oversight

Tax Administration: Trends in the Growth and Age of IRS' Accounts Receivable

Published by the Government Accountability Office on 1990-07-30.

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

                           TAX
                           ADMINISTRATION
                           Trends in the Growth
                           and Age of IRS’
                           Accounts Receivable


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                   United States
GAO                General Accounting Office
                   Washington, D.C. 20648

                   General Government Division

                   B-240593

                   July 30, 1990

                   The Honorable J.J. Pickle
                   Chairman, Subcommittee on Oversight
                   Committee on Ways and Means
                   House of Representatives

                   Dear Mr. Chairman:

                   This fact sheet, one of a series of documents responding to your request
                   of March 28, 1990, describes trends in the growth and age of the
                   Internal Revenue Service’s (IRS) year-end accounts receivable balances
                   for fiscal years 1986 through 1989. Trends in growth and age are useful
                   indicators for monitoring accounts receivable. Our analyses were limited
                   to accounts receivable in IRS’ Individual Master File (IMF) and Business
                   Master File (BMF) because IRS databases on the composition and aging of
                   accounts receivable only include information from these two master
                   files.1 The IMF and BMF accounts receivable we are reporting on amount
                   to $66 billion, which is over 85 percent of IRS’ total $65.7 billion assessed
                   accounts receivable at the end of fiscal year 1989.2

                   IRS has limited management information on its accounts receivable
                   inventory, but in 1988 it began developing a new accounts receivable
                   management information system. As part of this effort, IRS has devel-
                   oped initial databases on accounts receivable that contain detailed infor-
                   mation on the collection status and age of receivables. Using these new
                   databases for fiscal years 1988 and 1989, and earlier IRS reports for
                   fiscal years 1986 and 1987, we developed the information in this fact
                   sheet to assist you in monitoring IRS’ accounts receivable.


                   The dollar value of the combined IMF and BMF accounts receivable has
Results in Brief   grown by $13.6 billion, or 32 percent, between the ends of fiscal years
                   1986 and 1989. Most of this growth occurred in IMF accounts, which
                   accounted for two-thirds of the dollar growth and three-fourths of the

                   ‘Detailed composition and aging information was not available for accounts on the Individual Retire-
                   ment Account file and nonmaster file, which represent less than 6 percent of the total accounts
                   receivable dollar inventory. During fiscal year 1987, IRS transferred a portion of the nonmaster file
                   accounts-certain penalties-to the IMF. These penalties were about 10 percent of the accounts
                   receivable at the end of fiscal year 1989. For consistency, we have eliminated these accounts from
                   IMF information used in this report unless otherwise stated.

                   “In addition to the assessedamounts, IRS accounts receivable at the end of fiscal year 1989 included
                   about $20.4 billion in accrued interest and penalties. Because IRS does not have accrued interest and
                   penalty information for fiscal years 1986 and 1987 and we want to compare yearend amounts, we do
                   not include interest and penalties in any of the amounts in this report.



                   Page 1                                    GAO/GGD9@1llFS        Trends in IRS’ Accounta   Receivable
             B-240593




             growth in the number of accounts. Over 60 percent of the total dollar
             growth was in accounts where IRS had suspended collection action due to
             such factors as disputes over the taxpayers’ liability, taxpayer bank-
             ruptcy, or IRS’ inability to locate or obtain payment from the taxpayers.

             At the end of fiscal year 1989, $30.8 billion, or 55 percent, of the total
             IMF and BMF accounts were over 1 year old, compared with $19.6 billion,
             or 46 percent, at the end of fiscal year 1986. The dollar value of
             accounts over 1 year old grew 66 percent since 1986, which exceeded
             the 32-percent overall growth in accounts receivable during this period.
             Most of the growth in the number and dollar value of accounts receiv-
             able over 1 year old occurred in IMF accounts. About $6.3 billion, or over
             11 percent, of the 1989 accounts were over 5 years old.


             IRS’process for collecting accounts receivable has three stages. In the
Background   first stage, a service center attempts to collect unpaid taxes by sending a
             series of notices, or bills, to the taxpayer. Accounts not collected or
             resolved as a result of these notices are classified as “Taxpayer Delin-
             quent Accounts” (TDA) and are generally sent to IRS’ Automated Collec-
             tion System (Acs)-the second collection stage. At this stage, IRS
             employees attempt to contact the delinquent taxpayer by telephone to
             arrange payment. TDAS not collected or resolved during the ACS stage are
             sent to revenue officers in IRS district offices for face to face contacts.

             During any stage of the collection process, IRS may suspend collection
             action for a number of reasons, such as the amount is below a predeter-
             mined dollar level and, in IRS’ opinion, does not warrant extensive collec-
             tion efforts; the taxpayer is in bankruptcy; or IRS has determined that
             the taxpayer is currently unable to pay, cannot be located, has died, or,
             in the case of a corporation, no longer exists. In addition, collection
             action is suspended while IRS tries to resolve disputed amounts.

             For this fact sheet, accounts are categorized as “active”--Ins is trying to
             collect or establish a payment plan for the amount owed, the taxpayer
             and IRS have agreed on an installment payment plan, or the taxpayer is
             paying over the period of time allowed by 1aw3-or “inactive”-collec-
             tion efforts have been suspended.


             :lThese accounts are primarily for estate and highway use taxes when the taxpayer has elected-as
             provided in the Internal Revenue Code-to pay in installments. These accounts only appear in the
             RMF and are considered under 1 year old.



             Page 2                                   GAO/GGD-90-11    IF’S Trends in IRS’ Accounts   Receivable
-s

                       B-240593




                       The potential collectibility of the accounts receivable is directly related
                       to the age of the accounts. It is generally accepted in the business com-
                       munity that as accounts become older, they are harder to collect.
                       According to IRS, this also holds true for taxes. Generally, after 6 years
                       these tax debts become uncollectible when the collection statute of limi-
                       tation expires.


                       The objective of this assignment was to develop trend information on
Objective, Scope,and   the growth and age of IRS’ accounts receivable. To do this, we obtained
Methodology            information from IRS’ new accounts receivable databases-which
                       started with the end of fiscal year 1988 data-and other IRS sources on
                       the number and dollar value of accounts receivable in the IMF and BMF by
                       collection status at the end of fiscal years 1986 through 1989. We did
                       not analyze accounts on IRS’ Individual Retirement Account file or its’
                       nonmaster file because detailed composition and aging information was
                       not available. We chose 1986 as our base year for analyses because com-
                       parable IRS information was not available for prior years. We did not
                       verify the accuracy of IRS’ data.

                       Our trend analyses are based on the dollar value of accounts receivable
                       assessed by IRS at the end of fiscal years 1986 through 1989 and do not
                       include accrued interest and penalties. IRS did not begin reporting
                       accrued interest and penalties until fiscal year 1989 and only has
                       accrued interest and penalty information for accounts receivable bal-
                       ances at the end of fiscal years 1988 and 1989. Therefore, for compara-
                       bility, we have excluded interest and penalties from all amounts.

                       A major change in the composition of the IMF accounts receivable
                       occurred during fiscal year 1987 when IRS transferred amounts resulting
                       from the assessment of loo-percent penalties4 from the nonmaster file to
                       the IMF. These loo-percent penalty cases accounted for $5.9 billion, $6.6
                       billion, and $6.8 billion of the combined unadjusted IMF and BMF accounts
                       receivable at the end of fiscal years 1987 through 1989, respectively. In
                       order to be comparable to fiscal year 1986, we have adjusted our data to
                       remove these penalties from subsequent years’ IMF amounts unless
                       otherwise stated.


                       41RSassessesthe loo-percent penalty against corporate officers or other responsible officials who
                       were willfully responsible for the business not withholding or not paying over employment taxes that
                       had been withheld from employees. The amount of the penalty is equal to the amount of withheld but
                       unpaid taxes or the amount that should have been withheld. IRS can assessthe penalty against one or
                       more of the responsible officials.



                       Page 3                                   GAO/GGD-90-11    IF’S Trends in IRS’ Accounts   Receivable
For fiscal years 1988 and 1989, IRS began developing more detailed
information on the age of accounts.However, for fiscal years 1986 and
1987, IRS grouped accounts into a number of categoriesunder 1 year old,
but grouped all accountsover 1 year old into one category. Therefore,
when making comparisons,we have grouped accountsinto two age cate-
gories-under 1 year and over 1 year. We did not attempt to determine
the specific reasonsfor the trends we identified in the growth and age of
the accounts receivable inventory.

We did our work from March 1990 to July 1990 in accordancewith gen-
erally acceptedgovernment auditing standards. We discussedthe infor-
mation in this fact sheet with appropriate IRS officials, who agreed with
the facts presented.

As arranged with the Subcommittee,we are sending copiesof this fact
sheet Eothe Commissionerof Internal Revenueand other interested par-
ties. We will make copies available to others upon request.

The major contributors to this fact sheet are listed in appendix II. Please
contact me on 272-7904 if you or your staff have any questions con-
cerning this fact sheet.

Sincerely yours,




Paul L. Posner
Associate Director, Tax Policy and
  Administration Issues




Page 4                        GAO/GGD-99-11lFS   Trends in IRS’ Accounta   Receivable
Page 6   GAO/GGD-BO-111FS   ‘hen&   in IRS’ Accounts   Receivable
Contents


Letter                                                                                                       1

Appendix I                                                                                                   8
Growth and Aging of     Accounts Receivable Growth Trends Have Not Been
                            Equal Among Categories
                                                                                                             8
IRS’ Accounts           IRS Accounts Receivable Are Getting Older                                        10
Receivable
Appendix II                                                                                              14
Major Contributors to
This Report
Tables                  Table I. 1: Growth in the Dollar Value of IMF and BMF                                9
                            Accounts Receivable, by Collection Status, From
                            Fiscal Year 1986 to 1989
                        Table 1.2: Growth in the Number of IMF and BMF                                       9
                            Accounts Receivable, by Collection Status, From
                            Fiscal Year 1986 to 1989
                        Table 1.3: Growth in the Dollar Value of IMF and BMF                             11
                            Accounts Receivable Over 1 Year Old, by Collection
                            Status, From Fiscal Year 1986 to 1989
                        Table 1.4: Growth in the Number of IMF and BMF                                   11
                            Accounts Receivable Over 1 Year Old, by Collection
                            Status, From Fiscal Year 1986 to 1989
                        Table 1.5: Age of the Fiscal Year 1989 IMF and BMF                               11
                            Accounts Receivable Ending Inventory in Dollars and
                            as Percent of Total IMF and BMF

Figures                 Figure I. 1: Dollar Value Growth of Active and Inactive                              8
                             IMF and BMF Accounts Receivable Since Fiscal Year
                             1986
                        Figure 1.2: Percent of Dollar Growth in IMF, BMF, and                            10
                             Combined IMF and BMF Accounts Receivable Since
                             Fiscal Year 1986
                        Figure 1.3: Percent Growth in Total Number of IMF and                            12
                             BMF Accounts Receivable and Number of Accounts
                             Over 1 Year Old Since Fiscal Year 1986




                        Page 6                       GAO/GGDWl   11Fs Trends in IRS’ Accounts   Receivable
Contents




Figure 1.4: Percent Growth in Total Dollar Value of IMF                           13
     and BMF Accounts Receivable and Dollar Value of
     Accounts Over 1 Year Old Since Fiscal Year 1986




Abbreviations

ACS        Automated Collection System
BMF        Business Master File
IMF        Individual Master File
IRS        Internal Revenue Service
TDA        Taxpayer Delinquent Account


Page 7                       GAO/GGD99-1llFS   Trends in IRS’ Accounts   Receivable
Appendix I

Growth and Aging of IRS’ Accounts Receivable


                                    Trends in growth and age are useful indicators for monitoring accounts
                                    receivable. Increasing trends in specific categories of accounts can help
                                    identify areas that need attention. These indicators, however, do not
                                    necessarily point out problems; they only identify issues for which fur-
                                    ther information is needed to determine the reasons for trends.


                                    The dollar value of accounts receivable in the IMF and BMF increased by
Accounts Receivable                 $13.6 billion, or almost 32 percent, in the 3 years ending September 30,
Growth Trends Have                  1989. The number of accounts increased by 2.7 million, or about 22 per-
Not Been Equal                      cent, during the same period.
Among Categories                    As shown in figure I.1 and tables 1.1 and 1.2, the overall growth has not
                                    been equally distributed between the IMF and BMF nor between active
                                    and inactive accounts.



and lnactlve IMF and BMF Account6
                                    14   Bllllons of Dollars
Receivable Since Fiscal Year 1986
                                    12




                                         Aotlvs                 Inactive      Total Accounts
                                         Accounts               Accounts
                                         Collsctlon Status

                                         1       1 BMF
                                                    IMF
                                                    Total IMF and BMF




                                    Page 8                                 GAO/GGKHO-1    1 IFS Trends in IRS’ Accounta   Receivable
                                           APPendlx   I
                                           GowthandAglnrjofwS’
                                           Accounta   Fteceivable




Table 1.1:Growth in the Dollar Value ot IMF and BMF Accounts Receivable, by Collection Status, From Fiscal Year 1966 to 1969
Dollars in billions
                                            IMF                            BMF                              Total’
Collection statu8                  1966        1969 Change’       1966       1969 Change0           1966        1969 Change0
Active
--~-                                $9.8      $15.7     $5.9     $16.6       $16.1       ($0.5)     $26.4       $31.8       $5.4
Inactive
---                                  5.6         8.8     3.2       10.4       15.4         5.0       16.1        24.2        8.2
Totel’                            $15.5       924.5     89.1     627.0      631.5         $4.5     $42.5       656.0      $13.6
                                           aNumbers do not add or subtract because of rounding



Table 1.2:Qrowth In the Number of IMF and BMF Accounts Receivable. bv Collection Status. From Fiscal Year 1966 to 1969
Numbers
--_I       in millions
                                          IMF                            BMF                               TotaP
Collection
---          status              1966       1969  Change0       1966        1969   Change’        1966        1989 Change”
Active                             4.1        5.7      1.6        2.6          3.0       0.4         6.7        8.7     2.0
inactive
----~~                             2.4        2.9      0.5        3.1          3.3       0.2         5.5        6.2     0.7
TotaP                              6.5        6.6      2.1        5.7          6.3       0.6       12.2        14.9     2l;f
                                           aNumbers do not add or subtract because of rounding

                                           Accounts receivable due from individuals accounted for two-thirds of
                                           the dollar growth in IMF and BMF combined, and three-fourths of the
                                           growth in the number of accounts. The dollar value of inactive accounts
                                           in total increased more than the dollar value of active accounts, while
                                           the number of active accounts in total increased more than the number
                                           of inactive accounts. However, the dollar value and number of active
                                           individual accounts grew more in the 3 years ending September 30,
                                            1989, than the dollar value and number of accounts in any other
                                           category.

                                           In addition, the dollar value and number of IMF accounts grew at a faster
                                           rate than the dollar value and number of BMF accounts. Figure I.2 shows
                                           the dollar growth rate in IMF and BMF accounts.




                                           Page 9                                  GAO/GGD4WlllFS   Trends in IR!3’ Accounta   Receivable
                                         Appendix I
                                         Growth and Aging of IRS’
                                         Accounts Receivable




Figure 1.2: Percent of Dollar Wowth in
IMF, BMF, and Combined IMF and BMF
Accounts Receivable Since Fiscal Year    80      Percent Increase
1966                                     65
                                         SO
                                         45
                                         40
                                         35
                                         30
                                         25
                                         20
                                         15
                                         10
                                          5
                                          0

                                          1988                               1987                         lQ88                            1989
                                          Fiscal Year

                                                 -         IMFaccountsreceivable
                                                 I I I I   Total IMFand BMF accountsreceivable
                                                 m         BMFaccountsreceivable


                      The number and dollar value of accounts receivable over 1 year old has
IRS Accounts          increased since the end of fiscal year 1986. On a dollar value basis, the
ReceivableAre Getting f’isca 1year 1989 accounts over 1 year old were 55 percent of the
Older                 accounts receivable inventory as compared with 46 percent at the end of
                      fiscal year 1986.

                                         The dollar value of accounts receivable over 1 year old has increased by
                                         $11.2 billion to $30.8 billion between fiscal years 1986 and 1989-a
                                         growth of 57 percent- compared with the 32 percent growth of all
                                         accounts receivable. The total number of IMF and BMF accounts over 1
                                         year old has increased by 1.8 million accounts to 8.1 million between
                                         fiscal years 1986 and 1989-a growth rate of 29 percent.

                                         Most of the growth in the number and dollar value of accounts receiv-
                                         able over 1 year old occurred in the IMF accounts. However, in terms of
                                         categories, the largest portion of the dollar growth is accounted for by
                                         increases in inactive business accounts while the largest portion of the
                                         growth in number is accounted for by increases in active individual
                                         accounts. Tables I.3 and I.4 show the growth in the dollar value and



                                         Page 10                                      GAO/XI%90-l   11Fs Trends in JRS’ Accounts   Receivable
                                                                   Appendix I
                                                                   Growth and A&ng of IRS’
                                                                   Accounts Receivable




                                                                   number of IMF and               BMF   accounts over 1 year old between fiscal years
                                                                   1986 and 1989.


Table 1.3:Growth In the Dollar Value of IMF and BMF Accounts Receivable Over 1 Year Old, by Collection Status, From Fiscal Year
1988 to 1989
Dollars
 _      in billions

Collection status
Act,“e.                      ~.                1986
                                    ._-..- . -__--__                1989         Changea             1986      1989        Changea          1986        1989      Changea
                                               $3.3                  $6.5            $3.2             $3.6       $3.7         $0.1           $6.9       $10.2         -- $3.1
lr&$e
,-. .“I               .                          4.8 -----.-
                              .-~ .--~- .-.--~-------                 7.6             2.8              8.0      -13.0          5.0           12.7        20.6             7.8
Total’                                            $8.0             $14.1            $6.1            $11.6      $16.7          $5.1          $19.6       $30.8          $11.2
                                                                   aNumbers do not add or subtract because of rounding.



Table 1.4:Growth in the Number of IMF and BMF Accounts Receivable Over 1 Year Old, by Collection Status, From Fiscal Year
1986 to 1969
Numbers_ in millions              ..-.- .. ..-..... --.-                    --
                                                          IMF                                                BMF                                     TotaP
Collection
.-.        statue                                1986 .-.--.--.1989              Changea             1986      1989        Changea          1986        1989      Changea
Active
._                 ‘- ~~                            0.9           1.7                    0.8           0.6       0.9           0.3            1.5          2.6           1.1
Inactive                                            2 o --.---~.~~--.--o,                  5           2.7       3.0           0.2            4.7          5.4           0.7
Tot&                                                2.9           4.2                    1.3           3.3       3.9           0.5            6.2          8.1           1.8
                                                                   aNumbers do not add or subtract because of rounding

                                                                   As table I.5 shows, at the end of fiscal year 1989,55 percent of the total
                                                                   IMF and BMF accounts were over 1 year old and 11 percent were over 5
                                                                   years old.


Table 1.5:Age of the Fiscal Year 1989 IMF and BMF Accounts Receivable Ending Inventory in Dollars and as Percent of Total IMF
and BMF
Dollars in blllions                                                                                                                                                   --
                                                   -c 1 --.------..-
                                                   ..--.-. year      l-2 years                 - 2-3 years    3-4 years        4-5 years       > 5 years      --~--   TotaP
IMF dollar amount                                          $10.4                  $4.5                $3.1          $2.4             $1.6             $2.5            $24.5
IMF percentan&           ~‘~                                  42                    18                  13            IO                7               Id-              100
BMF dollar amount  .. _ _._  ..__.-._____-. .-~--                                                     $3.5          $2.6             $2.3             $3.8
                                                                                                                                                    ___-.--           $31.5
f3MF oercentaae                                                                                         11             8                7               12                99
        -.--... .----._ -........_....-- - . -.._
Total dollar
      .       amount”
                . . - -_...~~---.                          $25.3 _--...-_-
                                                                    ____--        $8.9                $6.6          $5.0             $4.0             $6.3            $56.0
                                                                                                                                                                      .__
Total percentaae                                              45                    16                  12             9                7               11               100
                                                                   aNumbers do not add or subtract because of rounding.




                                                                   Page 11                                     GAO/GGDSO-111Fs       Trends in IRS Accounts      Receivable
                                         Appendix I
                                         Growth and Aging of IRS’
                                         Accounts Receivable




                                         As shown in figures I.3 and 1.4, the growth rate for accounts receivable
                                         over 1 year old has been greater than the growth rate for the combined
                                         IMF (including loo-percent penalties) and BMF accounts receivable since
                                         fiscal year 1986-both in terms of the number of accounts and their
                                         dollar value.


Figure 1.3: Percent Growth in Total
Number of IMF and BMF Accounts
                                         35   Percent Change
Receivable and Number of Accounts
Over 1 Year Old Since Fiscal Year 1986
                                         30


                                         25


                                         20


                                         15


                                         10                                                       ICI..L----
                                                                                           .m--
                                                                                    4-0
                                                                            ** *-
                                          5                     ..*-   **
                                                        +.‘c-
                                                   *-
                                          0   v-


                                          1955                                      1957                          1955                            1939
                                          Fiscal Year

                                               -           Numberof accountsover 1 year old
                                               ---I        Total numberof IMFand BMFaccounts

                                         Note: The information on this figure includes loo-percent penalties. Although the percentages would be
                                         lower without the loo-percent penalties, the relationship and slant of the lines would remain the same.




                                         Page 12                                              GAO/GGD-90.11lFS   Trends in IRS’ Accounta   Receivable



                                                                                                                                           ”
                                              Appendix I
                                              Growth and Aging of IRS’
                                              Accounta Receivable



0




 Figure 1.4: Percent drowth in Total Dollar
 Value of IMF and BMF Accounts
,Receivabie and Dollar Value of Accounts      ”  Porc*ntChange
 Over 1 Year Old Since Ficrcal Year 1986      Bo

                                              70

YS
                                              60

                                              50

                                              40

                                              30

                                              20

                                              10

                                               0

                                               la55                             1987                            1988                             1333
                                               Fiscal Year

                                                      -      Dollaramountof accounu)over 1 year old
                                                      ----   Total dollaramount of IMF and BMF accounts

                                              Note: The information on this figure includes loo-percent penalties. Although the percentages would be
                                              lower without the loo-percent penalties, the relationship and slant of the lines would remain the same.




                                              Page 13                                     GAO/GGINO-1llFs      Trends in IRS’ Accounts    Receivable
Appendix II

Major Cmtributorq to This Report


                     Cornelia M. Blanchette, Assistant Director, Tax Policy and
General Government     Administration Issues
Division,            Charles G. Kilian, Assignment Manager
Washington, D.C.

                     Thomas D. Venezia, Regional Management Representative
Chicago Regional     Neal H. Gottlieb, Evaluator-in-Charge
Office               Timothy F. Hannegan, Site Senior
                     Gail F. Marnik, Evaluator
                     John Zarem, Computer Programmer Analyst




(268443)             Page 14                      GAO/GGD-90-1llFS   Trends in IRS’ Accounts   Receivable
OI’ficial   Husiwss   I   Permit   No. GlOO