                         taxpayer may respond by disputing the validity of the debt, and FCRA
                                         prohibits credit bureaus from including disputed information in credit
                                         reports. To the extent that encouraging payment is an important purpose
                                         behind a debt reporting proposal, the statuses indicating collectibility
                                         would also be important. Some taxpayers have agreed to installment
                                         agreements, so reporting their debts may not influence their willingness to
                                         pay because they are already making payments. IRS classifies other



                                         Page 9                                                GAO-12-939 Tax Debt Reporting
                                            debts as uncollectible, and reporting those debts may not make the debts
                                            any more collectible. On the other hand, if the purpose of a proposal is to
                                            have more complete information in credit bureau files, both active
                                            installment agreements and debts considered uncollectible may be worth
                                            reporting. Table 3 shows the dollar value of debts owed in the different
                                            IRS collection statuses.

Table 3: Tax Debt Inventory by Collection Process Status, as of End of Fiscal Year 2011

                             Individual tax debts owed                Business tax debts owed              Total tax debts owed
                                                  Percentage                              Percentage
Collection process               Dollars              of total             Dollars            of total        Dollars     Percentage
status                      (in billions)     individual debt         (in billions)     business debt    (in billions)   of total debt
Notice                            $16.3                    6.3%               $5.7               4.9%          $22.0            5.9%
Automated Collection                34.6                   13.4                 2.9                2.5           37.5            10.0
System
Queue                               56.5                   21.9               10.7                 9.4           67.2            18.0
Collection Field                    20.9                    8.1               10.4                 9.0           31.2             8.4
Function
Shelved                             15.4                    6.0                 4.9                4.3           20.3             5.5
Installment agreement               30.6                   11.8                 8.1                7.1           38.7            10.4
Adjustments                         10.2                    3.9                 6.2                5.4           16.4             4.4
Currently not                       33.7                   13.1                 6.3                5.4           40.0            10.7
collectible (hardship)
Currently not                       22.5                    8.7               47.4               41.3            69.9            18.7
collectible (other)
Other                               17.6                    6.8               12.3               10.7            29.9             8.0
Total                            $258.4                    100%            $114.8               100%          $373.2            100%
                                            Source: IRS.


                                            Note: Totals may not add due to rounding.

                                            Another indication of the extent to which tax debts have been validated
                                            and their collectibility can be found in IRS’s financial reports. IRS reports
                                            on taxes receivable for financial reporting purposes, including estimates
                                            of how much of the unpaid tax is agreed to and collectible. Under federal
                                            accounting standards, to be considered federal taxes receivable, unpaid
                                            assessments must have taxpayer or court agreement and have future
                                            collection potential. As of the end of fiscal year 2011, federal taxes
                                            recorded as receivable were about $158 billion of the $373 billion owed.
                                            The rest of the total amount owed included about $98 billion in
                                            compliance assessments. Compliance assessments are debts that do not
                                            have taxpayer or court agreements and are made through IRS



                                            Page 10                                                      GAO-12-939 Tax Debt Reporting
enforcement programs, such as IRS’s Automated Substitute for Return
program. Although not recorded as federal taxes receivable, some of
these debts may eventually be collected. However, because the debts are
estimates and may overstate the taxpayer’s true liability, they would not
be appropriate to report to credit bureaus under current law. Also, about
$117 billion was classified by IRS as write-offs—debts considered to have
no future collection potential. 11 According to IRS officials, most debts in
the write-off classification are in one of the currently not collectible
collection statuses. Table 4 presents more detail on the amounts of debt
owed in each classification using available IRS data. 12




11
  The balance in the write-off classification includes “memo” balances, which includes
amounts owed by federal government agencies and assessments recorded based on
fraudulent or frivolous tax returns. While these debts are included in IRS’s unpaid
assessments inventory, IRS does not include them on its financial statements.
12
   For purposes of comparison with other data in this report the data presented in this table
are from IRS’s unadjusted data, and therefore do not match amounts IRS reports in its
fiscal year 2011 financial statements. We have determined that IRS’s systems cannot
classify its unpaid assessments inventory for financial reporting without material
inaccuracies. As a result, IRS uses a statistical estimation process to adjust for errors,
misclassifications, and duplicate assessments in its systems. These adjustments are
made to aggregate-level summary data rather than to the raw data. As we reported in our
most recent audit of IRS financial statements (see GAO-12-165), after such adjustments,
as of the end of fiscal year 2011, unpaid tax debts (to include debts in IRS master files for
individual and businesses as well as other debts) totaled $356 billion, consisting of $103
billion in compliance assessments, $106 billion in write-offs, and $147 billion in gross
taxes receivable; after an allowance for uncollectible taxes receivable ($112 billion), net
taxes receivable was $35 billion.




Page 11                                                      GAO-12-939 Tax Debt Reporting
Table 4: Tax Debt Inventory by Financial Reporting Classification, as of the End of
Fiscal Year 2011

    Dollar in billions
    Financial reporting                    Individual tax        Business tax             Total tax
    classification                           debts owed           debts owed            debts owed
    Write-offs                                        $55.3                $62.1              $117.4
    Compliance assessments                             85.3                 12.6                 97.9
    Federal financial receivables                     117.7                 40.2               157.9
                                                                                                     a
    Total                                           $258.4               $114.8              $373.2
Source: IRS data.

Note: Numbers may not add to total due to rounding.
a
 The amount of total tax debts includes duplicate assessments. Duplicate assessments are assessed
against multiple parties to protect the government’s interest, but can be collected only once. While
these debts are included in IRS’s unpaid tax debt inventory, IRS does not include them on its financial
statements.

Another debt inventory characteristic that may be relevant to a proposal
to report tax debts to credit bureaus is the extent to which information
about tax debts is already known to credit bureaus because of tax liens.
Lien filing is not necessarily incompatible with IRS directly reporting
information about tax debts to credit bureaus, but policymakers may want
to consider whether liens, which are public records that credit bureaus
pick up, are already doing much of what direct reporting of debts might
do. Table 5 shows the extent of lien coverage for debts in each collection
status. As shown in the table, liens have been filed on over half of all of
the dollars owed in tax debts; liens are generally not filed until after the
debt has moved out of the notice status.




Page 12                                                            GAO-12-939 Tax Debt Reporting
                       Table 5: Tax Debt Inventory for Individuals and Businesses for Which Liens Had or
                       Had Not Been Filed by Collection Process Status, as of the End of Fiscal Year 2011

                       Dollars in billions
                                                                   Individual and business tax debts
                                                                   Total liens      Total liens
                       Collection process status                          filed       not filed         Total
                       Notice                                             $1.5           $20.5          $22.0
                       Automated Collection System                        13.8            23.7          $37.5
                       Queue                                              37.3            29.9          $67.2
                       Collection Field Function                          24.6             6.6          $31.2
                       Shelved                                            10.3            10.0          $20.3
                       Installment agreement                              14.3            24.4          $38.7
                       Adjustments                                         6.0            10.4          $16.4
                       Currently not collectible
                       (hardship)                                         35.6             4.4          $40.0
                       Currently not collectible
                       (other)                                            52.9            17.0          $69.9
                       Other                                              14.6            15.3          $29.9
                       Total                                           $210.9           $162.3         $ 373.2
                       Source: IRS data.


                       Note: Totals may not add due to rounding.



                       Subject matter specialists offered insights and comments about important
Experts Suggested      factors to consider should policymakers decide to develop or evaluate a
That Data Accuracy,    proposal to directly report unpaid federal tax debts to credit bureaus.
                       Important observations raised in our discussions include the following:
Alternatives, and
Expected Benefits      •     A proposal to report tax debts to credit bureaus would need to be
                             clear about the specific information about taxpayers and their debts
Are among the                that would be reported. Information about individual consumers that is
Important Factors to         furnished to credit bureaus is typically transmitted in an industry-
                             standard format and includes sufficient identifying data such that the
Consider                     information can be associated with the right person.

                       •     Federal agencies currently report nontax debts to five designated
                             nationwide credit bureaus. This could be a likely approach under a tax
                             debt reporting proposal, but Congress could consider other
                             alternatives. We limited our discussions to policy scenarios wherein
                             credit bureaus would incorporate and use tax debt information from
                             IRS consistent with current practice for debt information reported by


                       Page 13                                                    GAO-12-939 Tax Debt Reporting
    other federal agencies and private creditors. This would mean that
    credit bureaus would redisclose the information to other entities
    consistent with current legal requirements regarding consumer debt
    contained in FCRA.

•   Specifying the purpose of a privacy exception proposal and estimating
    the associated expected benefits are important considerations.
    Among the possible expected benefits that some specialists identified
    were (1) giving tax debtors an incentive to pay their tax debts and (2)
    encouraging taxpayers in general to stay out of debt in the first place.
    Another possible benefit identified by the experts was having more
    complete credit history information available to entities that currently
    are allowed to use credit bureau information, including government
    entities, for improved lending or other business decisions. Some other
    possible benefits that came up in our discussions and our review of
    Treasury Financial Management Service guidelines were (1)
    enhanced tax enforcement capability by barring parties owing
    selected thresholds of federal taxes from receiving certain benefits,
    such as contracts, grants, or loans, and (2) better protection against
    loan applicants taking on new debts when they are already unable to
    pay their existing debts.

•   Some subject matter specialists we spoke to said it would be
    important to consider a proposal to report tax debts directly to credit
    bureaus in light of the alternative present in IRS’s current use of tax
    liens, which are already known to credit bureaus. Credit bureau
    officials noted that only the initial dollar amount of the tax debt that is
    the subject of the lien and the identity of the debtor are publicly
    reported and picked up and included in credit bureau files. Changes in
    tax debts over time, such as if a tax debt grows (because of penalties
    and interest) or is reduced (because the debtor pays IRS some of
    what is owed), are not included with tax liens or known to credit
    bureaus. For this reason, direct reporting could involve more current
    information than what is available from tax liens and provide an
    incentive to taxpayers to pay down their debts because their declining
    balance due would be reflected on their credit histories. On the other
    hand, some subject matter specialists noted that direct reporting of tax
    debts to credit bureaus along with lien filings would increase the risk
    of reporting duplicative negative information on a taxpayer’s credit
    report.

•   Any reporting will necessarily involve costs. It is possible that a higher
    volume of reporting (in terms of either the number of debts being
    reported or the frequency of reporting) will result in higher costs, but


Page 14                                            GAO-12-939 Tax Debt Reporting
      the mix of fixed and variable costs could mean that the cost per report
      decreases with higher volume. Costs to IRS would likely include start-
      up and recurring information system costs, including devoting
      additional staff to manage the transmission of information and deal
      with taxpayers’ disputes, inquiries, and other activities resulting from
      debts reported. Such costs could mean IRS would have to reallocate
      resources from collections operations or other areas. However, credit
      bureau reporting may enhance the efficiency of IRS collections, to the
      extent that such reporting obviates the need for more costly debt
      collection tools. Costs to IRS would also be affected by how a
      proposal assigns IRS’s responsibilities for accounting for disclosures
      and providing oversight to ensure that taxpayer information is
      safeguarded by credit bureaus.

•     Several specialists we talked to stressed that the accuracy of any
      information reported to credit bureaus is of paramount importance.
      They said if inaccurate data are provided to credit bureaus, this would
      impose burdens on taxpayers and IRS. Taxpayers would be forced to
      either dispute the inaccurate information to have it corrected or face
      possible serious consequences such as denial of credit, employment,
      or housing due to the inaccurate negative information on their credit
      histories. IRS would incur additional costs as it would have to respond
      to related inquiries and disputes. Our 2011 audit of IRS’s financial
      statements found that IRS experienced errors and delays in recording
      taxpayer information, payments and other tax assessment related
      activities. 13 Subject matter specialists commented that to help ensure
      that a reported tax debt is valid, IRS would need to ensure that
      taxpayers are provided opportunities to dispute tax assessments
      before reporting debts to credit bureaus. 14 Also, under FCRA, should
      policymakers choose to apply it, there could be financial liability for
      IRS associated with reporting debt information inaccurately.

•     The frequency of reporting is another important consideration as it
      would have implications for the currency and accuracy of data. Credit
      bureau officials told us that many data furnishers report information
      monthly, but others report information only when something changes.
      FCRA requires that furnishers of information update information on a


13
    GAO-12-165.
14
  Before filing a tax lien, IRS procedures gives taxpayers notice of the amount of the debt
and opportunity to dispute it.




Page 15                                                     GAO-12-939 Tax Debt Reporting
    regular basis, but does not specify the timing for such reporting. Credit
    bureau and financial industry representatives observed that regular
    reporting of tax debts by IRS would mean that the bureaus would
    have more up-to-date information than what is currently available from
    filed tax liens and data about debts for which liens have not been filed.

•   Amending section 6103 of the Internal Revenue Code in order to
    authorize disclosure of tax information to credit bureaus may not be
    the only change needed to implement a debt reporting proposal.
    Potential statutes likely to be included in consideration of legal
    implications include FCRA, the Debt Collection Improvement Act,
    Freedom of Information Act, and Privacy Act. Discussions with
    officials from federal agencies that report nontax debts to credit
    bureaus suggest that, while there would be costs associated with any
    IRS tax debt reporting, there are not specific obstacles that would
    prevent such reporting.

•   Subject matter specialists offered differing perspectives on the effect
    that directly reporting tax debt information would have on privacy.
    Some specialists said that reporting tax debts to credit bureaus would
    be significantly different from other disclosures of federal tax
    information. Current authorizations to disclose tax information
    generally are to government agencies for tax and other limited,
    specific uses by the government. In contrast, reporting tax debts to
    credit bureaus would involve disclosure of federal tax information to
    private sector companies. However, some specialists also noted that
    some tax debts are already subject to public disclosure in the notice of
    federal tax lien, and that credit bureaus routinely identify and report
    the information from such notices.

•   Experts observed that policymakers may wish to consider applying
    the requirements of FCRA to a tax debt reporting program, as doing
    so could address concerns about giving taxpayers the opportunity to
    dispute negative information and ensuring transparent and limited use
    of information about them. Policymakers may also wish to consider
    applying the requirements of the Debt Collection Improvement Act,
    which governs debt reporting by other federal agencies and gives
    taxpayers the opportunity to dispute negative information about
    nontax federal debts before a federal agency reports it. Several
    specialists stressed the importance of IRS having an effective process
    for giving taxpayers adequate notice before information is reported
    and for timely response and resolution of taxpayers’ inquiries or
    disputes. Notice, access, and correction opportunities could be




Page 16                                           GAO-12-939 Tax Debt Reporting
     addressed by incorporating those concepts into existing IRS
     procedures or possibly developing new procedures.

•    Most IRS disclosures of federal tax information include strict
     requirements to prevent subsequent redisclosure of the federal tax
     information, but reporting tax debts to credit bureaus would be
     different. Inherent in any likely proposal to report tax debt information
     to credit bureaus would be the understanding that the information
     would be redisclosed to other parties as permitted by federal law. 15
     Some specialists noted that once credit bureau information is
     redisclosed, it is less subject to controls on its use and more open to
     possible misuse. They noted that this would be a very serious
     consideration in light of the high level of protection typically given to
     federal tax information and taxpayers’ expectation that information
     about them will be protected by IRS. However, some specialists also
     noted that information about many tax debts is already made public
     through tax liens and available in credit bureau files.

•    Some specialists suggested the possibility that the threat of credit
     bureau reporting could increase compliance because people would
     seek to avoid incurring reportable debts or hurry to pay off their
     existing debts to improve their credit scores. The National Taxpayer
     Advocate, however, suggested that any proposal should be evaluated
     in light of the possibility that reporting tax debts to credit bureaus may
     result in some people choosing to not file or file inaccurately if they
     know they owe money to IRS. 16

•    Finally, experts observed that experience with tax liens may provide a
     useful analogue for considering potential effects of direct tax debt
     reporting on voluntary compliance. Studies by IRS and the Taxpayer
     Advocate have revealed desired and undesired compliance effects of
     liens in some cases. For example, the Taxpayer Advocate Service
     has conducted research that raises concerns about potential negative
     effects associated with liens. A 2011 study found that lien filing was
     associated with declines in taxpayers’ compliance and reported


15
  Credit bureaus are required by FCRA to protect the consumer information they maintain
from unauthorized disclosures or uses not allowed by federal law.
16
  The National Taxpayer Advocate is appointed by the Secretary of the Treasury and
reports to the Commissioner of Internal Revenue. The Taxpayer Advocate presents an
independent taxpayer perspective that does not necessarily reflect the position of the IRS,
the Treasury Department, or the Office of Management and Budget.




Page 17                                                    GAO-12-939 Tax Debt Reporting
                       income. 17 In the years studied, taxpayers subject to liens were less
                       likely to reduce their initial tax debt, file required returns, and have
                       increased income than other similarly situated taxpayers without liens
                       filed. However, the study also found lien filing was associated with
                       better payment compliance behavior among these same taxpayers in
                       subsequent years. IRS studies have also found that liens had positive
                       compliance effects for cases studied, such as increasing the likelihood
                       that a collection case would be resolved if a lien is filed sooner.

                  The IRS provided technical comments after viewing a draft of this report,
Agency Comments   which we incorporated as appropriate.


                  As agreed with your offices, unless you publicly announce the contents of
                  this report earlier, we plan no further distribution until 30 days from the
                  report date. At that time, we will send copies to interested congressional
                  committees, Secretary of the Treasury, Commissioner of Internal
                  Revenue, and other interested parties. In addition, the report will be
                  available at no charge on the GAO website at http://www.gao.gov.




                  17
                    National Taxpayer Advocate, “Estimating the Impact of Liens on Taxpayer Compliance
                  Behavior and Income,” 2011 Annual Report to Congress, Volume Two: TAS Research
                  and Related Studies, (Dec.31, 2011) p. 94.




                  Page 18                                                GAO-12-939 Tax Debt Reporting
If you have any questions about this report, please contact me at (202)
512-9110 or whitej@gao.gov. Contact points for our Offices of
Congressional Relations and Public Affairs may be found on the last page
of this report. Key contributors to this guide are listed in appendix III.




James R. White, Director
Tax Issues
Strategic Issues




Page 19                                         GAO-12-939 Tax Debt Reporting
Appendix I: External Parties Contacted


              Tax policy and tax administration

              •   Office of Tax Policy, Department of the Treasury

              •   Internal Revenue Service

              Reporting nontax debts to credit bureaus

              •   Financial Management Service, Department of the Treasury

              •   Department of Education

              •   Small Business Administration

              Regulating credit bureaus

              •   Federal Trade Commission

              •   Consumer Financial Protection Bureau

              Taxpayer and practitioner interests

              •   National Taxpayer Advocate

              •   American Institute of Certified Public Accountants

              •   National Association of Tax Professionals

              Privacy interests

              •   American Civil Liberties Union

              •   Center for Democracy & Technology

              •   Robert Gellman, Information Policy and Privacy Consultant

              Credit bureaus and credit reporting

              •   Equifax




              Page 20                                          GAO-12-939 Tax Debt Reporting
•   Experian

•   TransUnion

•   Innovis

•   Dun & Bradstreet

•   FICO

•   Consumer Data Industry Association

Financial business concerns

•   Financial Services Roundtable

•   American Bankers Association




Page 21                                  GAO-12-939 Tax Debt Reporting
Appendix II: List of Threshold and Policy
Factor Questions and Subquestions That
Guided Our Discussions with Subject Matter
Specialists
              Threshold questions

              1. Does the proposal have a clear purpose and description of how the
                 tax information will be used?
                  •     What specific information will be disclosed?

                  •     To whom will the information be disclosed?

                  •     What category or categories of taxpayers will be affected?

                  •     How will the information be used?

                  •     What purpose will be achieved?

              2. Does the proposal consider reasonable alternatives?

              3. Is the tax information accurate, complete, and current enough for the
                 stated purpose?

              4. Is the tax information to be disclosed relevant and the minimum
                 needed to achieve the stated purpose?

              5. Does the proposal address any other statutory, regulatory, or logistical
                 issues necessary for its implementation?

                  •     Will the proposal require additional legislation besides modifying
                        section 6103 to accomplish the desired result?

                  •     Does the proposal conflict with existing regulations, rules, or
                        statutes other than section 6103?

                  •     How will any logistical or practical barriers or hindrances to
                        implementing the proposed disclosure and use of information for
                        the stated purpose be resolved?




              Page 22                                              GAO-12-939 Tax Debt Reporting
Policy factor questions

Expected benefits and costs

1. What are the expected benefits of the proposal to disclose tax
   information?
    •     What are the estimated financial benefits, if any, to be achieved by
          using tax data?

    •     What are the nonfinancial benefits that are expected, if any?

2. What are the expected costs of obtaining and using the tax
   information to be disclosed?

    •     What are the estimated costs for IRS to provide the tax data?

    •     What are the estimated costs to the entity receiving the
          information?

    •     What are the expected costs for others affected by the tax-
          disclosure proposal?

Privacy effect and safeguards

3. What is the potential effect on privacy?

    •     To what extent will the proposal adversely affect taxpayer privacy?

    •     Is the use of the information transparent and limited?

    •     Will sufficient notice and control be provided to individuals?

4. What risks of improper use or unauthorized disclosure does the
   proposal create and how well does the proposal address those risks?

    •     Does the proposal adequately take into account risks of
          unauthorized use or redisclosure associated with the disclosure?




Page 23                                              GAO-12-939 Tax Debt Reporting
    •     Does the proposal provide adequate safeguards to mitigate those
          risks?

Effects on the tax system

5. What is the potential effect on voluntary taxpayer compliance?
    •     What is the potential effect on voluntary compliance by taxpayers
          whose tax information will be disclosed?

    •     What is the potential effect on general voluntary compliance for
          other taxpayers?

6. What is the potential effect on tax administration?
    •     How much will implementing the proposal affect current IRS
          activities or performance?

    •     How much will any related safeguard responsibilities add to IRS’s
          current responsibilities?




Page 24                                            GAO-12-939 Tax Debt Reporting
Appendix III: GAO Contact and Staff
Acknowledgments

                  James R. White, (202) 512-9110 or whitej@gao.gov
GAO Contact
                  In addition to the contact named above, David Lewis, Assistant Director;
Staff             Ronald W. Jones, Analyst-in-Charge; Ellen Rominger; Cynthia Saunders;
Acknowledgments   and Sabrina Streagle made key contributions to this report.




(450958)
                  Page 25                                        GAO-12-939 Tax Debt Reporting
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