oversight

IRS' Accounts Receivable Inventory

Published by the Government Accountability Office on 1990-02-20.

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

                    United !States General Accounting Office
                    Testimony




For Release         IRS' Accounts     Receivable     Inventory
on Delivery
Expected at
9:30 a.m. EST
Tuesday
February 20, 1990




                    Statement of --
                    Jennie S. Stathis
                    Director,    Tax Policy and
                       Administration    Issues
                    General Government Division
                    Before the
                    Subcommittee on OverSight
                    Committee on Ways and Means
                    House of Representatives




GAO/T-GGD-90-19                                                  QAOlrrr la (u/n)
                      IRS' ACCOUNTSRECEIVABLE INVENTORY


                        SUMMARYOF STATEMENTBY
                           JENNIE S. STATHIS
             DIRECTOR, TAX POLICY AND ADMINISTRATION ISSUES
                          GENERAL GOVERNMENT DIVISION
                        U.S. GENERALACCOUNTINGOFFICE


The reported     amount of money owed the federal         government in
assessed but unpaid taxes-- IRS' accounts receivable              inventory
--grew from $24 billion       in 1983 to nearly       $61 billion    in 1989.
While the amount that is actually        collectible      may be overstated
by as much as a half,      the growth is significant          and represents  a
serious problem.      The accounts receivable         grew three times faster
than collections     of delinquent   taxes and twice as fast as total
net tax receipts.      This growth persisted         even though the Internal
Revenue Service devoted more resources to collection               activities
and undertook numerous internal        studies and projects        aimed at
slowing the growth.
On the basis of rough estimates made by GAO, IRS' Internal                        Audit,
and Price Waterhouse, about half of the accounts receivable                        may
be collectible.         Some of the accounts are known to be erroneous,
previously      paid, or duplicates.          Other accounts would not likely
be paid because of the taxpayers'               financial     condition.     IRS lacks
th”g ;i+ernal      controls     and the information        systems    to identify     the
e&tent of such accounts.            Consequently,        IRS cannot currently
determine exactly         how much of the inventory           of delinquent     taxes
could be collected          with either existing        or additional     resources.
IRS also lacks basic information              that would help in forging a
more effective       collection     strategy.
The continuing    budget deficits    make it imperative     that IRS take
action now. In the short term, IRS needs to reduce its backlog
by collecting    what is owed as quickly    and equitably      as possible.
In the long term, IRS needs to reevaluate         its collection
strategy.     Because so many other IRS functions       are involved       when
delinquencies    occur, IRS needs to focus on Service-wide          efforts
to improve prevention,    detection,    and collection     of delinquent
taxes.
                           . .   !

M r. Chairmanrand                     Members of            the Subcommittee:


W e are pb eased to be here today to assist                                                the Subcommittee in its
review     of the Internal                   Revenue Service’s                            (IRS)         growing accounts
receivable           inventory.              This           is not a new topic                          for      the
Subcommittee              or GAO, but one made more compelling                                                 by recent
statistics.               At a time when the government                                     has a need to reduce
a continuing              high deficit,                it        is     imperative               to collect              taxes         that
are properly              owed.


Over the past 6 years,                       the       reported              amount         of money owed the
federal        government               in assessed               but      unpaid          taxes--IRS’                  accounts
receivable           inventory --has                skyrocketed                    from     $24 billion                  at     the     end
of fiscal           year         1983 to nearly                  $61     billion           at         the     end of         fiscal
year     1989.        W h ile the amount that                            is collectible                       may be
overstated           by as much as a half,                             the    growth             is     significant              and
represents           a serious            problem.                The accounts                   receivable              inventory
has grown three                      times faster            than        collections                   of     delinquent              taxes
and twice           as fast            as total        net        tax      receipts.                   This      growth
persists           even though             IRS has increased                        the     amount of                  resources
spent on collection                      activities               and undertaken                       numerous          internal
studies        and projects                aimed at              finding           ways of             slowing          the growth.


Today t M r. Chairman,                     I want           to    make four            points.                 All      of    them
relate        to    the     failure         of    IRS’ internal                     controls                 system      to assure
that     assessed           taxes        are properly                   accounted               for         and collected.
First,        the    overstatement                of        accounts          receivable .                   dollars         may
                                                                                        c
mislead       some into              thinking       that        the full            amount of the
receivables           balance           could     be collected                and applied                    to reduce               the

budget deficit.                  Second, the continued                        growth               of the accounts
receivable          inventory             is a serious               potential                loss        to the Treasury
that     cannot       be allowed               to continue.              Third,               IRS does not know
conclusively            why the inventory                     is increasing.                         It    also         lacks        very
basic      management information                        that        would        enable             it    to fashion                a
better       strategy          for      reducing         the growth               of        these         accounts          and
collecting          them.            Fourth,      we believe             that           the        current          collection
strategy       will        not lead            to a reduction                of     the growth                   in accounts
receivable          anytime           soon.       Accounts            receivable                   is     an IRS-wide
problem,       and IRS must consider                          this      in    rethinking                   its     overall
collection          strategy.


POTENTIAL REVENUESUNCERTAIN


The reported            accounts           receivable            inventory                   is overstated                 because
it     includes       inaccurate               account        balances,             duplicate                receivables,
and accounts            that         IRS will       never        be able               to     collect.              IRS does
not have       the information                   to determine                the        extent            that      these
receivables           inflate           the     accounts         receivable                   balance.              However,
on     the basis        of      some limited             analysis            of        the     $67 billion                 in
accounts          IRS closed            over     the     past        2 years,               we found             that      about

half     was due to             inaccurate          or duplicate                   receivables.                     This        is
consistent          with        studies         done     by     IRS’ Internal                      Audit         and Price
Waterhouse,           which          estimated         that      the     amount               of     money        owed the

2
federal      government        in back taxes may be overstated                  by as much as
40 to 60 percent.             Thus, the actual          receivables          balance     available
for   col'%ection         is probably     about half        the   reported      $61 billion.
But   even that        amount of money would go far                in reducing          the
deficit      and, as a matter           of equity     to all      taxpayers,      should       be
collected.


CON?rf;-JUED
           GRJWTHOF ACCOUNTSRECEIVABLE INVENTORY


Du&ng      the last        6 years,     IRS' accounts        receivable        inventory
increased       over      170 percent,     a much greater          increase      than     the 44
percent      increase       in delinquency       collections        or the 71 percent
increase       in total      net tax receipts.           The graph shows the
percentage       increases       in accounts        receivable,       delinquency
collections,        and total         net tax   receipts.




3
For comparison                purposes,                 this      graph      shows growth                in    the    accounts
receivable            inventory             for         fiscal      year       1989, based on $66 billion,
rather        khan the $61 billion                             reported        by IRS.            This        is because in
September            1989 IRS recalculated                           its     accounts          receivable             balance
to include            accrued         interest                 and penalties,               which were not
previously            reported,          and exclude                  the      $25 billion            of       accounts         it
had classified                as “currently                      not collectible.”                   IRS plans              further
changes in the way it                        will          report          accounts         receivable            in future
years,        which are             intended             to better           estimate          potential             revenues
from the         accounts            receivable.                   However,           while       reducing           the
reported         inventory,             these            changes will                not necessarily                 reduce
IRS ’ workload.                   These accounts                   will      still         remain     on the          books          and
require        IRS resources                 to identify                   changes         in taxpayers’              ability
to pay and to resolve                        the duplicate                   and inaccurate                   accounts.


In     the    past        several      years,              IRS has paid               increasing              attention         to
this      dramatic          growth.               It     has done numerous                    internal          studies         of
the      accounts          receivable                  inventory           and has even             sought        help       from
Price        Waterhouse             in assessing                  the growth.               IRS also           increased             its
resources            in    this      area.              From 1987 to               1989,      Collection             staffing
increased            13 percent          and the                 amount      of      money IRS spent                 on
collection            activities             increased              26 percent.                Even with             this
increased            attention,          the            amount      of      accounts          receivable             collected
increased            by less         than         3 percent.                This      is    not     a very        good return
on the        public’s            investment.



4
LACK OF INFORMATION HINDERS COLLECTION EFFORTS


As we h&e              said on numerous occasions                              over the last             decade,          IRS

lacks      basic        information            that      would help                  in forging         a more
effective          collection           strategy.               For example,                   IRS does       not    know
--        enough about             the reasons            for        the growth                in the inventory:
--        the effectiveness                of its         various              collection             programs and
          tools,        such as levies                 or cases          worked          by revenue           officers:
          and
--        whether        additional            resources             are       needed.


IRS internal             reports        and a Price               Waterhouse                  study    done    for    IRS
cited      several        possible         reasons          for         the     growth          in    accounts
receivable.              These       reports           indicated              that      some of the increase
ml&t;      &a due to factors                   over which IRS has little                               control--more
returns         being     filed,        more     cases          in      litigation              or bankruptcy,             or
higher        dollar      values        per     account.                Some of          the      increase       was also
said      to be due to higher                   examination                assessments                and some due to
IRS errors,             such   as returns               processing              errors          or    improper
refunds.


IRS has little              conclusive            information                  on the extent             of growth
caused        by each       factor       or whether               all         factors          have    been
identified.              For   example,           it     would          seem reasonable                 to expect
collections             to grow       along      with       receivables                  if     the    only    growth
factors         were     higher       assessments               and higher               accounts        values.           But


5
                      ‘,        -.t


 they have not.


Another'reason                        for      the growth            could        be inefficiencies                in IRS'
collection            activities.                        While collections                   grew only           3 percent
over       the past              3 years,            the amounts realized                       through      various
collection            programs                   changed.            Collections             through      the more          cost-
effective           automated                    collection            system        declined      about          25 percent,

while       those          through               revenue        officers           increased.           Thus,        it    is
costing          more to collect                         each dollar.


Identifying                the causes                for      growth         in the accounts              receivable
inventory           is important                     because          it    could      lead      to more effective
efforts          to reduce                   the inventory.                 For      example,      if     IRS were to
identify          errors               in returns             processing            as a major          cause       of growth,
it     could      focus               its      efforts        on the returns                 processing          pipeline        to
reduce          such errors.


IRS is gathering                            more information                about      its     accounts          receivable
to     better      report                   the size       of the inventory                   and learn          more about
the composition                        and age of             its     accounts.              Much of      this
information                is geared               toward           determining          the proper          amount of the
receivables                to         report       for     financial              statement      purposes.                We have
long      supported                   the      need for        federal            agencies      to prepare            proper
financial          statements                     and believe              that     IRS’ current           efforts          in
this      direction                   are      appropriate.



6
But while               the information                       IRS is currently                    collecting               may present
a clearer           picture           of how much IRS expects                                 to collect,                  it    will     not
be suff>cient                for      the purpose                  of managing                the collections
workload           or devising               a more effective                       and better                targeted
collection               strategy.            We believe                 that       as      IRS develops                   additional
management               information               it      should        be sure to collect                          information
that       will     help          evaluate              the     effectiveness                 of its          various
collection               programs          and tools               and determine                   whether           or where
additional               resources           are         needed.


CONCLUSIONS


Additional              management               information,                while          vital,          will          not    solve
the    accounts             receivable                  problem       by itself.                   And we recognize                      that
getting           control          of the accounts                    receivable                  problem          will         not     be a
short-term              effort.            However,               despite          increased            attention                and
resources,               including           a number              of projects               that       are        presently
under way,          the      growth          pattern              continues.                Mr.      Chairman,              this
suggests           to     us that          the          current       collection                  strategy           lacks         the
proper        structure              and     focus             to lead       to a reduction                    of     the        growth
in accounts               receivable              anytime            soon.          Yet,          the   continuing                 budget
deficits           make      it      imperative                 to attack           this          problem          now.          We
believe           IRS should           embark              upon a short-term                       effort          to collect
more money from                    existing              accounts           and,      for         the   long         term,         develop
a more comprehensive                         collection               strategy.



7
To this        end, we believe                      that        the Subcommittee                    may want to ask IRS
to lay out            its      collection              goals         for         the next        3 to 4 years.                      The
major       thrust          should       be to increase                     the amount of money collected.
Within        the assumed context                          of    protecting              taxpayers’             rights,             the
goals       should          include       well-defined                     time      frames,          financial             targets,
and an aggressive                     approach             to reducing               the    inventory./                One target
of opportunity   may be to reverse the declining       collections   of the
              *
automited collection   system.   The proposed   fiscal     year 1991
budget        for     IRS contemplates                      almost          1,000        more staff             for     the
      -
collection            function:           but the budget                     also        reflects            a relatively
modest increase                 of $150 million                     in collections.                         IRS should              be
poised        to act          should      those            resources              become        available:              ready              to
train       and put           these      new staff               into       action         quickly.             In sum1 the
short-term            strategy           should            be to collect                 what       is owed as quickly
and equitably                 as possible.


In    the     long     term,          focusing             solely       on IRS’ collection                          function               is
insufficient.                  Accounts             receivable              is     an IRS-wide               problem.               If
IRS were viewed                 as a factory,                    collection              would      be the            end of             the
production            line.           Other         IRS functions                  are     involved            when tax
delinquencies                occur.           For     example,              many delinquencies                        are
identified            in examinations.                          Returns           Processing               has a role          in
posting        payments           to accounts.                    Taxpayer            Services              often      deal         with
taxpayers            who receive              delinquency               notices.                In short,             almost             all
IRS functions                 can affect             the        collection            workload              and the         size          of
the       accounts          receivable              inventory.               We believe               it     is time          for          IRS

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to rethink       its      overall     collection     strategy    by focusing    on
Service-wide           efforts      that   can lead to substantial       improvements      in
the    pre>ention,         detection,       and collection      of delinquent     taxes.


This    concludes        my prepared        statement.       I would be pleased      to
answer questions.




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ATTACHMENT                                                                                        ATTACHMENT


                   GAO PUBLICATIONS ON IRS' ACCOUNTS RECEIVABLE
                            AND THE COLLECTION PROCESS

IRS Can Improve            the Process              for      Collecting        loo-Percent        Penalties
(GAO/GGD-89-94,            Aug.       21,     1989).

Statistics          on IRS' Use of Levies                     to Collect           Delinquent     Taxes
(GAO/GGD-89-97FS,              July         17,    1989).

Administration's    Fiscal  Year 1990 Budget Proposals for IRS and
the Tax Court,    Statement Before the Subcommittee on Oversight,
Committee    on Ways and Means, House of Representatives   (GAO/T-GGD-
89-16,   Apr. 4, 1989).
Periodic         Evaluation Needed If IRS Uses Levies                                to Collect        Deferred
Accounts         (GAO/GGD-89-34, Feb. 14, 1989).
Internal         Revenue Service              Issues         (GAO/OCG-89026TR,            Nov.    1988).

Managing         IRS: Actions          Needed         to Assure          Quality      Service     in the
Future         (GAO/GGD-89-1,          Oct.        14,      1988).

The 1988 Tax Return Filing Season and IRS' Fiscal    Year                                         1989
BUdaft: Statement Before the Subcommittee  on Oversight,
Committee   on Ways and Means,                       House of          Representatives           (GAO/T-GGD-
88-30, Apr..13,   1988).

IRS' Fiscal    Year 1988 Budget    Request, Statement  Before the
Subcommittee on Oversight,      Committee on Ways and Means, House of
Representatives     (GAO/T-GGD-87-9,   Apr. 23, 1987).
IRS' Automated            Collection              System      (GAO/GGD-12OBR,           July     31,    1986).

The Administration's    Fiscal Year 1987 Budget Request for the
Internal  Revenue Service,    Statement Before the Subcommittee on
Oversight,          Committee         on Ways and Means,                  House of      Representatives
(May     12,     1986).

Further  Research Into Noncompliance                                 Is Needed       to Reduce Growing
Tax Dosses (GAO/GGD-82-34,  July 23,                                 1982).

What IRS Can Do to Collect                         More Delinquent            Taxes      (GAO/GGD-82-4,
Nov.     5,     1981).

Who's Not Filinq            Income Taxes?  IRS Needs Better Ways to Find
Them and Collect            Their Taxes (GGD-19-69, July 11, 1979).
loo-Percent          Penalty      Assessments                (GAO/GGD-77-49,           May 3,     1977).