Tax Administration: Extent and Causes of Erroneous Levies

Published by the Government Accountability Office on 1990-12-21.

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

A    ‘I
                      United   States   General   Accounting   Office

GAO                   Report to the Joint Committee on
                      Taxation, U.S. Congress

December   1990
                      Extent and Causesof
                      Erroneous Levies

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

      General    Government        Division


      December 21,199O

      The Honorable Lloyd Bentsen
      The Honorable Dan Rostenkowski
      Vice Chairman
      Joint Committee on Taxation
      Congress of the United States

      This report, the last of four reports responding to the request of the
      Joint Committee on Taxation that we review the Internal Revenue Ser-
      vice’s (IRS) use of levies,’ addresses erroneous levies. Erroneous levies
      occur when IRSlevies the assets of taxpayers who do not owe taxes,
      levies for an amount greater than the taxes owed, or levies when the
      taxpayer has an installment agreement to pay the delinquency or is in
      bankruptcy. Specifically, this report discusses (1) the extent and causes
      of erroneous levies and (2) IRS’ controls to prevent erroneous levies or
      mitigate their effects.

      Levies are one of IRS most widely used collection tools; 2 million levies
      were initiated in each of the past 3 fiscal years. According to IRSstatis-
      tics, most levies are initiated through IRS Automated Collection System
      (ACS).~ About 1.8 million of the 2 million levies initiated during each of
      the past 3 fiscal years were through ACS.The remainder were initiated
      by revenue officers in IRS district offices. However, IRS does not maintain
      statistics on erroneous levies.

      An erroneous levy can cause financial hardship for the taxpayer whose
      assets are levied and tarnish his or her reputation. In addition, erro-
      neous levies can be costly for IRS.

      Our report discusses IRS’ use of levies initiated through ACS. As agreed
      with the Committee, we did not develop information on erroneous levies
      initiated by revenue officers because complete information on their use
      of levies was not available.

      ‘Levies, as used in this report, refer to seizures of taxpayers’ liquid assets, such as wages and bank
      accounts, in the possession of employers and financial institutions.

      ‘ACS ls a computerized inventory management system designed to promote efficient case manage-
      ment and improved taxpayer contact. AC3 staff can automatically dial the taxpayer’s telephone
      number, access case information, update the taxpayer’s case, and initiate enforcement actions.

      Page 1                                                               GAO/GGDSl-9      Erroneous   Levies

requests the taxpayer to contact IRS immediately if the tax bill is not
correct and to provide information to resolve the discrepancy.

Accounts not resolved through these notices are classified as delinquent
and generally transferred to Acs-the second stage of collection. During
the ACS stage, IRS tries to contact the taxpayer by telephone. However, if
IRS has information regarding the taxpayer’s employer or financial insti-
tution, IRS’ first action is usually to levy assets before attempting tele-
phone contact. If the initial levy does not satisfy the delinquency, ACS
staff, using existing or newly identified levy sources, can use additional
levies to collect any outstanding delinquencies.

When IRS levies a taxpayer’s account in the ACS stage, ACS staff transmit
levy information, including the name and address of the third party
holding the taxpayer’s funds, to a computer at the service center. Over-
night, the service center computer prints the levy, which is then mailed
to the third party.

During a prior review,” we found that IRS initiated 850,3007 levies on the
assets of an estimated 448,200 taxpayers, or almost 51 percent of the
883,300 individuals and businesses whose delinquent accounts were
sent to ACS during fiscal year 1986. IRS used an average of two levies per
taxpayer, and collected an estimated $700 million from the time the
accounts were sent to ACS until mid-1988. IRS statistics show that, during
fiscal year 1989, IRS initiated over 1.8 million levies through ACS.

Although not the focus of our review, field collection is the third stage
of the collection process. Revenue officers from IRS’ 63 district offices
attempt to collect delinquent taxes through more direct means, such as
face-to-face contact with taxpayers. They can also levy taxpayers’

IRS has various controls to prevent erroneous levies. Section 6331(d) of
the Internal Revenue Code requires that before issuing a levy, IRS must
notify the taxpayer in writing of its intent to levy. This notice must be
(1) given in person, (2) left at the dwelling or usual place of business of
the taxpayer, or (3) sent by certified or registered mail to the taxpayer’s
last known address at least 30 days before the levy is initiated unless

“Tax Admimstration: Statistics on IRS’ IJse of Levies to Collect Delinquent Taxes (GAO/
      I- 97F3, Jul. 17,1989)

iSampling error is greater than 5 percent. However, we are 95 percent confident that IRS initiated   at
least 815,900 levies and may have initiated as many as 884,800.

Page 3                                                             GAO/GGDSI-9      I3moneous Levies

                         The objectives of this assignment were to (1) determine the extent to
Objectives, Scope, and   which IRS erroneously levies taxpayers’ assets, (2) identify the causes of
Methodology              erroneous levies, and (3) evaluate the adequacy of IRS’controls for
                         preventing or mitigating the effects of erroneous levies.

                         To determine the extent and causes of erroneous levies, we analyzed IRS’
                         use of levies for our stratified nationwide sample of 787 delinquent tax-
                         payers whose accounts were sent to ACS in fiscal year 1986. (The sample
                         contained levies on 404 individuals and 383 businesses. It was selected
                         during work for our 1989 report.) The sample was stratified to allow us
                         to make separate universe estimates for individuals and businesses.

                         We examined information on each levy to determine whether the levy
                         was erroneous and, if so, the reason why the levy was issued errone-
                         ously. We discussed our determinations with IRSITpIXSentatiVeS.

                         Using our sample results, we estimated the number of erroneously
                         levied taxpayers in a universe of 448,200 delinquent taxpayers who had
                         assets levied as a result of accounts sent to ACS during fiscal year 1986.
                         (See app. I for a detailed discussion of sample selection and universe

                         To evaluate the adequacy of IRS’ controls for avoiding erroneous levies
                         or mitigating their effects, we used the 787 sample cases to determine
                         whether IRS’ policies and procedures were being followed. We also
                         obtained information on the levy verification programs at the Kansas
                         City, Memphis, and Philadelphia Service Centers, the only service cen-
                         ters with such programs. We cannot generalize information on IRS’ con-
                         trols obtained from the sample cases to the universe because there were
                         not a sufficient number of erroneous levies in the sample to permit reli-
                         able universe estimates.

                          Our work was done between July 1989 and March 1990 in accordance
                          with generally accepted government auditing standards. We did our
                          audit work at IRS’ headquarters in Washington, D.C.; IRS Service Centers
                          in Kansas City, Missouri; Memphis; and Philadelphia; and IRS’ Midwest
                          Regional and District Offices in Chicago. IRS provided written comments
                          on a draft of this report. These comments are incorporated where appro-
                          priate and are included in appendix II.

                          Page 6                                          GAO/GGBSl-9   Erroneous   Levies

                          been a major problem for IRS This is particularly true for business tax-
                          payers, who can have as many as 10 separate accounts per year.”

                          Once payments are posted to the master files, MCC creates new computer
                          tapes that are sent to the service centers to update ACS and other collec-
                          tion computer systems. Thus, there is a built-in delay of up to 7 days
                          between the time IRS receives payments and the time collection computer
                          systems are updated. However, according to an IFSstudy completed in
                           1988, delays of up to 4 weeks are not uncommon. In the interim, IRS IDRS
                          terminals will show payments received after the last ACS update as
                          pending transactions (i.e., payments not yet posted) until the updated
                          tapes from MCC are received and used to update ACS. The IDRS terminals
                          are located at each service center.

                          The posting delays in our sample ranged from 7 days to 3 years. Infor-
                          mation was not available to determine the reasons for delays in posting
                          payments to the accounts of the taxpayers in our sample whose assets
                          were erroneously levied because of such delays. However, on the basis
                          of our discussions with IRS officials, we believe some of the longer delays
                          could have occurred because of insufficient information to associate the
                          payments with specific taxpayers. These payments may have been ini-
                          tially posted to suspense accounts and later transferred to appropriate
                          taxpayer accounts as additional information became available.12

                              had notified, by certified mail, all of the 787 taxpayers in our sample
Controls to Prevent or    IRS
                          of its intention to initiate levies. However, from the information IRS
Mitigate the Effects of   maintains, we were unable to determine whether the taxpayers received
Erroneous Levies          and responded to these notices.

                          We found information indicating that IRShad released about half of the
                          erroneous levies in our sample. Information on the release of levies was
                          not shown in the other case files we reviewed, but not all erroneous
                          levies require IRS action to be explicitly released. Levies on wages gener-
                          ally remain in effect until the delinquency is satisfied or IRS releases the
                          levy. However, levies on bank accounts apply to funds in the account
                          only at the time the bank receives the levy. Therefore, if IRS levies a
                          taxpayer’s bank account and that account has no funds, IRS would not

                           ’ ‘Businesses can be required to file four quarterly employment tax returns, four quarterly   excise tax
                           returns, one unemployment tax return, and one corporate tax return each year.

                           ‘LSuspense accounts are accountz in which incoming payments are temporarily       recorded when IRS
                           does not know to which taxpayer account the payment pertains.

                           Page 7                                                              GAO/GGDSlB        Erroneous   Levies

as pending transactions at the time IRS levied the taxpayer’s assets.
However, on the basis of discussions with IRSofficials about the manual
levy verification programs in place at three service centers, we believe
that the majority of these pending payments would have appeared on
IDRS, and IRS could have avoided issuing these erroneous levies.

To further assess the potential benefits of the manual levy verification
programs in preventing erroneous levies, we obtained available IRS infor-
mation on the results of its verification of over 117,000 levy notices at
the three service centers in late 1989 and early 1990. This information
showed that IRS identified approximately 5,600, or 4.7 percent, of the
 117,000 levy notices as incorrect. The percentages of incorrect notices
ranged from about 4.4 percent at the Philadelphia Service Center to
approximately 12.7 percent at the Memphis Service Center. Upon identi-
fication of the incorrect notices, IRS researched and corrected them, and
when appropriate, did not issue them.

 The reasons for incorrect levies at the three service centers indicated
 that a levy verification program would reduce the number of erroneous
 levies caused by IRS’ delays and errors in recording taxpayers’ payments
 and by changes in taxpayers’ account status. Statistics obtained from
 these service centers showed that over 70 percent of the 5,600 incorrect
 levy notices were due to pending payments on IDRS that had not been
 posted to ACS, overpayments in other accounts of the taxpayers, or
 changes in the status of taxpayers’ accounts.

 Currently, the Philadelphia Service Center is developing an automated
 system to match taxpayer information on the levy notice with the most
 recent IDRS information. The planned automated system is designed to
 identify (1) overpayments in other accounts of the taxpayer, (2)
 pending payments, and (3) changes in the status of the taxpayer’s
 account. The Philadelphia Service Center plans to test this program
 locally. If successful, it will be proposed for nationwide testing and

 Precise cost information on manual levy verification was not available.
 Officials at the Kansas City and Memphis Service Centers estimated that
 costs are about 1 staff year; officials at the Philadelphia Service Center
 estimated between 3 and 4 staff years. However, these local IRS officials
 said that they believe the costs of their programs were clearly justified
 by the benefits they would give both taxpayers and IRS.

 Page 9                                           GAO/GGBSI-9   Elmmeous   Levies

                      Until the computer modernization effort is completed, a levy verifica-
                      tion program would provide needed safeguards for both taxpayers and

                      We recommend that the Commissioner of Internal Revenue establish a
Recommendation to     nationwide levy verification program that would determine whether
the Commissioner of   there are (1) overpayments in the taxpayer’s other accounts, (2)
Internal Revenue      pending payments, and (3) changes in the status of the taxpayer’s

                      IRSagrees with our recommendation and expects to implement it by
IRS Comments          December 31, 1990.

                      As arranged with the Committee, we are sending copies of this report to
                      the Commissioner of Internal Revenue and other interested parties. We
                      will make copies available to others upon request. Major contributors to
                      this report are listed in appendix III. If you have questions about this
                      report, please call me at (202) 272-7904.

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

                       Page 11                                        GAO/GGDSl-9   Firmneous   levies
                                     Appendix   I
                                     sampling   Metllodology

Table 1.1:Estimates and Associated
Sampling Errors of the Extent 01                                                                   Samplin error at
Erroneous Levies                                                                                      the 9B-percent
                                                                                                    confidence level
                                     Description                   Type of taxpayer   Estimate        (plus or minus)
                                     Taxpayers with accounts       Indtvidual           514,175                23,588
                                       sent to ACS with            Business                                    13,235
                                       Information on collectlon   Combmed              ~::;~                  27,134
                                     Cases In which IRS used       lndivldual           312,371                19,071
                                       levles to attempt           Business             135,800                10,798
                                       collection                  Combmed              448,171                21,915
                                     Number of cases in which      lndlvidual             4,639                 3,682
                                       etroneous levies were       Business               7,801                 3,160
                                       used                        Combined              12,440                 4,852
                                     Percent of cases In which     lndlvidual                1.5                   1.2
                                       enoneous levies were        Business                  5.7                   2.3
                                       used                        Combined                  2.8                   1.1
                                     Total number of levles used   Combined             850,346                34,404
                                       to attempt collectlon
                                     Number of erroneous levies    Combined              16.114                 7,284
                                     Erroneous levies due to IRS   Combined              12,666                 5,470
                                       recording errors and

                                     Page 13                                          GAO/GGDSlB     EITO~~OIM Levies
Appendix III

Major Contributors to This Report

General Government   Issues
Division             Charles G. Kilian, Assignment Manager
                     Michael M. Yacura, Evaluator

                     Mark H. Egger, Evaluator-in-Charge
Office               Jo Ann Bufford, Evaluator
                     Miriam Kahn, Evaluator
                     Francis M. Zbylski, Technical Advisor

 (269419)            Page 15                                 GAO/GGB91%   Ermnenns   Levies

                   - _ _           _- ,.. . . ,. -- _ -

                   --,- -                    _ ,. _ ,,. .--,-----      . .-----   --
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Comments From the Internal RevenueService

                                       DEPARTMENT OF THE TREASURY
                                         INTERNAL     REVENUE     SERVICE
                                             WASHINGTON.      DC. 20224

                                                  SEP   28 1990

            Mr. Richard      L. Fogel
            Assistant     Comptroller      General.
            United    States   General     Accounting       Office
            Washington,      DC 20548

            Dear   Mr.     Fogel:

                   We have      reviewed     your recent  draft  report        entitled    "Tax
            Administration:           Extent    and Cause of Erroneous         Levies."
                   We agree with the recommendation         in the draft report,
            that we establish    a verification      program for notices    of levy
            issued   by the Automated     Collection    System (ACS).
                    We plan to evaluate       the procedures       of the three  service
            centers    that    have levy verification        programs    and to develop           a
            uniform,     nationwide    program.       We expect    to have a system in
            place by December 31, 1990.
                   We believe    this  action     will  further    improve  the quality
            of ACS notices     of levy by ensuring          that we are alerted   to
            recent   overpayments,     pending     payments     and changes in the
            status   of the taxpayer's        account.

                    Best    regards.

                   page14                                                   GAO/GGDSl-9 Erroneous Levies
Appendix I

Sampling Methodology

                       To develop information on the extent and causes of erroneous levies and
                       the adequacy of IRS’controls to prevent erroneous levies or mitigate
                       their effects, we used a random sample of delinquent taxpayers. This
                       sample was stratified by individual and business taxpayers, which
                       allowed us to make separate statistical estimates of the number of tax-
                       payers who were erroneously levied and the number of levies that were

                       Our sample, developed during previous work. was drawn from IRScom-
Sample Selection       puter tapes containing the universe of 1.4 million t,axpayers with
                       accounts classified as delinquent during fiscal year 1986. We initially
                       sampled 2,652 delinquent taxpayers-l      ,052 individuals and 1,600 busi-
                       nesses Of these, we did not review 946 cases-387 individuals and 559
                       businesses-either because they had been srnt t,o revenue officers in the
                       field or because IRSwas otherwise unable to provide information on the
                       collection actions taken. Accordingly, we reduced the sample size to
                       1,706, resulting in an ad,justed univcrsc of 883,281 delinquent tax-
                       payers. Of the 1,706 cases reviewed, we idontificd 787-404 individuals
                       and 383 businesses--in which 11~used levies to attempt collection. This
                       represents an ad.justrrl universe of 448.17 i taxpayers-3 12.37 1 individ-
                       uals and 135,800 busmesses. ‘To develop our results. WCanalyzed tax-
                       payer account data from IRS’individual and business master files and
                       ACScase files.

                       We do not cite numbers for the cases in which IRSrefunded money and
                       bank charges (see 1’ 8). This is because msrecords were insufficient t,o
                       determine whethcll’ rc:‘ru~ls wcrc rn:rc!~~
                                                                 ;n iii c C.::t’~,

                       Because we review erl d statist i(~l sample , ,a
                                                                      F :‘;i:x5 in which IRs ~iscd
Sampling Errors for    levies to collect, dclmquent laxes. each es1mat t’ dt~vclopeti from the
Results on Extent of   sample has a measurable precision. or sampling error. The sampling
Erroneous Levies       error is the amount by which the estimate obtained from a statistical
                       sample can be expected to differ frOm the true universe value at a given
                       level of confidence,. Sampling errors arc usually stated at a c,ertain confi-
                       dence level; in this cast 1~is 95 percent. This means thr chances are 19
                       out of 20 that if WV rcviewcd all taxpayers with accounts sent to ACS
                       during fiscal year I988 and for which information on collection actions
                       was available, the results would differ from the estimates obtained from
                       our sample by no more than t,hc sampling l’rrors of such estimates, Table
                       I. 1 shows our estirnal~!s and sampling errors.

                       Page 12                                           GAO/GGDY   1-Y Erroneous   Levies

IRS’ Computer               IRS’computer modernization effort may address problems associated
                            with erroneous levies over the long term by providing more accurate,
Modernization Initiatives   up-to-date information. Improvements in computer hardware and pro-
May Help in the Long Run    grams may result in payments being posted more quickly to accounts,
                            thereby reducing the number of erroneous levies caused by posting
                            delays. At the present time, however, we do not know the full effect
                            computer modernization will have on reducing erroneous levies. These
                            improvements may take up to 10 years to complete, according to IRS.

                            IRS  has several more near-term, narrowly focused automation efforts, in
                            progress now. The efforts, to be completed soon, may provide IRS with
                            additional information that could reduce errors and delays in recording
                            taxpayers’ payments. For example, in some instances, the On Line
                            Entity Project should provide IRSemployees with taxpayer identification
                            information that could be used to associate payments with the correct
                            taxpayer accounts. IRSofficials estimate that this information could
                            reduce by 3 to 4 weeks the time it takes to properly record some uniden-
                            tifiable payments. However, we do not know whether the reduction in
                            recording time will be sufficient to significantly reduce erroneous levies.
                            In addition, the Connectivity Project, which will allow operators to
                            simultaneously access ACS and IDRS, could provide ACS personnel ready
                            access to the most current information on delinquent taxpayers. How-
                            ever, the Connectivity Project cannot reduce erroneous levies unless it is
                            used as part of a systematic verification program in which analysts use
                            the linked IDRS-ACS to verify levies before issuance.

                             Although IRS is following its procedures and the Internal Revenue Code
Conclusions                  provisions to provide taxpayers with opportunities to resolve discrepan-
                             cies, erroneous levies still occur. They are costly for affected taxpayers
                             and IRS. The majority of the erroneous levies in our sample were caused
                             by IRS’ delays and errors in recording taxpayers’ payments. The levy
                             verification program used at the three service centers should prevent
                             most of the erroneous levies that result from such delays and errors.

                             We believe that such a program should be adopted by IRSnationwide.
                             The benefits in terms of reducing erroneous levies are substantial, while
                             the costs, which are estimated to be between 1 and 4 staff years at each
                             of the three service centers, appear to be small. While IRS’ computer
                             modernization effort may eventually address the erroneous levies
                             problem, we believe it will not resolve the problem in the near term.

                             page 10                                          GAO/GGDSl-9   Emoneous   Levies

need to release the levy for it to be no longer in effect. We could not
determine from IRS' records whether the erroneous levies in our sample
for which no release information was found were levies on zero-balance
bank accounts.

For most of the erroneous levies in our sample that resulted in collec-
tions, IRS’records showed that the amounts erroneously collected were
refunded with interest. IRS’records did not contain sufficient informa-
tion on the others for us to determine whether IRS made refunds. We
were also unable to determine whether taxpayers received reimburse-
ments for bank charges incurred in connection with any of the erro-
neous levies in our sample. The 21-day freeze requirement of the
Taxpayer Bill of Rights is not applicable to the levies in our sample
because they were initiated before July 1, 1989.

To help minimize the number of erroneous levies, IRS Kansas City, Mem-
phis, and Philadelphia Service Centers instituted manual levy verifica-
tion programs. Although the procedures and criteria used to identify
incorrect levies differed slightly among the three programs, they all
included the basic features that should eliminate many of the types of
erroneous levies we identified. Each of the three levy verification pro-
grams relies on IDRS (which, as we noted earlier, has more up-to-date
information than ACS) to determine whether the status of the taxpayer’s
account has changed, if there are pending payments that would affect
the amount of the levy, and whether the taxpayer has overpayments in
other tax accounts. IRScompares information on the notice of levy with
taxpayer account information on IDRS to identify discrepancies. If dis-
 crepancies exist, IRS determines whether it is still appropriate to levy the
 taxpayer’s assets. If the taxpayer has made a payment, a change in the
 dollar amount of the levy may be all that is needed to issue the levy.

 Our analysis of the causes of the erroneous levies in our sample and
 information on the procedures and results of the levy verification pro-
 grams indicated that at least one-third and as many as two-thirds of the
 erroneous levies could have been avoided by using this type of levy
 review. For example, by checking the taxpayers’ other accounts on IDRS,
 IRScould have identified overpayments in these other accounts and
 avoided erroneous levies caused by payments it incorrectly applied to
 these accounts. Also, we believe some of the erroneous levies caused by
 IRSdelays in recording taxpayers’ payments might have been prevented
 if, while IRS staff were verifying the amounts of the levies, these pay-
 ments had appeared on IDRS as pending transactions. Information was
 not available to show whether the payments actually appeared on IDRS

 Page8                                            GAO/GGD91-9   Erroneous   Levies

IExtent and Causes of
                        payers in our sample, we estimate that IRS erroneously levied the assets
 Erroneous Levies       of 12,400, or 2.8 percent, of the 448,200 taxpayers who had assets
                        levied as a result of accounts sent to ACSduring fiscal year 1986. An
                        estimated 7,800, or 5.7 percent, of the 135,800 businesses and 4,600, or
                        1.5 percent, of the 3 12,400 individual taxpayers had assets erroneously
                        levied. We estimate that a total of 16,100 erroneous levies were issued
                        for business and individual taxpayers.

                        Erroneous levies have adverse effects on both the taxpayer and IRS.The
                        taxpayer can be deprived of his or her money. Erroneous levies are also
                        costly to IRS because they can damage its image and require staff time
                        and money to correct. When IRSdiscovers an erroneous levy, it must
                        release the levy and refund any money erroneously collected plus
                        interest. In situations in which taxpayers’ actions or inactions did not
                        contribute to the erroneous levies, IRSmust pay the taxpayers’ associ-
                        ated bank expenses.

                        We estimate that 12,700 of the 16,100 erroneous levies were caused by
                        errors and delays by IRSin recording payments in taxpayers’ accounts9
                        Errors we identified included applying payments to wrong tax periods,
                        to wrong tax returns, or to accounts of other taxpayers. The remaining
                        erroneous levies had other, less frequently occurring causes. These
                        included levying the assets of taxpayers who had entered into install-
                        ment agreements prior to the levies and levying the wrong taxpayers.‘”

                         Because IRS maintains multiple accounts for each taxpayer, a payment
                         must be posted not only to the records of the appropriate taxpayer but
                         also to the taxpayer’s proper account. Tax information is maintained on
                         magnetic tape master files at IRS’ Martinsburg Computing Center (MCC)
                         in West Virginia. For each individual and business taxpayer, separate
                         accounts are maintained for each tax period for which a tax return is
                         required and for each type of tax. Generally, tax returns and payments
                         are initially processed at IRS’ 10 service centers, and computer tapes
                         reflecting payment information are shipped weekly to MC% to update the
                         master files. Errors in posting payments to the correct account have

                         %mpling error is greater than 5 percent. However, we are 95 percent confident that at least 7,200 of
                         the erroneous levies we identified were due to enws and delays m posting payments to taxpayer

                         ‘%like   the erroneous levies discussed above, which wew caused by IRS misapplying    payments, in
                         these cases IRS levied the wrong taxpayer.

                         Page 6                                                            GAO/GGD-918     Erroneous   Levies

collection of the tax is in jeopardy. It must also inform the taxpayer of
available alternatives that could prevent the levy. IRSgenerally satisfies
this requirement by sending the final service center notice (during the
first stage of the collection process) by certified mail. IRS procedures
state that if the certified letter is returned as undeliverable, IRS is not to
attempt a levy until the taxpayer is properly notified. ACS personnel are
required to verify that the final notice was sent before a levy is issued
by the service center.

IRSprocedures also require that levy notices be reviewed for complete-
ness and readability prior to mailing. This process, however, is normally
limited to a check of the name and address appearing on the levy.
Although there are no other Ins-wide verification requirements, 3 of IRS’
 10 service centers-the Kansas City, Memphis, and Philadelphia Service
Centers-have established local procedures to manually review all
levies to help ensure that the amount is correct and the taxpayer’s delin-
quency status has not changed. In these manual reviews, IRSstaff com-
pare the information on the levy notice with account information
 contained in IRS’ Integrated Data Retrieval System (IDRS)-a  computer
 system that has more up-to-date information than ACS.

 If IRS erroneously levies a taxpayer’s assets, its procedures require the
 immediate release of the levy. A release of a levy is a notification to a
 bank or other third party that the levy is no longer valid and should not
 be honored. If money has already been sent to IRS, the money will usu-
 ally be refunded with interest to the taxpayer. In addition, the taxpayer
 can also file a claim with IRS for reimbursement of bank expenses related
 to erroneous levies.

 In 1988, in an effort to better protect taxpayers, Congress passed the
 Taxpayer Bill of Rights8 One provision of this law requires that begin-
 ning July 1, 1989, financial institutions freeze the taxpayer’s account
 for the amount of the levy for 21 days before sending the money to IRS.
 During the Zl-day period, the taxpayer cannot withdraw the amount of
 the levy from the account. This provision was enacted to provide tax-
 payers an opportunity to resolve any differences with IRS before any
 money is sent to IRS.

 8Technical and Miscellanm~s   Revenue Act of 1988 (Public Law 100-647).

 Page 4                                                           GAO/GGD91-9   Erroneous   Levies

                   IRSinitiated levies on the assets of an estimated 448,200 taxpayer@
Results in Brief   whose delinquent accounts were sent to ACS during fiscal year 1986.4 We
                   estimate that IRS erroneously levied the assets of 12,400, or 2.8 percent,
                   of those taxpayers. IRSerroneously levied the assets of businesses to a
                   much greater extent than those of individuals-5.7      percent for busi-
                   nesses and 1.5 percent for individuals. IRS initiated 16,1006 erroneous
                   levies on the assets of these 12,400 taxpayers. Delays and errors in
                   recording taxpayers’ payments were the two primary causes of the erro-
                   neous levies.

                   IRScan improve its controls and significantly reduce the number of erro-
                   neous levies by instituting a levy verification program nationwide. As of
                   March 1990, when we completed our work, 3 of IRS’ 10 service centers
                   were using a manual levy verification program before issuing levies.
                   This program helps ensure that the amount of each levy is correct by
                   searching for changes in the taxpayer’s delinquency status, unrecorded
                   payments received from the taxpayer that could affect the amount of
                   the levy, and overpayments in the taxpayer’s other accounts that would
                   reduce the taxpayer’s liability. This type of verification program, if
                   properly implemented, could have eliminated at least one-third, and pos-
                   sibly as many as two-thirds, of the erroneous levies we identified. IRS
                   officials agreed with our recommendation to establish a levy verification
                   program nationwide and expect to implement it by December 31,199O.

                   IRS’process for collecting delinquent taxes consists of three stages,
Background         which afford taxpayers several opportunities to satisfy their tax obliga-
                   tions and resolve any discrepancies before levy action is taken. In the
                   first stage, a service center attempts to collect unpaid taxes, penalties,
                   and interest by sending a series of computer-generated notices, or bills,
                   to the taxpayer. (The notices are usually sent at 5-week intervals.)
                   Depending on the type and amount of delinquent taxes owed, a taxpayer
                   can receive up to five notices. The final notice is sent by certified mail
                   alerting the taxpayer that if payment is not received within 30 days, IRS
                   can levy the taxpayer’s assets without further notification. Each notice

                    3All nunben reported are estimates based on OUTsample results. Estimates are made at the 96 per-
                    cent confident  level. plus 01’ minus 5 percent, unless otherwse noted. Estimates are rounded to the
                    nearest 100. see app. I

                    4Although these taxpayer accounts were sent to ACS in fiscal year 1986, we monitored IRS’ activity,
                    including the issuance of Iwirs on these accounts, through mid-1988.

                    5Sampliig error is greater than 5 percent. However, we are 95 percent confident that IRS initiated    at
                    least 8,800 erronews levies and may have initiated as many as 23,400.

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