oversight

IRS' Accounts Receivable Inventory

Published by the Government Accountability Office on 1990-08-01.

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.
Wednesday
August   1, 1990




                    Statement   of
                    Paul L. Posner
                    Associate   Director,       Tax Policy
                       and Administration         Issues
                    General   Government       Division

                    Before    the
                    Committee      on Governmental        Affairs
                    United    States   Senate




GAO/T-GGD-90-60                                                      GAOPolr 160(12/87
Mr.     Chairman                and      Members              of         the         Committee:



We are         pleased             to        be here           today                 to        assist           the      Committee                in      its

inquiry            into         IRS’         growing           accounts                         receivable                inventory.                   As you
know,        Mr.      Chairman,                  this         is         one         of         the     14 high            risk       areas            in

government                designated                 by       the            Comptroller                      General           as having

significant                 potential                for           loss            to      the         Treasury.                His        reasons              for

including             the        accounts                receivable                        inventory               on this               list       are:



--    First,          billions                of     dollars                   are         at         stake       here.           As we point                    out

      later,          reported                receivables                          are         probably               substantially

      overstated.                      But       even         at         a conservative                           estimate,                the      Treasury

      stands          to        lose      billions                      in     tax         revenues               unless           IRS          improves

      its      collection                    programs.



--    Second,             the      growing               accounts                    receivable                   inventory               may have               a

      serious             negative                 impact           on taxpayer                          voluntary              compliance.

      Though          the         impact            is     difficult                       to     measure,               we believe                 the         fact

      that       billions                of      dollars                 in        delinquent                   taxes        are      not         being

      collected                 and      that        IRS           is        not         pursuing               thousands             of

      delinquency                  cases            cannot               help            but          have      a negative                 impact           on

      taxpayers                 who dutifully                       pay            their              taxes       each       year.



--    Finally,              IRS        itself            has            identified                     internal            controls               over

      accounts              receivable                   as a significant                                    financial            management

      weakness              in     its          financial                     integrity                  reports           to      the          Congress.

      Stemming              the        growth            of    delinquent                             receivables               has        become           one
        of     the         barometers                  by which                  IRS and                  the        public             gauges        the

        agency’s              performance.                          Because                   so many                 IRS     functions               feed         into
        the        success             or     failure               of         IRS’           collection                    efforts,             IRS’
       performance                     in     collecting                       delinquent                       taxes         is        a reflection                   of

        the        performance                    of    many            elements                    of     the         organization.



We have             been          reporting                  on the             accounts                   receivable                     inventory           and

IRS’          efforts             to    collect               it         for        many            years.              Unfortunately,                       in
spite          of        improvements                    IRS has                made               in     its        collection               programs--

many          as a result                    of    our        reports                --the              problem             grows          worse       each

year.              Over       the       past           6 years                 the       amount                 of     delinquent                taxes        owed

the      federal              government,                     as         reported                   by IRS,             has         grown        by almost

175      percent              to       $66        billion                at      the          end         of     fiscal             year      1989,          using

the      methodology                    IRS        used            in     previous                      years.

We must             caution             that           the         $66         billion                   inventory                 is     probably

significantly                       overstated                     because               it         includes                inaccurate                account

balances,                 duplicate                 receivables,                         and            accounts              that         IRS will           never

be able             to      collect.                   On the             basis               of        some limited                      analysis           of        the

accounts                IRS closed                  over           the         past           2 years,                 we found              that      about

half          of     the      accounts                 were         closed               because                 they         were         inaccurate                  or

duplicate                  receivables.                       This             is      consistent                      with         the      results              of

studies             done          by    IRS’           Internal                 Audit               and         Price         Waterhouse,                   which

estimated                  that        the        amount            of         money           owed             the     federal              government                     in

back          taxes         may be overstated                                  by      as much                  as 40 to                60 percent.




2
Thus,          the        actual               receivables                         balance                  available                    for        collection                       may

be about             half          of      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,                       IRS should                             attempt               to     collect                it.



GROWTH OF THE ACCOUNTS RECEIVABLE                                                                    INVENTORY



Let      me now discuss                          the         trends                 we find                   most          troubling                    about             the

accounts             receivable                       inventory.                           To us,               Mr.         Chairman,                    the         most
disturbing                 feature               is         not         the         growth                  itself,               though             that            is         a

considerable                     concern.                    It         is         the          fact          that          IRS'             collections                        of

these       taxes               have       not         kept             pace         with               this          growth.                     Each         year             IRS
falls       farther                and          farther                 behind                  in      its       efforts                    to    reduce             the

accounts             receivable                    balance.                         As you                  can       see         from            this      graph

(see      attachment                     I),       since                1983,              the          growth              in         the        accounts
receivable                 inventory                   has         been             far          outpacing                   IRS'              collections,

which       have           remained                relatively                            flat           over          the         last            3 years.                      In

addition,             the         growth               in         the        accounts                       receivable                    has        outpaced                       the

growth          in    net          tax         receipts.



In      terms        of         source,            the            largest                 portion                 of        the         growth            in         the

accounts             receivable                    balance                    in     the              past        3 years                 has        been            the

portion          due            from       individual                        taxpayers.                           In    our             report            issued

yesterday             to         Chairman                Pickle                of         the           Oversight                     Subcommittee                         of        the

House       Ways and                   Means           Committee,                         we discuss                        the         fact         that            taxes

owed      by     individuals                       accounted                        for          two-thirds                       of      the        dollar


3
growth           and        three-fourths                       of      the         growth         in       the           number               of         accounts

receivable.                      This        next            graph           (see      attachment                       II)        shows             the         more

rapid        increase                 of     the        individual                   delinquencies                            when        compared                    to
business                delinquencies.                          Overall,              ,about          40 percent                         of         the        dollar

growth            is     in      accounts               IRS      is      actively                 pursuing;                    about                60 percent

is     in    accounts                 IRS         is    not      actively                  pursuing                for         various                    reasons.

IRS has            little             information                     available                  on the            reasons                    for         the        much

more        rapid           growth           in        individual                   delinquencies                         and       it         does             not
have        information                     on the            characteristics                         of         these             delinquent

taxpayers.                     Such         information                  would             be useful                    in     devising                    a more

effective                collection                    strategy.



AGE OF THE RECEIVABLES                                       INVENTORY



Mr.      Chairman,                our        recent             work          has         revealed               another                 serious

trend.             Yesterday,                     in    our          report          to      Chairman                   Pickle,                 we showed

that        the         accounts             receivable                      inventory             as a whole                        is         getting

older.             At       the       end         of    fiscal           year          1989,              8.1      million,                     or        54

percent            of       the       accounts                were           over     -1 year              old,              an increase                        of    29

percent                since         the     end        of      fiscal              year         1986.             These            accounts

contained                 55 percent                   of     the       dollar             value           of          the     accounts

receivable                    inventory                as compared                   to      46 percent                       of    the             dollar

value         in        fiscal             year        1986.            As any             business                    person            would             tell            you

and,        as         IRS’       own data                  suggests,               the      older              the          delinquent

receivable,                    the         less        likely           it      is        that       it         will          be collected.




4
Also,          Mr.         Chairman,                  the        older                 the        receivable                  gets,           the        more
likely          it         is        that         IRS will              need                 to       use     its        most          costly            collection

techniques                   to       attempt               collection.                            The        IRS collection                           process              has
three          stages.                  First,              delinquent                         taxpayers                 receive              a series                 of
notices              requesting                     payment.                      If         collection                  is      not         made,        the          case
is     sent          to      one        of        IRS’          automated                      call         sites          where             operators

attempt              to     call            taxpayers                  to     arrange                    payment.                   Finally,               if      the
delinquency                     is      still             not      satisfied,                           the    case           is       sent         to    revenue
officers              in        the         field           who attempt                           to     collect              the       delinquent                     taxes

through              face-to-face                         contacts                     with           taxpayers.                    AS you             can       see,         as
a case          moves              through                the      process,                       the       amount            of       “hands-on”

involvement                     of      IRS         staff          in        the             collection                  process              increases,

and,       consequently,                            the         cost         of         collection                   increases.                        IRS’        own
data       shows            that            for      1988,             IRS             collected               more           than           $15       billion

through              the        notice              process             but             collected                   only         $7 billion                     through

telephone                  calls            and      revenue                 officers                    combined.                     The       fact           that        the

most       costly               collection                      processes--                       telephone                calls             and       revenue

officer          contacts                   --produce                  the             least            amount           of      revenue             means             that

IRS       is    facing                increasing                   cost-inefficiencies                                        as the            accounts

receivable                  grow            older.               This         does                not       bode         well          for       the      effective

use       of    IRS’            limited              collection                         resources                   in     the         future.



REASONS FOR ACCOUNTS RECEIVABLE                                                              PROBLEMS



The       reasons               for         the      growth             in             the        accounts               receivable                    inventory

are       unclear               at      this         time.              Economic                        factors            have         been           cited--the


5
increasing             numbers                of    returns               filed,          tax         receipts,                 and      inflation.

However,             as our            previous             graph          showed              (see      attachment                    1) , the

inventory             has        grown         much         faster           than         any      of      these            economic

indicators.                 The         addition             of      interest              and         penalties                  to     the

inventory             in    1989          has       also         been        mentioned,                  but         the         inventory              had
been       escalating                  rapidly            well       before             1989.



IRS mentions                increased                    assessments                and         other          compliance                     actions
as other             reasons            for        the      increase,               but         IRS’      data         does             not        provide

information                on the             origin         of      delinquent                  accounts                  to     either

support         or     refute             this           hypothesis.                    Moreover,               if         increased

assessments                are         responsible,                  we would              expect              that         this         would

result        in      a commensurate                        increase               in     collections,                      but,         as we

noted       above,          collections                    have       not          kept        pace       with             the     growth             in

the      accounts           receivable                    inventory.                    Other          factors,                  such         as

changes         in     taxpayer                behavior              and       characteristics                         could             also        be

cited.



Clearly,            more         research                needs       to      be done             to     pinpoint                  the      causes            of

the      growth        in        the      inventory.                  Armed             with      better              information,                      IRS

will       be in       a better                position              to      address             those          causal             factors

within        its      control.
 SHORT-TERM AND LONG-TERM SOLUTIONS


 These,           then,            are       our        most         significant                          concerns             about        the         trends
 in     the       accounts                 receivable                     inventory                   and        IRS’     efforts                to     collect

 it.          The next              question                 is,          where             should              IRS and Congress                        look             to
 find         solutions                to      these          problems?



 In     the      short             term,        we believe                       that              IRS should             better            focus             its
efforts            to        collect            more          from              existing                  accounts.               To assist                   IRS         in
doing           this,         we believe                     the         Committee                    may want            to      ask       IRS        to          lay
out       its      collection                   goals              for          the         next          several         years.               Within               the
context            of        protecting                  taxpayers’                         rights,             the      goals          should

include            well-defined                       time           frames,                     financial             targets,             and        an

aggressive                   approach              to        reducing                   the         inventory.



Mr.     Chairman,                   let       me turn                to       the           issue          of    staffing.                  In        the      past,
IRS has            cited            understaffing                          in         its         collection              function                as a major

contributor                   to      its       failure                  to      improve                  collection              of     the          accounts

receivable                   inventory.                      However,                  we are              unconvinced                  that

understaffing                       within            the          collections                        function            is      the       key        reason

for      IRS’       poor            performance.                           The         following                 chart          (see        attachment

III)       shows             IRS’          staffing                for        1985,               1987,         and 1990           for         IRS
telephone                collection                   call          sites              and          for      revenue            officers.                     In

general,            staffing                  has       been             level              or      increasing             over          the          S-year

period.                 In    addition,                 at         least            for           revenue           officers,               IRS does                 not

seem to           have         a major                problem                 with            inexperienced                     staff          due       to         high


7
turnover.                 The       attrition                 for         revenue             officers                  in      the      field         has
averaged            about           6.6        percent              per        year          for      each         of         the       last      3 years,

according             to      IRS.             By comparison,                          the         overall              government
attrition             rate          for        white-collar                     employees                  was about                    9 percent             in

1987,        the      most          recent             year         for        which          information                      was available.



Nonetheless,                 given             the      current                state          of      the        accounts                receivable

inventory             and         its         growth,          we would                   agree           that          additional,                   steady

increases             in     collection                   staffing                  are       probably                  necessary.

Particularly                  in        the      short-term,                    however,                  one      should               be careful
not     to        overestimate                   the      amount               of     additional                   revenue               additional

collection                staffing              will          produce.                    Our       recent              report           on revenue
yield        estimates                  for     enforcement                     programs,1                      documented                 the

current            IRS estimating                       process                has        been        unable             to      accurately

predict            what      revenues                  actually                result              from         staffing                increases              in

its     enforcement                     programs.                   Hiring            more          revenue              officers                and       other
collection                staff           may     reduce             revenue                 collections                      by taking               some        of

the     more        experienced                   staff             away        from          collection                      activities               in

order        to     provide               new staff                 with        training.                    And         it      will          take        time

for     these         new staff                  to     gain         sufficient                     expertise                  to       handle         all

the     types         of     collection                   cases,               including                  the      most          difficult                 ones.

But,        Mr.     Chairman,                  increases                  in    numbers               of        staff          must        be coupled

with        other         major           human         resources                   improvements                        to     achieve            major




1Tax Administration:                                   IRS Needs More                         Reliable                  Information                   on
Enforcement    Revenues                               (GAO/GGD-90-85,                         June 20,                  1990).

8
progress                  in     stemming               the         growth           of       the     accounts              receivable
inventory.



We have               identified                  three             areas       for           potential              improvement.

First,              IRS may want                      to      examine           collection                   staff          productivity.

IRS statistics                          show          that          delinquent                   account        dispositions                        per
staff              year        have       been          steadily              declining                since          1983         while

collection                     staffing               has          remained              relatively             constant                 or    has

increased                  during              this         period.             Second,               we are          examining                IRS’
collection                     staffing               plan.             Due     to         the      hiring           freeze             IRS
experienced,                       there          may be significant                                imbalances                around           the

country              in        collection                   staffing.                    In      some districts,                        IRS may be
able          to     work          lower          dollar             cases          because            of     availability                     of

collection                     staff.             But         in     other          districts,                only          the     higher               dollar

cases          may be worked.                               Aside        from         potential               losses           when           cases             are

not      worked,                such           imbalances                in     workload               mean          that         taxpayers                in

different                  parts          of      the        country            are           being        treated           differently.

Third,             we are             beginning                studies              of        the     method          by which                IRS

prioritizes                     the       collection                  cases           to       be worked              to     be     sure            it     is

working              the        most        productive                   cases.                 IRS currently                  uses           a scoring

system             based          on projected                       yield          to        prioritize              the      cases           it        will

work.              We do not                know            whether           the         assumptions                 used         to     develop

this          scoring             system              are      the      most          reasonable                ones.



In      the         long        term,           several              servicewide                    areas       need         sustained

management                     attention.                    These           include


9
--     AmprovlnJ            rlnanciai            management              systems           and developing                     useful

       management             information              systems



--     implementing                systems          modernization                 effectively                 and


--     ensuring           that         the    improved          collection               of     delinquent              taxes          is

       seen    as a servicewide                      goal.




IMPROVING            FINANCIAL               MANAGEMENT INFORMATION

AND DEVELOPING                   USEFUL MANAGEMENT INFORMATION



IRS'       current          systems          must     account            for      taxes,            interest,           and
penalties            that        are     assessed         but      unpaid          in      order         to     help     maintain

managerial              control          over       and   provide              information               about         IRS'

collection              efforts.             The     systems        must         also         record          accounting
transactions            and provide                  IRS officials      with                    information               for
financial            management   and                reporting     purposes.                         Unfortunately,                    the
current        systems             generate          information                that       is       often       not     the      most

reliable          for       financial           management            purposes                nor      the      most     useful

for      program         management             purposes.



Financial            Management               Information           Problems



Often,        useful         collection              information                from      a management

perspective              causes          misstatements              of         account          information              from          an


10
accounting                perspective.                               For     example,               IRS will                sometimes                 assess
more        than         one     delinquent                           taxpayer              for     the       same delinquency.                                This
is    the      case        where                 a business                    is    delinquent                    on employment                      taxes
and       officers              of         the          business             are          also      responsible.                        IRS’          practice
is    to     assess             the         business                   and      the         responsible                   officers              for      the

same delinquency.                                 These              cases          are      called          100-percent                      penalty

cases.             Aside         from             the          fact        that           this       is     a legal               remedy         IRS

should        pursue,                 it     makes               good        sense           from         a collection                    management
standpoint                because                  it         affords           IRS         additional                   opportunities                   to

collect            the     delinquency.                                However,              from         an accounting                       standpoint,
it    results             in     the         accounts                   receivable                  inventory                   being         overstated

because            the     same delinquency                                --which                should           only         be collected
once--is             recorded                    for          each      officer              as well               as the          business.



Similarly,                when             a taxpayer                   has         failed          to      file          a required                  return

and       IRS has          sufficient                          information,                       IRS will               prepare          a

“substitute                return”                      for      the       taxpayer                and      then          assess          the         amount

of    tax     due.              These             assessments                       are      made on the                   most         expansive

basis        possible                 in     order               to     capture              all      the          tax      the      taxpayer

might        owe.          Thus,             the              assessment               may be overstated                             by as much                  as

80 to        100      percent.                          Again,          from         a collection                        management

standpoint,                this             makes              good        sense.                 IRS would               not      want         to

underbill                a delinquent                          taxpayer.                    However,               from         an accounting

perspective                it         again               overstates                  the         accounts               receivable              balance.

When IRS reports                            its           receivables,                      the     amounts               of      overstatement                   in

these        accounts                and          other              similar              amounts           should              be deleted.                    From


11
these         examples,                  it      is      clear         that          IRS needs                  to      develop           more
accurate            accounts                    receivable                  information                   for          financial            statement

purposes.



IRS also             is     currently                    in     the     process               of     developing                     an estimate            of
the      amount            of      the          receivables                  inventory               it         will          not    collect          by


tracking            the          accounts                receivable                  over        a g-year                 period,           which

began         October             1,      1988.               During           the        course           of          this     period,          IRS
plans         to    develop                   an increasingly                        accurate              estimate                 of    the    amount

it      can    expect              to         collect           from         its         inventory.                     We are           currently
evaluating                 IRS’         efforts               to     develop              this       estimate                  and will          be

reporting                later          on it.



Manaqement                 Information                    Systems             Problems



IRS also            needs           to         develop             a management                     information                     system       that

contains            the          kinds           of      data        that          can      be useful                   in     directing             and

focusing            its          collection                   strategy.                   IRS’       current                  systems        do not

contain            the      kind          of       information                     that      we think                   would        be most
useful         in        directing                 its        collection                  effort,                Specifically,                   we
think         IRS would                 want          quantitative                    information                       on


--      the    reasons              for          the      growth             and      aging          of         the       accounts
        receivable                inventory,                    and     particularly                       why          the     individual

        delinquency                 inventory                   is     growing              so rapidly;




12
--     the      kinds         of     cases                that         produce              the       most        collections                    (for

       example,           which               types             of     examination                    cases           produce              the     best

       yield          when         worked            by collection                          staff);



--     characteristics                         of     taxpayers                   who become                  delinquent;                    and



--     the      effectiveness                        of         its      various             collection                     programs             and

       tools,          such         as    levies.



IRS currently                  does            not         have          such         information.                          If     IRS did,              the
Service          would         be        in     a much                 better          position                  to    devise            more

effective              collection                    strategies.                       It        would        be better                  able       to
target          particularly                    fruitful                      types         of    cases,              design         programs

which        might        prevent               or         at         least       reduce              the     amounts               of
delinquencies,                      and        emphasize                      those         collection                 tools         and         programs

that      seem to            be most                effective.                        For        example,              if         IRS knew          that

first-time              businesses                    were             disproportionately                              delinquent,                  it

could        tailor          education                     and         prevention                 programs                  for     this         group         to

help      reduce          delinquencies.



IMPLEMENTING                 TAX SYSTEM MODERNIZATION                                             EFFECTIVELY


One unfortunate                      legacy                of         IRS’      history               as a paper-driven

organization                  is     that            considerable                      amounts              of        errors         have         been

entered          into        the         system.                      As a result,                    IRS        is    often          in     the




13
position                  of     spending                 valuable        time          correcting                documents             and
notices              it        generates.                    For     example:



--     A 1990              IRS study                     reported       that       13 percent                 of     large-dollar

       notices                 to      individual                  taxpayers           and      45 percent                 to    business

       taxpayers                     from      July          through          September,                1989,        had        to     be
       corrected                     before          they       were      sent         or    had        to    be cancelled

       completely.                           Some of           these      were         caused           by taxpayer                  errors          but

     many were                       caused          by      IRS     service           center           errors.             Service            center
     errors                included                 keypunching               errors         and payments                   being           applied

       to     the          wrong            taxpayer’s               account.



--   We found                    that         for         a period        of      time       in     late          1989      and        early

     1990,                levy        notices,               which      are       issued           to     third       parties               who are

     holding                   taxpayers’                  money,       were       wrong          about           4 percent             of     the

       time         at         the      Philadelphia                   Service           Center          and       about         13 percent

     of       the          time         at     the         Memphis        Service            Center.               We had            asked        these

     Service                   Centers              to     collect        several            weeks’           worth         levy        notices

       for      us during                     this         period.            Fortunately,                   these         service            centers

     had        in         place            programs            to     identify             these         incorrect              notices

     before                they         were         sent.           Except        for       the        Kansas        City           Service

     Center,                   other          service           centers           do not           have       such       programs.



Since         the          accounts                 receivable            inventory                has       received            increased
attention,                     we have              noted       that      IRS      is       monitoring               the        inventory

more         closely                 and      is     generating               short-         and        long-term               data        and


14
reports         that        may eventually                        be useful               in    pinpointing                  trends.

However,            in     terms          of    systems             modernization,                     we believe                     IRS needs

to     go farther.



AS IRS moves                 toward            modernization                   of      its      data        entry          capabilities,
returns        processing                  systems,               and    enforcement                   programs,                 it         needs      to
consider            carefully              how         it    can     reduce            the      amount         of         incorrect

information                currently              in        the     system          and,        as     importantly,                         sharply

increase            the     accuracy              of        new     information                 that        gets          into         the

system.             Time       spent           correcting               errors          is      time        IRS could                  better

spend       doing          collection              work.             Further,                errors         can      undermine                  IRS'
credibility                and       threaten               innocent           taxpayers               in     the         process,

potentially                having          a negative                impact            on the          voluntary                 compliance

of   the      tax         system.



MAKING COLLECTION                         OF DELINQUENT

TAXES A SERVICE-WIDE                            EFFORT



In   many ways,                the        collection                function            can      be viewed                 as         the     end

of   the      tax        administration                      road       for      the         taxpayer          and         for         1~s.

Collection               receives              cases         that       have        gone        through             the      IRS
processing               and     examination                  pipeline              and        have     not        been          resolved.

As such,            these        cases          may contain                   an accumulation                       of     all         the

errors,        problems               and       collection               difficulties                   the         case         may have

been       subject          to       at    Taxpayer               Services,             Computer              Services,                     Returns
Processing,                Examinations,                     and     many        other          IRS functions.


15
consequently,                       it         is     not      reasonable                            to     expect             that           improvements                 in
the     collection                       function              alone,            however                     Significant,                        will       be

sufficient                   to     solve             the      problems                    in         the         accounts                receivable
inventory.



Part       of     the         reason                that       Collection                            is     the         recipient                of      so many

problems               from         other             IRS      functions                        is        IRS'          fragmented                   management

structure.                    For         example,                  Examination                           reviews              cases,            assesses

taxes        due        and        passes               cases            along             to         Collection.                         Examination
management                   is     interested                      in    moving                 cases             out         of        Examination;                its
success           is     not            directly               measured                on how many                             of        those          cases

actually           result                 in        collection.



IRS abated               $15.5                billion               in    assessments                             in     fiscal               year       1988.

Some of           these            abatements                       were        the         result                 of      normal              IRS

procedures,                   such            as      in      the        case         of         the         100-percent                       penalty            cases

I discussed                   previously.                           However,                some of                    these             abatements--an

unknown           number --were                         the         result            of         IRS errors                         in    recording

information,                      for         example,               in      Returns                      Processing                     or    in

Examinations.                            IRS        needs           to    modify                 its         expectations                        for      all

functions               to        hold          them          accountable                        for         the         collection                     impact      of

what       they         do.              In     the        long          term,         reversing                         the         current             trends          in

the     accounts                  receivable                   inventory                    will             require                 IRS to             transcend

this       fragmented                     approach                  to    management.




16
One servicewide                           area        where           cost-effective                          improvements                    could
possibly            be made                is     in        the       prevention                  of     delinquencies,                             IRS’

current            delinquency                    prevention                 programs                   are        modest,             and     we
believe            IRS         could         do more               in     this         area.              Employment                   tax

delinquencies                       account             for        about          one-third                   of    all      the         accounts

receivable                inventory.                        To help          prevent                   some of            these          in     the

future,            Taxpayer                Service                could      provide                more           help--through

improved            publications                        and        instructional                        material--targeted                                to

those       businesses                     most         susceptible                    to        becoming               delinquent                  and        on

issues        causing                the         most         problems.                     In     our        ongoing             work        we are

exploring             other               possibilities                     for        preventing                   tax      delinquencies

from       occurring,                     such         as     improving                IRS’            early        warning              programs               to

alert       taxpayers                     and     IRS of                impending                delinquencies                        and     requiring
federal            contractors,                        subcontractors,                           and      grantees                to     be current

with       their          tax         obligations                       as a provision                         of. receiving                   federal
assistance.



The Administration                               and        Congress,               too,           can         contribute                to        this

delinquency                    prevention                   effort.               In        our        recently             issued             report           on

federal            tax         deposit                requirements,2                        we recommended                        that         the

Secretary                of        the      Treasury               change           the           regulations                    to    enable

employers’                deposit                requirements                     to        be fixed               at      the        beginning                of

the       year       and           that         the      requirements                       themselves                  be simplified.                          We

found        that             at    about             one-third             of      the           nation’s                employers                are



2TAX POLICY:    Federal   Tax                                       Deposit             Requirements                       Should             Be
Simplified   (GAO/GGD-90-102,                                         JULY             31, 1990) .

17
assessed         at         least         one      failure-to-deposit                           penalty               annually.              Some
employers           may be penalized                           because            they         do not             understand            the

complexities                 of     the         deposit             requirements.                         These       requirements                  are
complex        because              they         can      vary         from       month         to         month       depending               on

the     amount         of      employment                 taxes           withheld             each         payday            and     because

the     exceptions                to      the      requirements                   can     be confusing.                         Other
proposals           to       simplify              the        tax     code        may well                 reap       additional

benefits         in      reducing                taxpayer             confusion                and         errors,            which     will         in

turn       reduce        the        number          of        potential               delinquencies                     for     IRS.



In     summary,          Mr.        Chairman,                 we believe               that          it      is      time      for     IRS      to

approach         the         collection                  of    delinquent                taxes             as a servicewide

challenge.               When the                reduction                of    the      accounts                 receivable

inventory           is       viewed         as an             IRS goal,               rather              than       a collection

function         goal,            IRS      is      likely            to    make        substantial                    improvements                  in

the     prevention                and      collection                 of       delinquent                  taxes.



This       concludes              my prepared                  statement.                 I would                 be pleased            to

answer       questions.




18
     17S


     160


     1s


     loo


      n


      so


      a


          0


          1BU   lw4   1006   1SM   la?   laa   1m
          Ym




19
     6s

     so

     45

     40

     m

     so

     25

     20

     1s

     10

      5

      0




          -      MF
          .-.-   ToplkFandW
          -      SW




20
     zoo0

     1000

        0




            -
                1067

                1ooQ




21