oversight

IRS Seizures: Needed for Compliance but Processes for Protecting Taxpayer Rights Have Some Weaknesses

Published by the Government Accountability Office on 1999-11-29.

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

                United States General Accounting Office

GAO             Report to the Chairman, Committee on
                Finance, U.S. Senate



November 1999

                IRS SEIZURES
                Needed for
                Compliance but
                Processes for
                Protecting Taxpayer
                Rights Have Some
                Weaknesses




GAO/GGD-00-4
United States General Accounting Office                                            General Government Division
Washington, D.C. 20548



                 B-278956

                 November 29, 1999

                 The Honorable William V. Roth, Jr.
                 Chairman, Committee on Finance
                 United States Senate

                 Dear Mr. Chairman:

                 This report discusses the Internal Revenue Service’s (IRS) use of seizure authority, including
                 which taxpayers were targeted for seizure; whether appropriate discretion was exercised in
                 conducting seizures and protecting taxpayer rights; whether IRS properly managed and
                 disposed of seized assets; and whether IRS’ implementation of the IRS Restructuring and
                 Reform Act of 1998 will address any weaknesses found in the pre-Restructuring Act process.

                 This report was prepared at your request because of concerns over the adequacy of taxpayer
                 protections during the seizure process that were identified during hearings held by the
                 Committee in September 1997.

                 As agreed with your office, unless you publicly announce its contents earlier, we plan no
                 further distribution of this report until 30 days from the date of this letter. At that time, we
                 will send copies to Senator Daniel P. Moynihan, Ranking Minority Member, Committee on
                 Finance, and to other congressional committees as appropriate. We will also send copies of
                 this report to the Honorable Charles O. Rossotti, Commissioner of Internal Revenue, and we
                 will make copies available to others upon request.

                 This work was done under the direction of Thomas M. Richards. Other major contributors to
                 this report are acknowledged in appendix IV. If you have any questions, please call me or Mr.
                 Richards on (202) 512-9110.

                 Sincerely yours,




                 James R. White
                 Director, Tax Policy and
                   Administration Issues




                 Page 1                                                     GAO/GGD-00-4 IRS’ Use of Seizure Authority
Executive Summary


              To collect unpaid taxes, in fiscal year 1997, Internal Revenue Service
Purpose       revenue officers seized property from about 8,300 delinquent taxpayers
              who owed the federal government about $1.1 billion. In making these
              seizures, revenue officers were required to follow statutory and IRS
              procedural requirements established to protect taxpayer interests.

              Although a relatively small number of delinquent taxpayers are affected by
              seizures, the impact on these taxpayers can be severe. Delinquent
              taxpayers have lost their homes and businesses for nonpayment of taxes.

              Because of concerns over the adequacy of taxpayer protections during the
              seizure process, the Senate Finance Committee held a series of hearings
                                                                                     1
              beginning in September 1997. These hearings, at which GAO testified,
              contributed to the passage of the IRS Restructuring and Reform Act of
              1998. In part, the act was designed to better protect taxpayers from
              unwarranted collection actions, such as the seizure of their property, if
              other collection alternatives were available. IRS has begun implementing
              these additional protections.

              Given congressional concerns over taxpayer protections, the Chairman
              asked GAO to review IRS’ use of seizure authority as documented in a
              random sample of closed collection case files predating the Restructuring
              Act and to gather information that could indicate whether IRS’
              implementation of Restructuring Act process changes would fully address
              any weaknesses found. Accordingly, the objectives of GAO’s review were
              to

            • determine whether IRS, in exercising seizure authority, (1) targeted the
              most noncompliant taxpayers, (2) brought affected taxpayers into
              compliance, and (3) exercised appropriate discretion in conducting
              seizures;
            • assess IRS’ pre-Restructuring Act processes, and any departures from
              those processes, for protecting taxpayer rights and interests in planning
              and conducting seizures; and
            • determine if the changes being made to the seizure process pursuant to the
              Restructuring Act would address any weaknesses found in IRS’ pre-
              Restructuring Act seizure process.

              GAO reviewed a representative sample of seizures initiated in fiscal year
              1997 with assets sold or returned to the taxpayers by mid-1998. As agreed

              1
              See Tax Administration: IRS’ Use of Enforcement Authorities to Collect Delinquent Taxes (GAO/T-
              GGD-97-155, Sept. 23, 1997).




              Page 2                                            GAO/GGD-00-4 IRS’ Use of Seizure Authority
                     Executive Summary




                     with the Committee staff and IRS, these cases were selected because they
                     were the most recent closed cases available for this review.

                     IRS’ use of seizure authority produced mixed results in terms of targeting
Results in Brief     the most noncompliant taxpayers and then bringing them into compliance.
                     GAO’s review of a sample of fiscal year 1997 seizures showed the
                     following:

                   • Seizures targeted the more noncompliant taxpayers—statistically, the
                     greater the amount of unpaid taxes or the number of outstanding tax
                     delinquencies, the greater the likelihood of seizure.
                   • The likelihood of seizure varied by location—seizures were as much as 17
                     times more likely for delinquent individual taxpayers in some IRS district
                     offices than others. Investigating the causes for the variation was outside
                     the scope of this report.
                   • Many seizures improved compliance with the tax laws—for example, 42
                     percent of taxpayers had their full tax liability resolved after having assets
                     seized, largely by the taxpayers producing funds to pay all of their
                     outstanding tax liabilities and having their property returned.
                   • Some seizures produced little—for 22 percent of affected taxpayers, the
                     seizures produced little revenue to the government and contributed little
                     to resolving the taxpayers’ delinquencies.

                     In reviewing 115 sample seizure cases, GAO found examples in which IRS
                     revenue officers’ use of discretion in deciding whether and how to conduct
                     a seizure was questionable. GAO recognizes that some revenue officer
                     discretion is necessary and that the adversarial nature of seizure cases can
                     limit the information available to revenue officers when making seizure
                     decisions. Nevertheless, some of the decisions made by revenue officers
                     were questionable. For example, in one case IRS seized two assets from a
                     taxpayer, both of which were disproportionately greater in value than the
                     outstanding tax liability. Given that identifying questionable decisions is
                     inherently subjective, GAO noted some clear-cut cases but did not attempt
                     to estimate the overall number of questionable decisions.

                     IRS’ use of seizure authority is in transition while IRS adapts to the
                     Restructuring Act requirements. Revenue officers have expressed
                     concerns about a lack of guidance on when to make seizures in light of the
                     act, and the number of seizures has declined by about 98 percent, from
                     roughly 10,000 per year (1990-97) to about 200 for fiscal year 1999. IRS
                     officials expect the number of seizures to rebound as changes to the
                     seizure program are implemented and revenue officers adapt to the new
                     requirements.



                     Page 3                                  GAO/GGD-00-4 IRS’ Use of Seizure Authority
Executive Summary




GAO’s review of IRS’ processes for protecting taxpayer rights and interests
in planning and conducting seizures identified implementation
breakdowns and, in some instances, inadequate process requirements.
Specifically, GAO identified departures from requirements in IRS’
preseizure processes for controlling the use of seizure authority where, for
example, an estimated 9 percent of taxpayers with seized assets were not
sent all of the required written notices. Breakdowns and inadequate
processes were also identified in the postseizure processes for controlling
assets, selling assets, and reviewing actions taken. One example is that
about one-half of asset sales attracted no more than one bidder.

Because of the severe impact that seizures may have on taxpayers, GAO
views any breakdown in the seizure process as a weakness. Additionally,
GAO found numerous instances of incomplete documentation in seizure
files. The lack of documentation did not allow managers to properly
review revenue officer actions, leaving the potential that taxpayer
protections were not fully considered.

GAO’s comparison of the weaknesses found in the pre-Restructuring Act
seizure program with the changes IRS is making shows that some
significant weaknesses were not being fully addressed. With respect to
controlling the use of seizure authority, it is unclear whether continued
reliance on manual reviews of revenue officer case files, which failed to
prevent process departures in the past, would be sufficient to prevent
departures from process requirements in the future. In addition, only
limited guidance is being provided to revenue officers on how to carry out
and document some of the new seizure guidelines.

With respect to controlling and selling assets after seizure, existing and
proposed controls do not establish accountability over seized assets nor
have processes been put in place to provide assurance that assets are sold
for the maximum possible price.

With respect to management review of seizure actions, changes being
made to implement the act will not give IRS’ management the information
it needs to monitor seizure results, including the uniform use of seizure
authority across the country, appropriate use of discretion in seizure
decisionmaking, or resolution of taxpayer complaints.

Because the impact of seizures on taxpayers can be severe and the number
of seizures are likely to increase in the future, GAO is making
recommendations to deal with weaknesses that persist in IRS’ collection
process.



Page 4                                 GAO/GGD-00-4 IRS’ Use of Seizure Authority
               Executive Summary




               IRS has long operated a graduated collection process (i.e., sending
Background     taxpayers written notifications requesting payment, followed by telephone
               contacts and personal visits). Under IRS procedures, for taxpayers who
               were unwilling to pay their tax debts in a manner that was commensurate
               with their ability to pay, IRS was to initiate enforced collection actions.
               The actions could culminate in the seizure of the taxpayers’ property by
               IRS revenue officers–IRS’ field staff responsible for collecting taxes from
               delinquent taxpayers.

               IRS policies defined the general conditions that were to be met before a
               seizure action was considered appropriate. The policies specified that all
               taxpayers were expected to pay their taxes in full. If that was not possible,
               taxpayers were to be required to pay an amount that was determined by
               IRS to be reasonable. However, if taxpayers resisted complying or did not
               show a good-faith effort to comply, enforced collection action, up to and
               including asset seizure, was to be promptly taken. The IRS policy
               recognized that “good judgment” was needed to make such decisions.

               IRS policies specify that decisions to seize were the most sensitive
               decisions that revenue officers were called upon to make. As such, the
               Internal Revenue Manual emphasized that revenue officer decisions
               regarding the taxpayers’ ability to pay (as determined by an analysis of
                                                                2
               their income and expenses and equity in assets ) and taxpayers’ efforts to
               resolve their tax liabilities should be reviewed by collection managers.
               Also, before taking seizure action, the Internal Revenue Manual required
               that all relevant statutory and procedural requirements be met.

               With enactment of the IRS Restructuring Act in July 1998, additional
               taxpayer protections were incorporated into the graduated collection
               process that IRS had operated for years. For example, IRS was mandated
               to make a number of changes to the seizure process. These changes
               included requiring IRS to

             • notify taxpayers of newly established rights to appeal collection issues and
             • discipline revenue officers and collections managers, including terminating
               their employment, for not adhering to statutory or IRS procedural
               requirements.

               2
                Under the Internal Revenue Code, IRS’ seizure authority only extends to a taxpayer’s actual ownership
               interest (i.e., equity) in an asset. For example, a delinquent taxpayer may “own” a relatively expensive
               car. However, the taxpayer may owe almost as much to a secured creditor as the car’s fair market
               value, perhaps owing $23,000 on a $25,000 car. Given that a prospective purchaser of such property
               from IRS would be responsible for resolving the secured debt, the maximum that IRS could expect to
               realize from the sale of such an automobile would be $2,000, the taxpayer’s equity in the car.




               Page 5                                               GAO/GGD-00-4 IRS’ Use of Seizure Authority
                               Executive Summary




Principal Findings

IRS’ Use of Seizure            IRS’ use of seizure authority and processes for protecting taxpayers’
Principal   Findings           interests and rights produced mixed results in terms of targeting the most
Authority Produced             noncompliant taxpayers and bringing taxpayers into compliance with the
Mixed Results and Was          tax law.
Questionable in Some Cases
                             • GAO’s analyses of seizure data showed that seizures were targeted, on
                               average, to the more noncompliant taxpayers. Individuals whose assets
                               were seized, on average, owed about 2.6 times more unpaid taxes than
                               those whose assets were not seized. In a statistical analysis, GAO
                               determined that each additional outstanding tax debt increased an
                               individual taxpayer’s odds of seizure by 13 percent, while each $1,000 of
                               unpaid taxes increased the odds by 1 percent.
                             • After controlling for noncompliance and other factors, such as income, the
                               likelihood of a delinquent taxpayer’s assets being seized varied
                               substantially by IRS district office. For individual taxpayers, the likelihood
                               of a seizure was as much as 17 times higher in some district offices than
                               others. Investigating the causes for the variation was outside the scope of
                               this report.
                             • GAO estimates that 42 percent of taxpayers in seizure cases had their full
                               tax liability resolved after having their assets seized. Almost 9 out of 10 of
                               these taxpayers produced funds to fully pay their total tax liabilities and
                               thus had their property returned. The funds were produced after the
                               seizure and after the taxpayers had been unresponsive to other preseizure
                               tax collection efforts, including letters, personal visits, and levies of bank
                               accounts and wages.
                             • GAO estimates that the seizure of property from 22 percent of the affected
                               taxpayers contributed little to reducing their tax debt. The seizure of these
                               taxpayers’ property produced less than IRS’ estimate of the overall
                                                                                        3
                               administrative cost of making a seizure (about $2,000 ) and resolved less
                               than 5 percent of each taxpayer’s outstanding tax debt. Moreover, these
                               seizures had little or no prospect for inducing further payments because
                               the taxpayers’ delinquent accounts were classified as “currently-not -
                               collectible” after the seizure.



                               3
                                IRS has data on out-of-pocket costs, such as third-party moving and storage costs, but does not have
                               data on the overall costs associated with making a seizure. IRS Internal Audit has estimated the total
                               costs of a seizure at about $2,000, which includes revenue officer time, indirect overhead, and
                               processing costs.




                               Page 6                                               GAO/GGD-00-4 IRS’ Use of Seizure Authority
    Executive Summary




    In addition, in reviewing 115 sample seizure cases, GAO identified
    examples where IRS revenue officers’ use of discretion in deciding
    whether and how to conduct a seizure was questionable. These cases
    included

•   seizure of property with a value disproportionate to the tax debt,
•   unwillingness to work with a taxpayer to resolve the delinquency,
•   superficial investigative work before seizure,
•   little advance warning of seizure, and
•   non-arms-length sale of assets.

    For example, a revenue officer seized taxpayer property valued at about
    $90,000 from a taxpayer who owed about $9,000 in unpaid taxes and then
                                                                             4
    subsequently seized another piece of property valued at about $38,000.
    The taxpayer fully paid the liability, and IRS returned the property. Given
    the unique characteristics of seizure cases and the subjective nature of
    determining what constitutes a “questionable” seizure, GAO did not
    attempt to estimate the number of questionable actions in the entire
    population of seizures.

    IRS’ use of seizure authority is in transition while it adapts to
    Restructuring Act requirements for providing greater taxpayer protections.
    During this transition, the number of seizures has declined by about 98
    percent, from roughly 10,000 seizures per year (1990-97) to about 200 for
    fiscal year 1999. Revenue officers in the four district offices visited by GAO
    said that seizures have nearly stopped because of their uncertainty
    regarding the Restructuring Act’s new and what they viewed as complex
    rules with potentially severe penalties for not following those rules. The
    revenue officers were concerned that unintentional errors in implementing
    the act’s provisions related to seizures could possibly lead to disciplinary
    actions, including termination of employment.

    Collection officials in IRS’ National Office indicated that they expect the
    number of seizures to rebound as changes to the program are implemented
    and revenue officers adapt to the new requirements. However they
    indicated that the anticipated level would be less than the previous level of
    about 10,000 seizures per year. Anticipating a rebound is consistent with
    GAO’s analyses of fiscal year 1997 seizures. For example, GAO estimates
    that about 3,000 taxpayers waited until after a seizure to fully pay their tax


    4
    Values cited are the taxpayer’s ownership rights to the property (i.e., equity in the property) as
    determined by IRS.




    Page 7                                                GAO/GGD-00-4 IRS’ Use of Seizure Authority
                          Executive Summary




                          liability despite numerous collection contacts by revenue officers over
                                                    5
                          extended periods of time.

Pre-Restructuring Act     GAO’s review of fiscal year 1997 cases identified a number of weaknesses
                          in IRS’ pre-Restructuring Act processes for protecting taxpayer rights and
Process Weaknesses        interests. Weaknesses appear in the preseizure processes for controlling
                          the use of seizure authority and in the postseizure processes for
                          controlling and selling assets and for reviewing the actions taken.

                          Before seizure, most but not all taxpayers were given numerous warnings
                          of possible seizure action. GAO estimates that, on average, delinquent
                          taxpayers received 15 written notices in the 3 years before seizure and 5
                          personal contacts by revenue officers in the year before seizure. However,
                          IRS’ controls did not prevent departures from notification requirements.
                          For example, GAO estimates that about 9 percent of taxpayers whose
                          assets were seized were not sent all required written notices. Also, GAO
                          estimates that revenue officers did not attempt to personally contact about
                          4 percent of taxpayers before seizing their property.

                          GAO’s file review also showed that seizures were frequently made without
                          all the information required to justify the seizure. For example, GAO
                          estimates that 39 percent of seizures were made without complete
                          information on the expected financial results of the seizure–18 percent
                          lacked estimates of asset fair market value, 20 percent lacked estimates of
                          asset encumbrances necessary for estimating taxpayer equity in the assets,
                          and 32 percent lacked estimates of seizure and sale costs. GAO recognizes
                          that, because of the adversarial nature of seizure proceedings, estimates of
                          expected financial results from seizures may be uncertain. IRS did
                          routinely ask taxpayers for financial information before seizure, however,
                          GAO estimates that approximately 90 percent of the taxpayers did not
                          provide complete and accurate information when asked. Nevertheless,
                          such information is required to comply with the tax code’s prohibition on
                          uneconomical seizures.

                          With respect to postseizure controls, GAO found weaknesses in IRS’ asset
                          control system.

                        • First, the asset control information documented by revenue officers in
                          their case files was not as comprehensive as the control information
                          5
                           GAO estimates that the fiscal year 1997 seizures resolved about $235 million (about 22 percent) of the
                          taxpayers’ outstanding tax debts. Because IRS generally has up to 10 years to collect delinquent taxes
                          and because some seizures did not bring in significant revenue, it is unclear what the transition to a
                          new seizure program means in terms of tax collections.




                          Page 8                                               GAO/GGD-00-4 IRS’ Use of Seizure Authority
                           Executive Summary




                           required by federal financial management guidelines. For example, GAO
                           estimates that asset description and asset custody information was
                           incomplete for about 25 percent and 47 percent of the seizure files,
                           respectively.
                         • Second, GAO estimates that for 12 percent of the seizures involving assets
                           requiring security, such as jewelry, the case files did not document
                           whether any security arrangements were made.
                         • Third, IRS’ automated inventory control system did not capture some of
                           the basic asset control information documented by revenue officers, was
                           not always accurate, was not always updated in a timely manner, and was
                           not periodically reconciled to revenue officer files or actual assets-on-hand
                           through physical inventories. In one case, taxpayer equity as shown in the
                           automated system and revenue officer files differed by more than $2
                           million.

                           GAO’s review showed that IRS had little assurance that it sold seized
                           assets for the maximum possible price. An estimated 51 percent of the
                           asset sales attracted no more than one bidder. Nor, absent strong
                           competition, did IRS controls establish an adequate basis for evaluating
                           the reasonableness of sales proceeds or guard against self-interest sales.
                           IRS’ basic control, the minimum acceptable sales price, was frequently
                           computed in an arbitrary manner. GAO estimates that values for only
                           about 4 percent of the seized assets were based on a professional
                           appraisal.

                           GAO’s review also showed that IRS’ seizure monitoring systems did not
                           provide senior management with information useful for overseeing the use
                           of seizure authority. The systems did not provide information on (1)
                           seizure results, including the uniformity of seizure use across the country,
                           and costs; (2) seizure quality, such as compliance with process
                           requirements and appropriateness of seizure decisionmaking; and (3) the
                           resolution of taxpayer complaints.

Comparing Pre-Act          GAO’s comparison of pre-Restructuring Act weaknesses in IRS’ processes
                           for protecting taxpayer rights and interests to changes being made to
Weaknesses to Post-Act     implement the act shows that not all significant weaknesses have been
Changes                    fully addressed.

                           Because IRS’ controls were not sufficient to prevent departures from pre-
                           act process requirements, it is unclear whether the continued reliance on
                           manual reviews of revenue officer case file information would be sufficient
                           to prevent future departures from requirements. GAO looked for a
                           relatively “fail-safe” check that could stop a collection case from advancing



                           Page 9                                 GAO/GGD-00-4 IRS’ Use of Seizure Authority
Executive Summary




to seizure if a requirement was not met. An IRS automated field collection
system was identified that could be modified to make such checks and
thus allow managers to focus their reviews on judgmental areas, such as
revenue officer’s use of discretion.

Given the Restructuring Act’s requirement for IRS to make judgments
regarding taxpayer’s ability to pay and the expected seizure proceeds and
the difficulty of collecting the needed information from uncooperative
taxpayers, GAO expected to see clearly delineated preseizure procedures
and documentation requirements. To implement the act, IRS is requiring
revenue officers before a seizure to make a risk analysis that would
consider such factors as the taxpayer’s financial condition. However, only
limited guidance has been provided on how to carry out the risk analysis.
For example, the guidance does not specify the lengths that revenue
officers are expected to go to obtain and document financial information
for uncooperative taxpayers. GAO found that IRS’ new procedures
regarding seizure decisionmaking did not clearly depict conditions under
which a seizure would be warranted or specify senior management’s
responsibilities for ensuring seizure authority was appropriately exercised.

With respect to controlling and selling assets after seizure, the
Restructuring Act requires IRS to remove revenue officers from any
participation in the sale of seized assets and consider “outsourcing” asset
sales. IRS has convened a study group to develop plans and guidance for
removing revenue officers from the asset sale process and to consider
outsourcing. The group’s decisions were not finalized at the time we
published our report but were expected by late 1999.

Regardless of who sells the assets, controls must be sufficient to establish
accountability and safeguard assets and to provide assurance that assets
are sold for the maximum amount possible. However, IRS’ existing and
proposed controls do not provide such assurance. For example, proposed
asset controls do not require the use of receipts to document responsibility
for asset custody.

The Restructuring Act mandated a number of changes to improve
oversight of the seizure program, such as an annual review of seizure cases
by the Department of the Treasury’s Inspector General for Tax
Administration to ensure compliance with statutory requirements.
However, changes being made to implement the act will not give IRS
management the information it needs on seizure results and costs, the
appropriate use of discretion by revenue officers and their supervisors in




Page 10                                GAO/GGD-00-4 IRS’ Use of Seizure Authority
                    Executive Summary




                    deciding whether and how to conduct a seizure, and the resolution of
                    taxpayer complaints.

                    The tax system depends on taxpayers voluntarily paying their taxes, a
Recommendations     practice dependent on taxpayers having confidence that their neighbors or
                    competitors are also complying. The use of seizure authority is a necessary
                    part of a tax enforcement program that is intended to provide this
                    confidence. Taxpayers with substantial amounts of delinquent taxes, long-
                    standing delinquencies, repeated failures to respond to nonseizure
                    collection actions, and substantial assets cannot be allowed to evade
                    payment without putting the credibility and fairness of the tax system at
                    risk. However, the protection of taxpayers’ rights and interests is also
                    crucial to a credible and fair tax system. In this regard, IRS’ seizure
                    process has a number of weaknesses–weaknesses that are not all
                    addressed by changes being made pursuant to the Restructuring Act.

                  • To strengthen IRS’ processes for ensuring that seizure authority is
                    appropriately exercised and when warranted is exercised, GAO is making
                    four recommendations aimed at clarifying when seizure actions ought to
                    be taken, preventing departures from process requirements established to
                    protect taxpayer interests, and delineating senior managers’
                    responsibilities for ensuring that seizures are made when justified.
                  • To improve IRS’ process for controlling assets after seizure, GAO is
                    making four recommendations for improving accountability and
                    safeguards over seized assets, including periodic physical inventories.
                  • To strengthen the sales process for assuring that the maximum prices are
                    obtained from seized asset sales, GAO is making two recommendations for
                    promoting reasonable competition at sales and improving methodologies
                    for determining the minimum acceptable prices.
                  • To strengthen the oversight of seizure activities, GAO is making two
                    recommendations for providing IRS senior managers with useful
                    information to monitor the use of seizure authority and resolution of
                    taxpayer complaints.

                    The recommendations appear at the end of chapter 4.

                    In written comments on a draft of this report, IRS generally agreed with
Agency Comments     the report’s findings and recommendations, although it said that some
                    recommendations appeared impractical to implement at this time. IRS also
                    said it will use the report to help improve the seizure process. In its letter,
                    IRS emphasized three points made in the report.




                    Page 11                                 GAO/GGD-00-4 IRS’ Use of Seizure Authority
  Executive Summary




• First, while additional guidance needs to be provided to IRS employees
  about how to conduct seizures, that guidance needs to allow room for
  employees to exercise judgment to address individual taxpayer situations.
• Second, predicting seizure results is extremely difficult.
• Third, the wide variation in the use of seizure authority by district offices
  can be attributable to a number of factors.

  IRS further said that the procedural changes being implemented were
  expected to eliminate a number of seizures that would otherwise provide
  little or no proceeds.

  In an enclosure to the letter, IRS commented on each recommendation.
  With respect to the two recommendations to strengthen oversight of
  seizure activities, IRS commented that, at this time, it appeared impractical
  to monitor the appropriateness of seizure decisionmaking. IRS’ comments
  indicated that existing case file handling and selection criteria preclude
  seizure cases from entering IRS’ overall program for assessing work
  quality and that feedback from required Inspector General reviews was
  more comprehensive. GAO agrees that current IRS procedures preclude
  seizure cases from entering the review process established to assess the
  quality of collection work, including the appropriateness of decision-
  making. But, because of the impact that seizures may have on taxpayers,
  GAO believes that the procedures should be reconsidered so that an
  appropriate number are selected for review. Moreover, as discussed in the
  report, the Inspector General reviews have focused on compliance with
  seizure process requirements and not on the quality of seizure work in
  terms of the appropriateness of seizure decisionmaking. This reinforces
  the need for seizure cases to be included in the quality review process.

  In comments on the oversight recommendation for monitoring seizure
  results (e.g., use of seizure authority by district offices and resolution of
  taxpayer complaints), IRS commented that useful information could only
  be developed through detailed case-by-case analyses. In part, GAO agrees,
  and that is why GAO had recommended that IRS’ quality review of
  collection cases include seizures. Also, GAO continues to believe that
  effective oversight is necessary for IRS to have assurance that collection
  authority is both appropriately and uniformly applied across the country.
  To this end, a monitoring system comprised of seizure results data
  (including data on the use of seizure authority by district offices and the
  resolution of taxpayer complaints) together with quality indicators could
  provide senior management with the kind of data that would be useful in
  identifying potentially troublesome areas that may need management’s
  attention. The information on complaints resolved in the taxpayers’ favor



  Page 12                                 GAO/GGD-00-4 IRS’ Use of Seizure Authority
Executive Summary




may be particularly useful. But, contrary to IRS’ comments, GAO sees no
need to channel all complaints through a single process in order to have
complaint resolution information reported to management.




Page 13                               GAO/GGD-00-4 IRS’ Use of Seizure Authority
Contents



Executive Summary                                                                                    2


Chapter 1                                                                                           18
                        Background                                                                  19
Introduction            Objectives, Scope, and Methodology                                          24


Chapter 2                                                                                           30
                        Extent of Noncompliance and Location Were                                   31
Many Seizures             Determinants of Seizure Likelihood
Increased Compliance,   Many Seizures Produced Taxpayer Compliance and                              35
                          Millions of Dollars
But Use Varied by       Seizures for About One in Five Taxpayers Achieved Little                    38
Location, and Some        Compliance
                        Examples of Questionable Seizures                                           40
Were Questionable       Sharp Decline in IRS’ Use of Seizure Authority                              42
                        Conclusions                                                                 44


Chapter 3                                                                                           45
                        Most, But Not All, Affected Taxpayers Were Provided the                     45
Weaknesses in IRS’        Required Opportunities to Resolve Tax Debts Before
Pre-Restructuring Act     Seizure
                        Some Seizures Approved Based on Limited Information                         50
Seizure Processes for   IRS Generally Complied With Procedures for Conducting                       55
Protecting Taxpayer       Seizures
                        Weak Controls Over Assets Seized                                            56
Rights and Interests    Asset Sales: Little Assurance That Maximum Returns                          62
                          Were Achieved
                        Limited Management Oversight of Use of Seizure                              69
                          Authority
                        Conclusions                                                                 74




                        Page 14                              GAO/GGD-00-4 IRS’ Use of Seizure Authority
                         Contents




Chapter 4                                                                                            76
                         Continuing Seizure Process Weaknesses                                       76
IRS’ Implementation of   Conclusions                                                                 85
Restructuring Act        Recommendations to the Commissioner of Internal                             85
                           Revenue
Requirements:            Agency Comments and Our Evaluation                                          87
Taxpayer Safeguards
Strengthened But
Some Weaknesses
Remain
Appendixes               Appendix I: Statistical Analysis of Delinquent Taxpayers                    90
                           With and Without Seized Assets
                         Appendix II: Confidence Intervals for Tables                               97
                         Appendix III: Comments From the Internal Revenue                          104
                           Service
                         Appendix IV: GAO Contacts and Staff Acknowledgments                       111


Tables                   Table 2.1: Delinquency Characteristics of Individual                        31
                           Taxpayers With and Without Seized Assets
                         Table 2.2: Delinquency Characteristics of Business                          33
                           Taxpayers With and Without Seized Assets
                         Table 2.3: Percentage of Delinquencies Resolved Through                     36
                           Seizures
                         Table 2.4: Delinquency Amounts, Days in Collection, and                     37
                           Revenue Officer Collection Results
                         Table 3.1: Key Requirements for Giving Taxpayers an                         47
                           Opportunity to Resolve Their Delinquent Tax Debts
                         Table 3.2: Key Steps in Developing Information for                          51
                           Assessing Taxpayers’ Ability to Pay
                         Table 3.3: Required Elements for Estimating Seizure                         53
                           Results
                         Table 3.4: Documented Reasons for Taking Seizure                            54
                           Action
                         Table 3.5: Key Steps Taken to Protect Taxpayer Rights                       55
                           During the Seizure Process
                         Table 3.6: Completeness of Inventory Descriptions                           57
                         Table 3.7: Adherence to Basic Taxpayer Protections in                       63
                           Cases That Went to Sale
                         Table 3.8: Type of Taxpayer Complaint                                       73




                         Page 15                              GAO/GGD-00-4 IRS’ Use of Seizure Authority
          Contents




          Table 3.9: Resolution of Taxpayer Complaints                                  73
          Table I.1: Logistic Regression Analysis of the Probability                    92
            of Seizure for Individual Taxpayers
          Table I.2: Logistic Regression Analysis of the Probability                    94
            of Seizure for Business Taxpayers
          Table II.1: Confidence Intervals for Percentage of Tax                        97
            Delinquencies Resolved
          Table II.2: Confidence Intervals for Delinquency                              98
            Amounts, Days in Collection, and Revenue Officer
            Collection Results
          Table II.3: Confidence Intervals for Key Requirement for                      99
            Giving Taxpayers an Opportunity to Resolve Their Tax
            Debts
          Table II.4: Confidence Intervals for Assessing Taxpayers’                     99
            Ability to Pay
          Table II.5: Confidence Intervals for Estimating Seizure                     100
            Results
          Table II.6: Confidence Intervals for Reasons for Taking                     100
            Seizure Action
          Table II.7: Confidence Intervals for Protecting Taxpayer                    101
            Rights During the Seizure Process
          Table II.8: Confidence Intervals for Completeness of                        101
            Inventory Descriptions
          Table II.9: Confidence Intervals for Adhering to Basic                      102
            Taxpayer Protections in Cases That Went to Sale
          Table II.10: Confidence Intervals for Types of Taxpayer                     102
            Complaint
          Table II.11 Confidence Intervals for Resolution of                          103
            Taxpayer Complaints


Figures   Figure 2.1: Trends in IRS’ Use of Seizure Authority                           43




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Page 17   GAO/GGD-00-4 IRS’ Use of Seizure Authority
Chapter 1

Introduction


                 To collect unpaid taxes in fiscal year 1997, IRS revenue officers seized
                 property (e.g., residences, automobiles, and business assets) from about
                                                                                        1
                 8,300 taxpayers who owed the federal government about $1.1 billion. In
                 making these seizures, revenue officers were required to follow statutory
                 and procedural requirements established to protect taxpayer interests.

                 Because of concerns over the adequacy of taxpayer protections, the Senate
                 Finance Committee held a series of hearings beginning in September 1997.
                                                       2
                 These hearings, at which we testified, contributed to the passage of the
                                                           3
                 IRS Restructuring and Reform Act of 1998. In part, the act was designed to
                 better protect taxpayers from unwarranted collection actions (e.g., the
                 seizure of taxpayer property when other collection alternatives were
                 available). IRS has begun implementing these additional protections.

                 Given congressional concerns over taxpayer protections, the Chairman
                 asked us to review IRS’ use of seizure authority as documented in a
                 random sample of closed collection case files and to determine whether
                 IRS’ adoption of Restructuring Act process changes would fully address
                 any problems found. Accordingly, the objectives of this review were to

               • determine whether IRS, in exercising seizure authority, (1) targeted the
                 most noncompliant taxpayers, (2) brought affected taxpayers into
                 compliance, and (3) exercised appropriate discretion in conducting
                 seizures;
               • assess IRS’ pre-Restructuring Act processes, and any departures from
                 those processes, for protecting taxpayer rights and interests in planning
                 and conducting seizures; and
               • determine if the changes being made to the seizure process pursuant to the
                 Restructuring Act would address any weaknesses found in IRS’ pre-
                 Restructuring Act seizure process.

                 The random sample of 1997 seizure cases that we selected for this review
                 were drawn from cases in which IRS seizure action was initiated in fiscal

                 1
                  As described in the Objectives, Scope, and Methodology section of this report, the results of our
                 analyses of the random sample of taxpayers whose assets were seized by IRS are presented as
                 estimates within certain intervals computed at the 95-percent confidence level. The estimates are cited
                 in the report text and the confidence intervals in footnotes. For example, regarding the amount of
                 taxes owed by these taxpayers, we can be 95-percent confident that the interval of $1.1 billion plus or
                 minus about $300 million contains the actual value of taxes owed. The format adopted for reporting
                 confidence intervals in this report follows: 95-percent confidence interval: $800 million to $1.4 billion.
                 2
                 See Tax Administration: IRS’ Use of Enforcement Authorities to Collect Delinquent Taxes (GAO/T-
                 GGD-97-155, Sept. 23, 1997).
                 3
                     P.L. 105-206, July 22, 1998.




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                        Introduction




                        year 1997 and collection action was completed, including the sale of the
                        seized assets, by mid-1998. This was the most recent year of closed
                        collection case files available at the time we started our review.

                        To collect delinquent taxes, IRS has long operated a graduated process
Background              that could culminate in the seizure of taxpayer assets. With passage of the
                        Restructuring Act, the graduated process was retained, but a number
                        taxpayer protections were added. These protections included requiring IRS
                        to redefine its mission statement to place greater emphasis on meeting
                        taxpayer needs; establishing “due process” in collections by requiring IRS
                        to provide taxpayers with notice and opportunity for a hearing before
                        seizure; expanding the availability and consideration to be given to
                        alternative collection methods, such as installment agreements; requiring
                        more senior level review and approval of seizure decisions; and mandating
                        disciplinary actions against IRS employees, including revenue officers, for
                        certain acts or omissions.

Overview of Pre-        The collection process started once IRS had identified taxpayers who had
                        not paid the amount due as determined by their tax assessment and
Restructuring Act       payment history. These tax assessments resulted from a number of
Collection Process      actions, ranging from the self-assessment of taxes by a taxpayer on a tax
and Policies            return filed voluntarily to an IRS assessment of a tax deficiency identified
                        in an audit.

                        After determining that a tax was due and unpaid, IRS was required to send
                        the taxpayer a notice of deficiency. This notice gave the taxpayer 90 days
                        (150 days for a taxpayer outside the United States) to file a petition with
                        the Tax Court contesting the deficiency. Upon expiration of the 90 days or
                        a determination by the Tax Court that the deficiency existed, IRS was
                        authorized to officially assess the tax and within 60 days send the taxpayer
                        a notice and demand for payment of the tax. If these requirements were
                        met and the tax was still unpaid, IRS was authorized to initiate enforced
                        collection action.

                        The collection process was grounded on the principle that a tax system
                        based on voluntary assessment and payment of taxes would not be viable
                        without enforcement processes to ensure compliance. Accordingly, IRS
                        was responsible for taking all appropriate actions provided by law,
                        including the seizure of taxpayer property, to compel noncompliant
                        taxpayers to pay their taxes.

Stages of the Process   In the first stage of the collection process, IRS service centers were
                        required to send a series of notices demanding payment from the



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delinquent taxpayers. Collectively, these notices also were to provide the
taxpayers with statutorily required notifications of their tax liabilities, IRS’
              4
intent to levy assets if necessary, and information on the taxpayers’ rights.

Under the Internal Revenue Code, if the taxpayers did not pay after being
                                                       5
notified of their tax delinquencies, a federal tax lien was automatically
established on the taxpayers’ property to protect the government’s interest
over other creditors and purchasers of the taxpayers’ property. The lien,
however, was not generally enforceable until IRS recorded it in the
                                          6
jurisdiction where the property resided.

In the second stage of the collection process, which included the
Automated Collection System, IRS employees were to make telephone
contact with the delinquent taxpayers. During this stage, if taxpayers did
not make arrangements to pay their taxes and information was available
on the taxpayers’ assets, IRS was authorized to record the liens on the
taxpayers’ property and send notices to levy the taxpayers’ wages, bank
accounts, and other financial assets held by third parties. Unresolved tax
delinquencies exceeding certain thresholds were to be referred to the third
and final stage of the collection process. Also, tax delinquencies exceeding
certain thresholds were generally to be referred directly to the final stage,
bypassing the second stage.

In the final stage of the collection process (known as field collections),
information about the tax delinquencies was referred to IRS’ field offices
for possible face-to-face contact with the delinquent taxpayers and for
possible in-depth investigation of the taxpayers’ ability to pay their tax
debts. To compel compliance, field offices were authorized to seize
taxpayers’ property when a number of specific requirements were met. For
example, IRS was prohibited from making uneconomical seizures in which
the amount of the expenses estimated at the time of seizure exceeded the
fair market value of the property at the time of seizure. (See chs. 3 and 4
for detailed analyses of taxpayer protection requirements.) The field
offices were also authorized to record liens on taxpayer property or levy
wages, bank accounts, and other financial assets held by third parties,
4
 Under the Internal Revenue Code, levy is defined as the seizure of a taxpayer’s assets to satisfy a tax
delinquency. IRS differentiates between the levy of assets in the possession of the taxpayer (referred to
as a seizure) and the levy of assets, such as bank accounts and wages, that are in the possession of
third parties, such as banks and employers (referred to as a levy). Before seizing or levying taxpayer
property, however, IRS must give the taxpayer 30 days’ notice of its intent.
5
    A lien is a legal claim that attaches to property to secure the payment of a debt.
6
 The recording of a lien would prevent the taxpayer from selling an asset to an unrelated party, with
clear title, without payment of the tax debt.




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                       depending on the need for such actions following those taken during the
                       second stage of the collection process.

                       At any stage in the collection process, IRS might find that taxpayers cannot
                       pay what is owed or do not owe what IRS records show as the unpaid tax
                       assessment. In such situations, IRS could abate erroneous assessments,
                       enter into installment agreements with the taxpayers for full payment of
                       the assessments, compromise for amounts less than the delinquent
                       assessments, and suspend or terminate the collection actions.

                       Also, if a taxpayer was having a problem reaching agreement on a
                       collection action with the initiating IRS office, the taxpayer could have
                       contacted IRS’ Taxpayer Advocate or IRS’ Collection Appeals Program for
                       resolution. The Taxpayer Advocate had the authority to order relief if the
                       enforced collection would be a hardship for the taxpayer. If an
                       enforcement action involved a reckless or intentional disregard of
                       taxpayer rights by an IRS employee, a taxpayer could sue for damages.

                       Property that had been seized by IRS may in turn have been sold once IRS
                       had given notice to the taxpayer and advertised the sale. In preparing to
                       sell the property, IRS was required to set a minimum price for which the
                       property may be sold. If no person offered the minimum price, IRS could
                       have bought the property at that price or returned the property to the
                       taxpayer. Taxpayers could also have had their property returned by paying
                       the amount of the tax due together with IRS’ expenses. Also, for real
                       property, taxpayers had up to 180 days after the sale to buy back their
                       property at a price equal to the sales amount plus interest.

IRS Seizure Policies   IRS’ seizure authority only extended to a taxpayer’s actual ownership
                       interest (i.e., equity) in an asset. For example, a delinquent taxpayer may
                       have a relatively expensive car, but the taxpayer may owe almost as much
                       to a secured creditor as the car’s fair market value, perhaps owing $23,000
                       on a $25,000 car. Given that a prospective purchaser of such property from
                       IRS would be responsible for resolving the secured debt, the maximum
                       that IRS could expect to realize from the sale of such an automobile would
                       be $2,000, the taxpayer’s equity in the car.

                       IRS policies defined the general conditions that must be met before seizing
                       taxpayer assets could be considered appropriate. The policies specified
                       that all taxpayers were expected to pay their taxes in full. If that was not
                       possible, taxpayers were to be required to pay an amount that was
                       reasonable. However, if taxpayers resisted complying or did not show a
                       good-faith effort to comply, enforced collection action, up to and including



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                              Introduction




                              asset seizure, was to be promptly taken. The IRS policy recognized that
                              “good judgment” was needed to make a decision to seize assets.

                              The authority for initiating the decision to seize was vested in IRS’
                              frontline collection employees (i.e., revenue officers), subject to certain
                              management reviews. The revenue officers, working out of IRS field
                              offices, were responsible for day-to-day collection actions. This included
                              contacting taxpayers by phone or in writing; making field visits to the
                              taxpayers; advising taxpayers of their rights and obligations; demanding
                              payment of taxes; requesting financial statements; investigating the
                              completeness of those statements, if appropriate; and if warranted,
                              negotiating settlements or initiating enforced collection actions. This was
                              to be done under the supervision of a group manager.

                              IRS recognized that decisions to seize were the most sensitive decisions
                              that revenue officers were called upon to make. As such, the Internal
                              Revenue Manual emphasized that revenue officer decisions should be
                              reviewed regarding the taxpayers’ (1) ability to pay as determined by an
                              analysis of their income and expenses, (2) equity in assets, and (3) efforts
                              to resolve their tax liabilities. Also, before taking seizure action, the
                              Internal Revenue Manual required that all relevant statutory and
                              procedural requirements be met (e.g., those established to ensure that
                              taxpayers have been provided with opportunities to resolve their tax
                              delinquencies) and that appropriate approvals within IRS be obtained.
                              (These are discussed in detail in chs. 3 and 4.)

The 1998 Act Mandated         The Senate Committee on Finance held a series of hearings on taxpayer
                                                                                         7
                              abuse beginning in September 1997, at which we testified. Following those
Changes in the Collection     hearings, Congress enacted the IRS Restructuring and Reform Act of
Process                       1998—in part to better protect taxpayers from inappropriate IRS use of
                              collection enforcement actions. The act also codified in law some
                              protections already required under IRS procedures.

                              The act retained the graduated collection process that IRS had operated
                              for years, but a number of taxpayer protections were added. The act
                              included the following provisions.

                            • Redefined IRS’ overall mission. The act required IRS to review and restate
                              its mission to place greater emphasis on serving the public and meeting
                              taxpayer needs.

                              7
                              See Tax Administration: IRS’ Use of Enforcement Authorities to Collect Delinquent Taxes (GAO/T-
                              GGD-97-155, Sept. 23, 1997).




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• Established “due process” in collections. The act required IRS to provide
  taxpayers with additional notifications of IRS’ intent to take enforced
  collection actions and expanded taxpayer rights to appeal such decisions.
  The act required that IRS give the taxpayer written notice within 5
  business days after filing a lien and an additional notice 30 days before
  initiating a levy or seizure action. The act also required these notices to
  state that taxpayers are entitled to a hearing before IRS’ Capitol Office of
  Appeals. At these hearings, the act authorized taxpayers to raise relevant
  issues related to the unpaid tax, including the appropriateness of
  collection actions and collection alternatives, such as whether an
  installment agreement would be a more appropriate collection alternative
  than a seizure. Further, if the dispute could not be resolved within IRS, the
  act established the right for the taxpayer to appeal IRS’ determination to
  the Tax Court or to a U.S. district court.
• Increased supervision of enforced collection actions. The act emphasized
  the importance of IRS staff complying with procedures for reviewing
  proposed enforced collection actions. Under the act, an IRS supervisor is
  required, where appropriate, to review any proposed lien, levy, or seizure
  of property. As part of this review process, the act also stated that IRS
  employees may certify that they have reviewed the taxpayer’s information,
  verified the balance due, and affirmed that the collection action proposed
  is appropriate considering the taxpayer’s circumstances, the amount due,
  and the value of the property.
• Required investigation and consideration of collection alternatives before
  seizure. The act prohibited any levy on property, including seizure, until
  IRS has verified the taxpayer’s liability and determined that the expenses
  of seizing the property do not exceed the property’s fair market value; the
  taxpayer’s equity in the property is sufficient to yield net proceeds to apply
  to the tax liability; and alternative collection methods were considered.
  Additionally, the act codified existing IRS procedures guaranteeing the
  availability of installment agreements to individuals for satisfying tax
  delinquencies of less than $10,000 provided that a number of other
  requirements are met, such as payment of all taxes during the previous 5
  years.
• Increased review of residence and business property seizures. The act
  established additional reviews of seizures for residences and businesses.
  Seizures of a principal residence were to be allowed only if the taxpayer’s
  delinquency exceeded $5,000 and a U.S. district court judge or magistrate
  approved the seizure in writing. Seizures of certain business assets were to
  be allowed if an IRS district director or assistant district director approved
  the seizure in writing. In order to approve the seizure of business assets,
  the IRS official was required to determine that the taxpayer’s other assets




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                           Introduction




                           subject to collection were insufficient to pay the taxes due plus the
                           expenses of the proceedings.
                         • Expanded rights to damages for unauthorized collection actions. The act
                           allowed taxpayers and third parties to sue IRS if its employees negligently
                           disregarded Internal Revenue Code provisions when collecting taxes due.
                           Both taxpayers and third parties must exhaust their administrative
                           remedies within IRS before suing for damages.
                         • Mandated disciplinary actions against IRS employees. The act required
                           that the Commissioner terminate the employment of an IRS employee if
                           there is a final administrative or judicial determination that the employee
                           committed any 1 of 10 acts or omissions. These acts include the willful
                           failure to obtain the required approval signatures on documents
                           authorizing the seizure of a taxpayer’s home, personal belongings, or
                           business assets or violations of the Internal Revenue Code, Treasury
                           regulations, or IRS policies for the purpose of retaliating against or
                           harassing a taxpayer, taxpayer representative, or other IRS employee.

                           Most provisions were effective on enactment, July 22, 1998. However,
                           provisions for appeal rights and asset sales were delayed until February
                           1999 and July 2000, respectively. (The effect of the Restructuring Act
                           changes on IRS’ use of seizure authority is discussed in ch. 4.)

                           As mentioned above, the objectives of this review were to
Objectives, Scope, and
Methodology              • determine whether IRS, in exercising seizure authority, (1) targeted the
                           most noncompliant taxpayers, (2) brought affected taxpayers into
                           compliance, and (3) exercised appropriate discretion in conducting
                           seizures;
                         • assess IRS’ pre-Restructuring Act processes, and any departures from
                           those processes, for protecting taxpayer rights and interests in planning
                           and conducting seizures; and
                         • determine if the changes being made to the seizure process pursuant to the
                           Restructuring Act would address any weaknesses found in IRS’ pre-
                           Restructuring Act seizure process.

                           As part of our work, the Chairman asked that we review (1) the basis for
                           the tax assessments that lead to seizures; (2) the timing of seizures,
                           including when taxpayers were notified of impending seizures and
                           provided with opportunities to resolve their tax debts; (3) whether key
                           procedures were followed by IRS district offices; (4) how seized assets
                           were protected, managed, returned to taxpayers, or sold; (5) the dollar
                           amount recovered by IRS when seized assets were sold compared to the
                           value of the assets and the taxpayers’ tax liabilities; (6) when taxpayers



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Introduction




were notified of the sale of their assets and the amount credited to their
accounts; (7) any problems associated with IRS’ use of seizure authority;
(8) whether some district offices used seizure authority more than others;
and (9) whether there are any trends regarding the use of seizure authority
against certain taxpayers.

To respond to the Committee’s request, we reviewed the statutory and
regulatory requirements governing IRS’ use of seizure authority and
interviewed IRS National Office and district office officials regarding the
implementation of those requirements. We identified and reviewed
relevant seizure statistics maintained by IRS. We also identified the
databases within IRS that contained seizure-related information and
ascertained the practicality of extracting data from those systems. Also,
given the changing nature of seizure requirements initiated after the start
of this assignment, we interviewed National Office and district office
officials and reviewed procedural changes so that any conclusions drawn
on case file information could also take those changes into consideration.

Given the limited availability of quantitative data on IRS’ use of seizure
authority and the absence of qualitative data, we determined that it was
necessary to do extensive file reviews to develop the type of data
necessary to respond to the Committee. We also determined that since the
data should be national in scope, we would employ statistical sampling
techniques, given the impracticability of reviewing the population of cases.
The starting point for selecting seizure cases was IRS’ Automated
Workload Control System–an inventory of IRS seizure cases. We also made
arrangements to augment the case information with data that were
extractable from other IRS’ automated files, including IRS’ individual and
business masterfiles.

Although we used data from IRS automated systems to identify seizure
cases for analyses and to obtain data on the affected taxpayers, we did not
make an assessment of the reliability of those information systems, except
for certain aspects of the Automated Workload Control System. On that
system, we tested the reliability of data related to the value and type of
assets seized and seizure outcomes. The results of our analyses are
reported in chapter 3, and recommendations for system improvements are
in chapter 4.

As described in the following paragraphs, we selected six random samples
and developed standardized data collection instruments that we could use
to extract data in a consistent form. The first, our overall sample, was
designed to provide the primary baseline data for responding to all



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                 objectives in the Chairman’s request, except for responding to the seizure
                 targeting issue, which was addressed by our taxpayer characteristics
                 sample. The remaining samples were selected to provide information to
                 augment our overall sample and provide insights into (1) seizures that
                 produced little proceeds, (2) problems that taxpayers were experiencing
                 as indicated by complaints they raised to the Taxpayer Advocate or
                 Collection Appeals, (3) IRS district office use of seizures and types of
                 taxpayers affected, and (4) accountability over assets in IRS’ possession.

Overall Sample   First, we selected a random sample from a population of about 8,300
                 taxpayers who had property seized by IRS in fiscal year 1997 because of
                 unpaid taxes. About 9,700 seizures were associated with these 8,300
                 taxpayers. The population of taxpayers was identified by taxpayer
                 identification number and type of taxpayer (e.g., individual or business)
                 from IRS’ automated workload control system. The random sample of
                 seizure cases was chosen from fiscal year 1997 because it was the most
                 recent year that the case file information would be available on the
                 disposition of the assets seized and files would be available to us at the
                 time we started our review of them in late 1998.

                 In designing the sample, we partitioned the population of taxpayers into
                 groups, or strata. This was done to ensure that the final sample included
                 both high-dollar and low-dollar seizures in terms of the value of the assets
                 seized and the proceeds from the sale or other disposition of the assets.
                 The dollar threshold separating the strata was $2,000. We used this amount
                 based on estimates made by IRS’ Internal Audit that the average cost of
                 making a seizure and disposing of the assets, taking into account staff time
                 and expenses, was roughly about $2,000. We also included strata to cover
                 seizures that produced no proceeds. The data obtained from the sampled
                 seizures was then weighted to reflect their appropriate representation in
                 the population.

                 This first sample yielded sufficiently complete information on which to
                 evaluate IRS’ use of seizure authority to collect delinquent taxes from 115
                 taxpayers who had experienced 139 seizures. These were collection cases
                 for which IRS had completed collection actions against the taxpayers or
                 had suspended further collection action as of the time we were selecting
                                                   8
                 case files for review in mid-1998.


                 8
                  To compensate for the selection of IRS collection files that might not be located, we oversampled,
                 requesting files on 219 taxpayers. From this request, IRS was able to locate sufficiently complete files
                 for us to analyze collections from 115 taxpayers.




                 Page 26                                               GAO/GGD-00-4 IRS’ Use of Seizure Authority
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                    To review this sample, we developed a standardized data collection
                    instrument designed to (1) profile the taxpayers, (2) document the extent
                    of IRS’ preseizure collection efforts, and (3) document seizure results and
                    IRS’ compliance with key pre-Restructuring Act taxpayer protection
                    requirements governing the various phases in a seizure case. These phases
                    include planning, approving, and conducting seizures; managing and
                    disposing of seized assets; and crediting proceeds to taxpayer accounts. In
                    short, the data collection instrument was designed to gather primary
                    baseline data for responding to all objectives in the Chairman’s request
                    (except for responding to the seizure targeting issue) and the nine specific
                    issues raised by the Committee.

                    The sample was designed to produce statistically reliable estimates on the
                    characteristics of taxpayers subject to seizure actions in fiscal year 1997
                    and IRS’ compliance with taxpayer safeguard requirements in effect at the
                    time of the seizure. Given that IRS was only able to locate about 53 percent
                    of the files we requested, we compared the characteristics of the seizure
                    cases not located, using data available from IRS’ information systems, to
                    the characteristics of the located cases. These characteristics included the
                    total dollar amount received from the sale of the assets, the expense of the
                    sales, the net proceeds from the sales, the minimum sales price IRS set for
                    the assets, and the type of assets seized. We found no significant difference
                    in characteristics between the cases that we located and those that we did
                    not locate. We also selected five other samples to augment the information
                    collected in our overall sample.

Low-Dollar Sample   The low-dollar sample was selected to ensure that we had sufficient
                    representation and analyses of low-proceed seizures to respond to the
                    Committee’s specific interest in the dollar amount recovered by IRS when
                    assets were sold. The primary purpose for selecting this sample was to
                    learn more about why IRS engaged in seizure actions that either involved
                    property valued at less than $2,000 or resulted in proceeds amounting to
                    less than $2,000. We used $2,000 as the criterion for a low-dollar case
                    because, according to IRS Internal Audit estimates, that is the approximate
                    cost (i.e., revenue officer time, indirect overhead, and processing costs) of
                    seizing and selling taxpayer property.

                    To make our analyses, first, we collected additional data about such
                    seizures whenever they appeared in our overall random sample. Second,
                    we supplemented this sample by collecting information about the same
                    kinds of seizures from randomly selected taxpayers whose total seized
                    property during fiscal year 1997 was valued at less than $2,000 or for
                    whom any one seizure yielded less than $2,000 in proceeds.



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                          This low-dollar sample yielded information on 120 taxpayers and 139 low-
                          dollar seizures. As with the overall sample, we developed a standardized
                          data collection instrument designed to ensure consistent data collection
                          and provide for computer analysis of the collected data.

Taxpayer Complaint        We randomly selected 83 case files from IRS’ Office of the Taxpayer
                          Advocate and 74 case files from IRS’ Collection Appeals Program. These
Samples                   cases were selected from a population of 982 cases closed by the Taxpayer
                          Advocate in fiscal year 1997 that carried a designator as a seizure-related
                          case and from the entire population of 361 cases closed by Collection
                          Appeals in fiscal year 1997. We selected these cases to obtain an
                          understanding of the types of problems taxpayers were experiencing in
                          fiscal year 1997 and the type of resolution they were getting to their
                          complaints in order to more fully respond to the Committee’s specific
                          interests in the identification of any problems associated with IRS’ use of
                          seizure authority. As with the overall sample, we applied a standardized
                          data collection instrument designed to ensure consistent data collection
                          and computer analysis of the collected data.

Assets-on-Hand Sample     We randomly selected a total of 16 cases from 4 district offices (Atlanta,
                          Chicago, St. Louis, and Oakland) from a population of 76 seizure cases in
                          which these district offices had assets-on-hand—that is, assets were still in
                          the district’s possession. The primary purpose of this sample was to test-
                          check the accuracy of information in IRS’ Automated Control System on
                          its seized asset inventory. As this involved examining the seized assets,
                          which could be stored hundreds of miles from the district office visited, we
                          established a maximum travel range of about 100 miles from our work
                          location in making our random selections. Also, as with the overall sample,
                          we developed a standardized data collection instrument designed to
                          ensure consistent data collection and computer analysis of the collected
                          data.

Taxpayer Characteristic   From IRS’ database on taxpayers who were in field collections at the end
                          of fiscal year 1997, we selected a random sample of taxpayers whose
Sample                    assets had not been seized by IRS during fiscal year 1997 for comparison
                          with taxpayers whose assets were seized during the year. We also used IRS
                          databases to obtain information about these taxpayers’ delinquencies, such
                          as the number and total amount owed; about other taxpayer
                          characteristics, such as income source and filing status; and the district
                          office where the seizure took place. We selected this sample principally to
                          provide the basis for meeting the objective of determining whether IRS, in
                          exercising seizure authority, targeted the most noncompliant taxpayers
                          and to respond to the Committee’s specific interests in whether some



                          Page 28                                GAO/GGD-00-4 IRS’ Use of Seizure Authority
                  Chapter 1
                  Introduction




                  district offices use seizure authority more than others and the types of
                  taxpayers affected. We did not determine the causes for any variations
                  identified by this analysis as such work was outside the scope of the
                  assignment.

                  To determine the likelihood that taxpayers would have property seized, we
                  used logistic regression analysis. This statistical method measures the
                  separate effect of each of the taxpayer’s characteristics (e.g.,
                  noncompliance or district office location) on the likelihood of seizure
                  while controlling for the effects of the other characteristics that we
                  included in the analysis. We did not determine the causes for variations
                  identified in this part of our analysis as such work was outside the scope
                  of this assignment.

                  In summary, the logistic regression analyses enabled us to determine the
                  extent to which the odds of seizure varied across taxpayers with different
                  characteristics. A more detailed explanation of these analyses is described
                  in appendix I.

Sampling Error    For our overall sample, low-dollar sample, and taxpayer complaint
                  samples, we followed procedures to express our confidence in the
                  precision of the results at a 95-percent confidence interval separately
                  computed for each estimate. The sampling errors account for the stratified
                  nature of sample design. For the sample results cited in the text, the
                  sampling errors are reported as footnotes. For sample results cited in
                  report tables, see appendix II.

                  For the taxpayer characteristic sample, we tested whether the
                  characteristics had a statistically significant effect on the likelihood of
                  seizure. In order to perform this test, we computed the 95-percent
                  confidence interval for our estimate of the odds of seizure associated with
                  each characteristic. Appendix I reports on the results of the test.

Work Locations    Our work was done principally in IRS district offices located in Atlanta,
                  GA; Chicago, IL; St. Louis, MO; Oakland, CA; and the IRS National Office in
                  Washington, D.C.

                  We performed our work between January 1998 and August 1999 in
                  accordance with generally accepted government auditing standards.

Agency Comments   We obtained written comments from IRS on a draft of this report. We have
                  summarized those comments at the end of chapter 4 and reprinted the
                  written comments, in entirety, in appendix III.



                  Page 29                                GAO/GGD-00-4 IRS’ Use of Seizure Authority
Chapter 2

Many Seizures Increased Compliance, But
Use Varied by Location, and Some Were
Questionable
               In fiscal year 1997, IRS revenue officers seized the assets of about 8,300
                                                                                       1
               taxpayers who owed the federal government an estimated $1.1 billion in
                                                                               2
               unpaid taxes. The seizures resolved an estimated $235 million (about 22
                        3
               percent ) of the taxpayers’ tax debts. These affected taxpayers represented
               a small fraction of the taxpayers with unpaid tax debts. As of the end of
               fiscal year 1997, IRS revenue officers were working to collect about $12.7
               billion in unpaid taxes from about 463,000 delinquent taxpayers.

               Our analyses of the characteristics of the taxpayers whose assets were
               seized by IRS revenue officers and those whose assets were not seized and
               the end results of the seizure actions showed that, in general, IRS’
               discretionary use of seizure authority

             • targeted, on average, the more noncompliant taxpayers;
             • was more likely to be used by some district offices than others;
             • was instrumental in bringing into compliance (i.e., full-pay status) many
               delinquent taxpayers who had been unresponsive to other tax collection
               efforts; and
             • produced little revenue to the government and contributed little to the
                                                                                4
               resolution of the tax delinquencies for an estimated 22 percent of affected
               taxpayers.

               Also, in reviewing 115 sampled seizure cases, we identified examples
               where IRS’ use of discretionary authority was questionable. The
               questionable actions included seizure of taxpayer property
               disproportionate to the tax debt, unwillingness to work with the taxpayer,
               superficial investigation work, little advance warning provided to the
               taxpayer, and a non-arms-length sale of assets.

               In summary, IRS’ discretionary use of seizure authority was instrumental
               in ensuring tax compliance, but controls were not sufficient to prevent
               some questionable seizures. At the time our review concluded, IRS’
               discretionary use of seizure authority was in a period of transition as IRS
               adapted to Restructuring Act requirements for providing greater taxpayer
               protections. IRS officials expected the use of seizure authority to rebound
               from a 98-percent decline as changes to the program are implemented and
               revenue officers adapt to the new requirements.
               1
                   95-percent confidence interval: $800 million to $1.4 billion.
               2
                   95-percent confidence interval: $145 million to $325 million.
               3
                   95-percent confidence interval: 12 to 32 percent.
               4
                   95-percent confidence interval: 13 to 32 percent.




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                                         Many Seizures Increased Compliance, But Use Varied by Location, and Some Were
                                         Questionable




                                         Our analysis of the characteristics of taxpayers who had undergone
Extent of                                collection actions as of the end of fiscal year 1997 showed that the extent
Noncompliance and                        of noncompliance and location were determinants of the likelihood of
Location Were                            seizure. After controlling for other factors that might affect seizure
                                         likelihood, our statistical analysis showed that both delinquent individuals
Determinants of                          and businesses were more likely to have assets seized if they were more
Seizure Likelihood                       noncompliant than others as indicated by the number of tax delinquencies
                                         and the amount of unpaid taxes. Our analysis also showed that the
                                         likelihood of seizure varied by location, with individuals as much as 17
                                         times more likely and businesses as much as 14 times more likely, to have
                                         property seized in some IRS districts than in others.

For Individuals, the Amount              A comparison of delinquent individual taxpayers with and without seized
                                         assets shows that taxpayers with seized assets tended, on average, to be
of Unpaid Taxes, Repeated                more noncompliant. As table 2.1 shows, taxpayers with seized assets had
Noncompliance, and                       larger unpaid tax liabilities, larger amounts of penalties and interest, and a
Location Were                            greater number of delinquencies. The table also shows that, while their
Determinants of Seizure                  delinquencies were not as old as those of taxpayers whose assets were not
                                         seized, taxpayers with seized assets spent more time in field collections.
Likelihood                               On average, delinquencies involving seizures spent 38 percent of the time
                                         since the original assessment in field collections, while the delinquencies
                                         not involving seizures spent 22 percent of the time in field collections.

Table 2.1: Delinquency Characteristics
of Individual Taxpayers With and                                                                         Mean amount
Without Seized Assets                                                                          Taxpayers with   Taxpayers without
                                         Tax delinquency characteristic                         seized assets        seized assets
                                         Assessed taxes uncollected                                   $67,547              $25,961
                                         Assessed penalties and interest uncollecteda                 $81,087              $30,359
                                         Accrued penalties and interest uncollectedb                  $56,942              $23,848
                                         Number of delinquencies                                           4.6                  3.5
                                         Days since original assessment                                 1,031                1,102
                                         Days in field collections                                        396                  246
                                         a
                                         Penalties and interest that have been assessed to the delinquent taxpayer’s account.
                                         b
                                         Penalties and interest that have accrued but have not been assessed to the delinquent taxpayer’s
                                         account.
                                         Source: GAO analysis of IRS data.

                                         In addition to this comparison, we analyzed seizures using a statistical
                                         technique that allowed us to measure the effect of a characteristic, such as
                                         the number of delinquencies, on the likelihood of seizure while controlling
                                         for the effects of other characteristics. Using this technique, we estimated
                                         the odds of seizure for taxpayers of a particular category relative to
                                         taxpayers of other categories, and we estimated how the odds change




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Many Seizures Increased Compliance, But Use Varied by Location, and Some Were
Questionable




when a particular characteristic changes. Tables I.1 and I.2 in appendix I
contain detailed descriptions of the analysis and results.

Holding other characteristics constant, our analysis showed that individual
taxpayers with larger unpaid tax delinquencies and with a greater number
of delinquencies were more likely to have assets seized by IRS. We
estimated that each additional delinquency increased the odds of seizure
by 13 percent, and each additional $10,000 of unpaid taxes increased the
odds by 1 percent. After controlling for the amount of tax owed and the
age of the delinquency, our analysis showed that the amount of penalties
and interest owed by taxpayers had no separate effect on the likelihood of
seizure.

The age of the tax delinquency affected the odds of seizure in two ways.
On the one hand, delinquencies that ultimately involved seizures were
moved more quickly into field collections. These delinquencies were
“younger”–had less time elapse since the original assessment–than those of
taxpayers without seized assets. Our analysis showed that each month that
elapsed since original assessment decreased the odds of seizure by 2
percent. On the other hand, once these delinquencies were in field
collections, they took longer to resolve. The delinquencies of taxpayers
with seized assets spent more time in field collections than those of
taxpayers without seized assets. Our analysis showed that each month that
the delinquencies spent in field collections increased the odds of seizure
by 4 percent.

Our analysis showed considerable variation across IRS districts in the
likelihood that taxpayers would have assets seized. We estimated that
taxpayers in the Boston district had the greatest likelihood of seizure. They
were twice as likely to have property seized as taxpayers in St. Paul, and
17 times as likely as taxpayers in San Jose. Although Boston had the
largest estimated odds of seizure, the odds of some other districts were not
statistically different from Boston. These districts, which together with
Boston formed the group of districts with the greatest likelihood of
seizure, were Cincinnati, Indianapolis, Austin, and Oklahoma City. Because
our analysis controls for other delinquency and taxpayer characteristics, it
shows that taxpayers in these districts had a greater chance of having
property seized than taxpayers with the same characteristics (the same
number of delinquencies, the same amount of unpaid taxes, etc.) but who
resided in other IRS districts.

Taxpayers who received their income from wages were less likely to have
property seized than those with income from other sources. We estimated



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                                         Chapter 2
                                         Many Seizures Increased Compliance, But Use Varied by Location, and Some Were
                                         Questionable




                                         that self-employed taxpayers were twice as likely as wage earners to have
                                         property seized, as were those with income classified as “other”–largely
                                         income from rents, royalties, partnerships, and other businesses. Those
                                         with income from dividends, interest, and capital gains were 50 percent
                                         more likely than wage earners to have assets seized. Wages differ from the
                                         other sources of income because, in many cases, they represent a more
                                         easily identifiable stream of income, which could be a candidate for levy
                                         rather than seizure. According to IRS officials, it is expected that the self-
                                         employed have the greater likelihood of seizure because alternatives to
                                         seizure, such as levies of wages, are frequently not available when dealing
                                         with the self-employed.

                                         We also estimated how the odds of seizure were affected by other
                                         characteristics of taxpayers, such as their total income and filing status.
                                         Appendix I contains detailed descriptions of these estimates.

For Businesses, the Amount               A comparison of delinquent business taxpayers with and without seized
                                         assets shows a pattern of greater noncompliance for taxpayers whose
of Unpaid Taxes, Repeated                assets were seized that is similar to that of the individual taxpayers. As
Noncompliance, and                       table 2.2 shows, business taxpayers with seized assets had, on average,
Location Were                            larger unpaid tax liabilities, larger amounts of penalties and interest, and a
Determinants of Seizure                  greater number of delinquencies. They also had delinquencies that were
                                         not as old as those of taxpayers whose assets were not seized, and
Likelihood                               business taxpayers with seized assets spent more time in field collections.
                                         On average, delinquencies involving seizures spent 55 percent of the time
                                         since the original assessment in field collections, while the delinquencies
                                         not involving seizures spent 31 percent of the time in field collections.

Table 2.2: Delinquency Characteristics
of Business Taxpayers With and                                                                            Mean amount
Without Seized Assets                                                                            Taxpayers with Taxpayers without
                                         Tax delinquency characteristic                           seized assets     seized assets
                                         Assessed taxes uncollected                                     $46,116           $29,651
                                         Assessed penalties and interest uncollecteda                   $23,714           $15,495
                                         Accrued penalties and interest uncollectedb                    $18,211           $14,207
                                         Number of delinquencies                                             8.3               6.5
                                         Days since original assessment                                     546               881
                                         Days in field collections                                          298               277
                                         a
                                         Penalties and interest that have been assessed to the delinquent taxpayer’s account.
                                         b
                                         Penalties and interest that have accrued but have not been assessed to the delinquent taxpayer’s
                                         account.
                                         Source: GAO analysis of IRS data.

                                         In addition to this comparison, we also analyzed business seizures using
                                         the same statistical technique that controls for the effects of other



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Chapter 2
Many Seizures Increased Compliance, But Use Varied by Location, and Some Were
Questionable




characteristics on the likelihood of seizure as we used for individual
taxpayers. Our analysis showed that, like the individual taxpayers,
business taxpayers with larger unpaid tax delinquencies and with a greater
number of delinquencies were more likely to have assets seized by IRS. We
estimated that each additional $10,000 of unpaid taxes increased the odds
by 1 percent, and each additional delinquency increased the odds of
seizure by 4 percent. Our analysis also showed that the amount of
penalties and interest owed by taxpayers had no separate effect on the
probability of seizure.

The age of the tax delinquency also affected the probability of seizure. In a
pattern very similar to individual taxpayers, each month that the
delinquency spent in field collections increased the odds of seizure by 4
percent, while each month that elapsed since the original assessment
decreased the odds by 3 percent. Like the delinquencies of individuals, the
delinquencies of business taxpayers with seized property had less time
elapse since original assessment, but spent more time in field collections.
The delinquencies that ultimately involve seizures were moved more
quickly into field collections, but once there, took longer to resolve.

Our analysis shows considerable variation across IRS districts in the
probability of seizure. For business taxpayers, Newark was the district
with the greatest likelihood of seizure. We estimated that, controlling for
other factors that affect the likelihood of seizure, taxpayers in Newark
were 14 times more likely to have property seized than taxpayers in Fort
Lauderdale, the district which had the smallest probability of seizure.
Newark’s greater likelihood of seizure may be due to a program it adopted
during 1997 in which seizures were used in an attempt to increase
collections of employment tax delinquencies from business taxpayers.

Finally, our analysis showed that the type of business had no effect on the
probability of seizure. Corporations, partnerships, and other business
types had no greater chance of having assets seized than sole proprietors.




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                           Chapter 2
                           Many Seizures Increased Compliance, But Use Varied by Location, and Some Were
                           Questionable




                           Many of the seizures IRS made in fiscal year 1997 brought delinquent
Many Seizures              taxpayers into tax compliance (i.e., full-pay status) or collected relatively
Produced Taxpayer          large amounts of delinquent taxes. In general, we estimate that the seizures
                                                                     5                    6
Compliance and             resulted in resolving about $235 million or about 22 percent of the tax
                           liabilities of those taxpayers whose assets IRS seized. Moreover, an
Millions of Dollars                               7
                           estimated 42 percent of those taxpayers essentially became fully tax
                           compliant.

                           Most compliance occurred in cases where following the seizures, the
                           taxpayers produced funds to fully pay their total tax liabilities and thus
                           had their property returned. Given the taxpayers’ histories of not paying
                           taxes before the seizures and given IRS’ attempts to collect the unpaid
                           taxes before the use of seizure authority, the tax delinquencies would
                           likely not have been significantly resolved without the seizure actions. In
                           addition, some of the compliance achieved was through the seizure of
                           rather low-value assets that, by themselves, would not have resolved the
                           taxpayer’s tax debt.

Most Compliance Achieved   As shown in table 2.3, we estimate that fiscal year 1997 seizures essentially
                                                                                     8
                           resolved the full tax delinquencies of about 42 percent of the taxpayers
Through Payments From      whose assets IRS seized. Most of this compliance (an estimated 85
Delinquent Taxpayers               9
                           percent ) was attributable to taxpayers who, following the seizures,
                           produced funds to fully pay their total tax liabilities and thus had their
                                               10                                                 11
                           property returned. A much smaller portion (an estimated 6 percent )
                           resulted from IRS’ sale of the assets seized.

                           Also as indicated by table 2.3, the fiscal year 1997 seizures resolved more
                           than an inconsequential portion of the tax delinquencies of an additional
                                                   12
                           26 percent of taxpayers whose assets were seized. But for 32 percent of

                           5
                               95-percent confidence interval: $145 million to $325 million.
                           6
                               95-percent confidence interval: 12 to 32 percent.
                           7
                               95-percent confidence interval: 32 to 51 percent.
                           8
                               95-percent confidence interval: 32 to 51 percent.
                           9
                               95-percent confidence interval: 75 to 95 percent.
                           10
                              Additionally, IRS may release the property back to taxpayers when it cannot find a buyer for the
                           property; when it determines that it is in the government’s interest to return the property, such as if it
                           may increase the likelihood of future payment; or when the taxpayer files for bankruptcy, and the
                           assets become part of the bankruptcy settlement.
                           11
                                95-percent confidence interval: 1 to 17 percent.
                           12
                                95-percent confidence interval: 18 to 34 percent.




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                                           Many Seizures Increased Compliance, But Use Varied by Location, and Some Were
                                           Questionable




                                                             13
                                           taxpayers, the seizures resolved a very small portion of their tax
                                           delinquencies.

Table 2.3: Percentage of Delinquencies
Resolved Through Seizures                                                                      Percentage of taxpayers’ debt resolved
                                                                                                 Less    5 to    50 to   95% or
                                           Seizure result                                     than 5%    49%      94%      more     Total
                                           Taxpayers paid, and IRS returned the
                                           assets                                                    4%       9%         0           36%        49%
                                           Taxpayers did not pay, and IRS sold
                                           the assets                                                9       13          2%            3        26
                                           Taxpayers did not pay but IRS could
                                           not sell the assets and returned them                     7        0          0            0         7
                                           Othera                                                   12        1          1            4        17
                                           Total                                                    32       23          3           42       100
                                           Note 1: Confidence intervals for the estimates in this table are found in table II.1 of app. II. Some of
                                           these confidence intervals may be large.
                                           Note 2: Percentages may not add due to rounding.
                                           a
                                            This covers taxpayers who could be categorized under more than one category because they had
                                           multiple assets seized or experienced multiple seizures and not all assets had the same disposition or
                                           payment status.
                                           Source: GAO analysis of IRS case files.


Without Seizures, This Level               In general, the delinquent taxpayers whose assets were seized voluntarily
                                           paid very little on their tax liabilities before the seizure, and IRS had
of Compliance Would Likely                 generally been unsuccessful in using its authority to levy wages or bank
Not Have Occurred                          accounts to enforce their compliance, as shown in table 2.4. We estimate
                                                                  14
                                           that about 15 percent of the dollar value of the taxpayers’ delinquencies
                                                                                                                     15
                                           was resolved before seizure. Additionally we estimate that 24 percent of
                                           taxpayers resolved none of their delinquencies before seizure.

                                           These collection results, taken together with the number of collection
                                           contacts, levies of taxpayer wages and bank accounts, and the amount of
                                           time that had elapsed (see table 2.4), indicate that if the seizure had not
                                           taken place, the tax delinquencies would likely not have been significantly
                                           resolved. For example, our review of collection case files showed the
                                           following:

                                         • A taxpayer owed about $81,000 in employment taxes, dating back over a 2-
                                           year period. The revenue officer seized the business assets, estimated to be
                                           worth about $18,000, after making four unsuccessful collection attempts
                                           13
                                                95-percent confidence interval: 23 to 40 percent.
                                           14
                                                95-percent confidence interval: 9 to 21 percent.
                                           15
                                                95-percent confidence interval: 16 to 32 percent.




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                                           Questionable




                                          over a 7-month period. Within 2 hours of the seizure, the taxpayer fully
                                          paid the tax liability, and IRS released the assets back to the taxpayer.
                                        • A taxpayer was a chronic delinquent, owing about $24,000 in employment
                                          taxes from 1993 through 1996. Over a 12-month period, the revenue officer
                                          contacted the taxpayer 20 times and levied the taxpayer’s bank account.
                                          These collection efforts garnered about $500. After seizing about $2,000 of
                                          the taxpayer’s business property, however, the taxpayer fully paid the tax
                                          liability, making full payment on the same day as the seizure.
                                        • A taxpayer was a chronic delinquent, owing about $16,000 in employment
                                          taxes, some dating back to 1992. After repeated unsuccessful collection
                                          attempts over a 15-month period, the revenue officer seized a vehicle from
                                          the taxpayer in January 1997. The taxpayer subsequently fully paid the tax
                                          liability, and IRS returned the vehicle to the taxpayer.
                                        • A taxpayer had self-reported a net worth of about $850,000, wages of about
                                          $140,000, and unpaid tax of about $75,000 overdue about 2 years. After
                                          repeated—but unsuccessful—collection attempts over about a 1-year
                                          period to have the taxpayer fully pay the liability, the revenue officer
                                          seized one of the taxpayer’s vehicles (estimated value of about $4,000).
                                          The taxpayer then fully paid his taxes, and IRS returned his automobile.


Table 2.4: Delinquency Amounts, Days in Collection, and Revenue Officer Collection Results
                                                                               Revenue officer collection results
                                           Average tax                       Average number                   Percent of tax
                                           delinquency                       before seizure of              liability resolved
                                                      Days from                                Levies on
                           Percent of            first collection Collection     Days in     wages, bank                Through
Seizure result             taxpayers   Amount              notice  contacts collection         accounts Preseizure seizure
Taxpayers paid, and IRS
returned the assets              49%   $63,424              1,180          8         423                3         18%       60%
Taxpayers did not pay, and
IRS sold the assets              26    214,775              1302           7         347                4          17        15
Taxpayers did not pay, but
IRS could not sell the
assets and returned them          7    259,201              1,091          8         328                3          10         0
Othera                           17    113,399              1,033         10         403                6           9         5
Total                           100   $126,354              1,181          8         392                4          15        22
                                           Note 1: Confidence intervals for the estimates in this table are found in table II.2 of app. II. Some of
                                           these confidence intervals may be quite large.
                                           Note 2: Percentage of taxpayers does not add due to rounding.
                                           a
                                            This covers taxpayers who could be categorized under more than one category because they had
                                           multiple assets seized or experienced multiple seizures and not all assets had the same disposition or
                                           payment status.
                                           Source: GAO analysis of IRS case files.




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                           Many Seizures Increased Compliance, But Use Varied by Location, and Some Were
                           Questionable




Some Small Seizures        In some instances, considerable compliance was also achieved when IRS
                           seized delinquent taxpayer property worth relatively small amounts. About
Produced Large Results                 16                                               17
                           30 percent of seizures involved property valued at $2,000 or less. About
                                       18
                           57 percent of the taxpayers who had such property seized fully paid their
                                                                               19
                           tax liability. Specifically, an estimated 41 percent resolved liabilities that
                                                                       20
                           exceeded $2,000, and another 16 percent resolved smaller tax debts. We
                           also estimate that the median liability resolved by these successful small
                                                          21
                           seizures was about $11,000. As with the larger seizures, these results,
                           taken together with the number of collection contacts and the amount of
                           time that had elapsed, indicate that if the seizure had not taken place, the
                           tax delinquencies would likely not have been significantly resolved. For
                           example:

                         • A taxpayer with employment tax delinquencies over $80,000 had been
                           contacted numerous times but had paid less than $6,000 of the
                           delinquencies. However, following the seizure of business vehicles whose
                           combined value was estimated to be about $600, the taxpayer made full
                           payment.
                         • A taxpayer had about $9,000 in employment tax delinquencies and was not
                           paying current amounts. Despite numerous contacts, the taxpayer had
                           made payments of only about $60 before seizure. However, following the
                           seizure of the contents of a cash register (about $400), the taxpayer fully
                           paid the outstanding delinquencies.

                           IRS revenue officers made a number of seizures of taxpayer property that
Seizures for About One     produced little or nothing in terms of receipts to the federal government or
in Five Taxpayers          little in terms of helping to resolve the taxpayers’ tax debts, and those
Achieved Little            taxpayers were subsequently judged by IRS to have insufficient remaining
                           resources to make additional payments on their delinquencies.
Compliance



                           16
                                95-percent confidence interval: 22 to 38 percent.
                           17
                            IRS Internal Audit estimated the general costs of a seizure that proceeds to sale to be about $2,000;
                           thus, we used this amount to identify low-value seizures.
                           18
                                95-percent confidence interval: 40 to 74 percent.
                           19
                                95-percent confidence interval: 30 to 53 percent.
                           20
                                95-percent confidence interval: 7 to 25 percent.
                           21
                                95-percent confidence interval: $7,000 to $19,000.




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                           Questionable




                                                                                                                22
                           We estimate that the seizure of property from about 22 percent of the
                           taxpayers met all of the following characteristics:

                         • The seizures produced less than $2,000 in total proceeds (i.e., less than the
                                                 23
                           general IRS estimate of the costs of a seizure);
                         • The seizures produced little in terms of tax debt resolved (i.e., less than 5
                           percent); and
                         • The taxpayer’s delinquent account was classified as “currently-not-
                           collectible” after the seizure.

                           The decisions to proceed with these seizures involved revenue officer
                           judgments based on information available to them at the time. As will be
                           discussed further in chapter 3, the quality of information from delinquent
                           taxpayers was often suspect. Also, we estimate that in about three-
                                    24
                           quarters of these cases, the revenue officers could have expected higher
                           proceeds (i.e. proceeds greater than $2,000) based on their estimates of the
                           value of the assets. However, as will also be discussed in chapter 3, IRS’
                           process for estimating asset value had weaknesses. The following
                           examples describe seizures that produced little compliance.

Low Proceeds From Sale   • To collect on a tax delinquency of about $32,000, IRS seized a taxpayer’s
of Assets                  van and assorted tools worth an estimated $1,500. IRS sold the property
                           for about $900 less expenses of about $700 (out-of-pocket expenses for
                           advertising, towing, and storage) for a net to the taxpayer’s account of
                           about $200. Given the taxpayer’s financial condition, the revenue officer
                           suspended collection action by closing the case as currently not
                           collectible.
                         • To collect on a tax delinquency of about $15,000, IRS seized artwork
                           having an estimated value of $1,200, sold it for about $170, and after
                           expenses (out-of-pocket expenses for advertising and storage), netted
                           about $100 for the taxpayer’s account. Given the taxpayer’s financial
                           condition, the revenue officer suspended collection action by closing the
                           case as currently not collectible.
                         • To collect on a tax delinquency of about $94,000, a revenue officer seized
                           taxpayer property that the revenue officer estimated to be worth about

                           22
                                95-percent confidence interval: 13 to 32 percent.
                           23
                              This IRS Internal Audit estimate was not based on a detailed cost analysis but, rather, a general
                           estimate of what was believed to be the time spent on an average seizure. IRS does not maintain data
                           on total seizure-related costs. Although IRS maintains data on out-of-pocket costs, such as asset
                           moving or storage costs paid to third-party vendors, IRS does not maintain data on internal costs
                           associated with the seizure and sale of assets, such as staff time and travel.
                           24
                                95-percent confidence interval: 62 to 93 percent.




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                             Questionable




                             $25,000. However, no prospective purchasers bid on the property at an IRS
                             auction. IRS returned the assets to the taxpayer and charged his account
                             an additional $330 for the out-of-pocket expenses related to the attempted
                             sale. Given the taxpayer’s financial condition, the revenue officer then
                             designated the case as currently not collectible.

Unmarketable Assets        • A defunct business owed over $800,000 in taxes dating back to 1989 but
                             retained title to a 30-acre parcel of land. The revenue officer seized the
                             property, but subsequently returned it because the land was contaminated
                             with hazardous material and IRS was unable to sell it.
                           • A business taxpayer owed about $82,000 dating back to 1989. The revenue
                             officer made four seizures, each involving a separate parcel of land. A sale
                             was held, but no bidders came. Then IRS found underground fuel tanks on
                             the properties and, because of lack of sales potential, returned the assets
                             to the business.

                             In reviewing 115 sample seizure cases, we identified examples where IRS
Examples of                  revenue officers’ use of discretion in deciding whether and how to conduct
Questionable Seizures        a seizure or sale was questionable. We recognize that some revenue officer
                             discretion is necessary and that the adversarial nature of seizure cases can
                             limit the information available to revenue officers when making seizure
                             decisions. Nevertheless, the examples we identified seemed clear cut
                             because they involved disproportionate seizures, unwillingness to work
                             with the taxpayer, superficial investigation work, little advance warning
                             provided to taxpayer, seizure of everything owned by the taxpayer, sale of
                             assets with uncertain value, and a non-arms-length sale of assets. Given the
                             unique characteristics of seizure cases and the subjective nature of
                             determining what constitutes a “questionable” seizure, we did not attempt
                             to estimate the number of questionable actions in the entire population of
                             seizures. The following are examples of the questionable uses of
                             discretionary seizure authority that we found.

Disproportionate Seizure   • A taxpayer owed about $9,000 in unpaid taxes. The revenue officer seized
                             taxpayer property valued at about $90,000 and then subsequently seized
                                                                                                 25
                             another piece of the taxpayer’s property valued at about $38,000. The
                             revenue officer justified the seizures on the basis that the IRS forced sale
                             would produce about what was owed. The taxpayer fully paid the liability,
                             and IRS returned the property.



                             25
                              Values cited are the taxpayer’s ownership rights to the property (i.e., equity in the property) as
                             determined by IRS.




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                                   Questionable




Unwillingness to Work            • A taxpayer approached IRS and explained the company bookkeeper was
With Taxpayer                      just caught embezzling the federal tax deposits. The taxpayer wanted to
                                   resolve the problem before IRS’ enforcement officers discovered the
                                   nonpayment. The taxpayer offered to make payments through an
                                   installment agreement. However, the revenue officer, after verifying the
                                   facts with law enforcement, refused to consider an installment agreement
                                   as the business was ongoing and had assets. The revenue officer seized the
                                   business. The taxpayer then raised a significant portion of the delinquency
                                   and agreed to a very short-term installment agreement with IRS in order to
                                   get the assets back. By the time the case was resolved, the taxpayer, who
                                   started out trying to comply, became recognized within IRS as a tax
                                   protestor.

Superficial Investigatory Work   • A revenue officer refused to consider an offer-in-compromise made by a
                                   low-income, physically and mentally disabled couple who owed
                                   employment taxes amounting to about $24,000. The couple earned less
                                   than $15,000 a year from a marginal business, disability payments, and
                                   Supplemental Security Income payments for their children; had been
                                   paying all federal taxes on time for a number of years; and were trying to
                                   find a way to pay the past-due taxes. The revenue officer refused to
                                   consider their request for IRS to settle for less than the total due. The
                                   revenue officer believed that the value of the taxpayers’ assets exceeded
                                   the amount of their liability, and therefore, he seized the taxpayers’
                                   business assets. After many taxpayer complaints, a more senior IRS
                                   manager reviewed the seizure. He found that the revenue officer “does not
                                   appear to have done even the minimal investigation . . .” to determine asset
                                   values or the maximum amount the taxpayers could offer. The
                                   delinquency, then, was settled for about one-third of the total (an amount
                                   equal to the taxes owed, excluding penalties and interest).

Little Advance Warning           • A taxpayer’s business license was seized within 21 days of a request made
                                   to a taxpayer’s associate for the taxpayer to contact the revenue officer
                                   regarding a tax delinquency of about $1,000. No response was received,
                                   and no further attempted contacts or warnings were made by the revenue
                                   officer.

Seized Everything                • A taxpayer, who had lost everything in a business venture, was
                                   unemployed and lived with his mother. The revenue officer found that a
                                   relative had given the unemployed taxpayer an automobile, with an
                                   estimated value of $4,000. IRS seized the car (realizing about $3,900 on a
                                   tax delinquency of about $41,000) and suspended collection until the
                                   taxpayer’s income reached $12,000.




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                          Questionable




Uncertain Asset Value   • IRS seized gemstones with an estimated value of roughly $23,000
                          according to a limited review (not an appraisal) by a coin and jewelry shop
                          owner approached by the seizing revenue officer. The gemstones were
                          advertised as unvalued colored stones (pink, green, amber, etc.). IRS
                          offered to make the stones available for inspection 1 hour before the
                          scheduled sale but would not make the stones available for appraisal
                          purposes. IRS sold the stones for the minimum price IRS would accept—
                          $800—as set by the revenue officer, not by an appraisal. The stones were
                          sold at a public auction conducted by the revenue officer.

Non-Arms-Length Sale    • IRS seized a taxpayer’s automobile to satisfy a tax debt of about $95,000.
                          The value of the automobile was originally estimated at the blue book
                          value ($16,000). After talking to the towing and storage company, the
                          revenue officer set the minimum amount that IRS would accept for the car
                          at $4,000 to guarantee a sale. The car was subsequently purchased for
                          $4,000 by the towing and storage company at an auction held by the
                          revenue officer and attended by the towing company and one other bidder.
                          After expenses were paid (almost all to the towing and storage company),
                          about $2,600 was applied to the taxpayer’s account.

                          IRS’ seizure program is in a period of transition while it adapts to
Sharp Decline in IRS’     Restructuring Act requirements for providing greater taxpayer protections.
Use of Seizure            During this transition period, the number of seizures has declined by about
Authority                 98 percent, from roughly 10,000 seizures per year to an estimated 200 for
                          fiscal year 1999. Figure 2.1 shows the 10-year trend in IRS’ discretionary
                          use of seizure authority. The decline began after congressional hearings
                          were held on collection practices in September 1997.

                          Revenue officers in the four district offices that we visited told us that
                          seizures have nearly stopped because of their uncertainty regarding the
                          Restructuring Act’s new, and what they viewed as complex, rules with
                          potentially severe penalties for not following those rules. In particular,
                          they voiced concerns over section 1203 of the act, which provides for
                          mandatory termination of employment for certain acts, omissions, or
                          misconduct. The revenue officers were concerned that unintentional
                          errors in implementing the act’s provisions related to seizures could
                          possibly lead to disciplinary actions, including termination of employment.

                          The revenue officers also said that IRS management was slow in
                          developing workable policies and procedures related to the
                          implementation of the new law and seizure conduct. They also said they
                          were unsure how enforcement activity would be integrated into IRS’ newly
                          restated mission. The restated mission says “Provide America’s taxpayers



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                                            Questionable




                                            top quality service by helping them understand their tax responsibilities
                                            and by applying tax law with integrity and fairness to all.”

Figure 2.1: Trends in IRS’ Use of Seizure
Authority




                                            Note: 1999 is an annualized estimate based on seizures done in the first half of the year.
                                            Source: GAO review of IRS data.


                                            National Office Collection officials indicated to us that they expected the
                                            number of seizures to rebound as changes to the program are implemented
                                            and revenue officers adapt to the new requirements. However, they
                                            indicated that the anticipated level would be less than the previous level of
                                            about 10,000 seizures per year. Anticipating a rebound seems consistent
                                            with our analyses of 1997 seizures. We estimate that about 3,000
                                                       26                         27
                                            taxpayers (an estimated 36 percent of the 8,300 taxpayers whose assets
                                            were seized by IRS) waited until after a seizure to pay their tax liability in
                                            full despite numerous collection contacts by revenue officers over
                                            extended periods of time.




                                            26
                                                 95-percent confidence interval: 2,273 to 3,737.
                                            27
                                                 95-percent confidence interval: 27 to 45 percent.




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              Questionable




              As discussed earlier in this chapter, we estimate that the fiscal year 1997
                                                      28                 29
              seizures resolved about $235 million (about 22 percent ) of the affected
                                     30
              taxpayers’ $1.1 billion of outstanding tax debt. Because IRS generally has
              up to 10 years to collect delinquent taxes and because some seizures did
              not bring in significant revenue, it is unclear what the transition to a new
              seizure program means in terms of tax collections.

              In general, IRS’ use of seizure authority was instrumental in getting many
Conclusions   delinquent taxpayers to become tax compliant or in resolving a significant
              part of their tax debts. Nonetheless, some seizures produced little;
              however, given the quality of information available to IRS, it is not clear
              whether these seizures could have been avoided. In addition, IRS’
              processes for controlling the use of discretionary seizure authority were
              not sufficient to prevent some questionable seizures. Our detailed analyses
              of these processes is presented in chapter 3; and our recommendations for
              improvement, recognizing the changes being made by IRS in light of
              Restructuring Act requirements and the expected rebound in the use of
              seizure authority, are discussed in chapter 4.




              28
                   95-percent confidence interval: $145 to $325 million.
              29
                   95-percent confidence interval: 12 to 32 percent.
              30
                   95-percent confidence interval: $800 million to $1.4 billion.




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Chapter 3

Weaknesses in IRS’ Pre-Restructuring Act
Seizure Processes for Protecting Taxpayer
Rights and Interests
                       During fiscal year 1997, the period of our review, IRS had processes in
                       place for protecting taxpayer rights and interests when planning and
                       conducting seizures of taxpayer property. In part, these processes were
                       intended to ensure that IRS

                     • made delinquent taxpayers aware of their responsibilities and the
                       consequences of not taking action to voluntarily resolve their tax debts,
                     • evaluated the necessity and appropriateness of seizing delinquent
                       taxpayers’ property before engaging in such an action,
                     • conducted the seizures appropriately,
                     • established controls over assets seized to protect against loss,
                     • sold the seized property for an amount that was in the government’s and
                       delinquent taxpayers’ interest, and
                     • had information to monitor the use of seizure authority.

                       We identified implementation breakdowns in each of these processes, and
                       in some instances, we identified inadequate process requirements. For
                       example, the procedures established for asset sales provided little
                       assurance that IRS asset sales obtained the highest financial return for
                       either the delinquent taxpayer or the government for a number of reasons,
                       including sales being conducted with little competitive bidding. Because of
                       the severe impact that asset seizures can have on taxpayers, we viewed
                       any breakdown in the process for protecting taxpayer rights and interests
                       as a weakness.

                       Our review of revenue officer files for 115 taxpayers and IRS masterfile
Most, But Not All,                                         1
                       records on their tax delinquencies, showed that most affected taxpayers
Affected Taxpayers     were provided with the required opportunities to resolve their tax debts
Were Provided the      voluntarily. In doing this review, we assessed IRS’ adherence to certain
                       basic taxpayer protection requirements, including whether or not IRS
Required
Opportunities to     • automated systems sent taxpayers written notification about the amount
Resolve Tax Debts      of their tax delinquencies and their rights and responsibilities in dealing
Before Seizure         with IRS to resolve the delinquencies, as required by statute;
                                                                                      2


                     • automated systems or revenue officers sent the delinquent taxpayers
                       written notices explaining the consequences of their continued
                       1
                       We reviewed masterfile records on 647 of 649 delinquencies owed by the 115 taxpayers. The two
                       delinquencies not reviewed had been archived by IRS, were not readily available for analysis, and were
                       unlikely to materially affect the results of our review.
                       2
                        For example, the taxpayer could (1) seek payment alternatives with the revenue officer; (2) contact
                       the IRS Taxpayer Advocate to address unresolved tax problems, such as hardship; or (3) ask IRS’
                       Collection Appeals Program to review issues concerning the amount of tax liability or certain
                       collection actions.




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                           nonpayment of taxes owed, including the potential seizure of their
                           property, and their rights during the collection process, as required by
                           statute;
                         • revenue officers personally visited the delinquent taxpayers or attempted
                           to personally contact them to collect the taxes due, as required by IRS
                           procedures;
                         • revenue officers personally warned the delinquent taxpayers of the
                           impending seizure of their property if arrangements were not made to
                           resolve their delinquencies, as required by IRS procedures; and
                         • revenue officers waited at least 30 days after notifying taxpayers in writing
                           about the potential for seizure action before initiating the seizure of
                           taxpayer property, as required by statute.

Frequent Notifications     We found that most taxpayers were notified, both in writing and verbally,
                           about their delinquencies and had numerous opportunities to resolve tax
                           debts before seizure. We estimate that IRS had sent delinquent taxpayers
                           an average of 15 written notifications during an average period of just over
                                    3
                           3 years. We also found that taxpayers had personal contact (i.e., personal
                           visits or phone calls) with revenue officers an average of 5 times and other
                           contacts (i.e., faxes or letters) an average of 3 times. These contacts
                           occurred over an average period of about 1 year before the taxpayer’s
                                                4
                           assets were seized.

Missing Notifications      Nonetheless, as shown in table 3.1, in a number of instances, IRS did not
                           follow basic notification requirements or the revenue officer files did not
                           document adherence to the basic taxpayer protection requirements. Lack
                           of documentation risks leaving managers unable to properly review the
                           revenue officer’s actions and risks fostering an environment in which
                           taxpayer protections are not fully considered during the seizure
                           decisionmaking process.




                           3
                            95-percent confidence interval: an average of 12 to an average of 17 written notifications during an
                           average period of 2.7 to 3.8 years.
                           4
                            95-percent confidence interval: an average of 4 to an average of 6 personal contacts and an average of
                           2 to an average of 3 other contacts over an average period of 0.9 to 1.3 years.




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                                         Weaknesses in IRS’ Pre-Restructuring Act Seizure Processes for Protecting Taxpayer Rights
                                         and Interests




Table 3.1: Key Requirements for Giving
Taxpayers an Opportunity to Resolve                                                                              Percentage of taxpayers
                                                                                                                                         a
Their Delinquent Tax Debts               Description of key requirement                                          Yes      No     Unknown
                                         Taxpayers were sent written notices about each
                                         delinquent tax liability and their rights and responsibilities           100          0                   0
                                         Taxpayers were sent a written notice for each delinquency
                                         about the possible seizure of their property and an
                                         explanation of their rights and responsibilities before
                                         seizure                                                                   91          9                   0
                                         Taxpayers were provided with written notification of
                                         possible seizure within 180 days or were subject to
                                         ongoing enforcement action (lien, levy, or seizure) within
                                         60 days of a seizure                                                      66         33                   1
                                         Revenue officers attempted at least one personal contact
                                         with taxpayers before seizure                                             96          4                   0
                                         Revenue officers personally advised taxpayers of potential
                                         for enforced collection action, e.g., seizure of property                 71         11                  18
                                         Revenue officers waited at least 30 days after all notices
                                         before seizing taxpayers’ property                                        86          8                   6
                                         Note: Confidence intervals for the estimates in this table are shown in table II.3 of app. II. Some of
                                         these confidence intervals may be large.
                                         a
                                             File documentation was not sufficient to make a yes or no determination.
                                         Source: GAO analysis of IRS case files.


Written Notifications Not Always         IRS was required by statute to provide taxpayers with written notification
Complete or Sent When                    of each tax delinquency and also a written notification of IRS’ intent to
Required                                 take enforced collection action against each delinquency, including the
                                         seizure of taxpayer assets. Therefore, an individual taxpayer who did not
                                         pay all income taxes annually would have to be notified at least twice for
                                         each tax year’s delinquency.
                                                                                          5
                                         Although an estimated 9 percent of the taxpayers were not sent a notice of
                                         intent to take enforced collection action, including seizure, for each
                                                                                              6
                                         delinquency before seizure, all but about 2 percent of the taxpayers
                                         received such notice on at least one of their delinquencies before seizure.
                                         We reviewed the three sample cases supporting the 2-percent estimate to
                                         determine why a notice of intent to take enforced collection action was
                                         not sent. In one of these cases, the revenue officer determined that quick
                                                7
                                         action was needed to ensure that some payment on the taxpayer’s
                                         delinquency was secured. However, we did not find documentation that
                                         the approvals required in such a situation were obtained. In the remaining
                                         5
                                             95-percent confidence interval: 5 to 15 percent.
                                         6
                                             95-percent confidence interval: 0 to 7 percent.
                                         7
                                          The tax code (section 6331(d) 3) authorizes IRS to take immediate action on determining that the
                                         collection of tax could be lost if quick action were not taken.




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                               two sample cases, we could not determine why a notice of intent to take
                               enforced collection action was not sent.

                               Table 3.1 also shows that revenue officers did not always notify taxpayers
                               of a possible seizure within the required time frames. IRS procedures
                               require revenue officers to determine if the taxpayer received a notice of
                               intent to take enforced collection action within 180 days of the seizure or
                               had ongoing enforcement action within 60 days of the seizure. Since IRS
                               procedures do not define enforcement action, the ongoing enforcement
                               action could encompass a range of revenue officer activities. Our analysis
                               for table 3.1 considered enforcement actions to be liens, levies, or seizures.
                                                                 8
                               Using this definition, 33 percent of the notifications were not current.
                               However, if a more encompassing definition of enforcement action were
                                                                                                           9
                               used (i.e., “any revenue officer collection action”), only about 14 percent
                               would have been considered as not current.

Personal Contact Not Always    According to IRS procedures, revenue officers are expected to attempt to
Made or Aggressively Pursued   make a personal contact with taxpayers before a seizure. At the time of
                               contact, revenue officers are to give taxpayers the opportunity to resolve
                               their tax liabilities voluntarily and to determine if taxpayers are aware of
                               their rights.

                               As shown in table 3.1, we estimate that revenue officers did not attempt to
                                                                    10
                               personally contact about 4 percent of the taxpayers. For example, in one
                               case, a revenue officer initiated a seizure of taxpayer property without
                               contacting the taxpayer, apparently based on learning that IRS had seized
                               property from that taxpayer a year earlier for a prior tax delinquency. This
                               was not consistent with IRS procedures.

                               Although revenue officers documented attempts to contact about 96
                                       11
                               percent of the taxpayers, such attempts were not always successful or
                               aggressively pursued. Revenue officers were successful in their attempts
                                             12                                                13
                               for 89 percent of the taxpayers and unsuccessful for 7 percent.


                               8
                                   95-percent confidence interval: 25 to 40 percent.
                               9
                                   95-percent confidence interval: 8 to 20 percent.
                               10
                                    95-percent confidence interval: 2 to 9 percent.
                               11
                                    95-percent confidence interval: 92 to 99 percent.
                               12
                                    95-percent confidence interval: 83 to 95 percent.
                               13
                                    95-percent confidence interval: 2 to 11 percent.




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                                  Examples of attempts to contact the taxpayer that we did not consider
                                  aggressive include the following:

                                • A revenue officer made no attempt to contact the taxpayer beyond his last
                                  officially known address, although the revenue officer had additional
                                  information on how to contact the taxpayer.
                                • A revenue officer made one attempt to personally meet with the taxpayer
                                  and no attempts to call the taxpayer before a seizure action.

Limited Warnings of Potential     IRS procedures required revenue officers to warn taxpayers of the
Seizure Given Taxpayers           consequences of not taking sufficient steps to resolve their tax
                                  delinquencies. The procedures called for revenue officers to warn
                                  taxpayers of the possibility of enforcement action and to personally advise
                                  the taxpayers that the next enforcement action would be seizure. Lack of
                                  documentation of personal contact in revenue officers’ case files, as with
                                  lack of documentation of written notification, risks leaving managers
                                  unable to properly review the files and risks fostering an environment
                                  where taxpayer protections are not fully considered during the seizure
                                  decisionmaking process.
                                                                                                             14
                                  As shown in table 3.1, we estimate that only 71 percent of the taxpayers
                                  were personally warned of an impending seizure action. For an estimated
                                            15
                                  11 percent of taxpayers, the revenue officers had not contacted and
                                                                                          16
                                  warned them before the seizure. An estimated 18 percent of the taxpayers
                                  were contacted, but the files did not document whether the taxpayers
                                  were warned of an impending seizure action.

30-Day Requirement Not Always     By statute, IRS is not permitted to make a seizure until 30 days have
Met                               elapsed from the date the taxpayers are notified in writing of the potential
                                  seizure of their property. Taxpayers with multiple tax delinquencies should
                                  receive a notification for each delinquency, and the 30-day period
                                  commences with the date of the last notification.
                                                                                                                  17
                                  As indicated in table 3.1, we estimate that about 8 percent of the
                                                                                                           18
                                  taxpayers were not given the full 30 days, and for an estimated 6 percent

                                  14
                                       95-percent confidence interval: 62 to 79 percent.
                                  15
                                       95-percent confidence interval: 5 to 17 percent.
                                  16
                                       95-percent confidence interval: 11 to 26 percent.
                                  17
                                       95-percent confidence interval: 3 to 14 percent.
                                  18
                                       95-percent confidence interval: 3 to 11 percent.




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                        Weaknesses in IRS’ Pre-Restructuring Act Seizure Processes for Protecting Taxpayer Rights
                        and Interests




                        of the taxpayers, there was not sufficient documentation to determine
                        whether the 30-day requirement was met.

                        We reviewed the nine sample cases supporting the 8-percent estimate to
                        determine why the 30-day requirement was not met. In five of the nine
                        cases, the revenue officers did not document the reasons why the
                        taxpayers were not given the full 30 days. For three cases involving
                        multiple delinquencies, we found that taxpayers were not sent
                        notifications 30 days in advance on at least one of their delinquencies. For
                        the remaining case, quick action was deemed necessary, but contrary to
                        IRS procedures, the revenue officer did not document the appropriate
                        approvals required to circumvent the 30-day requirement.

                        As a condition for gaining agency authorization to seize delinquent
Some Seizures           taxpayer’s property, revenue officers were required to document the
Approved Based on       necessity for making a seizure and to make that information available for
Limited Information     management review and approval. We reviewed revenue officer files to
                        determine whether the following key information needed to make and
                        approve a seizure decision was documented:

                      • financial information indicating the taxpayers’ ability to pay, to determine
                        which payment alternative may be appropriate;
                      • financial results expected from the seizures to prevent uneconomical
                        seizures (i.e., seizures in which the costs of the seizure and sale exceeded
                        the fair market value of the property); and
                      • rationale used to determine that the seizures were necessary.

                        In addition, we reviewed revenue officer files to determine whether
                        information on the possible seizure impacts, including the effect on the
                        taxpayer’s family or the taxpayer’s employees, was documented. While not
                        a requirement, IRS procedures encouraged this information to be
                        documented.

                        We found that case files often had incomplete information or lacked
                        complete documentation to justify seizures. Taxpayers subject to seizures
                        frequently did not cooperate with the revenue officers’ requests for
                        complete and accurate financial information. Revenue officers, in some
                        cases, did not develop all the estimates needed to determine if there would
                        be net proceeds from the sale. Additionally, most files did not document
                        information on the possible impacts of the seizures. Such documentation
                        would help ensure that IRS better considers both the potential return and
                        potential hardship from the seizure.




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                                       and Interests




Obtaining Information on               IRS procedures require revenue officers to request financial information
                                       (i.e., taxpayer income, expenses, assets, and liabilities) from delinquent
Taxpayers’ Ability to Pay              taxpayers and document the request and information obtained in the case
Was Problematic                        file. This information is necessary to determine whether it would be
                                       appropriate to (1) arrange for the taxpayers to pay off the liabilities in
                                       installments, (2) accept less than full payment to resolve the taxpayers’
                                       liabilities, or (3) temporarily suspend collections because of taxpayers’
                                       inability to pay or hardship.

                                       As shown in table 3.2, we estimate that complete and accurate taxpayer
                                                                                                    19
                                       financial information was obtained for only about 9 percent of the
                                       taxpayers, mainly because the taxpayers did not provide it when
                                       requested. In some cases, revenue officer files did not indicate that this
                                       information was requested.

Table 3.2: Key Steps in Developing                                                                                                           a
Information for Assessing Taxpayers’                                                                          Percentage of taxpayers
                                                                                                                                      b
Ability to Pay                         Description of key requirements                                          Yes     No Unknown
                                       Revenue officer requested financial information
                                       from taxpayer                                                               84         14                  2
                                       Taxpayer provided some financial information                                63         33                  4
                                       Taxpayer provided complete and accurate financial
                                       information                                                                 10         90                  0
                                       Revenue officer verified financial information for those
                                       taxpayers who provided it                                                   86          6                  9
                                       Revenue officer found unreported assets                                     25         75                  0
                                       IRS obtained complete and accurate financial information                     9         86                  5
                                       Note 1: Confidence intervals for the estimates in this table are shown in table II.4 of app. II. Some of
                                       these confidence intervals may be large.
                                       Note 2: Percentages may not add to 100 due to rounding.
                                       a
                                        Unless otherwise noted, projections are made to the universe of all taxpayers who were personally
                                       contacted before the seizures.
                                       b
                                        File documentation was not sufficient to make a yes or no determination.
                                       Source: GAO analysis of IRS case files.

                                       Revenue officers need to be cautious in accepting financial information
                                       from taxpayers. Based on revenue officers’ experience in finding
                                                                                       20
                                       unreported assets, we estimate that 25 percent of the taxpayers did not
                                       disclose all their assets to IRS. While not shown in the table, data from
                                       taxpayers were suspect even when taxpayers were seeking alternative
                                       payment arrangements, such as installment agreements.


                                       19
                                            95-percent confidence interval: 5 to 15 percent.
                                       20
                                            95-percent confidence interval: 16 to 33 percent.




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Incomplete Estimates of         Another factor revenue officers are required to consider and document in
                                deciding whether to seize taxpayer property is whether the sale of the
Potential Financial Results     seized asset would yield sufficient proceeds to pay some, if not all, of the
From Seizures                   tax debt.

                                The Internal Revenue Code has long prohibited IRS from making
                                uneconomical seizures. Implementing IRS procedures required the
                                revenue officers to determine that there was sufficient taxpayer equity in
                                the property to yield net proceeds from the sale to apply to the unpaid tax
                                liability. To meet these requirements, revenue officers were required to

                              • estimate the fair market value of the property to be seized,
                              • identify any encumbrances and interests on the property that would
                                reduce the taxpayer’s equity, and
                              • estimate the costs involved in the seizure through the sale of the property.

                                To the extent that prospective buyers would be willing to purchase the
                                asset for an amount equal to the taxpayer’s equity in the assets, IRS
                                procedures would provide the basic elements for estimating sales
                                proceeds.
                                                                                                      21
                                As shown in table 3.3, we estimate that 39 percent of the seizures were
                                made without the estimates required by IRS procedures. In some of these
                                cases, we identified extenuating circumstances that could have precluded
                                revenue officers from making the estimates, including six seizures where
                                the revenue officer was unable to obtain the taxpayer’s consent to enter
                                private premises and had to secure a court order permitting entry on the
                                day of the seizure, four seizures involving either cash in a cash register or
                                contents of a safety deposit box to which the revenue officer was not given
                                access, and one taxpayer who was hiding assets.

                                In other instances, however, omission of the preseizure estimates appears
                                                                                                   22
                                to have been an oversight. For example, an estimated 42 percent of the
                                cases in which the an estimate of the fair market value was not in the case
                                file involved vehicles, for which fair market values are readily available in
                                industry guides.




                                21
                                     95-percent confidence interval: 31 to 48 percent.
                                22
                                     95-percent confidence interval: 25 to 61 percent.




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Table 3.3: Required Elements for
Estimating Seizure Results                                                                               Percentage of seizures
                                                                                                                                 a
                                   Description of requirement                                              Yes       No Unknown
                                   Estimate of fair market value of property                                81       18         1
                                   Estimate of encumbrances on propertyb                                    76       20         4
                                   Estimate of the cost of seizure and sale                                 66       32         1
                                   Overall                                                                  57       39         4
                                   Note 1: Confidence intervals for the estimates in this table are shown in table II.5 of app. II. Some of
                                   these confidence intervals may be large.
                                   Note 2: Percentages may not add to 100 due to rounding.
                                   a
                                   File documentation was not sufficient to make a yes or no determination.
                                   b
                                   Two seizures involving only cash were excluded from the population, as encumbrances did not apply.
                                   Source: GAO analysis of IRS case files.

                                   Just making the required estimates, however, was generally not sufficient
                                   to estimate the return from asset sales. Before holding sales, revenue
                                   officers are required to establish minimum acceptable prices for the assets.
                                   As discussed in the asset disposal section of this chapter, the minimum
                                   acceptable prices were generally significantly less than the taxpayers’
                                   equity in the assets as identified by the revenue officers and were strong
                                   indicators of proceeds from actual asset sales. Requiring the computation,
                                   whenever possible, of the minimum acceptable price before making the
                                   seizure could provide a more reliable indicator of the eventual sales
                                   proceeds than computation of taxpayer equity under the current
                                   requirements.

Seizure Rationale                  IRS procedures required revenue officers to document in their case files
                                   the factors considered and the reasons the seizure was necessary. The
Documented; Impact                 documentation requirements are meant to enable IRS managers to review
Generally Not                      the case files to ensure that the seizure action was warranted before
                                   approving the seizure. The factors that were documented could be found
                                   in various places throughout the lengthy case files, but there was no
                                   requirement for a summary statement on the justification for the seizure,
                                   which increased both IRS managers’ and our difficulty in reviewing the
                                   case files.

                                   Our review of the case files showed that in all cases revenue officers
                                   documented at least one reason for the seizure, and most documented
                                   multiple reasons. Table 3.4 shows the various reasons for the seizures. The
                                   three most common reasons were repetitive delinquencies, lack of good-
                                   faith effort to pay taxes, and lack of cooperation to resolve tax
                                   delinquencies.




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Table 3.4: Documented Reasons for
Taking Seizure Action               Reason for seizure                                                           Percentage of seizures
                                    Taxpayer has been delinquent in filing income tax returns or
                                    paying taxes in more than 1 year                                                                         75
                                    Taxpayer not making a good-faith effort to pay the taxes due                                             62
                                    Uncooperative taxpayer (e.g., hiding assets, not providing
                                    financial information)                                                                                   41
                                    Taxpayer has not paid the current year taxes                                                             33
                                    Taxpayer pyramiding employment taxes liabilitiesa                                                        19
                                    Immediate action necessary (impending bankruptcy, etc.)                                                   6
                                    Other                                                                                                    31
                                    Note: Confidence intervals for the estimates in this table are shown in table II.6 of app. II. Some of
                                    these confidence intervals may be large.
                                    a
                                     When employment taxes are not paid from quarter to quarter and the taxpayer has not paid the
                                    current quarter’s taxes, the taxpayer is considered to be pyramiding employment tax liabilities.
                                    Source: GAO analysis of IRS case files.

                                    Revenue officers did not generally document the potential impact of the
                                    seizure (e.g., impact on family, employees, etc.). Yet hardship or inability
                                    to pay has been a common complaint raised by taxpayers. IRS procedures
                                    did not require documentation of the impact but did encourage revenue
                                    officers, when making personal residence seizures, to include any
                                    pertinent information, such as the potential effect on the taxpayer’s family.
                                    As discussed earlier, the lack of documentation risks (1) leaving managers
                                    unable to properly review the case files and (2) fostering an environment
                                    in which taxpayer protections are not fully considered.

                                    In some instances, however, revenue officers did a more thorough job of
                                    documenting key information to justify making the decision to seize. Due
                                    to the sensitive nature of residential seizures, IRS procedures provided for
                                    a higher level of review as well as additional assurance that key
                                    information on these cases was documented and reviewed before seizure.
                                    IRS procedures authorized the use of a summary memo to be prepared by
                                    the revenue officer before the seizure of personal residences. The
                                    suggested format provided for information on taxpayer equity and seizure
                                    rationale, date of liens filed by IRS, type of tax owed and for what years,
                                    collection efforts attempted, and any special circumstances of the
                                    taxpayer considered when making the decision to seize. The memo was
                                    meant to provide management with a concise review of many of the
                                    critical elements the revenue officer considered in determining that seizure
                                    was appropriate.




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                                          IRS procedures specified that revenue officers were to
IRS Generally
Complied With                           • obtain all required approvals within IRS and the courts, if appropriate;
Procedures for                          • have the seizure and the recording of the inventory witnessed by another
Conducting Seizures                       IRS employee; and
                                        • make appropriate notification to the taxpayer at time of seizure and make
                                          the record of the inventory available to the taxpayer.
                                                                                                   23
                                          As shown in table 3.5, in about 1 percent of the seizures, revenue officers
                                          did not obtain the required approvals. In the two sample cases reviewed
                                          where required approvals were not obtained, the revenue officers had
                                          determined that quick action was needed. While the group manager’s
                                          approval was obtained in both cases, neither case had the higher level of
                                          approval required for such seizures.

                                          Additionally, the table shows that sometimes the revenue officer did not
                                          record whether or not seizure documents (the notice of levy or seizure
                                          action and the inventory of seized assets) were delivered to the taxpayer.
                                          The notice of levy is to be given to the taxpayer at the time of seizure. The
                                          inventory of seized assets—an important accountability document—is to
                                          identify the taxpayer’s property that IRS has seized.

Table 3.5: Key Steps Taken to Protect
Taxpayer Rights During the Seizure                                                                                Percentage of seizures
                                                                                                                                          a
Process                                   Description of key step                                                  Yes      No Unknown
                                          Revenue officer obtained required approvals                                99       1          0
                                          Revenue officer obtained writ of entryb when needed                      100        0          0
                                          Revenue officer complied with witness requirements                         99       0          1
                                          Taxpayer provided with notice of levy or seizure action
                                          and the inventory of seized assets                                          72          0              28
                                          Note 1: Confidence intervals for the estimates in this table are shown in table II.7 of app. II. Some of
                                          these confidence intervals may be large.
                                          a
                                           File documentation was not sufficient to make a yes or no determination.
                                          b
                                          A writ of entry from the court must be obtained before seizure when the revenue officer has been
                                          denied taxpayer consent to enter private premises.

                                          Source: GAO analysis of IRS case files.


                                          As indicated earlier, documenting all aspects of IRS’ adherence to
                                          requirements is important to fostering an environment in which taxpayer
                                          protections are fully considered. Documenting IRS’ actions before and
                                          during seizure—and the information obtained as a result of those
                                          actions—helps ensure that seizures are done only when necessary and that

                                          23
                                               95-percent confidence interval: 0 to 5.




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                               taxpayer rights and interests are protected. Documenting IRS’ actions after
                               the seizure provides additional taxpayer protections, as discussed in the
                               sections of this chapter on IRS control over seized assets and asset
                               disposal.

                               Once assets are seized, IRS is responsible for establishing controls over
Weak Controls Over                                                                                24
                               those assets as set out in federal financial management guidelines and
Assets Seized                  safeguarding those assets against loss. To accomplish this, IRS requires
                               revenue officers to

                             • document basic control information, such as description, value, and
                               location, to establish accountability over the seized assets;
                             • arrange to protect seized assets from loss or damage; and
                             • submit control information for entry into IRS’ automated inventory control
                               system that was designed to monitor assets from seizure through
                               disposition.

                               We found shortcomings in each of these areas.

Incomplete or Questionable     To establish accountability and control over seized assets, federal financial
                               management guidelines specify the type of information that is to be
Asset Control Information      documented. This information includes type of asset, estimated value and
                                                                                                       25


                               the basis for that value, mortgage and claim liabilities, physical condition,
                               geographic location, responsible custodian, and costs incurred while the
                               asset is in custody. The guidelines explain that information should be
                               sufficiently specific to allow the independent verification that each asset
                               exists and that the recorded physical condition, geographic location, and
                               asset value are accurate.

                               IRS procedures required revenue officers to record basic inventory
                               information (e.g., description, value, and location) on a form that was to be
                               witnessed by another IRS official. Also, copies of this form were to be
                               provided to the taxpayer to document the property taken and to the local
                               IRS district office for data entry into IRS’ automated inventory system. As
                               such, this form served as the official accountability record of the property
                               IRS seized.
                               24
                                Joint Financial Management Improvement Program, Federal Financial Management System
                               Requirements, Seized/Forfeited Asset System Requirements (FFMRS-4, 3/93). The program established
                               uniform requirements for seized property systems operated by federal agencies. The agencies may
                               develop additional requirements as necessary to support unique mission requirements.
                               25
                                According to Statement of Federal Financial Accounting Standards Number 3, the value of property
                               seized under the Internal Revenue Code shall be based on taxpayer’s equity (market value less
                               encumbrances) as IRS seizes and sells only the unencumbered portion of the taxpayer’s property.




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                                         As shown in table 3.6, the baseline information revenue officers recorded
                                         on the official inventory forms did not always include all of the needed
                                         information to support an independent verification of each asset or the
                                         asset’s condition, custody, location, and value as envisioned by federal
                                         financial management guidelines.

Table 3.6: Completeness of Inventory
Descriptions                                                                          Percentage of seizures with baseline information
                                                                                                  recorded on inventory
                                                                                              Some but           Not Unable to
                                         Baseline information                            All     not all   recorded determine Total
                                         Asset description
                                          General description                               93             6                0            1     100
                                          Itemized list                                     91             6                3            0     100
                                          Asset quantity                                    85            12                3            0     100
                                          Detailed descriptiona                             74            20                5            1     100
                                         Asset value
                                          Estimated fair market value                       96              2              2             0     100
                                          Estimated taxpayer equityb                        88              2             10             1     100
                                         Asset location                                     90              2              8             0     100
                                         Asset custody                                      53              4             43             0     100
                                         Asset condition                                    26              8             66             0     100
                                         Note 1: Confidence intervals for the estimates in this table are found in table II.8 of app. II. Some of
                                         these confidence intervals may be large.
                                         Note 2: Percentages may not add to 100 due to rounding.
                                         a
                                          Description sufficient, in GAO’s opinion, to differentiate asset seized from other like items, such as by
                                         specifying make, model, or serial number.
                                         b
                                          Asset fair market value adjusted to account for encumbrances.
                                         Source: GAO review of IRS seized asset inventory records and attachments to those records.


Incomplete Asset Descriptions            As shown in table 3.6, for the most part, revenue officers generally
                                         described and enumerated most of the assets seized. However, in a
                                         number of instances, the descriptions used by revenue officers were not
                                         detailed enough (such as by identifying make, model, or serial number) to
                                         differentiate the items seized from other like items or to quantify the
                                                                  26
                                         number of items seized. For example:

                                       • IRS seized the inventory of an automotive business with an estimated
                                         value of over $24,500. The level of detail recorded on the inventory form
                                         for one of the 14 groups of assets seized was 1 snack machine; Reddy
                                         Heater; miscellaneous filters, disc pads, belts; 1 antifreeze recycling
                                         machine; compressor; miscellaneous auto parts; metal stand; 1 drum
                                         kerosene; and 1 table.

                                         26
                                              Based on our evaluation of the asset descriptions found in revenue officers’ files.




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                                  • IRS seized restaurant equipment with an estimated value of $8,000. The
                                    inventory form listed restaurant equipment including, but not limited to,
                                    fryers, prep tables, walk-in cooler, tables, chairs, dishes, flatware, drink
                                    machines, freezers, cash registers, safe, coffee machine, and miscellaneous
                                    office equipment.

                                    The omission of detailed descriptive information reduces accountability
                                    and could negate assurance that the specific asset seized was still under
                                    IRS or third-party custody, even if a physical inventory is taken.

Uncertain Asset Values              Table 3.6 shows that revenue officers estimated an asset value to cover
                                    most, but not all, assets seized. However, revenue officers rarely obtained
                                    written appraisals to ascertain asset value. As discussed later in the asset
                                    sale section of this chapter, asset values were determined largely based on
                                    revenue officer judgment or research (such as checking county tax records
                                    or automobile guides), but with little or no documentation to support the
                                    values assigned. The absence of documentation reduces accountability and
                                    limits an independent verification that recorded values are accurate.

Missing Condition, Custody, and     As shown in table 3.6, we found many cases where asset condition or
                                             27
Receipt Information                 custody was not recorded in IRS’ seizure inventory records. Moreover, in
                                    those cases where our review of the revenue officers’ case files indicated
                                    that seized assets were stored at contractor locations, the files did not
                                                                                                       28
                                    contain receipts from the contractors in an estimated 51 percent of the
                                    cases.

                                    IRS does not conduct a physical inventory of its seized assets. So, even if
                                    revenue officers documented the condition of each asset and who had
                                    custody of it and obtained receipts for storage from contractors, IRS
                                    would not use the information to independently verify various attributes of
                                    each asset as envisioned by federal financial management guidelines. Also,
                                    absence of documentation on condition, custody, and receipts limits
                                    accountability because baseline information would not be available to
                                    assess responsibility for apparent flaws in assets observable during
                                    physical inspection of the assets.




                                    27
                                     IRS guidelines state that revenue officers preparing an inventory of seized assets should record or
                                    otherwise document the condition of seized vehicles. But these guidelines did not require recording the
                                    condition of other types of assets or recording the identity of the party having custody of the assets.
                                    28
                                         95-percent confidence interval: 35 to 66 percent.




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Missing Information on      To protect seized assets from loss or damage while in IRS’ possession,
                            revenue officers were required to arrange for asset safekeeping. While
Asset Security and Losses   revenue officers were expected to use judgment in determining the extent
                            of security, IRS procedures also required that seized assets be given at
                            least the same level of protection as the taxpayer provided. Some of the
                            assets frequently seized by revenue officers, such as undeveloped real
                            property and residences occupied by the delinquent taxpayer, required no
                            safeguarding. While other seized assets, such as vehicles and jewelry,
                            required some type of security.

                            Our review of revenue officer case files indicated that revenue officers, in
                            exercising judgment on security matters, generally tended to hold down
                            costs since they had to be paid from budgeted funds. We estimate that 60
                                    29
                            percent of the seizures involved assets requiring no security. In some
                            instances, revenue officers obtained security for free (e.g., making
                            arrangements with local military installations to store property, such as
                            automobiles, in secured areas) or simply padlocked the premises. We
                                                     30
                            estimate that 33 percent of seizures involving asset security arrangements
                            involved no costs. For those with costs, we estimate that the median
                                                            31
                            security costs were about $150.
                                                                                          32
                            We also found that an estimated 12 percent of the seizure cases involved
                            assets that required safeguards, but the case files did not show whether
                            any safeguards were used. For example, in one case, the revenue officer
                            file contained no documentation on where a taxpayer’s $17,000 vehicle
                            was stored or how the vehicle was safeguarded. In another case, the
                            revenue officer seized personal property—jewelry, furniture, and clothes
                            valued at about $10,000 from a delinquent taxpayer. However, the revenue
                            officer did not indicate in the case file how the assets were safeguarded
                            against loss or damage.

                            We found a few case files that contained information about a loss, alleged
                            loss, or damage to property. However, because of limited documentation
                            in the files, we could not be certain of the magnitude of the loss or who
                            was liable for the loss. For example, a piece of seized artwork was
                            damaged while a storage company was moving the assets. The revenue
                            officer did not document the dollar amount of the damage or who was
                            29
                                 95-percent confidence interval: 52 to 67 percent.
                            30
                                 95-percent confidence interval: 20 to 45 percent.
                            31
                                 95-percent confidence interval: $109 to $241.
                            32
                                 95-percent confidence interval: 6 to 17 percent.




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                              liable for the loss. In another instance, a taxpayer complained that various
                              personal items located in a piece of seized real estate were missing. The
                              revenue officer’s file provided no information on the amount of the alleged
                              loss.
                                                                                                                           33
                              During our physical observation of assets from 16 open seizures, we also
                              found some situations where the assets were either missing or damaged or
                              there was insufficient information on the initial condition of the assets to
                              determine whether they were missing or damaged.

                            • A revenue officer seized various pieces of business equipment valued at
                              about $1,600. The assets were tagged with IRS seizure tags and left in a
                              public area of the open business. The business subsequently declared
                              bankruptcy and was involved in other legal proceedings, which kept the
                              seizure case open for over 18 months. At the time of our review, we were
                              unable to locate a number of the assets seized, and one asset was damaged
                              because it was left outside and unprotected.
                            • A revenue officer seized a parcel of improved real estate. At the time of the
                              seizure, the taxpayer was renting a building located on the land to a tenant
                              who was operating a used car lot and the real estate was left in such use.
                              During our visit, we found that the used car lot had been vacated and the
                              front door of the building was open. We were unable to determine whether
                              there was any damage to the property because of the limited information
                              on initial condition of the property included in the case file.

Automated Inventory Not       Federal financial management guidelines, in addition to specifying the
                              types of information to be included in an inventory control system, also
Sufficient for Monitoring     stated that management should be able to query their system at any time to
Seized Assets                 obtain current information about any asset. The system should also
                              generate periodic reports that provide performance results so management
                              can monitor areas of concern, evaluate results, and take appropriate
                              corrective action when necessary.

                              IRS’ system to track seized assets does not include all the information set
                              out by federal financial management guidelines, and the information it
                              does contain is not always current or accurate. More specifically:

                            • The automated inventory system, while requiring the entry of asset
                              description information, did not require the entry of the full description of

                              33
                                 As described in the Objectives, Scope, and Methodology section in ch. 1, we followed up on 16
                              seizures in 4 IRS district offices to examine assets that IRS still had in its possession at the time of our
                              review.




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    assets as recorded by revenue officers. For example, for one business
    seizure, the revenue officer prepared a 12-page written itemization of
    assets seized with an estimated value of almost $63,000. The automated
    inventory specified that miscellaneous business equipment and supplies
    were seized. Moreover, as shown in table 3.6, such detailed descriptive
    information was frequently not recorded by revenue officers on the source
    document used for data entry into the automated system.
•   The automated inventory system did not provide data entry fields for
    capturing information on asset condition or custody. Moreover, as shown
    in table 3.6, such information was not routinely recorded by revenue
    officers on the source document used for data entry into the automated
    system.
•   The automated inventory system did not provide a data entry field for
    theft, loss, and damage expenses.
•   The automated inventory system did not consistently capture information
    on the amount of taxpayer equity in the asset. The system provides a data
    entry field for taxpayer equity but the directions specified that the lesser of
    the taxpayer equity or tax delinquency amount should be recorded in the
    available field. Once entered, the system did not provide a means for
    distinguishing whether the amount represented the equity or delinquency
    amount.
•   The automated inventory system records did not always coincide with
    revenue officer records. We could not reconcile amounts between the two
    record-keeping systems regarding seizure costs, proceeds from seizures,
                                                              34            35
    number of assets, and type of asset in about 23 percent, 21 percent, 16
             36               37
    percent, and 13 percent of the seizures, respectively. In one case,
    taxpayer equity differed by over $2 million.
•   The automated system did not have to be updated in a timely manner. IRS
    has a requirement that all seizure and sale documents should be
    transmitted to the office that inputs the information into the automated
    inventory system within 5 working days after the related action has
    occurred. Since the date the submissions were transmitted was not always
    recorded in the revenue officers’ files, we could not determine if the
    requirement was met. Even if the 5-day requirement was met, there was no
    requirement that, once received, the information must be entered into the
    system within a certain time frame.

    34
         95-percent confidence interval: 15 to 30 percent.
    35
         95-percent confidence interval: 14 to 28 percent.
    36
         95-percent confidence interval: 10 to 22 percent.
    37
         95-percent confidence interval: 7 to 18 percent.




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                      • The automated system records did not always coincide with the revenue
                        officers’ files or the actual property on hand. When comparing system
                        records, revenue officers’ files, and our physical inspection of assets
                        involving 16 seizures in 4 IRS district offices, we found discrepancies in 15
                        seizures. In three cases, the inventory assets were no longer in IRS’
                        possession because the asset had been returned to the taxpayer, sold, or
                        taken (without permission) by the taxpayer. In the remaining 12 cases,
                        there were conflicts between the automated inventory system and the
                        revenue officers’ files, including differences in taxpayer equity, asset
                        description, asset location, date of seizure, asset quantity, or asset custody.
                        Also, in 2 of the remaining 12 cases, an observation of the asset showed
                        the asset was not in the same condition as described in the revenue
                        officers’ files and, in 1 of those 2 cases, some of the assets were missing.

                        Given the above limitations, the system produced little useful oversight
                        information that management could use to monitor seized assets.
                        Moreover, as discussed later in this chapter (see section on seizure
                        oversight and review), IRS officials made limited use of the information in
                        the inventory control system to oversee the seized asset program.
                                                                                                                                38
                        Because taxpayers avoided sales in most cases by reclaiming their assets,
Asset Sales: Little     we estimate that IRS’ revenue officers were responsible for making
Assurance That                                                                    39
                        arrangements to sell taxpayers’ assets in about 42 percent of the seizure
                                                                                                  40
Maximum Returns         cases. For 1997, we estimate that IRS’ sales produced about $26.5 million
                                        41
                        in net proceeds.
Were Achieved
                        In arranging asset sales, revenue officers usually adhered to most elements
                        of IRS’ procedures. Even when procedures were followed, however, IRS’
                        sales practices provided little assurance that the maximum possible
                        returns were achieved for two reasons. First, many assets were sold
                        without competitive bidding, and second, IRS’ minimum acceptable price
                        for an asset was often established in an arbitrary manner.




                        38
                           Most taxpayers exercised their rights to reclaim their property by either (1) paying off their tax
                        delinquency or (2) paying IRS an amount equal to the government’s interest in the property.
                        39
                             95-percent confidence interval: 33 to 50 percent.
                        40
                             95-percent confidence interval: $15.8 million to $37.1 million.
                        41
                             This was net of sales-related costs (e.g., moving, storing, and selling costs).




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Procedural Protections                   As shown in table 3.7, when complete information was available, our
                                         analysis of sales cases showed that revenue officers, in most instances,
Usually, But Not Always,                 adhered to basic procedures established by IRS to protect taxpayers’
Met                                      interests.

Table 3.7: Adherence to Basic Taxpayer
Protections in Cases That Went to Sale                                                                          Percentage of seizures
                                                                                                                                          a
                                         Taxpayer protection                                                      Yes     No      Unknown
                                         IRS computed a minimum price at which it could sell
                                         the seized assets                                                          97           3                   0
                                         Taxpayer was notified of minimum price and was
                                         given 10 days to submit a different valuation                              79           5                  16
                                         Sale was advertised in the required locations (e.g.,
                                         public postings and newspaper)                                             96           4                   0
                                         Sale was held within prescribed time period–at least
                                         10 days, but not later than 40 days, after public notice                   94           6                   0
                                         Sale was witnessed by another IRS employee                                 70           0                  30
                                         Asset was sold for the minimum price or moreb                              95           2                   2
                                         Taxpayer was notified of sales results (sale amount,
                                         sale expenses, and amount credited to taxpayer)                            16           0                  84
                                         Note 1: Confidence intervals for the estimates in this table are found in table II.9 of app. II. Some of
                                         these confidence intervals may be large.
                                         Note 2: Percentages may not add to 100 due to rounding.
                                         a
                                         File documentation was not sufficient to make a yes or no determination.
                                         b
                                         Excludes those sales where the asset was returned to the taxpayer.
                                         Source: GAO analysis of IRS case files.

                                         In a few instances, however, revenue officers did not adhere to basic
                                         procedural requirements established to protect taxpayers. For example,
                                         we found that IRS had rushed through a seizure and sale of a bus company.
                                         First, the revenue officer did not fully research ownership of the assets or
                                         compute a minimum price at which IRS could sell the seized assets.
                                         Second, the revenue officer did not notify the taxpayer of the minimum
                                         price to allow him to either challenge the price or buy the property back.
                                         Third, the revenue officer neither advertised the sale as required nor
                                         waited the 10 days after such advertising to hold the sale. Rather, he held
                                         the sale on the same day as the seizure. After consummating the sale, the
                                         revenue officer learned that the assets did not belong to the taxpayer, and
                                         he subsequently returned them to the rightful owner after retrieving the
                                         assets from a successful bidder.

                                         Also, as indicated by table 3.7, for some elements of the sales process, we
                                         could not be certain what actions took place because case file information
                                         was incomplete or inconclusive.




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Despite Protections, Many     Even when IRS’ sales procedures for protecting the rights and interests of
                              taxpayers were followed, IRS’ sales practices provided little assurance that
Assets Sold Without           the maximum possible returns were achieved. One reason is that many
Competitive Bidding           assets were sold without competitive bidding.

                              Our analysis showed that most IRS sales were not conducted in a
                                                                                                  42
                              competitive manner—we estimate that about 51 percent of the sales
                                                                                                 43
                              attracted no more than one bidder, and only 42 percent of the cases sold
                              for more than the IRS-established minimum price.

                              Steps that help promote competitive bidding include

                            • making potential bidders aware of the sale,
                            • enabling potential bidders to inspect the assets, and
                            • conducting the sales in a manner that makes the sale transactions
                              relatively easy for the purchasers.

                              Our previous reviews have demonstrated the importance of these steps to
                                                                                     44
                              ensure that the highest possible prices are obtained. The highest possible
                              price might not be the market price because certain conditions are
                              attached to IRS’ seized asset sales that cause them to differ from a typical
                              market sale. Although these conditions are intended to protect taxpayer
                              interests and reduce the risk of loss to the government, some of them may
                              reduce the price that could be obtained from selling an asset. Two
                              examples of such conditions are that (1) IRS is authorized to sell only the
                              taxpayer’s equity in the seized asset and makes no warranties or
                              guarantees that it has identified all lien holders and (2) the taxpayer has
                              the right to redeem real property from a buyer for up to 180 days after the
                              sale and, thus, the buyer is precluded from doing anything with the
                              property for that period of time. We could not quantify the impact of such
                              conditions on asset valuation nor do we have a position on the
                              appropriateness of these conditions. The uncertainty of the effect that the
                              conditions have on asset price highlights the importance of competitive
                              bidding.

                              In evaluating IRS’ sales practices, we identified shortcomings in the three
                              steps for promoting competitive bidding.
                              42
                                   95-percent confidence interval: 33 to 69 percent.
                              43
                                   95-percent confidence interval: 29 to 56 percent.
                              44
                               See Resolution Trust Corporation: 1992 Washington/Baltimore Auctions Planned and Managed Poorly
                              (GAO/GGD-93-115, July 7, 1993) and Resolution Trust Corporation: Better Data Could Improve
                              Effectiveness of Nonperforming Loan Auctions (GAO/GGD-95-1, Nov. 14, 1994).




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                              • Advertising was generally limited to legally required advertisements—one
                                local newspaper or posting in two public places. IRS made little use of
                                bidders lists or other media channels to target potentially interested
                                buyers. Most sales involved few assets because the sales were stand-alone
                                sales (assets from only one seizure). Almost all sales were conducted on
                                weekdays between 9:00 a.m. and 5:00 p.m. and in the county where the
                                asset was seized. This could limit the number of potential bidders from
                                knowing about the sale and being able to attend.
                              • IRS had no requirement to make assets available for inspection or
                                appraisal before the day of the sale. As a routine practice, IRS does not
                                provide information or comment on asset value, condition, or operability
                                because of liability concerns over any implied warranties. Also, while IRS
                                does advise potential buyers of any identified encumbrances, it does not
                                guarantee that all lienholders have been identified or the accuracy of the
                                amounts owed. This adds uncertainty to the asset value.
                              • IRS did not make use of commercial sales venues. Auctioneers who
                                specialize in selling preowned assets conducted few sales. Nor were
                                commercial markets specializing in certain types of assets, such as
                                regional automobile auctions, used.

                                Based on our analysis of sample cases where IRS sold taxpayer assets, we
                                                                  45
                                estimate that in about 30 percent of the sale cases, revenue officers sold
                                the assets for the minimum amount IRS was willing to accept. Additionally,
                                                            46
                                in an estimated 24 percent of the sales, revenue officers either did not
                                attract any bidders or attracted bidders who were unwilling to pay the
                                minimum price. The revenue officers then returned these assets to the
                                delinquent taxpayers and increased their tax liability to cover the out-of-
                                pocket costs incurred by IRS.

Absent Competitive              Given the limited number of bidders that revenue officers attracted to their
                                sales, IRS had to rely on its minimum price setting procedure to protect
Bidding, Other Controls Not     both taxpayer and government interests. The procedure involved first
Adequate for Ensuring           estimating the fair market value of an asset and then discounting that value
Maximum Return                  to obtain the minimum price that IRS would be willing to accept.

                                Some discounting of the fair market price appears reasonable, in part
                                because of the conditions described previously that are attached to seized
                                asset sales. The existence of the conditions under which IRS sells assets
                                makes it difficult, if not impossible, to find comparable sales for assets to

                                45
                                     95-percent confidence interval: 16 to 43 percent.
                                46
                                     95-percent confidence interval: 12 to 36 percent.




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                          estimate asset values. Consequently, the conditions attached to seized
                          asset sales, when combined with the lack of competitive bidding, put the
                          burden of protecting taxpayers’ and government’s interests on IRS’
                          minimum price setting process. However, our analysis shows that the
                          process was often arbitrary.

Uncertain Asset Value     The first step in determining the price IRS would accept for an asset is for
                          the revenue officer to identify the asset’s fair market value. Our
                          assessment of IRS’ practices for determining asset value showed that it
                          was not a formal or well-documented process. We estimate that about 35
                                  47
                          percent of the assets were valued on the basis of revenue officer
                                                                     48
                          judgment; the basis for valuing 8 percent of the assets was not recorded
                                                                         49
                          by the revenue officers; and about 4 percent were based on a professional
                          appraisal of the property. In the remaining cases, the assets were valued
                          on the basis of revenue officer research, such as checking county tax
                          records or automobile guides. But, in most revenue officer files (an
                                                50
                          estimated 71 percent ), we could not find physical evidence—copies of the
                          automobile guide or county records— for the set values.

                          The lack of a formal documented process contributed to the following
                          situations.

                        • A revenue officer seized gemstones with a value of about $23,000
                          according to a limited review (not an appraisal) by a coin and jewelry shop
                          owner approached by the revenue officer. In preparing for the sale, the
                          revenue officer ignored the earlier value and, without obtaining an
                          additional valuation, arbitrarily set the fair market value at about $14,000.
                        • A revenue officer checked county courthouse records and noted that the
                          value of seized real property was about $93,000. In preparing for the sale,
                          the revenue officer set the value at about $80,000. The revenue officer
                          provided no explanation for using the lower unsupported amount.

                          In each of these instances, without an appraisal, neither IRS nor we can be
                          certain what the value of the taxpayer’s property should have been.




                          47
                               95-percent confidence interval: 26 to 45 percent.
                          48
                               95-percent confidence interval: 4 to 14 percent.
                          49
                               95-percent confidence interval: 1 to 9 percent.
                          50
                               95-percent confidence interval: 62 to 80 percent.




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Arbitrary Minimum Price     The second basic step in determining the price at which IRS should sell an
                                                                                   51
                            asset is for the revenue officer to set a minimum price that IRS would
                            accept for the asset. To set the minimum price, revenue officers were
                            generally required to use a formula that allowed for the fair market value
                            to be reduced by up to a maximum of 40 percent. The amount was then
                            reduced further by any encumbrances (e.g., mortgages) on the assets.

                            Our assessment of the formula, the revenue officers’ use of the formula,
                            and exceptions to the formula, showed the minimum price set by IRS was
                            arbitrary and did not necessarily reflect the value of the taxpayer’s interest
                            in the property.

                          • First, we found little justification for the maximum percentage reduction
                            allowed in the formula used to compute the minimum price. National
                            Office officials responsible for program guidance advised us that they were
                            not aware of the origins of the reductions. And while the guidance
                            suggested that these were maximum reductions that needed to be
                            supported, revenue officers used the maximum reduction an estimated 69
                                    52
                            percent of the time with little detailed justifications shown.
                          • Second, the percentage reductions used by the revenue officers did not
                            necessarily reflect the different risks to buyers based on the type of asset.
                            Often we found that revenue officers applied the same maximum
                            reductions to both real property and personal property, yet the conditions
                            associated with the sale of these assets varied substantially. For personal
                            property, such as a car, ownership and control of the asset passed at sale.
                            For real property, such as a taxpayer’s residence, the taxpayer had 6
                            months to reclaim the asset after sale, and the purchaser usually did not
                            have access to the property during the 6-month period.
                          • Third, we noted that lesser percentage reductions appeared to be
                            sometimes used when the “maximum reductions” would have reduced the
                            minimum price to essentially nothing and thereby risked having an
                            uneconomical seizure, an event prohibited by law. For example, IRS seized
                            a taxpayer’s residence that the revenue officer valued at about $138,000.
                            After using a maximum reduction, justified on the basis of “experience,”
                            and deducting the encumbrances, the revenue officer set the minimum
                            price at about $20,000. Subsequently, the taxpayer produced a third-party
                            appraisal on the property showing a fair market value at about $84,000.

                            51
                               IRS may calculate a minimum price even though the item may not go to sale. In an estimated 73
                            percent (95-percent confidence interval 65 to 80 percent) of the cases, IRS calculated a minimum bid
                            price, while only an estimated 47 percent (95-percent confidence interval: 37 to 57 percent) of these
                            cases went to sale.
                            52
                                 95-percent confidence interval: 59 to 78 percent.




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                              The revenue officer accepted the appraisal but instead of using the
                              maximum reductions, he used a reduction of 19 percent, based as before
                              on his “experience.” This resulted in a minimum price of about $5,500 after
                              deductions for encumbrances. Use of the maximum reductions would have
                              resulted in a negative minimum price.
                            • Fourth, IRS’ policies limited the minimum price to no more than the
                              taxpayer’s tax liability plus estimated expenses of sale and seizure. Under
                              this policy, the minimum price could be set much lower than the formula,
                              using maximum percentage reductions, would allow. The minimum price
                              then would not necessarily reflect the value of the taxpayers’ ownership
                              interest in the seized property. For example, IRS seized taxpayer property
                              valued at about $50,000 and set a minimum price at about $30,000, using
                              the maximum reductions in the formula. Since the taxpayer owed about
                              $21,300 in delinquent taxes and since the costs of the sale were estimated
                              at about $2,500, the revenue officer set the minimum price at about
                              $23,800—about $6,200 less than the amount allowable under the formula—
                              in accordance with the IRS policy. IRS National Office officials involved in
                              the seizure program were uncertain about the origins of this policy.

Program Integrity at Risk     IRS delegated revenue officers wide discretion and authority in making
                              decisions during the seizure and sale process. This delegation of authority
                              included deciding what and when to seize, controlling the seized asset
                              inventory, determining asset security needs, arranging for asset security,
                              planning and advertising asset sales, setting minimum sales prices, and
                              selling the assets.

                              The concentration of responsibilities in the hands of a single revenue
                              officer puts program integrity at risk. The lack of separation of duties
                              could, for example, lead to conflicts of interest. Moreover, the lack of
                              documentation in revenue officer case files to support key decisions made
                              or actions taken during the seizure process, particularly minimum price
                              setting, limits the information available to managers to conduct oversight.
                              Limitations to oversight combined with the lack of segregation of duties
                              create situations such as the following.

                            • IRS seized a taxpayer’s automobile as part of an attempt to collect on a tax
                              debt of about $90,000. The automobile, considered in excellent condition,
                              was originally valued by the revenue officer, using the National
                              Automotive Dealers Association “Blue Book,” at about $19,200 retail and
                              about $16,400 wholesale. After talking to the towing and storage company
                              about the value of the car, the revenue officer set the minimum price that
                              IRS would accept for the car at about $4,000 to guarantee a sale. The car
                              was subsequently purchased for about $4,000 by the towing and storage



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                        company at an auction held by the revenue officer where two bidders
                        attended. After expenses were paid (almost all to the towing and storage
                        company), about $2,000 was applied to the taxpayer’s account.

                        IRS subsequently investigated the case. According to IRS District Counsel,
                        by lowering the minimum price and eventually selling the vehicle to the
                        third-party vendor that was used for towing and storage, the sale event had
                        the appearance of potential insider dealings. Upon further review, IRS
                        decided to pay the taxpayer a total of about $4,200—the $4,000 sales price
                        plus accrued interest. Yet no consideration was given to compensating the
                        taxpayer for the loss of an asset valued at over $16,000 that otherwise
                        could have been released back to the taxpayer because the minimum price
                        (computed at about $10,500 using the maximum reduction) was not
                        reached.

                      • IRS seized another taxpayer’s automobile. On the day of seizure, the
                        revenue officer estimated the value of the vehicle at about $1,100 and set a
                        minimum bid price of about $700. On the same day, the taxpayer paid IRS
                        the minimum price for the return of the vehicle. Approximately 1 month
                        later, the revenue officer seized the vehicle again and arranged for towing
                        and storage by a third-party vendor. At this time, the revenue officer
                        estimated the value of the automobile at about $2,000 and set the minimum
                        price at about $1,200. After attracting only one prospective bidder to the
                        sale and no bids in excess of the minimum price, the revenue officer
                        postponed the sale for several days. In the interim, he reduced his estimate
                        of the vehicle’s fair market value to about $980 and the minimum price to
                        about $590. On reconvening the sale, the revenue officer attracted the
                        third-party vendor that towed the vehicle and one other prospective
                        bidder. The vendor purchased the vehicle for the minimum price less the
                        costs of the services rendered (about $65 for towing, 30 days of storage of
                        about $10 a day and 15 days of storage at about $1 a day). This sale yielded
                        about $180 to be applied toward the taxpayer’s delinquency.

                        Both cases demonstrate the broad discretion and overall involvement that
                        revenue officers have during the seizure and sale process and show the
                        problems that can occur without segregation of duties and effective
                        oversight.

                        Without certain basic information and oversight programs, IRS
Limited Management      management cannot assure itself, Congress, or the taxpaying public that its
Oversight of Use of     employees are using seizures appropriately and uniformly and that
Seizure Authority       taxpayer rights are protected.




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                               We reviewed the information available to IRS National Office Collection
                               management for monitoring the use of seizures and assessing program
                               results, quality of seizure-related work, and resolution of taxpayer
                               problems. Generally, we found that while IRS had established systems to
                               capture information on certain aspects of the seizure program, these
                               systems did not provide senior management with information that was
                               useful for monitoring

                             • seizure costs and accomplishments, including tax law compliance
                               achieved, and the uniformity of seizure use across the country;
                             • compliance with seizure requirements and procedures and
                               appropriateness of decisionmaking; or
                             • type, magnitude, and resolution of taxpayer complaints.

Limited Information on the     IRS National Office Collection officials told us that they have little
                               information to assess the costs, accomplishments, and uniform use of
Costs, Accomplishments,        seizures by district office. The information that they received was
and Uniform Use of             contained in two monthly reports.
Seizures
                               The first, an activity report, showed the number of seizure cases opened,
                               the number closed, and the number in open inventory by district office.
                               The report also contained some limited cost information-–time spent by
                               district office support staff on seizures. However, according to IRS
                               officials, support staff time is a small portion of the total time spent on
                               seizures.

                               The second, a disposition report, showed in the aggregate the number of
                               seizure dispositions; the number of seized assets by type of property;
                               number by type of disposition; the total amount of tax delinquency owed
                               by the taxpayers who had assets disposed of; the total out-of-pocket cost
                               of seizures and sales; and the total cash payments from all of the closed
                               seizures by district office. The disposition report, however, contained no
                               information on such internal costs as revenue officer time associated with
                               the closed seizures or the effect the seizures had on taxpayers fully
                               resolving their outstanding tax debt. For example, the report did not
                               capture data on installment agreements or offers-in-compromise. Our
                               analysis of case file data indicated that IRS’ information systems, by
                               omitting this information, can understate seizure accomplishments.

                               Neither report provided information to determine whether seizures were
                               being uniformly used throughout the country. While both reports provided
                               information on seizures by district and contained some overall information
                               on taxpayer characteristics, such as number of delinquencies and total



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                                 amount of delinquencies for all seizures within the district, neither
                                 provided the detailed information by seizure or tax delinquent population
                                 to allow for comparisons and analyses such as we performed and reported
                                 in chapter 2.

                                 In summary, neither report provided sufficient information for assessing
                                 the costs, accomplishments, or whether taxpayers are being treated
                                 uniformly throughout the country. Examples of information that could be
                                 provided include

                               • tax law compliance achieved and the total costs incurred in producing the
                                 compliance,
                               • number of seizures relative to the amount and severity of noncompliance
                                 within a district,
                               • value of assets seized relative to the costs of protecting the assets and the
                                 amount of damage and other losses, and
                               • amounts collected through the seizure relative to the value of the assets
                                 seized.

Little Data Collected on         Determinations of the appropriateness of the use of seizures cannot be
                                 made on the basis of management information alone. Because the facts
Seizure Appropriateness          and circumstances of each taxpayer case can vary, a review of case files is
                                 necessary to judge the appropriateness of the seizure decisions. IRS had
                                 two processes that had the potential for checking on the appropriateness
                                 of seizures. These processes, one done by district office staff and the other
                                 under IRS’ Centralized Quality Measurement System (CQMS) program, did
                                 not provide a basis for fully assessing compliance with requirements or
                                 appropriateness of seizure decisions. In addition, the results of the district
                                 office reviews were not summarized on a national level.

District Office Case Reviews     IRS district collection support staff were to review seizure paperwork to
                                 ensure, among other things, that revenue officers obtained necessary
                                 approvals, properly prepared inventory and other forms, and adhered to
                                 certain legal and procedural requirements. However, because the
                                 reviewers did not have the revenue officer case files, they did not have
                                 access to information to determine whether all preseizure actions, such as
                                 the sending of required notifications were made.

                                 While the reviewers in three of the four IRS districts we visited told us they
                                 usually kept a record of the type of problems they identified, this
                                 information was not provided to IRS’ National Office.




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CQMS Reviews                 Under CQMS, samples of closed collection cases were to be reviewed at a
                             centralized location to check on compliance with collection requirements.
                             However, according to IRS National Office officials responsible for CQMS,
                             the size of the sample of cases selected for review was too small to make a
                             statistically reliable assessment of IRS’ use of any specific collection
                             authority, such as seizures. In addition, when a seizure case was included
                             in the sample, the review process was not designed to assess the
                             appropriateness of seizure decisions, nor report such information to
                             National Office management. Moreover, the reviews did not did not cover
                             all aspects of seizures, such as the management and sale of seized assets.

Information on the Type      IRS did not systematically capture or report to National Office Collection
                             management information on taxpayer complaints about the seizure
and Resolution of Taxpayer   process. Taxpayers could complain about the seizure process to the
Complaints                   revenue officer or the revenue officer’s manager, the Collection Appeals
                             Office, or the Office of the Taxpayer Advocate. National Office Collection
                             management did not routinely receive seizure complaint information from
                             the Taxpayer Advocate’s Office or from Appeals. Nor did Collection
                             management have a method for capturing information about the resolution
                             of complaints by their staff. This type of information would be helpful to
                             IRS Collection management to determine the extent and types of problem
                             occurring so that corrective actions could be taken when appropriate.

                             Because complaint information was not systematically captured and
                             reported, we collected information on the types of complaints taxpayers
                             made about the seizure process and IRS’ resolution of these complaints
                             from projectable samples of revenue officer, Taxpayer Advocate, and
                             Collection Appeals files. We categorized complaints as (1) the taxpayer
                             disputed the amount owed, (2) IRS did not follow procedures, (3) IRS
                             caused the taxpayer hardship, or (4) IRS judgment or conduct was
                                                                                  53
                             inappropriate. As shown in table 3.8, about one-half of the complaints
                             shown in the revenue officers’ files involved disputes over the taxes owed,
                                             54
                             while two-thirds of the complaints made to the Taxpayer Advocate or
                             Collection Appeals Program involved taxpayer hardship.




                             53
                                  95-percent confidence interval: 40 to 62 percent.
                             54
                                  95-percent confidence interval: 61 to 72 percent.




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Table 3.8: Type of Taxpayer Complaint
                                                                                                      Percentage of complaints
                                                                                                     In revenue In Taxpayer Advocate or
                                        Type of taxpayer complaint                                officers’ files Collection Appeals files
                                        Taxpayer disputed amount owed                                          51                       15
                                        IRS did not follow procedures                                          21                       10
                                        IRS caused taxpayer hardship                                           20                       67
                                        IRS judgment or conduct was
                                        Inappropriate                                                         9                                 9
                                        Total                                                               100                               100
                                        Note 1: Confidence intervals for the estimates in this table are found in table II.10 of app. II. Some of
                                        these confidence intervals may be quite large.
                                        Note 2: Percentages may not add to 100 due to rounding.
                                        Source: GAO analysis of IRS case files.


                                        Usually the complaints were resolved in support of IRS’ actions regardless
                                        of where the complaint was resolved (see table 3.9). However, we estimate
                                                             55
                                        that about 20 percent of complaints to the Taxpayer Advocate and
                                                                                         56
                                        Collection Appeals Program and about 26 percent of complaints to
                                        revenue officers or managers were resolved in a way that did not
                                        completely support IRS actions.

Table 3.9: Resolution of Taxpayer
Complaints                                                                                       Percentage of complaints resolved in
                                                                                                        support of IRS actions
                                                                                                                                a
                                        IRS party resolving taxpayer complaint                    Yes    No Partly Unknown Total
                                        Revenue officer or supervisor                               74     7      19           0    100
                                        Taxpayer Advocate or Collection Appeals
                                        Program                                                     64       9        11              17      100
                                        Note 1: Confidence intervals for the estimates in this table are found in table II.11 of app. II. Some of
                                        these confidence intervals may be quite large.
                                        Note 2: Percentages do not add to 100 due to rounding.
                                        a
                                         File information was not sufficient to determine resolution.
                                        Source: GAO analysis of IRS case files.

                                                                                57
                                        In an estimated 17 percent of the complaints, as shown in table 3.9,
                                        information was not available in either the Taxpayer Advocate or
                                        Collection Appeals Program files to determine whether the issues raised
                                        by the taxpayer were fully considered and resolved. In most of the cases
                                        that did not have information to determine the resolution of a complaint,
                                        the taxpayers raised more than one issue. While resolution was almost
                                        55
                                             95 percent confidence interval: 15 to 24 percent.
                                        56
                                             95 percent confidence interval: 15 to 38 percent.
                                        57
                                             95 percent confidence interval: 12 to 21 percent.




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                always shown for at least one of the issues raised, the case files did not
                address all of the issues raised. In other cases, issues were referred to
                other IRS units for resolution and the case files did not contain
                information on whether the issues were ever considered or resolved by
                these units.

                The information that we developed from case files and reported in tables
                3.8 and 3.9 was not routinely captured and reported to IRS management.
                Without information on taxpayer complaints, IRS National Office
                Collection management could not be aware of the extent and types of
                problems that taxpayers are experiencing and whether the problems are
                being resolved.

                We identified implementation breakdowns and other weaknesses in the
Conclusions     processes that were established to protect taxpayer interests when
                planning and conducting seizures. In summary

              • While most taxpayers were provided with many opportunities to resolve
                their tax delinquencies and frequent warnings of possible enforcement
                actions, in some instances, seizures were made without all required
                notifications and with minimal efforts to personally contact taxpayers or
                incomplete documentation for determining the appropriateness of
                judgments made.
              • In some instances, seizures were approved and made although key
                decisionmaking information, such as taxpayer financial information,
                measures of expected proceeds from the seizure, or potential impact of the
                seizure, were missing from the case files. Factors contributing to the
                missing information included (1) revenue officers not following
                requirements, (2) taxpayers not cooperating, and (3) procedures not being
                clear.
              • In a few instances, seizures were conducted without required approvals,
                and the collection files did not always document whether taxpayers were
                provided with an inventory listing of the assets seized.
              • IRS did not always capture some basic information to establish
                accountability over assets (e.g., asset condition information or asset
                identity information, such as model number). Nor did the process provide
                IRS management with a means to measure seizure results and monitor the
                program as envisioned by federal financial management guidelines.
              • The process requirements for marketing and selling seized assets provided
                little assurance that IRS sold the assets for the maximum price possible for
                a number of reasons, including sales being consummated with little
                competitive bidding and little basis for evaluating returns from
                noncompetitive sales.



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  and Interests




• IRS’ process for monitoring the use of seizure authority delivered little
  information to senior management for overseeing compliance with seizure
  requirements; appropriateness of seizure decisionmaking; seizure results
  including uniformity of seizure use across the country; and resolution of
  taxpayer complaints.

  In chapter 4, we discuss the extent to which these process weaknesses are
  being addressed and make recommendations to more fully resolve them.




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Chapter 4

IRS’ Implementation of Restructuring Act
Requirements: Taxpayer Safeguards
Strengthened But Some Weaknesses Remain
                           Comparing the weaknesses we identified in IRS’ seizure process with the
                           changes being made to the process pursuant to the Restructuring Act
                           showed that not all the weaknesses identified were being fully addressed.
                           Changes that IRS has made to its processes or is planning to make

                         • do not provide adequate assurance that notification requirements will be
                           met in all cases,
                         • do not provide adequate guidance to revenue officers on how to analyze
                           and document whether a seizure is an appropriate tax collection action,
                         • do not establish adequate accountability and control over seized assets,
                         • do not provide assurance that asset sales procedures are likely to generate
                           the highest possible sales prices, and
                         • do not provide IRS management with the information needed to oversee
                           the program.

                           In each of these areas of remaining weakness, IRS has options available to
                           address them through the Restructuring Act.

                           The following sections summarize the weaknesses identified in each
Continuing Seizure         process area, updated with changes mandated by the Restructuring Act as
Process Weaknesses         implemented by IRS. The sections conclude with a description of the
                           remaining weaknesses.

Notifying Taxpayers of     As discussed in chapter 3, we found that before initiating seizure action,
                           revenue officers provided most taxpayers with numerous opportunities to
Impending Collection       make arrangements to resolve their tax delinquencies. However, IRS’
Actions                    seizure approval system allowed some seizures to proceed when (1)
                           records indicated that not all required notifications had been sent to some
                           taxpayers, (2) limited attempts had been made to personally contact some
                           taxpayers as compared to others, and (3) seizure files did not fully
                           document compliance with all requirements.

Process Changes            Process changes required by the Restructuring Act and procedures
                           developed by IRS are intended to increase assurance that taxpayers are
                           made aware of their responsibilities and the potential consequences of not
                           taking action to voluntarily resolve their tax debts and that taxpayers are
                           provided with a final opportunity to resolve their delinquency before
                           seizure.

                         • The act requires IRS to send additional notifications to taxpayers,
                           including a written notice of intent to seize taxpayer property for
                           nonpayment of taxes, which inform the taxpayers about new appeal rights.
                           This notice requirement is designed not only to alert the taxpayer to an



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                         impending seizure, but also to stay the seizure action for at least 30 days to
                         allow the taxpayer time to file an administrative appeal. The basis for the
                         appeal may include the reasonableness of the action and the availability of
                         alternative collection methods other than seizure, such as an installment
                         agreement or offer-in-compromise. Also, IRS decisions may be appealed to
                         the Tax Court or district court, rendering proposed collection actions
                         reviewable by the courts for the first time.
                       • IRS revised its collection procedures governing personal contacts with
                         taxpayers. In response to concerns that taxpayers were not fully informed
                         of the possibility of seizure, newly established procedures require revenue
                         officers to summarize their discussions with taxpayers and provide them
                         with a written record of their discussion. The record would confirm that
                         revenue officers specified the actions required of the taxpayer, the time
                         frame for such actions, and the potential for seizure of taxpayer property if
                         the taxpayer failed to act accordingly.
                       • The act and related IRS procedures established a mechanism to help
                         ensure that notification requirements are carried out. Under the act,
                         supervisors must review proposed levies and liens and related notices,
                         where appropriate. Further, all seizures must be approved by a more
                         senior district office collection manager, including the district director, for
                         the seizure of business assets. Additionally, not complying with the
                         approval procedures would subject the responsible IRS employees (e.g.,
                         revenue officers and managers) to disciplinary actions, including
                         termination of employment.

Weaknesses Remaining     Although these changes should help to ensure that taxpayers are made
                         aware of their responsibilities, we are concerned that some problems that
                         existed before the changes have not been fully addressed. First, we found
                         instances in which seizures had been approved even though some
                         notification requirements were not met (e.g., a notification was not sent to
                         a taxpayer or a collection action was not postponed until the 30-day
                         notification period expired) or not documented as met. Because IRS’
                         controls were not sufficient to prevent departures from pre-Restructuring
                         Act process requirements, it is unclear whether the continued reliance on
                         manual reviews of revenue officer case file information would be sufficient
                         to prevent departures from requirements in the future.

                         Thus, we looked for a relatively “fail-safe” check that could stop a
                         collection case from advancing to seizure if a requirement was not met.
                         During our review, we found that IRS was expanding an automated field
                         collection system to cover the seizure process, including plans for the
                         computer generation of seizure forms. This automated system had linkages
                         to other information systems in IRS, such as the masterfile, which contain



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                           account data and notification data. In discussions with the IRS personnel
                           developing the automated system, we learned that programming could be
                           done to prevent the generation of forms, such as the form needed for
                           seizure approval, if taxpayer protection requirements were not met or not
                           documented as met. Also, expanding the capabilities of this system to
                           automate the technical requirements review would allow the managerial
                           review to focus largely on judgmental areas, such as the adequacy of
                           revenue officer contacts with taxpayers.

                           Second, we noted problems with the quality of case file documentation.
                           We found several instances in which revenue officers’ case files, because
                           of incomplete documentation, risked (1) leaving managers unable to
                           properly review seizure case files and (2) fostering an environment in
                           which taxpayer protections were not fully considered. In revising its
                           procedures, IRS has developed a succinct checklist of seizure
                           requirements. While revenue officers are required to initial that each
                           applicable requirement listed was met, this list does not have instructions
                           on the amount of explanation or evidence required to show the
                           appropriateness of judgments made, such as the adequacy of contacts with
                           taxpayers.

                           Third, we found instances in which limited attempts had been made to
                           personally contact some taxpayers. Given the potentially severe effect of a
                           seizure on a taxpayer, more than one attempt to contact the taxpayer
                           would be appropriate. We also recognize that revenue officer time is
                           limited and should not be spent repeatedly contacting or attempting to
                           contact the same taxpayer. At present, however, revenue officers do not
                           have clear guidance on the amount of effort they should make in
                           attempting to personally contact taxpayers before moving on to the
                           enforcement stage of the collection process.

Evaluating the Necessity   As discussed in chapter 3, revenue officer case files generally contained
                           information that indicated why seizure actions were necessary (e.g.,
and Appropriateness of     continuing nonpayment of taxes). However, some seizures were approved
Seizures                   without complete information in the files to show why the seizure was
                           appropriate or whether alternatives to seizure, such as installment
                           agreements, might have been warranted. Factors contributing to the
                           missing information included (1) procedural requirements not being clear,
                           (2) taxpayers not cooperating, and (3) revenue officers not following
                           requirements.

Process Changes            The Restructuring Act, while not mandating the collection of specific
                           information, established other requirements that increased the need for



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                         the type of decisionmaking information that we found missing in revenue
                         officers’ files. The act also established penalties for noncompliance with its
                         requirements. In general, the Restructuring Act, as implemented by IRS

                       • requires revenue officers, before initiating a seizure action, to consider all
                         other collection options (e.g., installment agreements or offers-in-
                         compromise);
                       • prohibits seizures that would not produce funds to apply to the taxpayers’
                         delinquent account;
                       • requires certain seizures to be approved by senior district office collection
                         managers; and
                       • subjects IRS employees, including revenue officers and collection
                         managers, to disciplinary actions, including employment termination, for
                         not adhering to statutory or IRS procedural requirements.

                         In implementing the act’s requirements, IRS introduced procedures for
                         revenue officers to make a “risk analysis” before making a seizure
                         determination. Revenue officers were instructed that if alternatives to
                         seizure (e.g., installment agreements) put the government at greater risk of
                         recovering the liability, then the alternative may not be acceptable. In
                         making the risk analysis for determining whether seizure action would be
                         appropriate, revenue officers were advised to consider issues such as the
                         taxpayer’s past and current compliance status; current and probable future
                         financial condition, and interest in the assets; the probable impact of the
                         seizure on the taxpayer’s family or employees; and the potential for future
                         alternative collection methods to produce more than the amount that
                         could be currently collected through seizure.

Weaknesses Remaining     Given the need for information on which to make and approve judgments
                         on whether seizure or alternative collection action would be the
                         appropriate resolution of a collection case, we expected to see rather
                         detailed evaluation instructions and documentation requirements. Instead,
                         the Internal Revenue Manual changes provided limited guidance on how
                         the risk assessment should be carried out or documented in revenue
                         officer case files. For example, the IRS procedures did not specify

                       • the lengths that revenue officers are expected to go to obtain and
                         document financial information from delinquent taxpayers or to develop
                         and document the information from alternative sources for review
                         purposes;
                       • the lengths that, before seizure, revenue officers are to go to develop and
                         document estimates of the minimum sales price that seized assets would
                         be sold for; and



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                            • the depth of investigation required to assess the potential impact that
                              seizure actions may have (e.g., no mention was made of assessing or
                              documenting the potential impact on the taxpayer’s family).

                              Also, as discussed in the previous section on taxpayer notifications, the
                              development of automated checks for meeting technical requirements
                              (e.g., taxpayer financial information or minimum acceptable asset sales
                              price) would help to ensure that the requirements are met and allow
                              managerial reviews to concentrate on judgmental areas.

Seizure Conduct               As discussed in chapter 3, we found that revenue officers generally
                              complied with procedural requirements for conducting seizures. But in an
                                                   1
                              estimated 1 percent of the seizures, revenue officers did not obtain
                              required approvals and the case files were not always sufficiently
                              documented to show adherence to seizure process requirements. For
                                                                    2
                              example, in an estimated 28 percent of the seizures, the documentation in
                              the revenue officers’ files was not sufficient to show whether the taxpayers
                              were fully notified of the assets seized. Incomplete documentation risks
                              (1) leaving managers unable to properly review seizure case files and (2)
                              fostering an environment in which taxpayer protections were not fully
                              considered.

Process Changes               The Restructuring Act and IRS procedures added several protections. The
                              changes made higher level managers responsible for approving seizures
                              and required disciplinary action, including mandatory termination, against
                              IRS employees who make seizures without required approvals.

Weaknesses Remaining          As explained in the preceding section on taxpayer notifications, we
                              questioned the sufficiency of IRS’ continued reliance on manual reviews of
                              case files to, in part, ensure that case files documented that all taxpayer
                              protection requirements were met as a means of preventing departures
                              from requirements. As discussed in that section, we identified process
                              changes that could provide automatic checks to prevent such occurrences.

Protecting Assets Against     As discussed in chapter 3, we found a number of weaknesses in IRS’
                              systems of controls for establishing accountability over seized assets and
Loss                          safeguarding assets against loss or damage. More specifically, we found
                              the following.


                              1
                                  95-percent confidence interval: 0 to 5 percent.
                              2
                                  95-percent confidence interval: 20 to 35 percent.




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                  • Some seizures involved assets that typically require safeguards, such as
                    jewelry. However, revenue officer files did not indicate whether safeguard
                    arrangements had been made. In a few instances, the files contained
                    information about a loss, alleged loss, or damage to property. However,
                    because of limited documentation in the case files, we could not be certain
                    of the magnitude of the loss or who was liable.
                  • The asset control information documented by revenue officers in their
                    case files, while generally meeting IRS’ minimum requirements, was not as
                    comprehensive as the control information envisioned under federal
                    financial management guidelines for establishing accountability over
                    seized assets.
                  • IRS’ automated inventory control system, while not designed to capture
                    the comprehensive control information envisioned by the federal financial
                    management guidelines, also did not capture some of the basic control
                    information documented by revenue officers or always capture the
                    information accurately or in a timely manner.
                  • IRS did not require periodic physical inventories of assets-on-hand as
                    envisioned by the federal financial management guidelines to ensure
                    accountability and check against loss and damage.

Process Changes     The Restructuring Act mandated changes in IRS’ management of seized
                    assets. The act requires that by July 2000, IRS remove revenue officers
                    from any participation in the sale of seized assets. In doing so, the act
                    suggested that IRS consider the use of outsourcing. During the course of
                    our work, IRS convened a study group to develop a proposal for complying
                    with the Restructuring Act change. The group’s decisions were not
                    finalized at the time we published our report but were expected by late
                    1999.

                    Also, during the course of our review, IRS began making plans for a new
                    automated inventory control system. The new system is to be an add-on
                    module to its automated field collection system. In designing the new
                    system for an estimated first-phase implementation in mid-2000, IRS took
                    into consideration the federal financial management guidelines and input
                    from us. Since IRS had not completed its systems design work, we are
                    uncertain about the extent to which controls are to be incorporated into
                    the system.




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Weaknesses Remaining      Regardless of its decision on outsourcing the sales function, IRS would
                          need to have sufficient controls to establish accountability and control
                          over assets. Outsourcing would merely mean that IRS would need to
                          monitor the actions of contractors instead of employees. Given the
                          weaknesses identified in our pre-act review and the process changes under
                          way, existing and proposed controls over assets do not fully comply with
                          federal financial management guidelines. These controls do not

                        • ensure that revenue officers document basic asset control information,
                          including detailed asset identity descriptions, asset condition, and custody
                          information;
                        • ensure that basic control information is entered in a timely manner and
                          included in the revised automated inventory control system;
                        • ensure asset security and accountability through scrutiny of decisions
                          regarding security and periodic reconciliation of inventory records to
                          assets-on-hand (periodic physical inventories); and
                        • require revenue officers to record and account for all theft, loss, and
                          damage expenses of each asset and document efforts to obtain
                          reimbursement for the expenses in collection case files.

Obtaining the Maximum     As described in chapter 3, even when revenue officers adhered to the basic
                          taxpayer protection requirements, IRS had little assurance that it sold
Return on Asset Sales     taxpayers’ assets for the highest price.

                          First, IRS’ sales practices did not ensure competitive bidding for assets.
                                                                          3
                          For example, we estimate that about 51 percent of IRS’ asset sales
                                                                                         4
                          attracted no more than one bidder, and only about 42 percent of the cases
                          sold for more than the minimum acceptable price set by IRS.

                          Second, absent strong competition, IRS’ procedures were not adequate to
                          evaluate the reasonableness of the sales proceeds and guard against self-
                          interest sales. The basic control—that is, the minimum acceptable price
                          computed by a revenue officer—was frequently based on uncertain
                          estimates of asset fair market values that were arbitrarily adjusted
                          downward either through the use of unsubstantiated percentage
                          reductions or set at an amount equal to the tax debt. Thus, IRS had little
                          assurance that the minimum price reflected the actual value of the assets.



                          3
                              95-percent confidence interval: 36 to 67 percent.
                          4
                              95-percent confidence interval: 29 to 56 percent.




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Process Changes                 The Restructuring Act mandated the following changes:

                              • IRS is prohibited from selling seized assets for less than an IRS-computed
                                minimum price that takes into consideration seizure and sales costs.
                              • IRS is prohibited from seizing and selling a taxpayer’s property until a
                                determination is made that the sale of the property would generate
                                proceeds to be applied to the taxpayer’s delinquent account.
                              • IRS is required to remove revenue officers from the sales process by July
                                2000 and, in so doing, is required to consider outsourcing the sales activity.
                              • IRS is required to notify the taxpayers of the results of the sale of their
                                assets, including the amount of their tax debts before the sales, amount of
                                sales’ proceeds, amount of sales’ expenses, amount applied to the
                                taxpayers’ liability, and amount of the remaining taxes due.

                                The Restructuring Act reemphasized the importance of setting minimum
                                prices for ensuring a return for both the taxpayer and government. But the
                                statute or preexisting tax code provisions provided little guidance on
                                setting a minimum price beyond indicating that the price should consider
                                the expense of making the seizure and conducting the sale.

                                During the course of our work, IRS convened a study group to develop a
                                proposal for removing revenue officers from the asset sales activity and to
                                consider outsourcing. The group’s decisions are not expected until late
                                1999.

Weaknesses Remaining            We see little that would directly counteract the two basic problems we
                                observed in IRS’ seized asset sales activity: little competitive bidding for
                                assets and unreliable minimum price setting. As discussed in chapter 3,
                                ensuring competitive bidding involves a number of activities, ranging from
                                advertising to attract bidders to providing them with information and
                                access to the assets.

                                Also, similar to the discussion in the previous section on taxpayer
                                notification, we found instances where sales were consummated even
                                though process requirements had not been met or were not documented as
                                met. As discussed in that section, adding checks to the automated field
                                collection system for meeting process requirements could help provide
                                assurance that such requirements are met.

Overseeing Seizure Activity     As discussed in chapter 3, we found that while IRS had established
                                oversight systems to capture information on certain aspects of the seizure
                                program, these systems did not provide information that could be used by
                                senior management for monitoring



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                       • the results and costs of seizures,
                       • compliance with seizure requirements or appropriateness of seizure
                         decisionmaking, or
                       • the resolution of taxpayer complaints.

Process Changes          The Restructuring Act mandated a number of changes to improve
                         oversight of the seizure program, including the following:

                       • Annual review of seizure cases by the Treasury Inspector General for Tax
                         Administration. The reviews are to ensure that statutorily established
                         requirements governing the use of seizure authority were followed.
                       • More senior-level approval for seizures. A seizure of a principal residence
                         requires the approval of a judge or magistrate. A seizure of a sole
                         proprietor’s ongoing business requires the district or assistant director’s
                         approval. In addition, IRS changed its procedures to require the district
                         collection chief to approve all other seizures.
                       • A due-process system for taxpayers to appeal IRS proposed seizure
                         actions. This system also provided for taxpayer appeals to the Tax Court
                         or district court.
                       • Expanded role of the Taxpayer Advocate. The law expanded the
                         circumstances under which the Taxpayer Advocate can review a case for
                         hardship to include, among other things, the threat of adverse action. All
                         seizures are required to be reviewed for potential hardship by the
                         Taxpayer Advocate’s Office if requested by the taxpayer.
                       • A workforce performance management system. IRS is to establish
                         performance goals and objectives and use data on meeting those to make
                         performance distinctions among employees and groups of employees. The
                         act also reiterates the basic concept that tax enforcement results should
                         not be used to evaluate employees or impose or suggest production quotas
                         or goals.

                         In addition, IRS has concluded ad hoc reviews of the collection system and
                         has initiated improvements. For example, collection staff reviewed seizure
                         activities in eight district offices, primarily through focus group meetings.
                         Also, during the course of our review, IRS initiated a redesign of its
                         automated asset control system.

Weaknesses Remaining     While the Restructuring Act mandated annual reviews of adherence to
                         seizure process requirements, other aspects of the three basic weaknesses
                         remain in overseeing the use of seizure authority.

                       • First, at the time our work concluded, IRS had no plans to change its
                         management information reporting on seizure results from what was in



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                        place in fiscal year 1997. This was a management information system that
                        collection officials said provided little or no insights on the appropriate use
                        of seizure authority. But they indicated that the Restructuring Act added to
                        program oversight, in part, by adding new checks and balances into the
                        collection process, such as by establishing the due-process appeal system
                        and expanding the Taxpayer Advocate role. However, at the time of our
                        review, no plans had been made for collection managers to be
                        systematically provided with information on the type of problems
                        experienced by taxpayers and the resolution of those problems. Such
                        information could be useful for making process changes to minimize
                        taxpayer problems.
                      • Second, at the time our work concluded, IRS had not fully developed the
                        capability to monitor the quality of seizure work in terms of the
                        appropriateness of seizure decisionmaking or the conduct of asset
                        management and sales activities. By mid-1999, IRS had revised its
                        consolidated review program to assess the quality of collection work as a
                        primary part of its revamped performance management system. The
                        program was not, however, designed to provide an assessment of the
                        quality of seizure decisionmaking or the quality of asset management and
                        sales activities. While the annual Inspector General reviews required by the
                        Restructuring Act will add to seizure oversight, the Inspector General
                        review work has been limited to checking on compliance with process
                        requirements—not the appropriateness of seizure decisionmaking. The
                        Inspector General’s staff informed us that under current plans, future
                        annual reviews would also be process-oriented.

                        The tax system depends on taxpayers voluntarily paying their taxes, a
Conclusions             practice dependent on taxpayers having confidence that their neighbors or
                        competitors are also complying. The use of seizure authority is a necessary
                        part of a tax enforcement program that is intended to help provide this
                        confidence. Taxpayers with substantial amounts of delinquent taxes, long-
                        standing delinquencies, repeated failures to respond to nonseizure
                        collection actions, and substantial assets cannot be allowed to evade
                        payment without risking the credibility and fairness of the tax system.
                        However, the protection of those taxpayers’ rights and interests is also
                        crucial to a credible and fair tax system. In this regard, IRS’ seizure
                        process had a number of weaknesses—weaknesses that are not all being
                        addressed by changes being made pursuant to the Restructuring Act.

                        To strengthen IRS’ processes for ensuring that seizure authority is
Recommendations to      appropriately exercised—that is, taxpayers are made aware of their
the Commissioner of     responsibilities and provided time to comply, proposed seizure actions are
Internal Revenue        evaluated for necessity and appropriateness, and seizure actions are



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  conducted appropriately—and when warranted is exercised, we
  recommend that the Commissioner of Internal Revenue

• build controls into the automated field collection system, currently under
  development, that would act as a check to prevent departures from seizure
  process requirements that are verifiable on an automated basis (e.g.,
  required taxpayer notifications made and time requirements followed);
• provide guidance that describes the lengths that revenue officers are to go
  to (1) personally contact delinquent taxpayers, (2) obtain financial
  information from delinquent taxpayers or develop such information from
  alternative sources, and (3) develop and document estimates of the
  minimum sales price at which the seized assets could be sold;
• require revenue officers to document the basis for judgments made (e.g.,
  the basis for determining that sufficient attempts were made to gain
  taxpayer cooperation to pay delinquent taxes and the basis for determining
  the impact on taxpayer dependents) to facilitate managerial review of case
  files; and
• provide written guidance on when seizure actions ought to be taken, that
  is, the conditions and circumstances that would justify seizure action and
  the responsibilities of senior managers to ensure that such actions are
  taken.

  To improve IRS’ process for controlling assets after seizure, we
  recommend that the Commissioner fully implement federal financial
  management guidelines to include

• ensuring that revenue officers document basic asset control information,
  including detailed asset identity descriptions, asset condition, and custody
  information;
• ensuring that basic control information is entered in a timely manner and
  included in the revised automated inventory control system;
• ensuring asset security and accountability through scrutiny of decisions
  regarding security and periodic reconciliation of inventory records to
  assets-on-hand (periodic physical inventories); and
• requiring revenue officers to record and account for all theft, loss, and
  damage expenses of each asset and document efforts to obtain
  reimbursement for the expenses in collection case files.

  To strengthen the sales process for assuring that the highest prices are
  obtained from seized asset sales, we recommend that the Commissioner




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                      • develop guidelines for establishing minimum asset prices to preclude the
                        use of arbitrary percentage reductions or the amount of the delinquency as
                        the minimum price and
                      • take the steps necessary to promote reasonable competition among
                        potential buyers during asset sales.

                        To strengthen oversight of seizure activities, we recommend that the
                        Commissioner

                      • expand the quality review of collection cases to include an assessment of
                        the use of seizure authority and of asset management and disposal
                        activities and
                      • establish a method for providing IRS senior managers with useful
                        information to monitor the use of seizure authority and resolution of
                        taxpayer complaints.

                        In written comments on a draft of this report, IRS generally agreed with
Agency Comments and     the report’s findings and recommendations, although it said that some
Our Evaluation          recommendations appeared impractical to implement at this time. IRS also
                        said it will use the report to help improve the seizure process. In its letter,
                        IRS emphasized three points made in the report.

                      • First, while additional guidance needs to be provided to IRS employees
                        about how to conduct seizures, that guidance needs to allow room for
                        employees to exercise judgment to address individual taxpayer situations.
                      • Second, predicting seizure results is extremely difficult.
                      • Third, the wide variation in the use of seizure authority by district offices
                        can be attributable to a number of factors.

                        IRS further said that the procedural changes being implemented were
                        expected to eliminate a number of seizures that would otherwise provide
                        little or no proceeds.

                        In an enclosure to the letter, IRS commented on each recommendation.
                        With respect to our four recommendations for strengthening IRS’
                        processes for ensuring that seizure authority is appropriately exercised,
                        IRS agreed that it could establish better controls to prevent departures
                        from seizure requirements and clearer guidance for making seizure
                        decisions. IRS also noted that, as discussed in the report, the appropriate
                        use of seizure authority would still be dependent on revenue officer
                        judgment, which may be based on incomplete information when taxpayers
                        have not been cooperative.




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With respect to our four recommendations to improve IRS’ process for
controlling assets after seizure, IRS generally agreed with three of the
recommendations. IRS also commented that the timing of the
recommended physical inventories may depend on the type of asset seized
and storage location. Although we agree, the timing of physical inventories
should also be based on agency control needs consistent with federal
financial management guidelines. Additionally, IRS commented that as it
removes revenue officers from any participation in asset sales as
mandated by the “Uniform Asset Disposal Mechanism” provision of the
Restructuring Act, revenue officer responsibility for maintaining control
over assets may change. As explained in our draft report provided to IRS
for comment, we found that regardless of IRS’ decision on who was to be
assigned responsibility for asset management and sale activities, IRS
employees or contractors, controls needed to be developed to establish
accountability and control over assets. Thus, our recommendations would
apply to whomever is subsequently responsible for the assets. With
respect to our fourth recommendation, IRS said that it would need to
secure a ruling from Chief Counsel before it could seek reimbursement
from third parties for any loss or damage to assets seized from taxpayers.

With respect to our two recommendations for strengthening the sales
process and assuring that maximum prices are obtained from the sale of
seized assets, IRS agreed that its sales instructions needed to be
augmented. IRS also indicated that it would seek a ruling from Chief
Counsel to overturn a seized asset price-setting precedent whose basis in
tax law had been repealed a number of years ago. But in doing so, IRS
expressed concern about being required to return valuable property back
to taxpayers if buyers offered to pay more for the property than the
taxpayer owed but less than the IRS set minimum acceptable price based
on a proper valuation of the asset. This highlights the importance of our
second recommendation, that is, promoting reasonable competition among
potential buyers during asset sales. IRS commented that it believed the
changes it was making would improve competition but noted that there
may be instances where, given the nature of the assets seized, there may
be limited marketability. We agree that this could happen, and that is why
our recommendation specifically referenced “reasonable” competition.

Lastly, with respect to our two recommendations to strengthen oversight
of seizure activities, IRS commented that, at this time, it appeared
impractical to monitor the appropriateness of seizure decisionmaking. IRS’
comments indicated that existing case file handling and selection criteria
preclude seizure cases from entering IRS’ overall program for assessing
work quality and that feedback from required Inspector General reviews



Page 88                                     GAO/GGD-00-4 IRS’ Use of Seizure Authority
Chapter 4
IRS’ Implementation of Restructuring Act Requirements: Taxpayer Safeguards Strengthened
But Some Weaknesses Remain




was more comprehensive. We agree that current IRS procedures preclude
seizure cases from entering the review process established to assess the
quality of collection work, including the appropriateness of
decisionmaking. But, because of the impact that seizures may have on
taxpayers, we believe that the procedures should be reconsidered so that
an appropriate number are selected for review. Moreover, as discussed in
the report, the Inspector General reviews have focused on compliance
with seizure process requirements and not on the quality of seizure work
in terms of the appropriateness of seizure decisionmaking. This reinforces
the need for seizure cases to be included in the quality review process.

In comments on our oversight recommendation for monitoring seizure
results (e.g., use of seizure authority by district offices and resolution of
taxpayer complaints), IRS commented that useful information could only
be developed through detailed case-by-case analyses. In part, we agree,
and that is why we had recommended that IRS’ quality review of collection
cases include seizures. Also, we continue to believe that effective oversight
is necessary for IRS to have assurance that collection authority is both
appropriately and uniformly applied across the country. To this end, a
monitoring system comprised of seizure results data (including data on the
use of seizure authority by district offices and the resolution of taxpayer
complaints) together with quality indicators could provide senior
management with the kind of data that would be useful in identifying
potentially troublesome areas that may need management’s attention. The
information on complaints resolved in the taxpayers’ favor may be
particularly useful. But, contrary to IRS’ comments, we see no need to
channel all complaints through a single process in order to have complaint
resolution information reported to management.




Page 89                                     GAO/GGD-00-4 IRS’ Use of Seizure Authority
Appendix I

Statistical Analysis of Delinquent Taxpayers
With and Without Seized Assets

               To investigate the factors affecting the likelihood that delinquent taxpayers
               would have had property seized, we used IRS data on characteristics of the
               taxpayers’ delinquencies; on other taxpayer characteristics, such as age,
               income, and filing status; and on the district office where the seizure took
               place. The data were collected for all taxpayers with seized property, and a
               random sample of delinquent taxpayers without seized property, who had
                                                                                           1
               accounts in field collections in the last 2-week period of fiscal year 1997.
               We limited our analysis to taxpayers with delinquent accounts in field
               collections because these taxpayers were most likely to be at the stage in
               the collection process where the decision to seize or not seize property
               was being made by IRS.

               We analyzed individual and business taxpayers separately. For individual
               taxpayers, we analyzed data for 876 taxpayers with seized property and a
                                                                             2
               random sample of 53,282 taxpayers without seized property. This random
               sample was weighted in the analysis to represent the total of 286,620
               individual taxpayers without seized property who were in field collections
               at the end of fiscal year 1997. For businesses, we analyzed data for 1,710
               taxpayers with seized property and a random sample of 32,080 taxpayers
               without seized property. This sample was also weighted in the analysis to
               represent the total of 173,865 business taxpayers without seized property
               who were in field collections at the end of fiscal year 1997.

               We used the logistic regression model to quantify the effect of delinquency
               and other taxpayer characteristics on the probability that taxpayers had




               1
                We identified seized taxpayers from IRS’ Automated Workload Control System database. We matched
               the taxpayers identified from this file with IRS’ Accounts Receivable File (ARF) to obtain delinquency
               information about the businesses and individuals. For individuals, the seized taxpayers were also
               matched with the Electronic Tax Administration (ETA) file to obtain tax return data. Similar
               information on business taxpayers was not available on ETA at the time of our analysis. For the
               random sample of taxpayers without seized property, we sampled business and individual taxpayers
               from the ARF and matched the individuals with the ETA file.
               2
                We used IRS delinquency and seizure files to identify a total of 1,594 individual taxpayers with seized
               property in field collections at the end of fiscal year 1997. Of these, we used the 876 who also had tax
               return information for our analysis. The tax return information came from the ETA file, which is an
               extract from the 1996 Individual Returns Transactions File. The missing observations, therefore, may
               be due to (1) an incomplete or imperfect match between IRS databases or (2) taxpayers who did not
               file tax returns in 1996. We tested the effects of these missing observations by estimating the logistic
               model using the full 1,594 seized taxpayers. We found no important differences in the estimated odds
               ratios for the delinquency, source of income, and district office characteristics between this model and
               the model reported in table I.1. The observations with missing ETA data were disproportionately those
               taxpayers with income from interest, dividends, and capital gains and those with income classified as
               “other”—largely income from rents, royalties, partnerships, and other businesses.




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Appendix I
Statistical Analysis of Delinquent Taxpayers With and Without Seized Assets




                              3
assets seized by IRS. The results of this analysis are presented as odds
ratios in tables I.1 and I.2. An odds ratio is a measure of the relative risk of
                                                                                4
the occurrence of an event—in this case, the seizure of taxpayer property.
The reported odds ratios indicate the effect of a particular characteristic
(e.g., number of delinquencies) on the probability of seizure, controlling
for the effects of other characteristics included in the analysis. The
estimate of the effect, represented by the odds ratio, is the net effect of the
characteristic (i.e., net of the effects of all the other characteristics).

If the characteristic increases the probability of seizure, the odds ratio will
be greater than 1, and if it decreases the probability of seizure, the odds
ratio will be less than 1. This interpretation of the ratios is slightly different
when the characteristics are distinct categories. An example of such
“categorical” characteristics is filing status, where the categories are
single, married, and head of household. The analysis omits one of the
categories (called the “reference group”) and tests whether the included
categories have greater or less chance of seizure relative to the omitted
category. An odds ratio greater than 1 indicates greater probability of
seizure, while an odds ratio less than 1 indicates less probability of seizure.

Our analysis of the delinquency characteristics of individual taxpayers
shows that the amount of tax uncollected, the number of delinquencies,
the age of the delinquency, and the time in field collections had statistically
significant effects on the odds that taxpayers had assets seized by IRS.
When we tested the significance of other, nondelinquency characteristics,
we found that source of income, age, and filing status were determinants
of the likelihood of a seizure. Table I.1 shows the delinquency and
taxpayer characteristics that we analyzed and the results. The table also
shows the effect on the probability of seizure of the district office in which
the taxpayers’ delinquencies were located.

3
 The logistic regression model is a standard method for estimating the size and significance of the
effects of categorical and continuous characteristics on dichotomous outcomes—in this case, seizing
or not seizing taxpayer assets. The size of the effects is estimated by the odds ratios, which indicate
how the odds of an outcome vary across categories or values of the characteristics. The model tests for
the statistical significance of the effect by testing whether the ratio is significantly different from 1. By
convention, the test is conducted at the 5-percent significance level, i.e., the estimated ratio is judged
statistically significant if, given the estimated value of the ratio, the probability that the true value of
the ratio is equal to 1 is less than 5 percent. Equivalently, the estimated ratio is judged significant if the
95-percent confidence interval for the estimate does not contain a value equal to 1.
4
 The odds ratio is calculated by, first, estimating the probability of seizure for a taxpayer in a particular
category (or with a particular value) of a characteristic. The odds of seizure are then determined by
dividing the probability that the taxpayer has property seized by the probability that the taxpayer does
not have property seized. Finally, the odds ratio is determined by dividing the odds of seizure for
taxpayers of a particular category (or with a particular value) of the characteristic by the odds of
seizure for taxpayers of a different category (or different value) of the characteristic.




Page 91                                                 GAO/GGD-00-4 IRS’ Use of Seizure Authority
                                          Appendix I
                                          Statistical Analysis of Delinquent Taxpayers With and Without Seized Assets




Table I.1: Logistic Regression Analysis
of the Probability of Seizure for         Characteristic tested                                                         Odds ratio
Individual Taxpayers                      Delinquency characteristic
                                                                      a                                                             b
                                          Assessed taxes uncollected                                                          1.01
                                                                           a
                                          Assessed penalties and interest                                                      1.00
                                                                         a
                                          Accrued penalties and interest                                                       1.00
                                                                                                                                   b
                                          Number of delinquencies                                                             1.13
                                                                                                                                   b
                                          Months in field collections                                                         1.04
                                                                                                                                   b
                                          Months since the original assessment                                                0.98
                                          Taxpayer characteristic
                                          Total income
                                                                                                                                    b
                                           Less than $0                                                                       1.75
                                           $0-$25,000                                                              Reference group
                                           More than $25,000 to $100,000                                                       0.92
                                           More than $100,000                                                                  1.16
                                          Income source
                                           Wages                                                                   Reference group
                                                             c                                                                     b
                                           Self-employment                                                                    2.08
                                                                                                                                   b
                                           Interest, dividends, and capital gains                                             1.51
                                                  d                                                                                b
                                           Other                                                                              1.86
                                          Filing status
                                           Single                                                                  Reference group
                                                                                                                                   b
                                           Married                                                                            1.20
                                           Head of household                                                                   1.01
                                          Number of dependents                                                                 1.05
                                                                                                                                   b
                                          Age of taxpayer                                                                     1.03
                                          District office
                                          Northeast
                                           Boston                                                                  Reference group
                                                                                                                                   b
                                           Hartford                                                                            .21
                                                                                                                                   b
                                           Buffalo                                                                             .64
                                                                                                                                   b
                                           Brooklyn                                                                            .47
                                                                                                                                   b
                                           Manhattan                                                                           .12
                                                                                                                                   b
                                           Newark                                                                              .53
                                                                                                                                   b
                                           Philadelphia                                                                        .54
                                                                                                                                   b
                                           Baltimore                                                                           .41
                                                                                                                                   b
                                           Richmond                                                                            .40
                                           Cincinnati                                                                           .69
                                           Indianapolis                                                                         .66
                                                                                                                                   b
                                           Detroit                                                                             .29
                                          Southeast
                                                                                                                                    b
                                           Atlanta                                                                              .42
                                                                                                                                    b
                                           Jacksonville                                                                         .43
                                                                                                                                    b
                                           Ft. Lauderdale                                                                       .29
                                                                                                                                    b
                                           Greensboro                                                                           .38
                                                                                                                                    b
                                           Nashville                                                                            .36
                                                                                                                                    b
                                           New Orleans                                                                          .36
                                          Midstates
                                                                                                                                    b
                                           Chicago                                                                              .38
                                                                                                                                    b
                                           Milwaukee                                                                            .28
                                                                                                                                    b
                                           St. Paul                                                                             .49




                                          Page 92                                       GAO/GGD-00-4 IRS’ Use of Seizure Authority
Appendix I
Statistical Analysis of Delinquent Taxpayers With and Without Seized Assets




Characteristic tested                                                                  Odds ratio
Midstates (cont.)
                                                                                                  b
 St. Louis                                                                                    .45
 Austin                                                                                        .79
 Oklahoma City                                                                                 .80
                                                                                                  b
 Dallas                                                                                       .33
                                                                                                  b
 Houston                                                                                      .40
West
                                                                                                  b
 Denver                                                                                       .37
                                                                                                  b
 Phoenix                                                                                      .19
                                                                                                  b
 Seattle                                                                                      .36
                                                                                                  b
 Liguna Niguel                                                                                .35
                                                                                                  b
 San Jose                                                                                     .06
                                                                                                  b
 San Francisco                                                                                .23
                                                                                                  b
 Los Angeles                                                                                  .21
a
Measured in units of $10,000.
b
Odds ratios that are statistically significant at the .05 level.
C
The self-employed are taxpayers who file a Schedule C with Form 1040, Individual Income Tax
Return, but do not file the employer’s tax forms: Form 940, Employer’s Annual Federal
Unemployment Tax Return, and Form 941, Employer’s Quarterly Tax Return.
d
Largely income from rents, royalties, partnerships, and other business.
Source: GAO analysis of IRS data.

In chapter 2, we explain the effect of the delinquency characteristics and
the source of income on the odds of seizure. In this appendix, we provide
more detail on the effect of other taxpayer characteristics on the odds of
seizure.

Differences in positive total income had no effect on the odds of seizure.
Taxpayers who reported moderate or higher levels of income were no
more likely to have property seized than those reporting lower incomes
($0-$25,000). However, taxpayers reporting negative income were 1.7 times
more likely to have property seized. These negative income taxpayers were
reporting losses from capital investments, partnerships, and other
businesses and from rental real estate property. In such cases, negative
income might an indicate increased chance of seizure because it is
associated with taxpayers who did not pay their tax liability, but who had
assets that could be seized.

Other taxpayer characteristics also affected the likelihood of seizure.
Married taxpayers were 1.2 times more likely to have property seized than
single taxpayers. Taxpayers filing as head of household (unmarried
individuals with a dependent child or parent) were no more likely than
single taxpayers to have property seized. The number of dependents
claimed by taxpayers had no effect, while the age of the taxpayer
increased the chances of seizure. The odds of having property seized



Page 93                                                 GAO/GGD-00-4 IRS’ Use of Seizure Authority
                                          Appendix I
                                          Statistical Analysis of Delinquent Taxpayers With and Without Seized Assets




                                          increased by 3 percent with each additional year of age. However, the age
                                          of the taxpayer and filing status may be correlated with the amount of
                                          assets held by the taxpayer since older, married taxpayers tend to
                                          accumulate more assets. The increased likelihood of seizure might have
                                          been due to increased asset holdings rather than age or filing status. IRS
                                          does not collect the asset information for individual taxpayers required to
                                          distinguish the separate effects of age, filing status, and asset holdings on
                                          the probability of seizure.

                                          Our statistical analysis of the delinquency characteristics of business
                                          taxpayers shows that the number of delinquencies, the amount of unpaid
                                          taxes, the age of the delinquencies, and the time in field collections had
                                          statistically significant effects on the odds of seizure. Table I.2 shows the
                                          delinquency and taxpayer characteristics that we analyzed and the results.
                                          The table also shows the effect on the probability of seizure of the district
                                          office in which the taxpayers’ delinquencies were located.

Table I.2: Logistic Regression Analysis
of the Probability of Seizure for         Characteristic tested                                                         Odds ratio
Business Taxpayers                        Delinquency characteristic
                                                                      a                                                               b
                                          Assessed taxes uncollected                                                          1.01
                                                                          a
                                          Assessed penalties and interest                                                      0.99
                                                                        a
                                          Accrued penalties and interest                                                       1.00
                                                                                                                                   b
                                          Number of delinquencies                                                             1.04
                                                                                                                                   b
                                          Months in field collections                                                         1.04
                                                                                                                                   b
                                          Months since the original assessment                                                0.97
                                          Taxpayer characteristic
                                          Business type
                                                           c
                                           Sole proprietor                                                         Reference group
                                           Corporation                                                                        1.06
                                           Partnership                                                                        0.93
                                                 d
                                           Other                                                                              0.88
                                          District office
                                          Northeast
                                           Boston                                                                               .81
                                                                                                                                   b
                                           Hartford                                                                            .23
                                                                                                                                   b
                                           Buffalo                                                                             .76
                                                                                                                                   b
                                           Brooklyn                                                                            .69
                                                                                                                                   b
                                           Manhattan                                                                           .29
                                           Newark                                                                  Reference group
                                                                                                                                   b
                                           Philadelphia                                                                        .38
                                                                                                                                   b
                                           Baltimore                                                                           .19
                                                                                                                                   b
                                           Richmond                                                                            .21
                                                                                                                                   b
                                           Cincinnati                                                                          .28
                                                                                                                                   b
                                           Indianapolis                                                                        .26
                                                                                                                                   b
                                           Detroit                                                                             .21
                                          Southeast
                                                                                                                                      b
                                           Atlanta                                                                              .38




                                          Page 94                                       GAO/GGD-00-4 IRS’ Use of Seizure Authority
Appendix I
Statistical Analysis of Delinquent Taxpayers With and Without Seized Assets




Characteristic tested                                                                      Odds ratio
Southeast (cont.)
                                                                                                      b
 Jacksonville                                                                                     .29
                                                                                                      b
 Ft. Lauderdale                                                                                   .07
                                                                                                      b
 Greensboro                                                                                       .13
                                                                                                      b
 Nashville                                                                                        .21
                                                                                                      b
 New Orleans                                                                                      .19
Midstates
                                                                                                      b
 Chicago                                                                                          .45
                                                                                                      b
 Milwaukee                                                                                        .28
                                                                                                      b
 St. Paul                                                                                         .19
                                                                                                      b
 St. Louis                                                                                        .28
                                                                                                      b
 Austin                                                                                           .65
                                                                                                      b
 Oklahoma City                                                                                    .39
                                                                                                      b
 Dallas                                                                                           .21
                                                                                                      b
 Houston                                                                                          .28
West
                                                                                                      b
 Denver                                                                                           .11
                                                                                                      b
 Phoenix                                                                                          .16
                                                                                                      b
 Seattle                                                                                          .17
                                                                                                      b
 Liguna Niguel                                                                                    .23
                                                                                                      b
 San Jose                                                                                         .08
                                                                                                      b
 San Francisco                                                                                    .28
                                                                                                      b
 Los Angeles                                                                                      .34
a
    Measured in units of $10,000.
b
    Odds ratios that are statistically significant at the .05 level.
c
Sole proprietors are taxpayers who file Schedule C with Form 1040,Individual Income Tax Return,
and who also file the employer’s tax forms: Form 940, Employer’s Annual Federal Unemployment Tax
Return, and Form 941, Employer’s Quarterly Federal Tax Return.
d
    Includes tax-exempt organizations and other businesses.


Tables I.1 and I.2 can be used to compute district office odds ratios that
are not directly reported in the tables. The odds of seizure for individual
Boston taxpayers relative to taxpayers in other districts is determined
from table I.1 by dividing 1.0 by the odds ratio of the other district. Thus,
the odds of seizure for Boston taxpayers relative to San Jose taxpayers is
1.0 divided by 0.06 which is equal to 16.67. In the same way, the odds of
seizure for business taxpayers in Newark can be determined from table I.2
by dividing 1.0 by the odds ratios for other district offices. The odds of
seizure for Newark business taxpayers relative to Fort Lauderdale
taxpayers is 1.0 divided by .07, which is equal to 14.29. The tables can also
be used to compare the probability of seizure in any two district offices by
dividing the odds ratios for the offices. For example, that Oklahoma City
taxpayers were about 4 times more likely to have property seized than Los
Angeles taxpayers is shown in table I.1 by dividing the odds ratio for
Oklahoma City (.81) by the odds ratio for Los Angeles (.21) to obtain the
odds ratio of 3.86. Note that when comparisons are made in this way, the



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Appendix I
Statistical Analysis of Delinquent Taxpayers With and Without Seized Assets




table does not provide information about whether differences in the odds
ratios are statistically significant.

The size of the odds ratios can be used to assess whether a characteristic
had a large or small effect on the probability of seizure. However, caution
should be used when comparing the odds ratios of categorical and
continuous variables. The value of the odds ratio for continuous variables
depends on the units in which the variable is measured, and a change in
the value of a continuous variable is not equivalent to differences in the
value of categorical variables. For example, the odds ratio of 1.13 for the
number of delinquencies for individuals (reported in table I.1) would
increase to 2.11 if the change in the number of delinquencies was
increased from one to six. The odds of seizure for the self-employed are
2.08 times greater than the odds for wage earners, about twice the odds
ratio for an increase of one delinquency for any individual and about equal
to the odds ratio for an increase of six delinquencies. Thus, the
comparison of the number of delinquencies and source of income
characteristics depends on the units of measurement and judgments about
the comparability of these numerical and qualitative differences.




Page 96                                       GAO/GGD-00-4 IRS’ Use of Seizure Authority
Appendix II

Confidence Intervals for Tables


                                          Most of the reported data in this report are estimates based on the sample
                                          of seizures and taxpayers we examined (see ch. 1). All estimates and
                                          sampling error intervals are presented at the 95-percent confidence level.
                                          This means that we can be 95-percent certain that this interval contains the
                                          actual value. For example, if the reported value is $235 million and the
                                          sampling error is plus or minus $90 million, we are 95-percent certain that
                                          the interval, $145 million to $325 million, contains the actual value.

                                          In the following tables, we present the confidence intervals for the results
                                          reported in chapters 2 and 3.

                                          Table II.1 provides the confidence intervals for the estimates in table 2.3.
Chapter 2 Tables


Table II.1: Confidence Intervals for Percentage of Tax Delinquencies Resolved
                                                           Percentage of taxpayers’ debt resolved
                               Less than 5%            5 to 50%            50 to 95%         95% or more       Total
Seizure result              Estimate     Interval Estimate Interval Estimate Interval Estimate Interval Estimate Interval
Taxpayers paid, and IRS
returned the assets                4        1 to 8       9     5 to 16        0      0 to 3     36   27 to 45  49 40 to 58
Taxpayers did not pay, and
IRS sold the assets                9      5 to 15      13      7 to 20        2    0.2 to 6       2    1 to 7  26 18 to 34
Taxpayers did not pay, but
IRS could not sell the
assets and returned them           7      3 to 13        0      0 to 3        0      0 to 3       0    0 to 3   7    3 to 13
      a
Other                             12      5 to 18        1      0 to 5        1      0 to 5       4    1 to 8  17 10 to 24
Total                             32     23 to 40      23     16 to 31        2      1 to 7     42 33 to 52   100
                                          Note: Percentages may not add due to rounding.
                                          a
                                          This covers taxpayers who could be categorized under more than one category because they had
                                          multiple assets seized or experienced multiple seizures and not all assets had the same disposition or
                                          payment status.
                                          Source: GAO analysis of IRS case files.




                                          Page 97                                             GAO/GGD-00-4 IRS’ Use of Seizure Authority
                                              Appendix II
                                              Confidence Intervals for Tables




                                              Table II.2 provides the confidence intervals for the estimates in table 2.4.




Table II.2: Confidence Intervals for Delinquency Amounts, Days in Collection, and Revenue Officer Collection Results
                                                                                         Revenue officer collection results
                                                                                      Average number                  Percent of tax
                                            Average tax delinquency                     before seizure              liability resolved
                                                                                                     Levies on
                        Percentage                          Days from first Collection Days in wages, bank                      Through
                        of taxpayers        Amount         collection notice contacts collection accounts Preseizure seizure
Seizure result           Est.     Int.    Est.        Int.      Est.     Int. Est. Int. Est. Int. Est.        Int. Est. Int. Est. Int.
Taxpayers paid and             40 to            43,528 to             916 to       7 to      326 to          2 to         6 to      42 to
IRS returned assets      49%     58 $63,424       83,320 1,180 1,444            8 10 423        519     3       4 18% 30 60% 78
Taxpayers did not pay          18 to            93,182 to             938 to       4 to      222 to          1 to         9 to       1 to
and IRS sold assets      26      34 214,775 336,368 1,302 1,666                 7 10 347        472     4       6 17        25 15      29
Taxpayers did not
pay, IRS could not sell
assets and returned             3 to            91,414 to             790 to       2 to      157 to          0 to         6 to
them                       7     13 259,201 426,988 1,091 1,392                 8 12 328        500     3       6 10        14 0        0
      a
Other                          10 to            33,067 to             355 to       5 to      107 to          2 to         1 to       0 to
                         17      24 113,399 193,730 1,033 1,711 10 15 403                       698     6      10    9      17 5       11
Total                   100            126,354 86,129 to 1,181 982 to           8 7 to 392 316 to       4    3 to 15 9 to 22 12 to
                                                 166,579               1,380        10          468             5           21         32
                                              Legend
                                              Est. = Estimate
                                              Int. = Confidence interval
                                              Note: Percentage of taxpayers does not add due to rounding.
                                              a
                                              This covers taxpayers who could be categorized under more than one category because they had
                                              multiple assets seized or experienced multiple seizures and not all assets had the same disposition or
                                              payment status.
                                              Source: GAO analysis of IRS case files.




                                              Page 98                                             GAO/GGD-00-4 IRS’ Use of Seizure Authority
                                             Appendix II
                                             Confidence Intervals for Tables




                                             Table II.3 provides the confidence intervals for the estimates in table 3.1.
Chapter 3 Tables


Table II.3: Confidence Intervals for Key Requirement for Giving Taxpayers an Opportunity to Resolve Their Tax Debts
                                                                                    Percentage of taxpayers
                                                                                                                        a
                                                                        Yes                    No               Unknown
Description of key requirement                                   Estimate    Interval Estimate      Interval Estimate Interval
Taxpayers were sent written notices about each delinquent tax
liability and their rights and responsibilities                      100    97 to 100        0             0       0           0
Taxpayers were sent a written notice for each delinquency
about the possible seizure of their property and an explanation
of their rights and responsibilities before seizure                   91     85 to 95        9       5 to 15       0           0
Taxpayers were provided written notification of possible seizure
within 180 days or were subject to ongoing enforcement action
(lien, levy, or seizure) within 60 days of a seizure                  66     58 to 74       33      25 to 40       1      0 to 5
Revenue officers attempted at least one personal contact with
taxpayers before seizure                                              96     91 to 98        4        2 to 9       0           0
Revenue officers personally advised taxpayers of potential for
enforced collection action, e.g., seizure of property                 71     63 to 79       11       5 to 17      18  11 to 25
Revenue officer waited at least 30 days after all notices before
seizing taxpayer’s property                                           86     79 to 93        8       4 to 14       6    3 to 11
                                             a
                                             File documentation was not sufficient to make a yes or no determination.
                                             Source: GAO analysis of IRS case files.




                                             Table II.4 provides the confidence intervals for the estimates in table 3.2.




Table II.4: Confidence Intervals for Assessing Taxpayers’ Ability to Pay
                                                                                                                        a
                                                                                     Percentage of taxpayers
                                                                                                                          b
                                                                           Yes                  No                Unknown
Description of key requirement                                        Estimate Interval Estimate     Interval Estimate  Interval
Revenue officer requested financial information from taxpayer               84 77 to 91       14      7 to 21        2      0 to 7
Taxpayer provided some financial information                                63 53 to 73       33     23 to 42        4      1 to 9
Taxpayer provided complete and accurate financial information               10  4 to 17       90     83 to 96
Revenue officer validated financial information for those
taxpayers who provided it                                                     86       78 to 94          6      2 to 15            9      4 to 18
Revenue officer found unreported assets                                       25       16 to 33         75     67 to 84            0            0
IRS obtained complete and accurate financial information                       9        5 to 15         86     79 to 93            5      2 to 12
                                             Note: Percentages may not add to 100 due to rounding.
                                             a
                                              Unless otherwise noted, projections are made to the universe of all taxpayers who were personally
                                             contacted before the seizures.
                                             b
                                             File documentation was not sufficient to make a yes or no determination.
                                             Source: GAO analysis of IRS case files.




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                                              Appendix II
                                              Confidence Intervals for Tables




                                              Table II.5 provides the confidence intervals for the estimates in table 3.3.




Table II.5: Confidence Intervals for Estimating Seizure Results
                                                                                        Percentage of seizures
                                                                                                                                           a
                                                                  Yes                              No                         Unknown
Description of requirement                                  Estimate         Interval       Estimate      Interval         Estimate   Interval
Estimate of fair market value of property                         81         74 to 88             18     12 to 25                 1     0 to 4
                                        b
Estimate of encumbrances on property                              76         69 to 84             20     13 to 27                 4      1 to 8
Estimate of the cost of seizure and sale                          66         58 to 74             32     25 to 40                 1      0 to 5
Overall, all estimates                                            57         49 to 65             39     31 to 48                 4      1 to 8
                                              Note: Percentages may not add to 100 due to rounding.
                                              a
                                              File documentation was not sufficient to make a yes or no determination.
                                              b
                                              Two seizures involving only cash were excluded from the population, as encumbrances did not apply.
                                              Source: GAO analysis of IRS case files.




                                              Table II.6 provides the confidence intervals for the estimates in table 3.4.




Table II.6: Confidence Intervals for Reasons for Taking Seizure Action
                                                                                                              Percentage of seizures
Reason for seizure                                                                                           Estimate   Confidence interval
Taxpayer has been delinquent in filing income tax returns or paying taxes in more than 1 year                      75                68 to 82
Taxpayer not making a good-faith effort to pay the taxes due                                                       62                54 to 70
Uncooperative taxpayer (e.g., hiding assets, not providing financial information)                                  41                33 to 50
Taxpayer has not paid the current year taxes                                                                       33                25 to 40
                                               a
Taxpayer pyramiding employment tax liabilities                                                                     19                13 to 25
Immediate action necessary (jeopardy collection, impending bankruptcy, etc.)                                        6                 3 to 10
Other                                                                                                              31                23 to 39
                                              a
                                               When employment taxes are not paid from quarter to quarter and the taxpayer has not paid the
                                              current quarter's taxes, the taxpayer is considered to be pyramiding employment tax liabilities.
                                              Source: GAO analysis of IRS case files.




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                                            Appendix II
                                            Confidence Intervals for Tables




                                            Table II.7 provides the confidence intervals for the estimates in table 3.5.




Table II.7: Confidence Intervals for Protecting Taxpayer Rights During the Seizure Process
                                                                                 Percentage of seizures
                                                                                                                                            a
                                                                 Yes                      No                                   Unknown
Description of key steps                                   Estimate     Interval    Estimate     Interval                   Estimate   Interval
Revenue officer obtained appropriate approvals                   99     95 to 99           1       0 to 5                          0          0
                                      b
Revenue officer obtained writ of entry when needed              100    83 to 100           0            0                          0          0
Revenue officer complied with witness requirements               99    95 to 100           0            0                          1     0 to 5
Taxpayer provided with notice of levy or seizure action
and the inventory of seized assets                               72     65 to 80           0            0                           28      20 to 35
                                            a
                                            File documentation was not sufficient to make a yes or no determination.
                                            b
                                            A writ of entry from the court must be obtained before seizure when the revenue officer has been
                                            denied taxpayer consent to enter private premises.
                                            Source: GAO analysis of IRS case files.




                                            Table II.8 provides the confidence intervals for the estimates in table 3.6.




Table II.8: Confidence Intervals for Completeness of Inventory Descriptions
                                         Percentage of seizures with baseline information recorded on inventory
                                       All               Some but not all           Not recorded       Unable to determine
Baseline information            Estimate    Interval       Estimate    Interval    Estimate Interval     Estimate Interval
Asset description
 General description                   93       89 to 97                  6       3 to 11                0       0 to 3               1         0 to 4
 Itemized list                         91       85 to 97                  6       3 to 13                3       1 to 9               0         0 to 4
 Asset quantity                        85       79 to 92                 12       6 to 18                3       0 to 8               0         0 to 3
                      a
 Detailed description                  75       68 to 82                 20      14 to 26                5      2 to 10               1         0 to 4
Asset value
 Estimated fair market value           96       92 to 99                   2        0 to 6               2       0 to 6                0        0 to 3
                           b
 Estimated taxpayer equity             88       83 to 94                   2        0 to 5              10      6 to 15                1        0 to 4
Asset location                         90       85 to 95                   2        0 to 5               8      5 to 13                0        0 to 3
Asset custody                          53       42 to 64                   4       0 to 10              43     32 to 53                0        0 to 5
Asset condition                        26       18 to 25                   8       4 to 13              66     58 to 75                0        0 to 3
                                            Note: Percentages may not add to 100 due to rounding.
                                            a
                                             Description sufficient, in GAO’s opinion, to differentiate asset seized from other like items such as by
                                            specifying make, model, or serial numbers.
                                            b
                                            Asset fair market value adjusted to account for encumbrances.
                                            Source: GAO review of IRS seized asset inventory records and attachments to those records.




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                                            Appendix II
                                            Confidence Intervals for Tables




                                            Table II.9 provides the confidence intervals for the estimates in table 3.7.




Table II.9: Confidence Intervals for Adhering to Basic Taxpayer Protections in Cases That Went to Sale
                                                                                   Percentage of seizures
                                                                                                                         a
                                                                     Yes                      No                 Unknown
Taxpayer protection                                           Estimate       Interval Estimate      Interval Estimate  Interval
IRS computed a minimum price at which it could sell the
seized assets                                                        98    89 to 100         2        0 to11        0         0
Taxpayer was notified of minimum price and was given 10
days to submit a different valuation                                 79     66 to 93         5       1 to 14       16   5 to 27
Sale was advertised in the required locations (e.g., public
postings and newspaper)                                              96     86 to 99         4       1 to 14        0         0
Sale was held within prescribed time period–at least 10 days,
but not later than 40 days, after public notice                      94     83 to 99         6       1 to 17        0
Sale was witnessed by another IRS employee                           70     57 to 84         0                     30 16 to 43
                                                b
Asset was sold for the minimum price or more                         95     83 to 99         2       0 to 13        2   0 to 13
Taxpayer was notified of sales results (sale amount, sale
expenses, and amount credited to taxpayer)                           16       7 to 29        0                     84 71 to 93
                                            Note: Percentages may not add to 100 due to rounding.
                                            a
                                            File documentation was not sufficient to make a yes or no determination.
                                            b
                                            Excludes those sales where the asset was returned to the taxpayer.
                                            Source: GAO analysis of IRS case files.




                                            Table II.10 provides the confidence intervals for the estimates in table 3.8.




Table II.10: Confidence Intervals for Types of Taxpayer Complaint
                                                                                       Percentage of complaints
                                                                            In revenue                   In Taxpayer Advocate
                                                                           officers’ files             or Collection Appeals files
Type of taxpayer complaint                                              Estimate             Interval     Estimate          Interval
Taxpayer disputed amount owed                                                  51            40 to 62            15         10 to 19
IRS did not follow procedures                                                  21            13 to 30            10           6 to 13
IRS caused taxpayer hardship                                                   20            11 to 28            67         61 to 72
IRS judgment or conduct was inappropriate                                       9             4 to 17             9           6 to 12
Total                                                                        100                                100
                                            Note: Percentages may not add to 100 due to rounding.
                                            Source: GAO analysis of IRS case files.




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                                           Appendix II
                                           Confidence Intervals for Tables




                                           Table II.11 provides the confidence intervals for the estimates in table 3.9.




Table II.11 Confidence Intervals for Resolution of Taxpayer Complaints
                                                         Percentage of complaints resolved in support of IRS actions
                                                                                                                         a
                                                      Yes                  No                  Partly            Unknown
IRS party resolving taxpayer complaint         Estimate     Interval Estimate Interval Estimate Interval Estimate Interval
Revenue officer or supervisor                         74    64 to 83         7 2 to 15          19 10 to 29          0   0 to 6
Taxpayer Advocate or Collection Appeals
Program                                               64    59 to 69         9 6 to 12          11 8 to 14          17 12 to 21
                                           Note: Totals may not add to 100 due to rounding.
                                           a
                                           File documentation was not sufficient to make a yes or no determination.
                                           Source: GAO analysis of IRS case files.




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Appendix III

Comments From the Internal Revenue Service




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Comments From the Internal Revenue Service




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Comments From the Internal Revenue Service




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Comments From the Internal Revenue Service




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Comments From the Internal Revenue Service




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Comments From the Internal Revenue Service




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Comments From the Internal Revenue Service




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Appendix IV

GAO Contacts and Staff Acknowledgments


                  James R. White, (202) 512-9110
GAO Contacts      Thomas M. Richards, (202) 512-9110

                  In addition to those named above, Wendy Ahmed, Julie Cahalan, Sharon
Acknowledgments   Caporale, Kevin Daly, Sally Gilley, Leon Green, Mary Jankowski, Joseph
                  Jozefczyk, Stuart Kaufman, Ann Lee, Mary Jo Lewnard, John Mingus,
                  George Quinn, Julie Scheinberg, Sidney Schwartz, Samuel Scrutchins,
                  James Slaterback, Shellee Soliday, Clarence Tull, Margarita Vallazza, and
                  Thomas Venezia made key contributions to this report.




                  Page 111                              GAO/GGD-00-4 IRS’ Use of Seizure Authority
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